80. Going-Out-of-Business Sales

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Hey there, it's Stephen Dubner from Free Economics 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 February 13th, and I hope you'll join us.

Guests will include Ari Emanuel, the CEO of the sports and entertainment firm Endeavour, the filmmaker RJ Cutler, and the Freakonomics Radio House Band led by Luis Guerra.

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

I don't want to grow up.

Buy Toys R Us games.

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

Founded in 1948 by a World War II veteran, Toys 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.

50 to 70% off store-wide.

50 to 70% off.

70% off?

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.

My name is Bradley Snyder.

I'm the Executive Managing Director at Tiger Group.

Snyder is in the going-out-of-business business.

We are event merchants, so we're running sales within an eight 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.

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 their 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.

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.

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 ShoeSource, Sears, Kmart, Jimboree.

And the problem is only getting bigger.

In 2024, at least 51 major retailers filed for bankruptcy, up from 25 a year earlier.

The retail apocalypse is very real.

We've lost thousands and thousands of these sort of primary retail stores.

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.

We owe money to creditors.

We probably owe money to suppliers.

We owe money money to stakeholders.

And so we need to bring as much cash in the door as possible.

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.

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.

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

Again, that's Brad Snyder of Tiger Group.

The firm has been in the liquidation business for more than 20 years.

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.

For a going-out of business sale, a liquidator will sometimes buy all of a retailer's inventory upfront 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.

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?

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

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 hangers.

I can smell a product and tell you whether it was a packaway from last year.

And I'll look at the labels and oftentimes I can tell by year when the product came in.

Tiger will write up an estimate of what the sale will 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.

We know almost by skew, 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.

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.

Circuit City is going out of business.

Discounts on all your purchases only through Sunday at the Gutchalks going out of business sale.

Mervyn's is going out of business.

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.

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.

But the most important part of getting people to buy things that are going out of business sale is knowing how much of a discount to offer.

And setting the perfect percentage is often a psychological gamble.

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 gonna be gone.

That's coming up.

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During a going-out-of-business sale, a retailer's goal is to recover as much of the inventory's value as possible.

Retail chains buy their products wholesale at much lower costs than what they sell them for at the store.

Even considering other overhead like labor, utilities, and storage, they tend to have a little wiggle room.

to discount products and make their money back.

Markup can range from as little as 15% for electronics to 300% for clothing.

That means that a retailer likely won't mark down a laptop much during a going-out of business sale, but they can afford to offer larger discounts on other items and still turn a profit on what they originally paid for it.

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

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.

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?

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.

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.

Luxury brands like Burberry and Cartier have even been known to destroy reclaimed inventory.

rather than allow it to be sold at a discount.

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.

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.

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 our Neither right now on sale for $40.

That is not an uncommon practice.

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.

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 filling because those goods are 90 off or 95% off.

And when you say nothing, do you mean, what are we talking, hangers, shelving units?

We sell all of that.

As the inventory levels go down, we start selling the fixtures right behind it.

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.

So Toys R Us will get rid of their stuff, 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 palettes of returned stuff all over the place.

There's one palette 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.

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 retailers' 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.

Toys R Us is back.

For the economics of everyday things, I'm Zachary Crackett.

This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston.

We had help from Daniel Morris Rapson.

A 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.

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