By Mary Wagner
In the brick-and-mortar world, returned goods bounce back along several stops in the secondary market supply chain—there’s retailer, manufacturer, outlet stores, dollar stores and finally jobbers who buy used merchandise by the truckload and ship it to flea markets or out of the country. Now, the last few stops on the chain have new competition, and it’s on the Internet.
With the explosion of the online marketplace, returns processing companies and auction management services, sometimes acting in tandem, see the possibility of recouping more on the value of returned merchandise. How? By going directly to consumers with the same rock bottom pricing consumers find at the farthest reaches of the secondary market. That way, retailers don’t have to wait for the product to wend its way down the chain and sacrifice more of their original cost to handlers at each level. By eliminating some steps, they’ll keep more on each dollar.
At least, that’s the plan behind three online offerings that sell returned merchandise that’s too far gone to make it back onto store shelves or back to the manufacturer. Retail returns processor ReturnBuy.com Inc. not only liquidates new, unopened and like-new returned merchandise for its retail clients online under Brand New Buy and ReturnBuy brands, it also operates a third storefront and listing service called Real Crazy Mo’s. That offering is stocked with the distressed consumer electronics goods that might otherwise find a home in a truckload headed for salvage.
Reverse logistics services provider Genco Distribution System, which similarly liquidates like-new returned merchandise for retailers through a variety of channels, is also now mining its returns centers for distressed consumer electronics returns to stock its brand-new eBay storefront and listing service, Delivery Dog. And in February, online secondary market seller eValueville.com, which already sells like-new merchandise on behalf of five major apparel retail clients on its own site and through auction sites, was scheduled to debut an online offering, Returns for Less, to sell clothing and distressed merchandise that can’t be presented as like-new.
The bargain basement, buy-it-at your-own risk online sales vehicles for merchandise that’s been around the block are just one wrinkle in attempts to resolve the retail problem that won’t go away. Returns are a fact of life for merchants, with anywhere from 8% to 35% of retail sales winding up as returns. Some estimates place the return rate higher for some categories of goods purchased online.
90 million online returns
Jupiter Media Metrix estimates that by the time online retail spending reaches $118 billion in 2005, the value of goods returned from an estimated 90 million online transactions will top $5.8 billion. Of the returned merchandise that can’t go back to the sales floor or back to the manufacturer by prior agreement, perhaps only 8% to 12% can be sold in the secondary market as like new, estimates Pete Rector, senior vice president of Genco. The rest is liquidated through various channels, of which online auctions have proven to be one of the most profitable.
Retailers’ return on salvaged goods that can’t be liquidated as like-new or close to it varies by category. It could be 10% of original cost or less for apparel that’s seen better days, and edge up to 40% for other types of goods, still in original boxes, whose main problem is that they are last year’s model.
Though these particular online offerings are an attempt to test whether there’s a higher-paying submarket for distressed goods that might otherwise go to salvage at a few cents on the dollar, web auctions already have proven their worth to retailers as an effective way to move returned merchandise in good condition—one reason a number of service providers have sprung up with software and services to help retailers put up their own auctions as well as launch them on eBay, Amazon and Yahoo. Though it varies by category, online auctions will recover for retailers on average three times what they would if they were sold as part of a truckload.
Sometimes more, says Rector, citing the auction dynamic’s well-know feeding frenzy that can bid up a product beyond its original value. A bicycle that sold for $69.99 at one of Genco’s retail clients recently went for 150% of its value on an eBay auction. “Baby strollers that may have gone for $80 at retail have gone for more than $100,” he says. “Though it varies by category, auctions can recover 70% to 80% of the price of goods, whereas handing it off to a jobber might get 20% to 25%.”
Testing
Though it delivers lower price points, the auction dynamic can work on end-of-model, distressed, and semi-functional or nonfunctional merchandise as well. That makes offerings such as Delivery Dog, Real Crazy Mo, and the soon-to-launch Returns for Less good news for the handling of returns in particular. Though the auctions also dispose of surplus goods, these are more often new, never sold, and therefore easier to move. The one-stop-above salvage online offerings provide another needed option for harder-to-move goods that have already been out in the marketplace—and show it in their condition.
These elements of the providers’ broader storefront/auction listing services operate under the premise that there’s a consumer market out there for certain goods that might otherwise go out to bulk liquidators at salvage rates. Genco, for example, puts returned goods online through a partnership with auction services provider Slingshot Solutions. Slingshot Solutions launches the auctions, branded not under the Genco name or that of the retailer, but under a branded “Slingshotman” icon to eBay, Yahoo and Amazon. The auctions also are reachable thorough a link on Slingshot Solutions’ own web site.
Before listing the returned merchandise for auction, Genco tests the products to ensure that goods to be advertised as like-new actually meet that standard. That inspection leaves a bunch of products that didn’t make the cut, yet still might have value to consumers. “Let’s say a DVD player has 12 functions and they all work except surround sound,” Rector says. “We’ll put that up on Delivery Dog and post the information about what doesn’t work. We think there’s still a market for someone who’s handy or looking for parts.” Maybe—but is it a market that will deliver more return on such items as one-offs than if they were part of a bulk truckload to a liquidator?
Button, button
It’s to soon to tell, says Rector, as the Delivery Dog site was only a week old as Internet Retailer went to press, and it remains to be seen how much sub-segmentation the returned goods market will bear. While the theory is that cherry-picking returned goods slated for salvage will capture more on the dollar for retailers, even Rector says he’s not sure of that yet. In a salvage economy where 1,000 items might sell at 20% of cost, picking out 50 that sell at 70% of cost and another 100 that sell for 60% leaves 850 very picked-over items. That’s roughly akin to mining the ore out of a claim and leaving the rubble. “Will we still get the same 20% for those items? Until we do it, we don’t really know, but we’ll find out,” Rector says.
Similarly, eValueville CEO Andrew Waites is betting there’s a consumer market that will pay more for a Tommy Hilfiger shirt that’s missing a few buttons than a liquidator buying by the truckload would, but he doesn’t yet know for sure either. “If someone wants that shirt, we can sew a button on and show it as Quality A, but that’s not what we’re about,” he says. “We’re about driving volumes of merchandise, so we’d rather tell the customer it’s missing a button and to bid accordingly. At the end of the day if that business model makes sense, then there’s plenty of merchandise available. We’re going to see if the customer will accept buying merchandise that’s less than perfect.”
Pointing out the flaws
Whether the one-step-above salvage model works for Returns for Less on eValueville depends in part on how effectively it can communicate damage on the merchandise to consumers. And that’s more problematic for apparel than for other goods such as consumer electronics. If a computer has a specific feature that doesn’t work, for example, that’s easy enough to relay to the consumer online. But apparel involves more subjective judgments. “With apparel, we need a system that picks up and communicates to the consumer what is wrong,” Waites says.
The company has been building the technology infrastructure to do that. And it’s tested a prototype on the regular women’s section of eValueville.com. There, part of the product description includes a quality rating of A through E, representing merchandise that ranges from goods in top condition down to those that are described as being in poor condition and in need of extensive repair or cleaning. Shoppers can click on the quality rating to link to a chart that details what each rating means. The quality rating system at Returns for Less will build on that system.
Return Buy already knows the economics of online direct-to-consumer salvage work, at least, when the distressed merchandise offering is part of a total solution for retailers that also bundles in the online disposition of goods that can be presented as new or like new. The company launched online more than two years ago. Segmenting out and marketing returned and surplus merchandise by condition and quality, including distressed goods under Real Crazy Mo brand, has always been part of the strategy.
“We have a five-star ratings system and we analyze product on five categories,” says senior vice president of marketing Steve Kirchner. “If an item has a five- or four-star rating on functionality, it goes online under one of the other two brands. If it has three stars or less on functionality, it goes to Real Crazy Mo.”
Marketing power
While Kirchner won’t disclose how much more retailers are recovering on their goods by selling online though Real Crazy Mo, he does say the brand has been a successful tool for the company. “Our clients are pleased with the pricing we get on Real Crazy Mo,” Kirchner says. The company recaptures more on the dollar for retailers and manufacturers by cutting steps out of the path to the end consumer who ultimately pays, he says. “We’re directly selling to the consumer,” he says. “If they sell goods to a liquidator, the liquidator won’t necessarily sell to a consumer.” In addition, goods on Real Crazy Mo get the kind of marketing and merchandising support it takes to bring in better prices, a treatment not afforded to distressed goods by liquidators who deal in bulk. For example, its listing templates offer detailed product information and quality rankings to increase shoppers’ confidence about what they are buying and set expectations properly.
“That adds value to the merchandise, so we’re able to get a higher price for it,” Kirchner says. The company also has developed proprietary software, used by all three of its brands, that factors in variables such as depreciation, market competition, and supply and demand curves to forecast the maximum price it believes an item could fetch based on its quality. “If it can’t sell there, the merchandise goes off in a truckload to a bulk liquidator—but that doesn’t happen very often,” he says.
Though selling “as is” returned goods online directly to higher-paying end consumers versus bulk liquidators makes sense in theory, in practice it may be different. Analysts like David Schatsky of Jupiter have collected few stories of retailers who’ve won big using this strategy. That’s partly because retailers tend to be tight-lipped on the subject of returns, period. “It’s one of those topics that suggests operations are going less well than they might be,” he says.
The rest of the reason could be that until now, the uptake on this solution among retailers has been moderate. Though Genco has been handling returns for years, its Delivery Dog is a brand-new effort. ReturnBuy’s client roster spans only about 20 retailers and manufacturers, and eValuville’s, five.
When retailers think about returns, they think about how to reduce their incidence rather than how to make them less costly to handle, Schatsky says. “One of the major inhibitions to online shopping has been consumers’ concerns about how difficult it might be to return a package,” he says. “So some retailers have put their investment in making the returns process easier to remove that objection.”
Nevertheless, online b2c liquidation does make sense, Schatsky adds. “A lot of the reverse logistics players offer relatively low-risk ways of getting into the game online, without requiring massive systems modifications to be able to liquidate on places like eBay,” he says. “It has some logic.” l
mary@verticalwebmedia.com
