With consumers recently underwhelmed by the discounts at Circuit City’s liquidation sale, scores of reports are now popping up about why buyers need to proceed cautiously at these events. The price reductions at a liquidation sale aren’t necessarily the best offers in town, even though they may present themselves as such.
“One might argue that having the big signs, touting 'Going Out of Business' [or] 'Final Days' creates a presumption that this [sale] is a big deal,” says Anthony Giorgianni, associate finance editor for Consumer Reports Money Advisor. “I think the liquidators are counting on people getting excited and not comparison shopping.”
The long lines at Circuit City stores across the country over the past week make clear that many shoppers are buying into the liquidation hype.
Is it a scam?
Not really. Giorgianni says it’s ultimately the consumer’s responsibility to do his or her homework and price compare.
“I don’t think it’s up to the liquidator to post a sign that says, ‘By the way, our discounts aren’t that good,’” he says.
If a store is going out of business, shouldn’t it be willing to sell its leftover items for pennies on the dollar? Nope. It turns out that in most cases, the retailer isn’t actually doing the selling. Companies like Circuit City partner with liquidation companies that purchase the store’s inventory up front, and then are responsible for selling it.
The Liquidation Formula
Jim Schaye, CEO of Hudson Capital, one of Circuit City's liquidators, offers some clarity to the behind-the-scenes financial strategy, which, he admits, doesn’t usually translate into massive discounts for consumers. Liquidation companies bid on a bankrupt business, agreeing to buy its assets for a guaranteed amount.
In the case of Circuit City, a group of liquidators have formed a joint venture and are handling the sale. It turns out the liquidation team guaranteed Circuit City’s creditors 70.5% of the electronic retailer’s estimated $1.2 billion of wholesale valued merchandise. That's on top of its operating expenses like rent, payroll and advertising during the three months of liquidation. From there, the liquidators must reward their own bottom line.
"We hope to recover better than we guaranteed," says Schaye. "There’s a huge amount of risk…and we can’t go to the government and ask them for a bailout.” He says if they could price everything 80% off they would, "but that’s not going to be good for the estate,” he says.
For now, Circuit City boasts price reductions of up to 30%. The longer shoppers wait, the more likely prices could drop even lower, but by then product selection will have become more limited.
For more tips on how to best navigate liquidation sales, check out Jeffrey Strain’s five reasons to avoid liquidation sales.
Catch more of Farnoosh’s advice on Real Simple. Real Life. on TLC, Friday nights at 8.