May 31, 2016
Restoring the Value of Excess Inventory
Though it's only June, many retailers are beginning to plan for the upcoming holiday season. There is no doubt most retailers are bulking up their supply chain capabilities and fine-tuning their inventory planning to prepare for the busiest shopping season of the year in November and December, when roughly 30 percent of the industry's annual sales are on the line.
Despite the work the industry is doing to prepare for the 2016 holiday shopping season, many retailers are still recouping from 2015's sluggish holiday shopping results. Described by the NRF as a "tough season," many retailers had to contend with more inventory sitting on store shelves in Q1 2016 than in years past.
Dismal holiday shopping results did, however, benefit the consumer. To clear out inventory and recover losses, many retailers turned to in-store discount sales and offered deep breaks throughout Q1.
But in-store sales of discounted merchandise present limited benefits for retailers. While it supports the use of existing distribution channels to move goods, in-store sales lower future revenue. In other words, while this strategy drives sales of old inventory, it simultaneously reduces the shelf space and time available to sell next season's merchandise. Ultimately, in-store discounts often fail to get inventory levels back on track in a timely manner.
Fortunately, there are significantly faster — and more valuable — ways to move excess inventory. Liquidation and corporate trade are two such solutions.
Retailers that choose to liquidate are often looking for an immediate fix. The process, which involves selling off excess inventory or assets at a lower price than what was paid for them originally, allows retailers to either distribute inventory through established channels or sell entire inventories to a liquidator or off-price buyer.
There are significant benefits associated with liquidation — most notably it can help retailers generate much-needed cash. Further, liquidation is a widely accepted method across the industry for handling excess inventory. As a result, liquidation is often the de facto solution for retailers.
But liquidation is not always the best solution for the business or the balance sheet. In fact, there are a handful of related drawbacks; liquidation requires retailers to sell inventory at a significantly reduced price, resulting in a loss on the books. This, in turn, can impact how investors perceive the financial strength of a company. From a logistics perspective, retailers must store excess inventory in warehouse space until the liquidator takes possession. This increases overhead costs on assets that have already lost money.
Corporate trade is another option for moving excess inventory quickly. With this corporate trade, a company’s excess inventory is purchased with cash, trade credits or a combination of both. Unlike liquidation or in-store sales, payment to the retailer is typically equal to the acquisition price of the assets, allowing retailers to receive more value for their inventory.
Under the corporate trade model, and in return for receiving greater value for their assets, the retailer agrees to make certain business expenditures through the corporate trade company, using the trade credit as partial payment. Services retailers can purchase from their corporate trade partner often include media, retail marketing, travel and events, freight and logistics, and lighting.
Receiving higher value for excess inventory is a significant benefit. But before entering into a partnership, retailers need to do their due diligence to make sure they've found the right corporate trade partner from a strategic point of view. When vetting potential corporate trade partners, retailers should ask the company about their trading inventory and what services they can access through trade. Retailers should also identify whether other parts of their own organizations — i.e., marketing, finance, procurement, etc. — can leverage corporate trade services. This is key for achieving the full potential that corporate trade offers.
Provided retailers are comfortable with purchasing select business services through the corporate trade company, this model provides flexible solutions to meet most retailers’ needs. To put it into context, rather than offering in-store discounts or turning to liquidation in order to move product, retailers can leverage corporate trade to receive higher value for their excess inventory in a timely manner, clear their in-store shelves for the next season's inventory, and maximize the revenue they are able to deliver through their brick-and-mortar footprint.
Even if retailers started holiday preparations in January, supply chain and inventory planning will always be an imperfect science. Despite the best of intentions, inefficiencies will be discovered. The only thing retailers can control is how they respond to these issues. While there are multiple options for retailers to manage the resulting revenue and inventory impact, corporate trade, in many cases, is the most strategic answer.