By Kevin Farkas, KFarkas@activeinternational.com
After a disappointing holiday season, retailers across the U.S. are left with large amounts of excess inventory sitting on their shelves in stores and warehouses. Many retailers have already chosen to mark down inventory in store to eliminate excess, sometimes multiple times – but this comes at a significant cost. For those that are interested in deriving more value from their excess inventory, retailers should look at other options, such as liquidation or corporate trade.
Before considering either option, retailers must define their needs. Is there a short-term cash need? Is there interest in expanding distribution channels? What financial, brand or distribution challenges is the company facing? Would it be beneficial to reduce costs for expenditures across their enterprise?
From that lens, let’s compare liquidation and corporate trade, an alternative solution to traditional methods of managing excess inventory.
Liquidation of inventory results in selling assets off quickly, often for less money than originally paid for them. Companies can either use their normal distribution channels at dramatically reduced prices, or sell entire inventories to a liquidator, also known as an off-price buyer, who will pay a lower price for the products, paying for them immediately and taking possession.
Retailers often turn to liquidation because of its ability to generate cash immediately. It’s also the most accepted method of handling excess inventory – so much so that it has been integrated into most companies’ supply chain strategy. For many retailers, it’s the automatic solution to excess inventory issues.
Yet, while the benefits are clear, liquidation does have some significant drawbacks. As the inventory is typically sold for less than what the company paid for it, retailers must take a loss on their income statement. When reported, this could negatively impact investor sentiment towards the company. In addition, until that inventory is either sold or the liquidator takes possession, storing the goods means that warehouse space can’t be used to stock for the upcoming seasonal merchandise. Most importantly, there’s the missed opportunity of getting more value across the enterprise.
In corporate trade, excess inventory is purchased with cash or a trade credit. Payment is typically equal to the wholesale/acquisition cost of the inventory. In return, the retailer commits to making expenditures through the corporate trade company, using the trade credit as partial payment. Expenditures often purchased through a corporate trade company include advertising, travel & events, freight & logistics, retail marketing.
Corporate trade enables retailers to receive more value for their excess inventory vs. traditional liquidation, as the value received in cash or trade is typically higher than the liquidation value of the goods. And, in many cases, corporate trade companies will sell the inventory to the same distribution channels that the retailer has in place, meaning that supply chain disruptions are minimal. In addition, since corporate trade companies work with companies across multiple categories, they can even provide access to new distribution channels – ones that the retailer wouldn’t have access to otherwise – such as trading partners or private networks (i.e. employee and friend and family sales).
Yet, retailers should know that while trading agreements provide a way to recognize the full value of the asset, there are strings attached. As part of the agreement, retailers must make future, mutually agreed upon, business purchases through the trading company – common expenses like advertising, freight, logistics and travel. So, understanding the caliber of trading inventory of the company, and having the ability to involve other parts of the retail organization that can use these services, are key to the success of corporate trading arrangements.
It is not until this point – when trade credits are used – that the added value of corporate trade is recognized. In the case of a cash payment, the value is recognized immediately. Either way, as long as retailers are comfortable purchasing services through the corporate trade company, and feels comfortable with the available inventory, the model is flexible enough to meet the business needs of most retailers.
Choosing the right solution
It’s clear that both options offer measurable benefits to retailers. Liquidation is straightforward and widely accepted, but is limited in the financial benefit it delivers. Corporate trade is growing as an alternative option because it can deliver improved financial benefits and added value for inventory, but retailers need to involve other areas of their business to achieve that additional value and, depending on the payment structure, may not realize the benefit immediately.
The good news is that retailers looking to manage their excess inventory following this holiday season have two good options to consider. Ultimately, the company’s needs drive which is the best choice.
Kevin Farkas is EVP, sales & business development for Active International, a global leader in corporate trade, helps companies use their excess assets to offset media, marketing, retail, travel, shipping & freight expenses. He can be reached at KFarkas@activeinternational.com.