March 06, 2017
The value of excess stock
Every year expectations rise leading up to the holiday season with sales forecasts looking very promising. It is the time of the year where most retailers across Australia are expecting new product lines to come in and therefore stock up in preparation for the year’s busiest season. However, there are some retailers who still have piles of excess stock taking over their warehouses while waiting to be sold.
This problem often becomes even bigger when retailers already in this situation are left post-Christmas with unsold and additional products sitting on their shelves in stores and warehouses. Managing excess inventory could ultimately become a living nightmare for many businesses.
The obvious solution is to mark down inventory in store to eliminate excess, sometimes multiple times – however this comes at a significant cost. For those that are interested in deriving more value from their excess inventory, they should look at other options, such as liquidation or corporate trade (also known as barter).
Before considering either option, retailers must define their needs. Is there a short-term cash need? Which one will offers greater value? Is there interest in expanding distribution channels? What financial, brand or distribution challenges is the company facing? Would it be beneficial to reduce costs for expenditures across their enterprise?
Based on that, it is worth comparing liquidation and corporate trade, to investigate if the alternative solution to traditional methods of managing excess inventory is any better.
A solution by default - liquidation
Liquidation of inventory results in selling assets off quickly, often for less money than originally paid for them. Companies can either use their normal distribution channels at dramatically reduced prices, or sell entire inventories to a liquidator, also known as an off-price buyer, who will pay a lower price for the products, paying immediately and taking possession.
Retailers often turn to liquidation because of its ability to generate cash immediately. For that reason this solution has been integrated into most retailers’ supply chain strategy; it’s a solution by default to excess inventory issues.
Yet, while the benefits are clear, liquidation does have some significant drawbacks. As the inventory is typically sold for much less than what the company paid for it, retailers must take a loss on their income statement. When reported, this could negatively impact investor sentiment towards the company. Also, until that inventory is either sold or the liquidator takes possession, storing the goods means that warehouse space can’t be used to stock for the upcoming seasonal merchandise or accommodate a new product line.
Most importantly, there’s the missed opportunity of getting more value across their business.
The alternative - corporate trade
In corporate trade, excess inventory is purchased with cash or a trade credit. Payment is typically equal to the wholesale/acquisition cost of the inventory. In return, the retailer commits to allocating a portion of their media spend or other expenditures through the corporate trade company, using the trade credit as partial payment.
"What is fascinating is that corporate trade has the power to unlock additional media value for retailers by part paying for advertising, using their unwanted stock, inventory or assets, and therefore making their marketing budgets work harder" Areef Vohra, Managing Director at Active International explains.
Corporate trade enables retailers to receive more value for their excess inventory vs. traditional liquidation, as the value received –in cash or in trade credit– is typically higher than the liquidation value of the goods. And, in many cases, corporate trade companies will sell the inventory to the same distribution channels that the retailer has in place, meaning that supply chain disruptions are minimal. In addition, since corporate trade companies have partnerships across multiple categories, they often provide access to new distribution channels –ones that the retailer would not have access to otherwise– such as trading partners or private networks (i.e. employee and friend and family sales).
How to guarantee ROI on a new product launch
When launching a new product line in the market, the retailer is obviously eager to generate sales and demonstrate a quantifiable ROI on their media spend behind the launch.
With corporate trade being part of their launch strategy, a portion of the marketing budget is placed with the corporate trade company’s media suppliers. In return the corporate trade company guarantees the purchase of an agreed amount of the new product achieving an immediate ROI with genuine incremental sales.
How to recover the P&L
If a retailer’s problem is depreciating assets that leaves them with an undesirable expense (storage or destruction expenses) for the business affecting their P&L, then corporate trade can be considered as an option. It underwrites these expenses by paying the client in cash for the right to trade their marketing budget with their existing media partners.
Choosing the right solution
It’s clear that both options offer measurable benefits to retailers. Liquidation is straightforward and widely accepted, but is limited in the financial benefit it delivers. Corporate trade is growing as an alternative option because it can deliver higher financial benefits, additional media, long-term benefits, new product sales and added value for inventory, but retailers need to involve other areas of their business to achieve that additional value and, depending on the payment structure, may not realise the benefit immediately.
The good news is that retailers looking to manage their excess inventory leading up to this holiday season have two good options to consider. Ultimately, the company’s needs drive which is the best choice.