Explained: What is the Liquidation Marketplace?
What do players in Brentford Football Club B Team and unwanted jars of mayo have in common?
SO WHAT IS LIQUIDATION MARKETPLACE IN BRIEF?
Allow me to explain through a left-field metaphor of Brentford Football Club’s B Team. In 2016 they abandoned a conventional youth team set-up developing their own players:
If we do the same thing as Chelsea, Arsenal and Tottenham Hotspur we have no chance. So why don’t we try and flip the model, rather than trying to compete with them? Why don’t we make them our friends. We went to them and said, ‘You release players who you don’t think are going to make your first team…and you get, for an example, a proportion on the next sale’. Those were the kind of deals we were looking to make. We would capitalise on that inefficiency in the system.
Rasmus Ankersen - Brentford FC Co-Director of Football
The leading consumer good companies churn out top-products like those elite clubs churn out top-players. But the constant drumbeat of shareholder demands for growth means losses on failed innovations must be accepted if greater return opportunities are to be pursued. Liquidation marketplaces present an opportunity to sell excess inventories of products into non-conventional channels and customers, thereby offering large consumer packaged goods (CPG) companies a way of reducing business waste at the same time as recouping money to cover original costs.
OK – SO CAN YOU TELL ME MORE?
That’s what I’m here for isn’t it! Let’s back up a bit and reflect on what “liquidation” means in a conventional sense: a discharge of products and other marketable possessions at a large discounted sum in order to generate cash. It can in some countries mean bringing a company to an end as it collapses. However, we will focus primarily on liquidation marketplaces used by going concern companies in the course of normal business.
If we were to categorise the four main reasons for liquidating brands:
Customer returns - the growth of eCommerce has led to increased return goods volume, which it is often more cost efficient to liquidate than re-shelf
Refurbished - products returned under warranty and refurbished can often not necessarily be re-sold to consumer through standard means
Overstock - if product is produced according to forecast, and there is sales under that forecast, the product (particularly that with shelf-life requirements) may need to be liquidated to prevent being sent to landfill
Closeouts - when shops are closing down or product ranges are being removed, an excess of inventory may be left over
In contrast to the overriding cash generation desire from companies in collapse, CPG companies would be primarily interested in liquidating products in order to avoid the need to write off unwanted stock (which would fly in the face of publicly stated commitments.)
WHY IS THIS BUSINESS MODEL RELEVANT TO FMCG?
There are two main types of liquidation
Direct
Indirect
Direct liquidation is performed by business organisations directly without involving any third party or intermediary liquidation platforms.
One of the most high-performing channels in recent years (in developed markets) has been the discounter channel. A key part of its initial business model was constructed on the ability to buy failed innovations and planned delists liquidated at discounted price, which it then sold to the consumer at market-leading prices.
However, as this channel became successful, such a wheeler-dealer approach could not support a broad store network and large discounters instead focused on working with CPG companies to target-cost products which could sit at magic price points.
This relative evolution of the discounter channel business model once again created a demand-side void ready to be filled. In addition, the imperative within consumer good companies to eliminate as much waste as possible has created a new class of “tail of the tail SKUs” - SKUs with volumes so low it simply wouldn’t be possible to seek interest from mainstream retailers.
Into this void stepped liquidation marketplaces: online platforms looking after the auction process and presenting a new business model within which consumer goods companies could carry out indirect liquidation without having to find new buyers of the goods.
ARE THERE ANY SPECIFIC COMPANIES OR MARKETS WE SHOULD BE INTERESTED IN?
One of the leading companies in the liquidation marketplace model is B-Stock. With a name deriving from the concept that it offers a place to liquidate a company’s B-grade stock (with the A-grade stock presumably sold through standard channels), B-Stock was founded by an ex-eBay employee.
eBay is a good mental model for understanding how B-Stock works. Instead of being a consumer-to-consumer platform or a business-to-consumer platform, it is a business-to-business platform. And indeed, some of those buying on the platform are eBay super sellers who are prepared to bulk buy lots which they break-down for the individual consumer.
To summarise B-Stock’s offering:
It offers retailers access to 570,000 resellers, ranging from mom-and-pop discount stores to independent eBay super sellers who operate 21st-century versions of the discount bin
Forbes1
Liquidation marketplace platforms offer buyers the ability to buy goods either in units, which is often referred to as retail unit casting, or wholesale lots. The leading companies which use the platform tend to prefer to liquidate as much stock as possible in batches.
On the demand-side, B-Stock brings an array of brand name products (underwritten to some extent by product warranties) to businesses without the friction which might be associated with setting up complicated system-related payment information.
On the supply-side, B-Stock provides the plug-and-play infrastructure within which CPG companies can reach a broader market for unwanted inventory by setting up brand portals under a trusted marketplace umbrella.
WHAT ARE THE ECONOMICS OF THE BUSINESS MODEL?
Using our previously shared Coca-Cola cost of goods example, let’s look at the business model from the economic perspective of the 3 parties involved:
Liquidation Marketplace = Platforms like B-Stock
A little like the “no win, no fee” law firm adverts of my childhood, most liquidation marketplaces are equally wedded to the joint success model by not charging up-front fees to launch the branded portals.
“Our fee structure is volume-based; our revenue is tied to how well we perform for our clients”
Howard Rosenberg, CEO B-Stock
Forbes quotes B-Stock as having sold around $2 billion worth of discounted merchandise in 2019, with an estimated revenue of $150 million. This equates to 7.5% revenue on the sales price; and is an additional layer of value skimmed off beyond the traditional CPG → retailer relationship.
On the cost side, since B-Stock do not take any involvement in operations (with sorting, packaging, shipping being left to the manufacturer) they are able to run asset-lite, securing recurring revenue streams from the role as an intermediary marketplace.
Retailer = The small independent discounter
Based on work by Steenkamp and Sloot (2019)2, the average price index of hard discounter Lidl is 0.46 of national brands (such as Coca-Cola). This brings down the revenue line and emphasises that the whole cost structure must be compressed for discount products - for discounters, the low cost to consumer is supported by cheaper sourcing and operational excellence, not by sacrificing retail margin.
The liquidation marketplace offers an opportunity to source at even lower prices than would be possible for regularly forecast SKUs, and if there is a sufficiently agile store network able to support product rotation, then the brand name profile of the product will carry it into the consumer basket.
There is also an ironic possibility that innovations or variants which have failed in mass market channels possess a novelty factor which would allow the buyer to sell the attained product at even higher prices than normal to increase the trade margin.
Manufacturer = The consumer packaged goods company
In our Coke cost explosion we identified that around 60% of the final consumer selling price is cost incurred by the manufacturer.
Let’s take an example of a product available on Unilever’s B-Stock - an 8 oz. jar of Hellmann’s mayo priced at $2.69. Under our exemplar cost model this would incur around $1.54 of total company cost.
However, on B-Stock the item is currently selling at $0.29 per unit3. Let’s assume that by auction close this has increased to $0.50. With B-Stock taking a 7.5% cut from this, that leaves Unilever with $0.46 - which seems to be terrible business.
The reality is that the variable costs which have gone into the product are more like $0.50; which doesn’t seem so bad after all. And even then, those are sunk costs - it could be argued any revenue recovery is good. Not to mention that for environmentally focused companies, this is not about economics only, but about eliminating waste through write-offs.
Bringing the Three-Party Economics Together
ANYTHING ELSE OF INTEREST?
The liquidation marketplace model is just one example of squeezing extra value from unwanted inventory or assets. There are surely further possibilities which could be explored: for big CPG companies one of their main balance book strains is manufacturing assets. A manufacturing capacity marketplace which connects capacity with demand for production could be a good way of improving company return on equity.
Steenkamp, J.-B. (2019). Retail Disruptors. Kogan Page