Retail woes bring cheer to liquidators

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Continued: Retail woes bring cheer to liquidators

Article by: JACKIE CROSBY , Star Tribune
Last update: January 4, 2009 - 7:32 AM

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These are sunny days for the merchants of doom.

Retailers across the nation may be going bankrupt, closing stores and watching unsold goods pile up, but that spells unprecedented buying -- and selling -- opportunities for the liquidators and salvagers who resell all that unwanted merchandise.

In Minnesota, entrepreneur Irwin Jacobs said "business is up 100 percent this year" at his Plymouth-based Jacobs Trading Co., which buys liquidated, overstocked or returned consumer products from vendors and resells them to businesses across the globe.

Hudson Capital, a Newton, Mass.-based outfit handling the liquidation of Linens 'N Things, Steve & Barry's, Tweeter and Mervyn's, has seen business increase tenfold in the past year. Liquidity Services Inc., which operates one of the nation's largest online wholesale surplus and salvage companies, experienced a 33 percent surge in revenue.

"I've never seen anything quite like it," said Jacobs, who also owns boat manufacturer Genmar Holdings Inc., among other businesses. "You've got the whole system backing up, which is creating enormous opportunities in the close-out business. And it's just beginning."

Analysts predict that as many as 73,000 retail stores will close in the first half of this year. For consumers, that not only means great sales through the end of January, which is the fiscal year-end for most retailers, it also could mean a boost in quality of merchandise at stores such as T.J. Maxx, Costco, Big Lots Stores or Tuesday Morning, businesses built around selling wares bought off the secondary market.

"It's a buyer's market now for liquidators. They're the ones controlling the pricing," said Brad Fritz, a retail partner at Deloitte's Minneapolis office. "This market has deteriorated much quicker than retailers anticipated back when they were placing their holiday orders."

The business of buying up overstocks, returns and out-of-business merchandise, estimated to be $80 billion to $100 billion a year, happens largely behind the scenes.

Liquidators buy assets from struggling or bankrupt merchants and often guarantee creditors payments up front. Sometimes liquidation companies even pay employees, the rent or the light bill.

Still-surviving retailers, unable to sell goods even after markdowns of 70 percent, are forcing some vendors to take the product back. Retailers also are canceling orders, leaving factories in Asia bursting with unwanted goods.

Meanwhile, the vendors and manufacturers are getting squeezed at the other end by banks and others wanting a guarantee on receivables. So they, too, are turning to liquidators for relief -- even if reluctantly.

"You could see a lot of high-end labels moving down to the mass markets," said Stan Pohmer, a Twin Cities retail consultant. "You'll also see a lot of those manufacturers kicking back against opportunistic retailers who may be buying their stuff on the gray market. The upscale manufacturers don't want to see their stuff dumped to liquidators and their brands winding up at Target or Wal-Mart or whatever."

Some retailers don't want to cut prices to the bone, believing it tarnishes their brand image. Those that have outlet stores push the merchandise there. Others turn to companies such as Jacobs Trading, which may -- with the retailer's blessing -- rip out tags, remove bar codes and repackage the items in unmarked boxes to sell at flea markets or to vendors in Africa, the Middle East, Asia or Latin America.

Returns are a big source

There are at least 75 wholesale trade liquidators around the country. Some have specialties, such as computer parts or books. Many are privately owned, but some are owned by hedge funds, such as Hudson Capital.

A big portion of industry sales come from the return-liquidation business, which accounts for about $60 billion, according to Liquidation.com. Shoppers return 6 to 10 percent of everything they buy in stores and as much as 25 percent of online purchases. Retailers' increasingly liberal return policies contribute to demand for liquidation services.

Jacobs Trading gets a major share of its more than $100 million a year enterprise by reselling returned merchandise. Out of the 500 trailer loads of merchandise in its system at a given time, 200 a week come from customer returns, Jacobs said.

The company trades in everything from televisions, DVDs, appliances, dishes, sporting goods and toys to furniture.

"We make inventory disappear," said Jacobs, who started in the business 50 years ago with his father. About 700 employees work at 11 distribution centers around the country. He hires prisoners and the developmentally disabled to deface, as it's called in the industry, the merchandise to sell to Third World markets.

Liquidation companies say they don't have a recession-proof model, despite recent gains. Margins are getting slimmer, and consumers are so anxious about the future that liquidators say it's harder to sell goods even at close-out prices.

But retailers are expected to report more downbeat December sales figures on Thursday, with early projections showing that holiday sales dropped 2.5 to 4 percent this year, the worst results in five decades.

It's a case where one market's downturn is another's upturn.

"Our company is a beneficiary of these kind of times," Jacobs said. "And we will continue to be. Because if people aren't buying, there's no other place [for manufacturers and vendors] to go to get rid of this stuff. We're a source for them ... to do that and get paid for it."

Jackie Crosby • 612-673-7335

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