April 28, 2006, 12:00 AM

The New Liquidators

Liquidation web sites fight for their share of $80 billion in excess inventory sales.

Overstocked, returned and outdated products have long been thorns in the sides of retailers. They take up valuable warehouse or shelf space that could be better used to stockpile current inventory. And perhaps more importantly, they represent lost revenue.

In the past, retailers would call local liquidators to bid on excess, returned and out-of-date products, a method that “leaves a lot to be desired,” says Bill Angrick, CEO of Liquidity Services Inc., operator of online auction site Liquidation.com. “You’re not maximizing the competition for the assets and so you’re not getting the best value for the assets,” he says. “And you’re taking on the direct burden of identifying the liquidator, negotiating a transaction, documenting the process, making sure you get the money, etc. It pulls your management away from your core business.”

Creating a market

But that’s changing as more liquidation operations are going online. Web-based liquidation services offer a nationwide pool of potential buyers, opening new markets for retailers’ and manufacturers’ excess inventory. “With 400,000 professional buyers, we’re able to create a market for virtually any quantity or condition of returned merchandise,” Angrick says. Liquidation.com’s buyer base is growing about 50% per year.

Internet-based liquidation sites also give manufacturers new retail outlets-mom-and-pop stores-for their surplus goods, says Ivan Ramirez, vice president of bulk goods buys and business supplies at Overstock.com. “Imagine having to send sales reps to contact 100 small mom and pops that are going to buy a case pack of each product. It’s just not economical,” he says. “There’s not a company out there that has the ability to reach millions of small mom-and-pops.”

The ability to reach a larger group of buyers is one reason that NewCorp.com switched to Liquidity Services’ Liquidation.com after using a traditional liquidator for most of its 22-year history, says Steven Miller, senior director of service operations.

NewCorp.com, operated by N.E.W. Customer Service Cos. Inc., runs extended warranty programs for major retailers, including Best Buy Co. Inc., Lowe’s Cos. Inc., Wal-Mart Stores Inc., Wal-Mart’s Sam’s Club, and Kmart Corp. Over the course of a year, it accumulates about 200,000 products returned by consumers under the warranty plans. “The traditional salvagers have partners and buyers they go to over and over again,” Miller says. “Internet salvagers touch an audience you can’t even put your hands around. Anybody can shop on the Internet.”

High return

For example, a buyer who might want to purchase 30 laptop computers to salvage the parts would never buy from a traditional salvager, but that buyer has access to an online liquidation site. “The bottom line is my return is 14 times higher through LSI than through our previous traditional liquidator,” Miller says.

Online liquidation also benefits buyers, particularly small, independent retailers, by giving them access to a wider variety of products at lower prices. Instead of traveling to trade shows or liquidators’ warehouses in search of inventory, these retailers simply go online.

Randall Pinson, owner of Rocket Auctions Inc., an eBay Power Seller, started buying merchandise from Overstock.com in 2001. “I hadn’t had much experience when I started selling,” he says. “I didn’t know that many liquidators. For me Overstock.com was the first resource I stumbled on to.”

Rocket-Auctions sells a wide variety of products, although Pinson recently began focusing on fashion and accessories. Pinson says he researches products on eBay before going to Overstock.com to purchase merchandise. He buys on average $10,000 of merchandise per month from the site.

“It’s worked out pretty well,” he says. “Their system is just as easy as buying from their retail site. The only thing I had to do differently was submit sales tax forms.”

In today’s fast-paced and highly competitive market, retailers need to be able to unload excess or out-of-date inventory quickly and efficiently, Angrick says. That’s particularly important in areas, such as consumer electronics, where a product can become obsolete shortly after landing on the retailer’s shelf.

“Whether they’re MP3 players or iPods-all of those things in the consumer electronics realm are constantly turning over,” he says. “Products have a 3- to 6-month cycle now. It’s very important that the retailer have a strategy for what to do once the item is less than current technology.”

The increasingly liberal return policies of retailers also have contributed to the demand for liquidation services. Liquidation.com estimates the return-merchandise business alone totals about $60 billion. “Most customers have been trained to expect a no-questions-asked return policy,” Angrick says. “That’s allowed all the big box guys to build market share. But one of the costs of that strategy is they have got to handle the returned merchandise.”

For online merchants, return rates can be as high as 25% because customers can’t try on apparel or examine merchandise before making a purchase, he adds.

This increasing demand for online liquidation is reflected in Liquidation.com’s growth. When Liquidity Services Inc. launched the online auction platform in 2000, it primarily sold goods for small commercial sellers and government agencies.

Six years later, Liquidation.com sells everything from general merchandise and apparel to consumer electronics and technology hardware. The site holds about 200,000 auctions annually and sold about $100 million in merchandise last year. Over the past three years, it has auctioned merchandise with the gross value of $264 million.

“Because of the efficiency of the Internet-based model, we’ve been able to attract the right buyers for all these categories,” Angrick says.

Small lots

The amount of inventory being sold varies among the online liquidation sites. Liquidation.com typically sells large quantities of products, for example, 10,000 items for a retailer eliminating a SKU.

Other liquidation sites deal in smaller quantities. Wholesaler Dollardays.com-which specializes in manufacturers’ closeout items-typically will sell a truckload or less of products. “A true closeout is not a lot of product,” says Marc Joseph, CEO.

About one-third of 30,000 goods listed on Dollardays.com are close-out goods. Dollardays, whose customer base primarily is independent merchants, also sells basic goods such as batteries and candles, and seasonal goods, such as holiday greeting cards.

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