A retailer’s perspective on using an outside company to do a GOB, inventory reduction, cash raising sale or other high impact promotion.
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Need an excuse to have a “SALE?” There are a lot more reasons than you may think. I’m not talking about your regular, run-of-the-mill Labor Day, or Memorial Day sale; or the kind of sale that every retail furniture and mattress store has every weekend. I’m talking about the kind of sale where you call in a “liquidator.” This is a company that comes in, sets up your store, and runs the sale as a third party manager, for the duration of the sale event.
Companies who conduct these third party sales often refer to these events as “promotions,” primarily because they can be framed or structured to address a wide range of situations. They also offer many other business services, but for this article, we will discuss “sales.”
WHY HAVE A SALE?
Some retailers think that the only time to have this kind of sale is when they are Going Out of Business (commonly referred to as a G.O.B.) But, as any good liquidator will tell you, a well-performed sale run by a competent third party, may be able to SAVE you from going out of business. Cash raising sales are a good example.
Whatever the reason, crisis is all too often the motive for the sale; and crisis is always accompanied with a set of special problems, as we will discuss in a few paragraphs.
Before I continue, I want to make certain that whoever is reading this does NOT think I am advertising for liquidators. I am a retailer, and this article is written for retailers by a retailer, not a liquidator. In my 23 years in the retail business, I have hired liquidators on several occasions, so I have some experience in dealing with them. In the following paragraphs, I will try to cover some of the points that a retailer needs to think about before hiring a liquidator.
WHEN SHOULD YOU BRING IN A LIQUIDATOR?
Although it is certainly not the only reason to hire a liquidator, the most common reason a store owner would consider a third party sale, is when he is thinking about closing, for good.
My first suggestion is, don’t do a Going-Out-of-Business sale by yourself, with your existing staff. GOB sales should make you money, not be the final nail in your proverbial coffin. You should interview several liquidators. They are not hard to find. Many advertise regularly in the furniture trade magazines. Explain your situation to them. They will tell you if you are a candidate for their services. These companies are specialists. Most of them are professionals. They know what they are doing. Again, DON’T do a GOB sale by yourself, with your salespeople. It will fail.
“Cash raising sales” are another good reason for hiring a liquidator. A cash raising sale is an event to inject some high voltage into plodding, faltering store performance and image. The liquidator probably won’t call it a “cash raising sale.” He’ll think of a more compelling reason to entice customers into your store. A well-executed sale can often double or triple a store’s normal sales volume. If your sale is not a retirement event, or a GOB, and you intend to remain in business, advise your liquidator to plan the sale to ENHANCE your store image, not degrade it.
When you conduct this kind of sale, it is very important to remember the following fact. Your competitors won’t like it. It pulls business away from their stores. They are going to try to make it look like you are going out of business. This reality makes it very hard to maintain your store’s image as a “going concern.”
HOW TO FIND A GOOD PROMOTION COMPANY?
Look for experience. There are probably some sales going on, at this moment, somewhere within 100 miles of your store. Find out which company is conducting the sale. Does the sale appear to be successful? It is a good idea to interview several liquidators before making a decision. Make sure they have a long record of successful sales. Think twice before hiring somebody who is “just getting started in the business.” He or she may charge you a smaller commission, but are you going to get the performance you really need?
HOW OFTEN SHOULD I HAVE A SALE?
Don’t overdo it. I can tell you that when the sale is over, your sales volume will probably drop back to pre-sale levels. In reaction to the suddenly lower revenue, the store owner’s normal impulse is to “have another sale!” Too many sales, too soon, will destroy your store’s image, unless you want to be thought of as some kind of clearance house. Having too many sales will also cause your customers to become jaded. They won’t even come in unless you are having some kind of liquidation. Sales are good for primarily two reasons. One, to close shop, liquidate your inventory and walk away with as much cash as possible; and two, to jump start a business that is in the doldrums.
A sale will be more effective if you are not competing with another ongoing sale at another store. Too many sales in one town, too often, spoil the market for everybody. Most experienced promotion companies will ask you, in the interview, “When was the last sale conducted in your town or market area?” Liquidators like what they call “virgin territory,” meaning that it has been a long time since the local buyers were treated to a big inventory liquidation event.
WHAT WILL THEY DO?
Not all liquidators are exactly alike. That is why you should interview more than one before making a decision. (This, of course, assumes that you can find a company willing to take the assignment.) Remember, liquidation companies do this to make money. It can be a big commitment on their part. They don’t want to waste money and valuable employee time on an unprofitable project.
What will they do? They will usually do what you ask them to do. But, to give a general idea, the normal protocol is as follows.
- They will probably want to change the set-up of the showroom to be in line with their sales methodology. This usually includes papering the windows to create mystery and excitement for customers. They will bring in other merchandise that you do not normally carry. These events can run for as long as 120 days, with high sales volume, and they need to know that they can keep inventory flowing in. Your store probably does not have enough inventory on hand to supply a 4 month sale, and some stores are on credit hold with their vendors. They must have a merchandise flow that they can rely on.
- They will manage the sale. This includes supervising all sales efforts, designing advertising and promotion, merchandising, tagging, inventory control, writing sales tickets and collecting money, and re-ordering depleted inventory.
- They will bring in their own sales people. Some companies may include some of your sales staff, and some may prefer not to. It probably depends on the quality of your staff. Either way, they will have their own personnel on the floor and their salespeople will handle most of the store’s traffic.
- In short, they will handle as much of the store operation as you ask them to do. It’s probably not a very good idea, but the store owner could probably take a vacation during the liquidator’s tenure.
HOW MUCH WILL IT COST?
There are normally at least three or four categories of cost to the store owner.
First, unless some other arrangements are made, the liquidator usually charges a commission. This commission, as you would expect, is a percentage of the total gross sales of the store during the event. These fees can vary, but fifteen percent is a ballpark figure.
Second, the store owner usually pays for all advertising. Your advertising expense will be higher in a sale than you are normally used to paying. Some store owners are shocked at the advertising cost. But, it has to be promoted, and if your sales volume increases by 150 percent, the extra cost is certainly justified.
Third, the store owner will normally pay all the usual rent, utilities, warehouse and service employees, phone, insurance etc. The usual “nut.”
Fourth, the store owner will normally pay for all of the new inventory coming in. Since some stores are in financial crisis at the outset of the event, the liquidator may have ways to work with you on this problem. Just remember, the more expense and trouble the liquidator has to assume, the more money he will probably charge.
Many readers will react; “Fifteen percent? I only pay my salespeople five percent! And, all those huge advertising costs? And, having to buy inventory that I don’t even recognize? How could I possibly make money?” Keep reading.
CAN I REALLY MAKE MONEY DOING THIS?
You can, if the sale is done professionally. This is why you carefully review your goals, financial position and store operations with the prospective sales company. They want you to make money and will work within your ability to handle expenses and operations. They may offer, if they perceive a good possible return, to assume all expenses, and give the store owner a share of the sales, or profits. Ask about all the options offered.
Let’s look at an example. Let’s say you have a store currently averaging $125K per month in sales. Your profit margin is 40 percent, leaving you with a gross profit of $50K per month. Your total monthly expenses, which include advertising of $12.5K, are $45K per month. This leaves you with a monthly net profit of $5,000. I don’t know about you, but $5K per month is not nearly enough compensation to persuade me to assume the risk and aggravation of running an operation like this.
Now, you have a sale. It isn’t unrealistic to see sales double (or even better) in a promotional sales event. Let’s update our example. Your sales now increase to $250K per month. Your liquidator will probably guarantee you a certain average profit margin, and it is usually more than 40 percent, but let’s use that same figure in this example. Now, your net is $100K per month. The liquidator is spending double your normal advertising budget, up to $25K per month. He is charging 15 percent commission, which comes to $37.5K per month. Add up your regular nut which is 45K per month + an extra $12.5K for additional advertising, and $37.5K for sales fees and the answer equals $95K per month, which leaves you….(oops) $5K per month profit. What happened here?
I included this example to show that there are risks. That is why the store owner is well advised to thoroughly discuss his goals and situation with the sales company, before jumping off into a sale. The idea is to MAKE MONEY, not break even, or worse, lose money.
WHAT DOES THE SALES COMPANY EXPECT?
If you’re still reading after that last example, you may be wondering what your role is in the sale. Your role is pretty much whatever you want it to be. The liquidator expects you to pay him, first and foremost. He will expect you to pay your store expenses to keep the store open, and probably pay for the additional advertising. After that, it is between you and the liquidator. Most store owners prefer to watch sale in action (it is a good learning experience) but, try not to get in the way.
The sales company will ask you to sign a contract that should clearly define all the duties of both parties, including payment and money handling.
HOW LONG SHOULD THE SALE LAST?
Most sales last anywhere from 30 to 120 days. Not many companies want to go to the trouble for a 30 day sale, but some will. Some states have a statutory limit of 120 days on certain sales, such as GOB sales. Most sales will start slowing down significantly after 120 days anyway. Four months is an average life span. After that, your signs and advertising become part of the city’s “woodwork” in the eyes of passing customers.
WHAT HAPPENS AFTER THE SALE?
Even if you are retiring, or going out of business, most conscientious store owners want to make sure their customers, many of whom are friends, can be taken care of, if a problem, such as warranty, crops up after the store has closed. Some liquidators offer customer care after the sale. Ask your prospective liquidator about this issue.
What about left-over inventory? Since you have to be fully merchandised for the full length of the sale, obviously, when you slam the door on day 120, you will have a lot of merchandise left over. What happens to that? Again, discuss this before signing a contract.
If you resume normal operations, carefully monitor both sales and customer attitudes to see if the sale truly succeeded or failed. A short term 4 month profit can deteriorate into a long-term loser if the sale is not done professionally and carefully with the store owner’s best interest in mind.
A final note about G.O.B. sales. The whole point of a GOB is to make money, not just unload a bunch of old merchandise at deeply discounted prices. That is why you need a professional to handle the job. If you are closing shop, everyone on your sales staff is looking for another job. They will be un-motivated and un-productive. You cannot possibly win in that situation.
Is it worth it? It has worked for some and not for others. As with any venture, it depends a lot on the pre-planning, forecasting of possible sales, and finding a liquidator who is looking out for your best interests.
David Benbow, a twenty-three year veteran of the mattress and bedding industry, is owner of Mattress Retail Training Company. Dave’s company offers mattress retailers a full array of retail guidance; from small store management to training retail sales associates (RSAs.) Dave’s many years of hands-on experience as retail sales associate, store manager, sales manager/trainer and store owner of multiple stores in six different American metropolitan areas uniquely qualifies him as an expert in selling bedding at the retail level.
David is the author of the recently published book, “How to Win the Battle for Mattress Sales, the Bed Seller’s Manual”. This book is the first book to systematically present a complete, organized, but easily read and understood text book for mattress and bedding retail sales associates, beginner and experienced professional alike. It is a complete training course in one 292 page book. The book can be purchased on-line at http://www.bedsellersmanual.com.
He also offers hands-on training classes for retailers on a variety of subjects and issues as well as on-line classes that can be downloaded from the websites mentioned above.
David can be contacted via e-mail at firstname.lastname@example.org or in person at 361-648-3775.
View all articles by David Benbow