Making the Case for Strategic Liquidation Planning
Every company has liquidation inventory: returned, excess, obsolete or damaged merchandise that can’t go back on store shelves. Though most organizations would rather not admit they have a need for it, liquidation is the rule – not the exception – in retail.
Given how competitive retailing is today, the ability to squeeze margin out of every area of the business is crucial; this includes merchandise slated for liquidation. There has been a clear lack of innovation around how companies approach the liquidation process; amazingly many companies still let excess inventory pile up in a warehouse and then, only after the CFO says, “we need to get this stuff off our books by end of quarter on Friday!” will they proceed to sell it to one or two liquidators at whatever low price it takes to get it sold by Friday. The result over time is billions of dollars lost. So why then, do so many retailers manage their liquidation programs the same way they did decades ago?
Historically investing in strategic liquidation planning has been viewed as a money-losing initiative: if a company’s liquidation revenue represents 3% of sales – which is generally in the ballpark for large enterprises – a 20% to 40% increase in recovery rate only impacts revenue by a fraction of a percent. Not nearly enough to get management’s attention.
However, there is another – and better – way to look at this: increasing recovery rate on liquidation is like raising price on a product. For example, if you are selling an item this week for $100 and next week you find you can sell it for $120, that incremental $20 drops straight to your bottom line. There is no additional cost of goods, marketing expense or other overhead to accomplish this.
This is exactly what happens when a company increases recovery rate on liquidation product.
Let’s run through some math using the following scenario:
1. Consider a retailer with $100 million in revenue and $3 million of that coming from liquidation sales
2. If this is a relatively well-run retailer it might have operating earnings margin of 6% (or $6 million)
If the company was able to increase pricing on its liquidation sales by 20%, that extra $600,000 would have made a mere 0.6% impact on the top line. However, since all $600,000 drops to the operating margin – turning $6mm into $6.6mm – it becomes much more meaningful. Now, all of a sudden, you have increased operating profit by 10%! Consider what the company would have to do in order to increase sales of ‘A’ stock product enough to have the same impact on operating profit? (Answer: you would have to generate an incremental $10 million in top line sales – that is 10% growth, no easy feat – to generate the same $600,000 in incremental operating profit assuming the same 6% margin).
So the question becomes, how do you achieve a 20% increase on liquidation pricing without sacrificing valuable in-house resources? It starts by ditching traditional, manual methods and instead applying technology to the process; this might include implementing a SaaS online marketplace platform that can be customized, integrated and scaled based on your unique needs.
The best solutions available will come with a high-quality and robust audience of active, interested buyers who will compete for your inventory, pushing prices up, versus having a single buyer negotiate them down. Some of the world’s largest retailers are using this type of remarketing solution to boost recovery by 30%-80% and sometimes much more.
Applying this type of online marketplace platform not only delivers the highest price a buyer community is willing to pay right now, but it also automates the sale process, delivers a faster sales cycle and generates proprietary market intelligence in the form of real data on market prices.
Rethinking your liquidation program is a must in today’s competitive business climate given the slim margins most retailers are fighting to maintain. Any increase in prices you can achieve on liquidation volume falls 100% to the bottom line. If you do the math on your company’s liquidation volume and assume a 20%-80% improvement in liquidation pricing, you will see that the impact on operating and net profit can be quite meaningful.
Howard Rosenberg is CEO and co-founder of B-Stock Solutions, a technology-enabled service company powering the largest network of private-label B2B liquidation marketplaces.