-- ABL Advisor: October 4, 2016
-- Coleman Report: November 7, 2016
To characterize a worse-case scenario of an asset-based loan gone bad, imagine a financial institution repossessing the collateralized inventory assets from a loan in default. The borrower is insolvent and management has been dissolved. Acquisition opportunities are off the table. The landlord has forced an evacuation of the space, and the merchandise has been relocated to a warehouse where it is depreciating or worse, becoming obsolete. Added expenses, carrying costs, and legal fees are accumulating rapidly.
Knowing that the inventory has value, the financial institution is searching for ways to minimize expected losses in recovery. Bids on the inventory have been taken from bulk-buyers smelling blood in the water and auctioneers are offering to sell directly from the warehouse. The challenge is forcing the financial institution to re-evaluate how it structures inventory deals and how it scrutinizes positions and covenants with its borrowers.
An Alternative Approach...
Retail businesses that are set-up as temporary, but highly cost-effective operations, “Pop-Up” retail stores, create a unique environment to quickly and effectively engage customers. Because of their strong contrast to conventional growth-oriented retailers, “Pop-Up” retail stores are ideal venues to host inventory-liquidation events. The leases are short-term, most of the costs are fixed and budgeted, and when marketed effectively, the store will quickly capture a surge of foot traffic and sales from customers feeling a sense of urgency from the planned spontaneity -- the store, and the great deals, will evaporate within several weeks. Recognizable firms such as Target, EBay, and most recently Amazon, which has begun introducing a new “Pop-Up” retail store nearly every week in malls across America, have set the stage for the “Pop-Up” retail trend.
Situations that necessitate a “Pop-Up” liquidation store strategy range from the extreme, as cited above, to situations where the inventory is still merchandised in the original location, but ownership has changed hands and operational support to execute a monetization program has been dissolved. Each case may warrant a modified approach, but experienced “Pop-Up” liquidation store operators are conditioned to be malleable to whatever situation may arise.
Factors to consider in the effective execution of a “Pop-Up” liquidation store strategy include:
Time: To achieve maximum recovery value, a typical “Pop-Up” liquidation event will be organized around a minimum three-month period that includes inception, site identification and leasing, operations setup, inventory transport and merchandising, marketing execution, sales and weekly operations, and upon conclusion, return of a ready-to-lease store.
Location: With landlord openness to short-term leasing, and oftentimes re-opening of the original location by an alternate party, space determination is not always a challenge. However, the size and location of the space must be carefully planned around customer critical mass, the type and amount of inventory available to sell, and distance from where it is being stored.
Marketing: A well-budgeted marketing plan will be the most important and the highest operating expense.
Operations: A “Pop-Up” liquidation store is not a day-to-day retail operation; therefore, there are no replenishment costs or long-term operating expenses preventing highly profitable returns.
Other considerations: If the merchandise is from a wholesaler or online retailer with no prior brick-and-mortar retail venue, a “Pop-Up” liquidation store can be set up in an area where the highest amount of sales to distributors or customers is concentrated.
Profitable Results From Monetized Inventory…
Clients who benefit from a “Pop-Up” liquidation strategy include financial institutions dealing with unique inventory monetization challenges, bankruptcy and turnaround professionals winding up dissolved inventory-driven businesses, bulk-buyout firms seeking an alternative source to monetize slow-moving inventory, and while not executed as a liquidation event, business owners looking for channels to test new products or markets.
While results from sales-to-inventory cost can reach $.90-$1.10 on the cost dollar, merchandise that has been compromised, depreciated, or sourced from a non-recognized retailer or wholesaler can affect the overall sales outcome. The greatest expense which has the greatest impact on the profitability of a “Pop-Up” liquidation event is the financial position that the lending institution or owner has on the inventory. While a lower position will always lead to a higher overall return, as long as the position is financially prudent, the results of the “Pop-Up” liquidation will invariably be higher than the alternative disposition options of bulk sell-off or auctioning. In fact, in a “Pop-Up” liquidation it is not uncommon for the financial institution to yield a significant profit on the sale of inventory that was never planned to be repossessed.