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How Liquidation Happens

It is only common sense to wonder why all this perfectly good and perfectly new merchandise becomes "liquidation merchandise". To those of us not in the business of running huge chains of department or "big box" specialty stores, it sounds wasteful, frivolous, and just plain dumb. After all, nearly everything will sell eventually…either next season, or now at a lower price.

And in fact, this is how the big retailers see it, too. But for Target and Walmart and all the other big stores to have become as big as they are, they had to separate themselves from their competition, or at least from their perceived competition.  And in the case of the biggest retailers, they do it by continually offering the newest, most modern, most fashionable merchandise at attractive prices, AND by offering a nice selection of these products at PRECISELY the time when people want to buy it, in order to create the highest possible profit per square foot of retail space.

Let us take a look at the inflatable plastic swimming pool, or kiddie pool as we used to call it. Your big chain store looks back at their sales of kiddie pools over the past decade or so, and can see from their historical data that people start buying these pools in mid-April, around the 4th of July they can hardly keep the shelves stocked with them, and by Labor Day they can hardly give them away. They look at this data to determine how many they can expect to sell during this time, and they make a fairly educated guess that each store will be able to sell on average 1000 pools during the upcoming season. They also know they can expect to sell 300 small pools, 500 medium pools, and 200 large pools. So that is what they order for each store.

(I should state here that this is an extremely simplified version of the true story - the stores dig extremely deep into their data to figure out why one store may sell more small pools than the others based on the economic health in that particular store's area, and how the selling season for northern states is much shorter than that for stores in southern states, etc. But you will understand the point by the time you are done reading this page.)



So our example store gets 1000 pools, and it turns out to be an unusually cool, wet summer. Further, one of the bigger factories in town unexpectedly announces large lay-offs, so the local economy takes a downturn.  All in all, it is a terrible summer to try to sell kiddie pools. As the summer wears on, the store discounts the pools, but despite reducing their prices, fewer people want or can afford the luxury of a new kiddie pool.  So they only end up selling about 600 of the pools by labor day. And regardless of the weather or the economy, historically NOBODY is in the market to buy a pool at ANY price after Labor Day.

Now in the meantime, having noticed this problem, the store may have sent some of the pools back to their distribution center, where they are re-routed to regions that happen to be experiencing record-high temperatures (this being one of the advantages of having lots of stores all over the country). But in the end, the store is sitting on 100 pools that they have no chance of selling, and they have to start clearing them out so they can have space to start selling Halloween and Thanksgiving and Christmas merchandise. So they sell the remaining pools to a liquidation company that buys them for, perhaps, 1/3 of their WHOLESALE cost. Probably even less. And the liquidation company then sells this merchandise to "off-price" retailers, OR TO YOU.

That's right: they unload pools that cost the store $10 and should have sold for $30 or more, for a FRACTION of the price - let's say $3 each. In your or my mind, we look at that and say the store lost $700 on those unsold pools (100 pools purchased for $10 each = $1000; sold to the liquidator for $300).

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But the reality is that the big chain store bought HUNDREDS of THOUSANDS of the pools for their hundreds of stores, and while they didn't sell all of them, they sold MOST of them - and made an EXCELLENT profit on the ones they did sell. They had pools at every store at the time people wanted to start buying pools, so they kept customers happy and kept them from going to a competitor to buy their pools. Also, the chain was able to move kiddie pools from un-productive stores (such as our example store) to other stores where demand might have out-stripped supply. And finally, the store was able to make space for those autumn and winter holiday products which are traditionally profitable regardless of weather.

Why doesn't the big chain just take all their unsold summer inventory (like our kiddie pools, and barbecues, and patio sets, etc...) back to a big warehouse and hold them for next year? One answer is that in the big scheme of things, it's easier (and therefore less expensive) to just unload this merchandise to a liquidator (after all, transportation and warehouse space are expensive too). Another answer, believe it or not, is that those kiddie pools are "outdated". Next year, most of America's consumers will want the "new" kiddie pool that is imprinted with the latest Disney characters, rather than those "old" kiddie pools that merely are imprinted with starfish and seashells, or last year's Pixar movie characters. (By the way, this is not a political or social rant - merely an opinionated observation.)