How Does A Recession Affect Closeout Sellers And Liquidators?
As sales revenues and profits decline, closeout wholesalers may cut back on hiring new employees, or freeze hiring entirely. In an effort to cut costs and improve the bottom line, inventory buyers, closeout companies and other overstock distributors may stop buying new equipment, curtail buying closeouts and stop new product roll outs (a factor in the growth of revenue and market share). Expenditures for marketing and advertising may also be reduced including budgets for obsolete stock and helping 3PL warehouses sell excess inventory and dispose of unwanted merchandise. These cost-cutting efforts will impact other businesses, both big and small, which provide the goods and services used by the big manufacturer.
One of the first impacts recessions have on excess inventory buyers tends to be a tightening of credit conditions. Early in the recession interest rates may rise initially, then fall as the monetary floodgates open. But throughout the recession standards for lending in the market tend to be tighter, and lenders are more selective of the risks they are willing to take on at any interest rate. The overstock and closeout segment of the retail market may be protected in a recession, as more Amazon sellers shut down their FBA accounts due to excessive high storage fees. This will result in more obsolete stock available in the marketplace for inventory buyers and closeout wholesalers who have cash. Even large businesses may face difficulty turning over their debt, which most are dependent on to finance ongoing operations. Corporate debt relative to the size of the economy has reached successively higher record peaks decade after decade leading into the last several recessions. Consumer demand is falling off as Federal Covid 19 relief programs have come to an end and consumers have less discretionary income for closeouts, overstock deals and excess inventory for sale at low prices.
A recession will also dampen a company's accounts receivable (AR) and liquidity issues impact consumers and businesses up and down the supply chain. Customers who owe money won't have extra funds for buying closeout sporting goods, overstock toys, excess inventory of home goods and discounted closeouts of lawn and garden inventory or hardware.
The company may make payments slower, later, or not at all. Then, with reduced revenues, the affected company may be forced to pay its own bills slower, later, or in smaller increments than their original credit agreement required. Closeouts are a hedge against recessions because they create an opportunity to sell goods cheaper, giving the consumer more value for their dollar. Excess inventory is often the result of an importer or distributor having too much inventory in the warehouse. These conditions create a condition referred to as overstock, excess inventory, obsolete stock or surplus inventory. Making late or delinquent payments will reduce the valuation of a corporation's debt, bonds, and ability to obtain financing. The company's ability to service its debt (pay interest on the money it has borrowed) may also be impaired, resulting in defaults on bonds and other debt and further damaging the firm's credit rating. In some cases if these conditions deteriorate the company may be at risk of looking for inventory buyers to help them dispose of unwanted merchandise and slow moving products. Dead stock is a problem especially when the company is experiencing cash flow problems and has high levels of debt. In some cases, if these issues are not addressed the business may fail forcing it to shut down it’s 3PL warehouse, move to a smaller warehouse space, or liquidate everything entirely just to service debt. Closeout wholesalers are buyers who will take advantage of this type of situation, often buying distressed inventory at discounts up to 90% off regular import cost.
The business may cut employees, and more work will have to be done by fewer people. Productivity per employee may increase, but morale may suffer as hours become more extended, work becomes more arduous, wage increases are stopped, and fear of further layoffs persists.
As the recession increases in severity and length, management and labor may meet and agree to mutual concessions to save the company from liquidating inventory and save jobs. The concessions may include wage reductions and reduced benefits. If the company is a manufacturer, it may be forced to close plants and discontinue poorly performing brands. These closeouts can be sold off to closeout websites, closeout wholesalers or even be sold direct to discount brick and mortar retail store. The goal is to reduce inventory enough and get rid of merchandise to generate cash flow and free up space in the warehouse. By allowing dead stock to sit in the warehouse, management is putting the company at risk because excess inventory is not being sold of to allow for new products coming in.
Small, private businesses with annual sales substantially less than the Fortune 1000 perform similarly to large companies during a recession. Without significant cash reserves and large capital assets as collateral, however, and with more difficulty securing additional financing in trying economic times, smaller businesses may have a more challenging time surviving a recession. Closeout companies and surplus inventory distributors have a better chance during a recession because they buy overstock and excess inventory at steep discounts. This allows them to pass along the savings to their customers who, in turn, offer goods to the general public for cheap prices. Consumer demand for closeouts, overstock inventory and obsolete merchandise traditionally remains strong when times get tough.
Small businesses are generally not able to issue new stock to the public the way large publicly listed companies may be able to. They also tend to be deemed less systemically essential and are usually less well politically connected in the distribution of government bailouts, loans, and other benefits. Large companies often sell closeouts once per year for their fiscal inventory. This allows them to reduce dead stock, increase cash on hand, and make room for new goods in the warehouse. These companies are often more structured and have a closeout process they follow for liquidating inventory. Bankruptcies among smaller businesses typically occur higher than among larger firms. To some extent, these bankruptcies can represent opportunities for other, often larger, businesses to buy out the liquidated assets or move into the markets of small businesses. Consolidation of industries and markets is common as many smaller businesses are liquidated during recessions.
The bankruptcy or dissolution of a small business that serves a community — a franchised convenience store, for example—can create hardships for small business owners and residents of the neighborhood. In the wake of such bankruptcies or warehouse liquidations, the entrepreneurial spirit which inspired someone to go into such a business may take a hit, discouraging, at least for a while, any risky business ventures. Bankruptcies are costly because the require companies to shut down operations and close 3PL warehouses or move to smaller warehouse locations. This includes having to have inventory liquidation sales and sell closeouts. Too many bankruptcies may also prevent banks and other lenders from making loans for startups until the economy turns around.
Merchandise USA buys excess inventory, closeouts and overstock merchandise. If you are not familiar with the closeout process and liquidation process we can make it easy for you. If you are trying to get rid of too much inventory let us be your guide. We have been buying and selling closeouts for 37 years.
