Out of sight, out of mind, out of pocket: is liquidating returns a good idea?
Liquidation, once the province of business failure, is now a common practice in the ecommerce world, largely because of returns and excess inventory. About 16.5% of goods purchased online are returned for a refund or replacement, which amounts to hundreds of billions of dollars (read about Retail’s Trillion Dollar Problem). But more importantly for our purposes, lots of products sitting in warehouses that need to be dealt with by someone. Brands and primary sellers often take the most expeditious route, which is to load them on pallets and sell them at an extreme loss to wholesalers–i.e. liquidate them.
However, while this practice does save original sellers and brands from the seemingly daunting task of dealing with the glut of inventory, it costs them more than it should. And beyond the loss of profits (which is considerable), there is also the loss of control of how, where, and to whom their products are sold. Even more importantly is the potential for long-term harm to their most precious commodity–their brand integrity. However, there is a better way to deal with returns–recommerce.
How Does Liquidation Work?
To understand the problem requires first understanding liquidation. Liquidation in the modern sense means offloading inventory to wholesalers, or bulk buyers, at a tiny fraction of its value, often as low as 4-6%. The orphaned goods are then sold for a fraction of the sticker price of a new item–sometimes as low as 15%, but it varies wildly due to the unregulated nature of the secondary market. Regardless, it’s not helping the bottom line of the original sellers or brands.
The most controlled version of this is when returns are routed to wholesalers. This gets close to a solution but misses the mark because these wholesalers are typically not beholden to the brand in any way. This leads to a number of problems, which will be discussed more below. More typically, returned goods sit in warehouses, untouched and unexamined, until their very volume becomes unsustainable. Original sellers or brands then sell the goods, often by weight or pallet, to wholesalers and bulk buyers.
Once the goods are no longer in the hands of the brand or a trusted seller, all bets are off. It is not too dramatic to say this practice, at best, causes more problems than it solves, and, at worst, can harm the brand’s integrity and its relationship with customers.
The Dangers of Liquidation
As has been pointed out, the benefits of liquidation are minimal, and can be summed up in the phrase “out of sight, out of mind.” By virtue of the fact that the returned and unsold products are no longer taking up warehouse space, they are written off and rarely thought of again.
Out of sight and out of mind–but not out of existence. Once introduced into the secondary market, brands and primary sellers have absolutely no control over the product. This can have a number of negative consequences:
Not only has the brand or retailer lost the revenue for the returned or unsold items, they have introduced a competitive product to the market that can be sold for whatever the wholesaler, or reseller, wants–typically about or below 15% of the original price. While the item might be a prior model or a refurbished item, it will still undercut price dynamics in the primary and secondary markets.
Depending on the scenario, there are many ways a wholesaler can negatively impact primary sellers or brands. Poor handling of the inventory can affect the quality of the products being sold to the end consumer, leading to bad reputations and bad reviews that can undo hard work to ensure brand integrity. Cost-cutting measures along the supply chain can lead to customer frustration that can blow back on the brand or primary sellers.
Possibly the worst effect of liquidation is wholesalers flooding the market with competing offers, promotional material, and marketing cannibalization of a brand or primary seller’s own products. While this will affect price, as stated above, it will also undermine current marketing programs and sales initiatives from the primary seller, or brand. Without control of the product, it is safe to assume this will happen at the worst possible time(s).
This can all lead to more excess and unsold inventory sitting in warehouses and, eventually, further lining wholesalers’ pockets, while considerably lightening the profits of primary sellers and brands.
A Better Way
Embracing the circular economy and recommerce can prevent brands and primary sellers from compromising price integrity and competing with their own products, while also maintaining quality control in the reverse supply chain and safeguarding their brand reputation across product life cycles.
Recommerce, especially for returns, is becoming more and more essential. Companies can now utilize a trusted recommerce partner to ensure returned and excess items are handled in alignment with brand preferences and restrictions throughout the reverse logistics and disposition processes.
Effective reverse logistics efforts will include transparency and accountability in the handling of returns and excess items, because brands are reclaiming their returns and excess inventory rather than offloading them to a wholesaler or liquidator, who has no motivation to maintain standards. With this comes streamlined reporting, handling, and insights all along the reverse supply chain. Brands will know what, when and how things are happening with a trusted partner. What’s more, brands are able to work with this partner to develop custom grading standards based on product type to ensure that as items enter the secondary market there is no concern that loyal brand customers might purchase something that impacts their opinion negatively.
So, a quality reseller will ensure that the customer service and product quality is aligned with brand and market standards. Furthermore, they will align their promotions with the brand or primary seller’s promotions to ensure that there is no cannibalization of sales, that reseller initiatives do not interfere with the brand’s, and that customers get a similar experience (in terms of customer service, support and quality control) to purchasing directly from the brand, complete with trained product experts. Effective, the reseller becomes an extension of the brand.
Embracing the Circular Economy
There is a real need for treating returns and overstock with the same level of care as primary sales, but most brands or primary sellers do not have the resources or space to refurbish and sell the goods effectively. This often leads to liquidating, which has the effect of keeping the items out of sight and out of mind, but also leaves the brands and primary sellers significantly out of pocket and out of control. Worse, brands are at risk of damaging their relationships with customers, who often do not even realize they are not buying from authorized sources. By embracing the circular economy,and outsourcing reverse logistics, brands and primary sellers can maintain control without having to devote resources to do so, a win-win by any measure.