Depending on what retailers do with holiday returns and overstock inventory—to the degree that they touch it, sort it, triage it, refurbish it, recycle it, resell it—the associated costs of the reverse supply chain can add up quickly. “It’s expected that roughly 10 percent of purchases will end up being returned, so the estimates that I’ve read is that will translate into $70 billion worth of retail sales, which just get reversed. The impact is enormous. With 10 percent of your sales coming back, it’s not just running the register backwards, but the cost associated with handling all that product coming back,” according to Howard Rosenberg, CEO and co-founder of B-Stock Solutions.
There are several ways a retailer can try to recoup value from the gift returns and overstock inventory that tend to accumulate immediately after the holidays: resale to another consumer (in some cases including reconditioning and/or refurbishment), resale in bulk on the secondary market, donation and recycling. Destruction is another option for retailers, although no value is recouped, but further reduced.
Another issue with dealing with this excess inventory and returns is that many retailers not only don’t have the space to house it or time to invest in it, but also the expertise to determine what inventory liquidation approach best suits their bottom line. That’s why B-Stock Solutions and other comparable organizations focus on helping retailers resell their returns into the secondary market in bulk to business buyers. “The secondary market is the non-primary consumer market for retailers’ products … anything that leaves a company’s facilities, but not through the front door of their retail stores. It’s going out from distribution and return centers. What we found is that retailers really want this product gone relatively quickly after it hits their warehouses and return centers,” says Rosenberg. The bulk secondary market “satisfies the velocity requirement that they have to move this product out so they can return to business as usual and have their normal inventory on the shelves, not all these return products.”
Eliminating Overstock while Recouping Value with an Online Auction
Rosenberg continues, “Returns have been happening forever. With the percentage of sales that are getting returned, I think that'll continue to rise as the balance of sales shifts from offline to online. We've definitely seen that already, so it becomes more and more important.” With the volume of returns ever-increasing, it often makes sense for retailers to collaborate with a third party specializing in inventory liquidation and the reverse supply chain. The core competency of retailers generally doesn’t include the reverse supply chain. “99.9 percent of the people that work at any given retailer are really focused on optimizing margins on the forward side of the business. You have a tiny number of people at the company who are even thinking about the liquidation and the reverse part of the business."
The online auction platform works directly with retailers and manufacturers to provide tools and services that allow them to open up the secondary-market sales of their excess inventory to a much broader audience, thereby eliminating the time-consuming negotiation step of selling inventory, which causes them to limit their secondary-market sales to a small group of buyers. Online, you can negotiate with 5,000 people, but “when you’re doing it the old-fashioned way of negotiating on the phone, you just have to limit the number of people that have access. The retailer gets the benefit of lots of buyers competing for their inventory with the likelihood of someone in that group of 5,000 is willing to pay more than the group of five that it may otherwise have.” The solution tends to deliver higher recovery rates, typically anywhere from 30 to 80 percent, than if retailers just negotiate directly with a buyer, according to Rosenberg. And buyers win as well because they have access to inventory that they never had direct access to before. “It’s really a win-win for both buyer and seller.”
A dedicated database of suppliers and product differentiation helps, too. "When we build these private marketplaces for a particular retailer, we build a buyer base in that marketplace for that product. It's there, ready, waiting and acceptable to the retailer to put their product in front of, any time they need 24/7/365. It fundamentally changes that dynamic in the market where the retailer feels dependent on some buyer because they don't know where to sell it themselves. Rather, they have the tool right there at their disposal, ready to go, with the appropriate buyer base just waiting for them to list something. I think the bottom line is it's one of those things that's not necessarily in the retailer's core competency, to know the secondary market and know where to go find demand for particular products, which is caused by the fact that so few people focused on liquidation. They don't have the bandwidth to go make this their job to go scouring global markets looking for the right buyers for the right product."
Retail is intensely competitive: Every dollar that a retailer generates matters. Rosenberg elaborates, “There's pressure on margins everywhere they turn, whether it's free shipping and faster delivery, or liberal return policies. Retailers work hard to squeeze every dollar they can out of the main business and gotten quite good at that. The retail business, selling single items to the consumers either in their stores or on their sites, streamlined the processes, put in massive systems, invested huge amounts of money in software and analytics, so the question I always asked (in the 10 years I've been doing this) is why would you neglect the last mile of liquidation, in particular, all of your supply chain, more generally. A lot of companies use very old, inefficient systems and processes in the reverse.
“I used to say that the opportunity for our business is that retailers just haven't gotten around to making the investment in the reverse part of the supply chain and the last mile of liquidation. I thought eventually they were going to get there as they realized that this was the last frontier of where they have significant financial margin opportunity that has yet to be taken advantage of and I think we're starting to see that.”