Post-Holiday Excess Inventory? Two Solutions to Consider
By Kevin Farkas, [email protected]
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 [email protected].
NRF forecasts tepid sales on slow economic growth
WASHINGTON — Retail industry sales (which exclude automobiles, gas stations, and restaurants) will increase 3.4%, down slightly from 4.2% in 2012 and 5.8% in 2011, according to the National Retail Federation’s 2013 economic forecast.
The lukewarm forecast, released Monday, comes on the heels of a holiday season that went head-to-head with Washington’s political wrangling over fiscal concerns, shifting consumers’ spending plans downward. In the end, holiday sales in 2012 grew 3.0%.
In its Monday press briefing, NRF attributed the lukewarm forecast to political wrangling in Washington over fiscal concerns, and NRF president and CEO Matthew Shay said that while it’s too early to precisely predict how recent tax hikes will impact spending, “We can safely predict that consumers will be shopping for price more often [in 2013] and there will be more ‘trading down’ occurring.”
Shop.org, NRF’s digital division, expects online sales in 2013 to grow between 9.0% and 12.0%. Online sales in 2012 during the months of November and December last year grew 11.1%.
“What we witnessed during the holiday season is an indication of what we are likely to see in 2013,” said Shay. “Pushing fiscal policy decisions down the road will lead to even greater uncertainty, and will continue to impact consumers’ desire and ability to spend on discretionary items. The administration and congress need to pursue and enact policies that lead to growth and economic expansion, or it could be another challenging year for retailers and consumers alike.”
A number of factors contributed to NRF’s 2013 economic forecast, including:
Employment: The labor market continues its modest recovery but 2013 is not expected to result in meaningful acceleration in growth. As of December 2012, the unemployment rate has held steady for the last two months at 7.9%. Retailers on average employed 150,000 more workers in 2012, and the industry remains one of the biggest employers in the world.
Income growth: Consumers are constrained by modest growth in income, and recent legislation passed in January increased payroll taxes for millions of workers, further limiting Americans’ spending decisions.
Housing: NRF expects the housing sector to continue to improve and the fundamentals for growth to see continued gains in 2013.
Inflation: Price pressures continue to be contained. NRF expects the Consumer Price Index to increase 1.9% in 2013, below the 2.1% increase in 2012.
Consumer confidence: Current consumer attitudes are likely weighed down because of the handling of the fiscal cliff and the increase in payroll taxes. NRF said it expects confidence to improve as the pace of the recovery accelerates in the second half of 2013.
“While it’s too early to know the full effect of higher payroll taxes, there’s no question that many consumers will feel some kind of impact from the change in their paychecks,” said NRF chief economist Jack Kleinhenz. “But consumers have been a key driver of the economy and I expect their spending to grow modestly in 2013.”
Former QVC chief to head merchandising at Rue La La
BOSTON — Private sale site, Rue La La, has appointed Darlene Daggett as a president overseeing merchandising, programming and member experience. Daggett will report to Ben Fischman, founder and CEO of Rue La La and be headquartered in the Boston and New York offices.
Daggett’s background includes 18 years at QVC Inc., one of the world’s largest e-commerce retailers. In her most recent role, as president of QVC U.S. Commerce, she was responsible for merchandising, planning, broadcasting and new business development.
“Rue La La’s culture and success reminds me of the early years at QVC,” explained Daggett. “I am extremely excited to join a team committed to changing how consumer’s shop. I believe the unique passion of Rue La La’s members, the quality of its brand partners and large addressable audience may present an even larger market opportunity.”
In her role, Daggett will be instrumental in further building Rue La La as a premier specialty retail destination across all major areas of business including fashion for men and women and the Living category. She will be responsible for sourcing strategies as well as working with the creative and merchandising teams to marry product with unique programming. Daggett has served as an advisor to the company for the past 12 months.