Retailers are reselling more returned goods, and Twin Cities liquidators are feeling the pinch.
Like many shoppers, Megan McCard of Golden Valley assumed the item she took back to Target recently would go right back on the shelf.
But she admitted she hadn't given the question much thought. "I have no idea what happens to it."
The answer is changing. The liquidation industry, an $80 billion network that gets rid of customer returns and unsold goods, is feeling a pinch as major retailers tighten their grip on inventories after the recession.
Stores are hanging onto more returned goods to try to sell a second time, instead of loading them on pallets for the liquidators to haul away and sell at a discount.
"More of those goods are now going back on the floor," said Tony Hofstede, president and co-owner of Event Sales Inc. in Minneapolis. "They never used to do that."
The change has big implications in the Twin Cities, where Event Sales and Jacobs Trading are two of the major players in the industry.
Ric Tessari closed his liquidation goods store in Brooklyn Park in 2010, for example, when the quality of liquidated goods declined. As major retailers held on to higher-quality returns, the merchandise available to liquidators went south and so did sales, he said.
Tessari, like any closeout retailer who has sold returns from stores such as Target, Wal-Mart and Costco, never had any control over what goods he was buying. Big-box retailers lump all their returns together, regardless of size or department, on pallets or in boxes.
Once the pallet is full, it is shrink-wrapped and purchased by the pallet or the truckload.
Tessari used to tell his supplier to watch for any pallets with what looked like furniture on them, because that was a popular seller. But most contractors don't sort merchandise, so there's no guarantee.
During the recession, the quality of goods he received declined. "One time I paid $325 for a pallet of Styrofoam coolers that was probably worth $50," he said.
The quality has rebounded somewhat since then, but it's still challenging as more players enter the field, said Bob Bushey, general manager of DealSmart liquidation in Little Canada and Mounds View. "It used to be mostly liquidators who were buying the odds and ends, but now we're competing with Goodwill and Salvation Army buying the same goods to sell as new," he said.
As major retailers restock more of their returns, consumers are forced to check more sources for discounted merchandise. The TV that would have been sent to a liquidator because the corner of its packing box was crumbled is now staying on the sales floor without a discount.
"Consumers may not have noticed, but that's not the way it used to be," Hofstede said.
Before the recession hardly any items were re-stocked, said Irwin Jacobs, who founded Jacobs Trading Co., a liquidation business in Hopkins.
Chains such as Target, Wal-Mart and Kmart traditionally restocked less than 5 percent of returns, even some in perfect condition.
But even with the shift in the business, liquidation remains a substantial industry.
Each weekday at Jacobs Trading, nearly 200 semitruck trailers are loaded for distribution around the country and overseas, said Jacobs. The company, although still headquartered in the Twin Cities, was purchased by Washington, D.C.-based Liquidity Services for $140 million in 2011.
Event Sales loads far fewer trucks per day than Jacobs, but it remains a prominent, international player.
Both companies ship most of their merchandise out of Minnesota and out of the country, but they also opened retail stores locally to liquidate small quantities. Event Sales operates Discount 70 in Columbia Heights, but it represents only 5 percent of the company's sales, said Hofstede.
Jacobs Trading retail store, Brand Name Deals in Fridley, closed earlier this year after Liquidity Services' purchase.
The Twin Cities is home to a large number of former and current retail liquidators such as Banks salvage, Brand Name Deals, C.O.M.B, Fingerhut and Petters as well as Ax-Man, DealSmart and Opitz Outlet. Consumers find discounts of 50 to 80 percent on brand name merchandise there.
"It's not surprising that liquidation found a hotbed in the Twin Cities," said George John at the University of Minnesota's Carlson School of Management. "We've got an industry cluster of Target, Best Buy and General Mills here."
But few people realize how many liquidated goods find their way to the Twin Cities because retailers and manufacturers like to keep second-tier goods quiet. They don't want to take the chance of "infecting" new product with returns that may not be perfect.
Experts say that retail return rates vary from 5 to 20 percent, depending on the category. Online retailers and electronics usually have the highest return rates, said Jacobs.
Once the misfit items are collected by contractors, liquidation stores pay about 5 to 15 percent of the retail price, according to Eventsale.com. Smaller stores pay up to 25 percent of the retail price.
For retailers, the liquidation specialists provide an important service.
"Retailers don't have the expertise or the time to check if all returned items are saleable," said Lorman Lundsten, professor of marketing at the University of St. Thomas. "They can recover a few percent by sorting through them, but before long they get buried in them."
In the past, some companies destroyed returned merchandise, but companies such as Event Sales persuaded retailers to be more creative with their closeouts and returns. "We offer a green alternative," Hofstede said.
John Ewoldt • 612-673-7633