Liquidation Inventory Buying

Companies liquidate a wide variety of things, including inventory and fixed, capital assets.  In terms of inventory, you can generally classify liquidation inventory into several categories:

Overstock:  Overstock inventory is brand new inventory that a company has determined it must sell for one reason or another.  Typically, this is because they have either over-bought or under-sold their projected volume.  At some point, companies must move out the old overstock product to make room on store shelves and warehouse shelves for new products.  It might be the newest models of electonics or next season's apparel.  The price of overstock liquidation product is typically the highest because it is in brand new condition and can immediately and easily be resold by they buyers.

Customer Returns:  Retailers and manufacturers receive customer returns all the time.  With more and more liberal return policies at retailers like Costco and Walmart, consumers take the liberty of returning products for virtually any reason.

• Refurbished Returns:  Some returns will be refurbished by the retailer before being liquidated.  Depending on the product and the amount of repair needed to put it back into 'like new' condition, retailers have figured out that they can invest $x/unit but then resell for $x+$y/unit because the products are in resellable condition.
• Unrefurbished Returns:  As the name implies, these are returns that have not been refurbished.  Also known as raw returns, often these loads will be palletized as they came back to the retailer.  Typically, the retailer will want to 'touch' the units as few times as possible if they don't intend to refurbish them.  Every touch adds cost to the product and increases the loss they will incur on the inventory.  Unrefurbished returns will always be less expensive.

End of Life:  This inventory category consists of products that a manufacturer is phasing out of production.  Most likely, they have introduced a new model.  It is similar to overstock inventory in that the product is typically in new condition, however, it is likely older and it is almost certain to have been made obsolete (or at least less desireable) by the introduction of the next generation model.

Here is an estimated breakdown of the liquidation market size from several years ago across the US and EU markets.

Retailers are the primary original source for buying returns.  As a buyer, you want to get your inventory directly from these guys.  You don't want to buy from other liquidators.  If you do, you are likely paying unnecessary markups, getting lots that have been culled for the best quality merchandise, and buying  merchandise that has been shipped from seller to buyer at least once.

The challenge is gaining access to purchase from them.  Most of these companies will maintain a very short list of buyers with whom they have done business for many, many years.  It is an old boys network and can take years to break into the inner circle who are welcome to buy.  This is a big part of why the liquidation business has developed a somewhat negative reputation.  When non-economic (to the company) factors impact the allocation of goods, it is inevitable that you will encounter some bad actors who pay or demand kickbacks or other benefits in order to steer inventory into someone's hands.

Here is a list of the top 42 non-food retailers, by sales, worldwide.

eCommerce Bytes has been compiling a list of auction sites. These appear to all be consumer sites. There are auction sites listed here that I have never heard of, so I suggest any resellers research the demand levels carefully before committing any meaningful effort to testing a new marketplace.

When it comes to auctions, DEMAND = SUCCESS!

When you buy liquidation inventory from retailers, manufacturers or from other liquidators you must be very careful to understand the various product conditions you are likely to run across.  Without a doubt, the most common problems I see with newbies in the business are related to their misunderstanding of what product condition descriptions mean. 

Here is an overview of product conditions you are likely to encounter and brief descriptions of each one:

• NEW:  This merchandise is in its original packaging and includes all features as advertised by the manufacturer. Usually, these are overstock items that were entirely ready for retail sale but never made it to the shelves.

• REFURBISHED:  These items are used but have been inspected, tested, and restored to full working condition. They rarely come in original packaging and usually do not come with manuals, documentation or additional parts and accessories. The condition of refurbished items can range from visually perfect to imperfect with noticeable cosmetic defects and blemishes, such as dents, scratches, and other signs of handling. Again, despite these defects, the merchandise is in full working condition.

• SHELF PULLS:  These are items that were at one time available for sale in stores but never purchased. They usually have assorted price tags and/or stickers, sometimes indicating multiple markdowns, and have been exposed to customer contact. In addition, since most of these items have been returned from retail stores back to the warehouse, they sometimes show signs of extra handling. Therefore, shelf pulls typically exhibit a wide range of individual package conditions.

• RETURNS:  Returned merchandise was sold at retail, but returned by the customer. Often, these purchases were simply the wrong color or size, or were gifts that were brought back to the retailer. As a result, this merchandise can be in perfect working order with all original packaging and documentation. Occasionally however, products do have some operational and/or cosmetic issues, all of which will be noted in our auction listings.

• USED:  These items were sold at retail and used by customers to varying degrees (i.e. light use, moderate use, and heavy use). These items often possess noticeable cosmetic blemishes including dents, scratches, and other signs of age and handling. They rarely come in original packaging and usually do not have original documentation, additional parts, and/or accessories. Used merchandise is minimally tested to meet only the most basic requirements of functionality — they may not be in optimal working condition and may require additional maintenance and repair.

• SALVAGE: Salvage merchandise has been identified as defective for reasons concerning functionality, appearance, or both. Salvage assets can usually only be used for parts but there is no assurance the particular parts you want haven't already been removed. As an example, if you are purchasing "Salvage" computers, DO NOT ASSUME that the hard drives are still inside. They may not be. If you have specific questions, please ask usbefore bidding. Be sure to carefully evaluate the photos and manifest details of all salvage auctions prior to placing a bid to make sure that you are aware of all known merchandise defects. Any listing described as "Salvage" will not be eligible for any return or make-good by the B-Stock or the seller for reasons related to condition.

For new liquidation inventory buyers, this is a great site to keep an eye on.  It is another auction site run by B-Stock Solutions, but this site offers merchandise from many different sellers.  The site offers lots as small as a few hundred dollars and as large as $75,000.

B-Stock does a great job of vetting and selecting sellers for the site so it has created a great, safe environment for buying.  They collect funds from buyers on every transaction and, for new sellers to the site, they hold the funds until they confirm the buyer receives what they were promised.

The site is very well designed and easy to use.  The variety of products available is great.  They get inventory listings from some great retailers like:  Macy's, Blockbuster, Gilt Group, Mercantila, Brown Shoes, Sam's Club, Walmart and many others. 

Click on your state below to see what forms are typically required to purchase inventory tax-free from any supplier.

Instructions on Obtaining a Resale Certificate/Sales Tax License

One great source for consumer returns is the Walmart Liquidation marketplace.  Walmart sells lots of customer returned inventory on the site directly to any approved resellers.  To get approved to purchase on the site only requires that you have a valid reseller's certificate.

They sell lots that range from a pallet or two up to full truckloads.  Most lots contain products from a variety of categories.  Occasionally, a lot will contain a single category.  For example, there are frequently lots made up of nothing but TV's.  Some of the categories common on the site include: furniture, bikes & rideons, home audio, outdoor furniture, and much more.

Every lot on the site is sold in an auction format and starts at $100 and sells to the highest bidder.  There are no reserves.  This is the purest form of a liquidation-minded seller.  They are converting inventory into cash extremely efficiently.

The site is a great place for beginners to start but be careful to read the manifests very carefully paying particular attention to the 'reason for return' column.  You can get a very good feel for the likely condition of every item from the code in this field.  A great thing about the site is that you can trust that Walmart is making its best effort to represent the items accurately.

One of the most important, yet subtle, concepts you will want to understand early is the difference between liquidation-minded sellers and wholesale-minded sellers.  If you don't understand this difference you could end up wasting a tremendous amount of time as you attempt to source profitable merchandise.

Liquidation

A liquidation-minded seller has one goal in mind--converting some distressed inventory into cash.  This is what all retailers and manufacturers do with some subset of their inventory at some point in time.  They know they will incur a loss on the product and they are OK with that.  Would they like to minimize this loss?  Of course.  However, they are motivated to sell the products and will trade off price (or recovery rate) for velocity (selling it quickly).

Wholesale

On the other hand, some sellers are really wholesaling.  Wholesaling means they are selling bulk quantities of products at a particular price that is generally above their cost.  This is what most manufacturers of any products do every day.  A pencil manufacturer wholesales large quantities of pencils to retailers who then sell them to consumers.  The pencil manufacturer may have made the pencils for 5 cents each and will wholesale them for 7 to 10 cents each.  They cannot wholesale for 3 cents each or they will lose money.

Similarly, when a liquidator buys a pallet of returns from a retailer, they establish a cost basis.  This liquidator now MUST sell that pallet for more than his cost if he is to make a profit and remain in business.  He will act more like a wholesaler than a liquidating retailer because of this and you will have a hard time getting a great deal on which you can profit.

Always try to buy from someone who is liquidation minded, not wholesale minded.  What you pay should be determined solely by what you can sell the inventory for, not what some middleman paid for it before you came along.

Before you jump straight in and start shelling out your hard earned cash, it is important to do a self assessment to ensure proper focus.  You want to make sure to understand your own proprietary knowledge base, capabilities and goals. Here are just a few questions to answer:

1. Are you working out of a warehouse with a loading dock or are you starting in your garage?
2. Are you able to repair broken items?  If so, what type of items?  
3. Do you have any specialized knowledge in a particular product area?
4. Do you want to simply buy functional, ready to resell products in volume and then resell by the unit (a more traditional wholesale buying/retail selling model)?  
5. How and where will you be selling?  eBay?  Amazon?  Flea markets?  Retailing or wholesaling?

There are many niches in the wholesale liquidation business.  Doing a self assessment of your capabilities, knowledge and goals is the most important first step to understand where you should start.

In a later post, I will discuss some of these different niches and the pro's and con's of each.