Swelling Ranks of Sellers

One feature that defines a deflationary downturn is the expanding array of sellers. You don't just have the usual crowd who are looking to make a profit or to get rid of something they already own so they can buy something else. You also see more and more individuals and firms who have to sell because they don't have enough cash on hand to meet their needs; lenders who end up with something they don't want because borrowers have defaulted on their obligations; people who are worried about their job prospects or other concerns who want to be more liquid; and others who simply get caught up in the spirit of the times. In "Rising Retailer Threat: Liquidations,"  the Wall Street Journal shines the light on one group whose ranks are destined to swell dramatically in the months and years ahead.

When Competitors Close, Their Fire Sales Lure Away Customers; KB Toys Latest to Shut Doors, Slash Prices

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

On Thursday, KB Toys Inc. 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."

Wednesday, Office Depot Inc. 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 Inc., Linens 'n Things Inc., Mervyn's LLC and Whitehall Jewelers Holdings Inc.

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, including mom-and-pop stores, 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% 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 an especially 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 in a liquidation sale, 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% to 15%. Before the liquidation, the retailer routinely gave out 20%-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, one of a handful of large U.S. liquidation companies. "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, payroll and other costs. They agree either to take a percentage of what they sell, or agree in advance to pay the company or its creditors a percentage of the wholesale value of the inventory, gambling they will be able to unload the merchandise at prices that will generate a solid profit.

To liquidate as much as possible, including store fixtures, a going-out-of-business sale typically takes six weeks to three months. But liquidators sometimes augment sales by bringing in new merchandise, or by adding leftovers from previous liquidations. "We want to get the most buck for the bang," said Mr. Kaye of Hilco, which is one of the liquidators involved with Circuit City and Linens 'n Things stores, as well as some Mervyn's outlets.

That practice also can prolong the sale -- and the pain for competing retailers.

In a statement accompanying a recent warning that Bed Bath & Beyond's quarterly profit would fall below expectations, CEO Steven H. Temares said, "The overall macroeconomic climate remains challenging, which, combined with liquidation sales of a major competitor, negatively impacted our fiscal third quarter."

Last month, shopping-center owner Andrew Segal filed a motion in Dallas federal bankruptcy court to stop a liquidator from expanding a sale in a Fort Worth, Texas, mall he owned. The liquidation was connected to the bankruptcy filing of the country's largest retailer of Western wear, BTWW Retail L.P. The company was liquidating the majority of its 95 stores, including its Fort Worth Boot Town outlet in Mr. Segal's mall.

Mr. Segal said he had spent $40 million to renovate the mall. He converted one of the spaces vacated by a department store into a market where entrepreneurs can offer wares, including several selling Western-style products.

Mr. Segal feared prolonging the liquidation sale by bringing in additional merchandise would hurt tenants during the important Christmas season, and possibly even put them out of business. "To me, it is a pretend going-out-of-business sale when you buy things to put in a going-out-of-business sale," he said.

Lawyers for the liquidator and Mr. Segal came to an agreement earlier this month, but the terms are confidential.

Circuit City's liquidation sales show how consumers can be drawn despite sometimes higher prices.

"It's funny that we've had so much more business since we announced we were going out of business," said Henry Cooper, a salesman at a Dallas Circuit City store, one of 154 the company is closing. "But many of these items have been much cheaper at various times before the sale." A 42-inch Sony LCD high-definition television recently selling at a 30% discount for $959.99 was $100 less weeks before, Mr. Cooper said. Now in the sale's fourth week, Circuit City has increased the markdowns.

Still, librarian Mary Norman said she spotted a Denon stereo receiver Thursday she thought was a good deal at a Parker, Colo., Circuit City. It was marked down 40% to $329.99. But when she called her fiancé to say she was going to buy it, he searched on Amazon.com and found a new one for more than $50 less -- $279.32 with no shipping charges or sales tax.

Merchandise pricing at stores that are going out of business is controlled by the liquidator, said Circuit City spokesman Bill Cimino. "We think it is a rare situation when a lower price than ours can be found elsewhere," said Hilco's Mr. Kaye.

Comments

[roger]

wall mart from sea to shinning sea,no need to be a Marxist
to understand the dialectics of monopoly

[H Spencer]

When sales are not there, a retailer loses income and must close his doors.
When a man loses his job, income is not there and he must close his doors.
The difference? NONE