80. Going-Out-of-Business Sales

Summary

The Economics of Everyday Things: Episode 80 - Going-Out-of-Business Sales

Host: Zachary Crockett
Guests: Bradley Snyder (Executive Managing Director at Tiger Group), Zach Rogers (Associate Professor of Supply Chain Management at Colorado State University)
Release Date: February 10, 2025

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Introduction

In Episode 80 of The Economics of Everyday Things, host Zachary Crockett delves into the intricate world of going-out-of-business (GOOB) sales. These sales are pivotal moments for retailers facing bankruptcy, serving as a last-ditch effort to liquidate inventory and recover debts. Through the lens of notable cases like Toys R Us and insights from industry experts, Crockett unpacks the economic mechanics behind these final sales events.

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The Rise and Fall of Toys R Us

[01:36] Zachary Crockett begins by recounting the history of Toys R Us, a retail giant founded in 1948 by a World War II veteran. At its peak, Toys R Us commanded 25% of the U.S. toy market, boasting hundreds of warehouse-style stores stocked with up to 18,000 products ranging from Barbie dolls to Lego sets.

However, by the 2000s, the company grappled with significant challenges:

• Private Equity Buyout: This plunged the company into billions of dollars in debt.
• Competition: The rise of retail behemoths like Walmart and e-commerce giants like Amazon eroded Toys R Us's market share.
• Declining Sales: Persistent financial woes led to a decline in consumer spending at their stores.

In 2017, facing insurmountable financial pressure, Toys R Us filed for bankruptcy, setting the stage for its GOOB sale.

Notable Quote:

Zachary Crockett [01:36]: "Founded in 1948 by a World War II veteran, Toys R Us at one point controlled 25% of the toy market."

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Understanding Going-Out-of-Business Sales

Crockett explains that a GOOB sale is not just a massive clearance event but a strategic move to maximize revenue from remaining inventory to pay off creditors.

Key Points:

• Purpose: Recover as much money as possible to settle debts owed to creditors, suppliers, and stakeholders.
• Strategy: Implementing significant discounts and orchestrating high-traffic sales events to sell off inventory swiftly.
• Outcome: Ideally, the store exits the market with minimal leftover inventory, maintaining its legacy through a "blaze of glory."

Notable Quote:

Bradley Snyder [02:58]: "We are event merchants, so we're running sales within an 8 to 12 week sale term. Our job is to drive traffic as fast as we can."

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The Role of Liquidators: Insights from Bradley Snyder

Bradley Snyder of Tiger Group, a leading liquidation firm, offers an insider's perspective on managing GOOB sales.

Process Overview:

1. Initial Assessment:

   • Financial Analysis: Reviewing the retailer's financial health and inventory levels.
   • Store Walkthroughs: Evaluating shelf space, product age, and overall store condition.

   Notable Quote:

   Bradley Snyder [07:18]: "When I walk into a store, I stand at the front door and the first thing I look at is the top shelves to see how crowded it is with product."

2. Pricing Strategy:

   • Discount Determination: Balancing between attracting customers and maximizing revenue.
   • Dynamic Pricing: Initial modest discounts (10-40%) escalating as inventory decreases.

   Notable Quote:

   Zach Rogers [05:42]: "Nobody wants to have a going out of business sale, but we're trying to minimize losses so that's where these liquidators come in."

3. Marketing the Sale:

   • Promotions: Utilizing giant signs, local advertisements, and media blitzes to drive traffic.
   • Store Presentation: Ensuring the store appears well-stocked and organized to attract shoppers.

4. Inventory Management:

   • Selective Discounts: High-margin items like clothing can sustain deeper discounts (up to 300%), while electronics might see minimal markdowns (~15%).
   • Brand Integrity: Luxury brands may resist steep discounts, opting for direct buybacks to maintain brand value.

Notable Quote:

Bradley Snyder [08:21]: "We know almost by SKU, by item, what things will recover."

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Economic Implications and Consumer Behavior

Zach Rogers sheds light on the broader economic trends fueling the retail apocalypse, noting a significant increase in retail bankruptcies—from 25 major filings annually to 51 in 2024. The decline is attributed to intense competition from online retailers and burdensome debt from leveraged buyouts.

Consumer Dynamics:

• Discount Psychology: Shoppers weigh immediate savings against potential future discounts, often waiting for prices to drop further.

  Notable Quote:

  Zach Rogers [14:18]: "You're trying to not only figure out the right pricing strategy, but create the sort of scarcity idea, hey, you better come in and take advantage of this now while it's only 20% off."

• Perceived Value: Effective GOOB sales make consumers feel they're securing exceptional deals, driving higher traffic and sales volume.

Challenges:

• Deceptive Practices: Instances where retailers artificially inflate original prices before applying discounts can lead to legal repercussions.

  Notable Quote:

  Zachary Crockett [16:37]: "During the liquidation of Circuit City in 2009, a CBS investigation found that the retailer was offering computer monitors on sale for $161. At a nearby competitor, the same monitor could be had at full price for $20 less."

• Regulatory Scrutiny: Laws in various states protect consumers from such deceptive pricing, ensuring transparency during sales.

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Post-Sale Inventory Handling

After a successful GOOB sale, any remaining inventory doesn't simply vanish. Instead, it's funneled through a multi-tiered liquidation network:

1. Salvage Dealers and Wholesale Liquidators: Companies like Inmar or Liquidity Services purchase leftover stock at minimal prices, consolidating them in warehouses.
2. Secondary Markets: Goods are resold to discount retailers such as Five Below or Dollar General, or auctioned to online resellers.
3. End-of-Line Disposal: For high-end brands, unsold inventory might even be destroyed to preserve brand integrity.

Notable Quote:

Zach Rogers [18:04]: "One person's trash is another person's treasure."

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The Revival of Brands: A Case Study

Despite the demise of its physical stores, Toys R Us experienced a resurgence. A private brand management firm acquired the company's intellectual property rights, leading to the reopening of stores nationwide. This revival underscores the enduring brand value and nostalgic appeal that can transcend bankruptcy.

Notable Quote:

Bradley Snyder [19:41]: "Toys R Us is back."

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Conclusion

Zachary Crockett's exploration into GOOB sales reveals the intricate balance between financial recovery for struggling retailers and consumer incentives to clear inventory. Through expert interviews and real-world examples, the episode underscores the economic strategies and psychological tactics that define these critical sales events. As the retail landscape continues to evolve, understanding the dynamics of GOOB sales offers valuable insights into the broader mechanisms of supply chain management and consumer behavior.

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Additional Insights

• Impact of Private Equity: Heavy debt from leveraged buyouts can cripple retailers, making GOOB sales an inevitable outcome in failing businesses.
• Technological Disruption: The rise of e-commerce platforms has fundamentally altered consumer purchasing habits, challenging traditional brick-and-mortar stores.
• Future of Retail: The cyclical nature of retail, including the revival of iconic brands, suggests a resilient yet evolving market landscape.

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Produced by:
Zachary Crockett, Sarah Lilly
Mixed by: Jeremy Johnston
Additional Assistance: Daniel Morris Rapson

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For more insightful episodes on the hidden economics behind everyday phenomena, subscribe to SiriusXM Podcasts+ on Apple Podcasts here.

Transcript

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[Stephen Dubner]

Hey there, it's Stephen Dubner from Freakonomics Radio and I am busting into this Economics of Everyday Things episode to tell you that we are doing a live Freakonomics radio show in Los Angeles on Febr, and I hope you'll join us. Guests will include Ari Emanuel, the CEO of the sports and entertainment firm Endeavor, the filmmaker RJ Cutler, and the Freakonomics Radio house band led by Luis Guerra. For tickets go to Freakonomics.com liveshows a portion of our ticket sales will go to wildfire relief efforts. Again, that's Freakonomics.com liveshows February 13th in LA. I hope to see you there.

[Zachary Crockett]

For decades. If you wanted to buy a toy of any kind, you would head to one of America's most beloved retail chains.

[American Express]

I don't want to grow a 5.

[Zach Rogers]

Toys R Us kit. They got a million toys at Toys R Us that I can play with.

[Zachary Crockett]

Founded in 1948 by a World War II veteran, Toys R Us at one point controlled 25% of the toy market. It had hundreds of warehouse style stores all over the country, and the typical location stocked as many as 18,000 products Barbie dolls, video game consoles, Nerf guns, stuffed animals and Lego sets. But by the 2000s, Toys R Us was in trouble. A private equity buyout put the chain billions of dollars in debt. It couldn't keep up with Walmart and Amazon, and sales declined. In 2017, it filed for bankruptcy and to pay off its creditors, it did what many ailing retailers do in their final days. It Put on a going out of business sale.

[T-Mobile]

50 to 70% off store wide.

[American Express]

50 to 70% off.

[Zach Rogers]

70% off.

[Zachary Crockett]

Closing hundreds of stores across the country and selling off a mountain of inventory is no simple feat. And to get the job done, Toys R Us called in a professional.

[Bradley Snyder]

My name is Bradley Snyder. I'm the executive managing director at Tiger Group.

[Zachary Crockett]

Snyder is in the going out of business business.

[Bradley Snyder]

We are event merchants, so we're running sales within an 8 to 12 week sale term. Our job is to drive traffic as fast as we can. And I will tell you that we've never been busier.

[Zachary Crockett]

For liquidators like Snyder, a going out of business sale is a game of retail chicken. Stores want to get as much as possible for the remaining inventory. And shoppers know that the longer they wait, the better the deals. But if a sale is managed successfully, it's a good way for a store to go out in a blaze of glory.

[Bradley Snyder]

When we start a sale, it's as though it's Christmas. By the end of the sale term, there should be few hangers, few fixtures, few anything left over. If we're doing our job correctly, we sell until there's nothing left.

[Zachary Crockett]

For the Freakonomics radio network, this is the economics of everyday things. I'm Zachary Crockett. Today, going out of business sales. Over the past decade, retail bankruptcies have become a common sight thanks to competition from the Internet and leveraged buyouts by private equity companies. A so called retail apocalypse has claimed some of America's biggest chains. Toys R Us, Radio Shack, Payless, Shoe Source, Sears, Kmart, Gymboree. And the problem is only getting bigger. In 2024, at least 51 major retailers filed for bankruptcy, up from 25 a year earlier.

[Zach Rogers]

The retail apocalypse is very real. We've lost thousands and thousands of these sort of primary retail stores.

[Zachary Crockett]

Zach Rogers is an associate professor of supply chain management at Colorado State University. He says that big retailers often have loans from banks and buy their inventory on credit from suppliers. When a retailer like Toys R Us files for bankruptcy and decides to permanently close its doors, it has an obligation to recover as much money as possible to pay off its debts.

[Zach Rogers]

We owe money to creditors, we probably owe money to suppliers, we owe money to stakeholders. And so we need to bring as much cash in the door as possible.

[Zachary Crockett]

One way a retailer does this is by selling off its inventory. All that stuff sitting on the shelves at its stores and warehouses, and that means putting on a sale.

[Zach Rogers]

Nobody wants to have a going out of business sale, but we're trying to minimize losses so that's where these liquidators come in. They're helping you die as peacefully as you possibly can.

[Bradley Snyder]

The big question is, what's the recovery going to be?

[Zachary Crockett]

Again, that's Brad Snyder of Tiger Group. The firm has been in the liquidation business for more than 20 years.

[Bradley Snyder]

I would say that we've been involved in practically every major liquidation or store closing project in North America. We did linens and things, Sharper Image, Lord and Taylor, Nordstrom Canada, Sears Canada, on and on and on.

[Zachary Crockett]

For a going out of business sale, a liquidator will sometimes buy all of a retailer's inventory up front and sell it on their own. But it's more common for them to work out a consulting agreement. They charge a percentage of the proceeds from the eventual sale and in turn help the retailer with the event from start to finish. That process begins with analysts at Tiger drilling into the retailer's state of affairs.

[Bradley Snyder]

So they would ask for financials. They would understand the levels of inventory that a retailer has. They would understand the mix of the inventory. Have certain areas sold out and you have all of the bad product left. What do the goods actually cost? And what's the ticket on the item?

[Zachary Crockett]

As a part of this early assessment, Snyder often takes a walk through some of the stores.

[Bradley Snyder]

When I walk into a store, I stand at the front door and the first thing I look at is the top shelves to see how crowded it is with product. If those are empty, then that tells me right away that they're not getting shipped new goods. I look at the space between the hangars, I can smell a product and tell you whether it was a pack away from last year. And I'll look at the labels. And oftentimes I can tell by year when the product came in.

[Zachary Crockett]

Tiger will write up an estimate of what the sale will cost to orchestrate and what all of the inventory will eventually sell for. They're able to do this because they have a whole team of appraisal experts in various fields.

[Bradley Snyder]

We know almost by sku, by item, what things will recover. I can tell you what a red sweater in linens and things recovers. A piece of houseware, we can tell you fragrance and cosmetics versus men's suits versus ladies dresses.

[Zachary Crockett]

Once the pricing information is determined, the sale planning begins. In many states, a going out of business sale has to be executed very quickly, typically within 60 to 90 days. And a liquidation firm has to drum up as much fanfare as it can. They plaster a store with giant yellow and red signs and pump out ads on local radio and tv.

[T-Mobile]

Circuit City is going out of business.

[American Express]

Discounts on all your purchases only through Sunday at the gotchalks Going out of Business sale, Mervyn's is going out of business.

[Zachary Crockett]

Time is running out. Everything's gotta go when the doors open and the sale begins, Snyder says it's important to make sure the store appears to be healthy and well stocked. You don't want customers seeing picked over shelves and products scattered all over the floor. In many cases, a liquidator will actually bring in more inventory to protect against this.

[Bradley Snyder]

In the grocery sector, if you're trying to sell the middle of the store, which are all the canned goods, it's all the tough stuff to sell. Then you've got to replenish your bananas and bread and all of the things that people come into a store for in order to get them coming back in on a regular basis to sell the middle of the store.

[Zachary Crockett]

But the most important part of getting people to buy things at a going out of business sale is knowing how much of a discount to offer. And setting the perfect percentage is often a psychological gamble.

[Zach Rogers]

You're trying to not only figure out the right pricing strategy, but create the sort of scarcity idea, hey, you better come in and take advantage of this now while it's only 20% off, because if you wait for 40%, all the good stuff's going to be gone.

[Zachary Crockett]

That's coming up.

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[Zachary Crockett]

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[Zach Rogers]

We're only discounting electronics 10%. Toys will go 30%, furniture 40%.

[Zachary Crockett]

Zach Rogers, the supply chain professor, says that at the beginning of a sale, the discounts usually start off pretty modest, between 10 and 40% for most goods. As time passes and inventory dwindles, liquidators will escalate the price cuts.

[Zach Rogers]

And it's funny because you see customers being pretty savvy about that. Usually a customer will know, all right, it's 50% off now. I bet in a week it's going to be 70% off and you'll see them sort of wait it out. People might be waiting for you to go from 50% to 75%. But at the same time, the other cross pressure there is, well, if I wait another week or so, is all the good stuff going to be gone?

[Zachary Crockett]

Brad Snyder says that some brands that supply products to a retailer, like Apple, Rolex or Bose, would rather not participate in such steep discounts. Instead, they'll work out a deal to buy their products back from the retailer directly.

[Bradley Snyder]

Certain brands won't allow us to go above a certain percentage. Then we do what's called rtv, which is return to vendor, and we'll actually pack everything up, get it off the floor so that our escalating discounts don't apply to those goods. They're protecting the integrity of those brands. They're protecting agreements they have because they sold it to other department stores and they don't want the discounts to be too high.

[Zachary Crockett]

Luxury brands like Burberry and Cartier have even been known to destroy reclaimed inventory rather than allow it to be sold at a discount.

[Zach Rogers]

They will say, hey, I'm sending out my own disposal agent and they're going to throw this away for me so that I know for sure that this was actually destroyed.

[Zachary Crockett]

Like any sale going out of business, events are engineered to make shoppers feel like they're getting a good deal. But consumer protection groups say stores might sometimes mark up their prices before applying discounts. During the liquidation of Circuit City in 2009, a CBS investigation found that the retailer was offering computer monitors on sale for $161. At a nearby competitor, the same monitor could be had at full price for $20 less.

[Zach Rogers]

You can have something that you are going to sell for $50 and you're like, all right, I want to give this a discount because it's not moving, so I'm going to sell it for $40. Well, $50 marked down to 40, that's not as exciting. So you can say, oh, this was going to be $80. Cross that out. And then underneath, right now, on sale for 40. That is not an uncommon practice.

[Zachary Crockett]

Many states have laws in place that protect against deceptive sales and advertising practices. And unscrupulous businesses have been held to account in court. In Boston, a liquidator that marked up prices at a furniture store sale was forced to pay out $230,000 in restitution, more than a quarter of the value of the merchandise. But Snyder says most liquidators don't have to cheat to be successful.

[Bradley Snyder]

There's never any merchandise left after a sale. At the very tail end, I'm often not surprised to see folks who have huge bags that are just fil because those goods are 90 off or 95% off.

[Zachary Crockett]

And when you say nothing, do you mean what are we talking? Hangers, shelfing units?

[Bradley Snyder]

We sell all of that. As the inventory levels go down, we start selling the fixtures right behind it.

[Zachary Crockett]

When retailers do have leftover inventory at the end of a sale, they have a last resort option. They can sell it all to a salvage dealer or wholesale liquidator like Inmar or Liquidity Services. These firms will buy huge amounts of inventory for pennies on the dollar and consolidate them by category at warehouses. They'll sell these goods to discount chains like Five Below or Dollar General or auction them off to resellers who flip them for a profit on the Internet.

[Zach Rogers]

So Toys R Us will get rid of their stuff, and it might go through two or three different levels of liquidators or salvage dealers. I've been to these sort of auction things before, and there's just pallets of return stuff all over the place. There's one pallet with a bunch of Hunger Games lunch boxes. The person who bought those, you know, is probably an ebay power seller or something like that. Because they're a smaller scale, they can make enough margin off these lunch boxes that it makes sense for them to do it. And so as you get down to each level, basically you have smaller and smaller operations. A hundred years ago, maybe when something went out of business, you would just throw everything away. Now something goes out of business, and all these mechanisms sort of whirl into motion. One person's trash is another person's treasure.

[Zachary Crockett]

After a going out of business sale is over, there's a pecking order to who is paid. The liquidation firm generally comes first. For the Toys R Us sale, Tiger Global and three other firms it partnered with split a 1.1% commission on hundreds of millions of dollars in sales. The rest went to the banks and other creditors to pay down outstanding debt. As for Toys R Us itself, a few years after the going out of business sale, a private brand management firm purchased the retailer's intellectual property rights and has since reopened stores all over the country. The company is back in business. Toys R Us is back just in time for the holidays.

[Bradley Snyder]

Toys R Us is back.

[Zachary Crockett]

For the economics of Everyday Things. I'm Zachary Crockett. This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Morris Rapson.

[Zach Rogers]

The restaurant right here in Fort Collins where I live, was going out of business. So many people showed up that they didn't close. I was ready to let them die, but I guess there was some sentimental value there.

[Zachary Crockett]

The Freakonomics Radio Network the Hidden side of Everything.

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