Commentary: Why liquidation is worth worrying about

Though most organizations would rather not admit it, when it comes to the handling of returned, excess, and otherwise obsolete merchandise, liquidation—the quick disposition of assets for a fraction of their original price—is the rule in retail. Around 95 percent of returned and unsold merchandise will end up slated for the secondary market (a post-retail channel where unwanted and liquidated goods can be bought and sold). Although this is the most common way to handle returned and unsold goods, many companies fail to get as much value from their liquidation process as they could.

Given how competitive retailing is today, the ability to squeeze margin out of every area of the business—including merchandise slated for liquidation—is crucial. Yet many retailers still manage their liquidation programs the same way they did decades ago: They let excess inventory pile up in a warehouse, and then, only after the chief financial officer (CFO) says, "we need to get this off our books by the end of the quarter," they sell it to one or two liquidators at a rock-bottom price. This can result in billions of dollars lost over time—a huge hit to companies with already skinny margins.

Historically, companies have viewed strategic liquidation planning as a money-losing investment; a 30 percent increase in pricing only impacts revenue by a fraction of a percent—so why pay much attention to it? But there is a better way to look at it: Increasing the recovery (pricing) on liquidation is like raising the price on a product. For example, if you are selling an item this week for $50, and next week you find you can sell it for $75, that incremental $25 drops straight to your bottom line. (This assumes there are no additional associated costs involved.)

This is exactly what happens when a company increases its recovery rate on liquidated products. Consider the following illustrative scenario:

1. A retailer has $100 million in revenue, and $3 million of that comes from liquidation sales.

2. This is a relatively well-run retailer with an operating margin of 6 percent (or $6 million).

3. If the company increased pricing on its liquidation sales by, for example, 20 percent, and assuming there are no additional associated costs, then that extra $600,000 ($3 million x 20 percent) goes right to the operating margin—turning $6 million into $6.6 million.

4. The retailer has now increased its operating profit by 10 percent.

What would the company have to do in order to increase sales of "A" stock product enough to have the same impact on its operating profit? Assuming the same 6 percent margin, it would have to generate an incremental $10 million in top-line sales—in other words, 10 percent growth, which is no easy feat—to generate $600,000 in incremental operating profit.

The benefit of achieving a higher recovery for customer returns and other overstock merchandise slated for liquidation seems clear. But conventional methods for dealing with customer returns and excess inventory may not be up to the task. For companies that sell inventory to one or two liquidation partners, recovery value will remain low because liquidators are experts at negotiating prices down in order to maximize their own profits. They make money by buying at lower prices, not by selling at higher prices. The traditional approach has another drawback, too. Selling directly to a liquidator can mean a lack of control over who is eventually buying a company's inventory and how its brand enters the secondary market.

How can organizations today update their liquidation programs in order to achieve higher recovery along with greater control over the entire process? The answer involves something they may already be doing in their forward supply chains: By applying technology and data-driven analytics to their liquidation programs, they can increase recovery by 20-80 percent and sometimes more, in our experience.

Over the past few years a shift has taken place in how organizations manage returned and overstock inventory. Many are bypassing layers of middlemen and incorporating technology-based liquidation programs into their overall business strategy. This might include launching a private marketplace platform that can be customized, integrated, and scaled based on a company's unique needs, or leveraging an established business-to-business (B2B) marketplace, making that merchandise available to thousands of buyers who will compete for it via online auctions.

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 accurate data on market prices. Automation reduces overhead, and it may offer other advantages as well, such as the ability to sell from multiple locations, a practice that reduces the need to consolidate inventory and eliminates extra transportation costs. And some marketplace models allow retailers to increase their recovery without paying added out-of-pocket costs.

Rethinking a liquidation program is a must in today's competitive business climate in light of the slim margins most retailers are fighting to maintain. Any increase in prices you can achieve on liquidation volume—assuming there are no additional costs associated with the sale—falls 100 percent to the bottom line. If you do the math on your company's liquidation volume and assume a 20 to 80 percent improvement in liquidation pricing, you will see that the impact on operating and net profit can be quite meaningful.