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Rising Retailer Threat: LIQUIDATIONS

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By ANN ZIMMERMAN The Wall Street Journal

The Tampa Tribune

Published: December 13, 2008

Retailers grappling with the grimmest holiday shopping season in decades face another threat: a boom in liquidation sales by competitors.

The sour retail market is leading to a flood of store closings, followed by the inevitable going-out-of-business sales. In a vicious cycle, the "everything must go" banners and ads are siphoning off shoppers from already-struggling retailers, further weakening their results, analysts say.

In the past few weeks, retailers ranging from Signet Jewelers Ltd. to Bed Bath & Beyond blamed competitors' liquidations, in part, for sharply reduced revenue and profit in the fiscal third quarter.

On Thursday, KB Toys said it has returned to Chapter 11 bankruptcy and will liquidate all of its more than 400 mall-based and outlet stores. The company said it plans to quickly start going-out-of business sales "to take advantage of the last two weeks of the holiday selling season."

On Wednesday, Office Depot announced it plans to shutter 126 stores through next year.

The moves are just the latest in a rash of store closings. Through the third quarter, 15 major chains filed for bankruptcy, including Circuit City Stores, Linens 'n' Things, Mervyn's LLC and Whitehall Jewelers Holdings.

Through the third quarter, large U.S. retailers announced 4,632 store closings, according to the International Council of Shopping Centers.

In all, the trade group projects 148,000 storefronts will be shuttered this year by retailers of all types, based on data collected by the Bureau of Labor Statistics. That would be the largest since 2001, when 151,000 locations closed. The group expects next year's numbers to be as dismal.

"Potentially, 10 percent of retailers could face significant restructuring, bankruptcy or liquidation" in 2009, said Colin McGranahan, a retail analyst at Sanford C. Bernstein & Co.
Liquidation sales are a potent draw during the current recession, when cash-strapped consumers are seeking the biggest bang for their buck. But bargain hunters may not realize that products aren't always cheaper at a liquidation. Indeed, prices can even be higher than at competing stores.

Liquidations are conducted by outside specialists who assume control of the stores. The liquidators profit only if they get the highest price for merchandise. Far from offering deep discounts, prices can sometimes even climb, particularly at the outset, as liquidators count on consumers' assumption that they're getting a good deal.

Dan de Granpre, chief executive of Dealnews.com, a Web site that analyzes bargains, observed that in the early days of the Linens 'n' Things liquidation, shoppers were paying higher prices than previously offered at the chain. Much of the stores' merchandise was marked down 10 percent to 15 percent. Before the liquidation, the retailer routinely gave out 20 percent-off coupons.

Liquidators say they take a chance when they agree to take over a retailer's merchandise.

"The liquidator tends to take a bad rap," said Richard L. Kaye, executive vice president of Hilco Organization, a liquidation company. "But there is a lot of risk involved and a significant science. The outcome doesn't benefit the liquidator as much as the creditor-lenders and suppliers."

Liquidators typically assume responsibility for a retailer's leases and other costs. They agree either to take a percentage of what they sell, or agree to pay the company or its creditors a percentage of the wholesale value of the inventory, gambling they will generate a solid profit.

A going-out-of-business sale typically takes six weeks to three months. But liquidators sometimes augment sales by adding leftovers from previous liquidations. "We want to get the most buck for the bang," said Kaye of Hilco, which is one of the liquidators involved with Linens 'n' Things.

That practice also can prolong the pain for competing retailers.

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