Thursday, January 24, 2019

Should You Go To A Liquidation Sale?

Image result for sears liquidation sale
Shopping for bargains is one sure way to go broke.

Sears is in its last dying throes.  Even if Eddie Lampert manages to draw a rabbit out of the hat, it looks like a substantial portion of the stores will be closing very soon. And I suspect with the damage to the brand, the remaining stores will probably go belly-up within a year or two.

So be prepared for liquidation sales.  Do these represent good bargains?   It is an interesting question, as liquidation sales are structured so that the discounts increase with every day or week and the available inventory decreases at the same time.  It presents an interesting mathematical algorithm (a non-racist one, we hope!) to the average shopper.

For example, say you go to an appliance company that is going out of business, because you want to buy a toaster oven.  And let's assume you actually need and want a toaster oven and are not just impulse-buying something because you think the price is attractive.

The same toaster oven sells at Walmart for $50 everyday.  You go to the liquidation sale on you see they have it marked down to $45 for the first week, taking 10% off.  You talked to one of the clerks and they say that each week they'll increase the discount by another 10% until all the merchandise is gone.  You take a pass at $45 as it doesn't seem that great a discount, and the "NO RETURNS! ALL SALES FINAL!" sign worries you.

Actually, that's not quite true.  Oftentimes, the liquidators only discount things so far, and it then at a certain point they load up the rest into a truck and take it somewhere and sell at another liquidation sale.  Yes this is a spoiler alert.  Stuff you might see for sale at "liquidation sale" might not even be from that store, but rather inventory liquidators had, from other stores in the chain or who-knows-where.  Liquidation sales are no different from ordinary mercantile transactions, and in fact may be so.

Years ago, when we lived in Alexandria, Virginia, there were a number of rug merchants on King Street and Duke Street that had perpetual "Going Out of Business sale!  Lost our Lease!" signs plastered in their windows.   And by perpetual, I mean a decade or more.   It was actually a shock to drive by one day, a decade later, and see they actually went out of business.   I guess it wasn't false advertising after all - all businesses eventually go out of business.   But I digress.

Anyway, you come by the appliance store next week and now the toaster oven is for sale for $40 - a 20% discount.  You're tempted to buy it because you'll save $10.  On the other hand, if it's broken or not what you wanted, you can't return it to the store as it's going out of business.  If the item is defective your only recourse is the manufacturer's warranty, which is difficult to make use of, as nobody wants to pay to ship a $50 toaster oven in for repair.

So you decide to wait another week for an additional discount.  At this point you're starting to get anxious.  For starters, you want the toaster oven in your kitchen now, not next week.  Second of all, you saw another lady looking at the same toaster oven - and there was only one or two in stock - and you're worried that somebody else might buy it out from under you, before the price goes low enough for you to jump on the purchase.

Fear of missing out or FOMO kicks in. You don't want to buy the toaster oven for $40 when you could wait a week and get it for $30 or maybe even a week more and get it for $25, or maybe even $20 if you want to wait until the bitter end.

After all, wouldn't it be great to regale your friends with tales of how you got a $50 toaster oven for $25?  Once again status rears its ugly head.   And yes, people do this - I know many folks who like to boast of "getting deals" on things as if they were winning minor victories in the economic wars.  On the other hand, you don't want to be ridiculed by those same friends for paying too much for a toaster oven from a company that's going out of business.

Finally, in the end, returning to the store two or three times (wasting $10 in gas on a $50 toaster oven), you bite the bullet and pay $35 for the toaster oven which really isn't a great bargain.  After all it was a display model - it might not even work.  If it doesn't, you cannot bring it back for a refund.

What's interesting about this liquidation model is that it's a very highly complex mathematical equation, which also involves psychology.  I'm sure a mathematician could probably create a model in one or two equations, contrasting the perceived increase in discount over list price versus the risk of losing out on the bargain if someone buys it before you.  And I suspect the latter causes a lot of people to pay more than they were they would like to for these liquidation items due to fear of missing out.

(You can see why liquidation sales are so lucrative - and why many creditors would prefer to have them and cut their losses than to keep shipping product to a money-losing company.)

At the other end of the spectrum are people who are buying things as impulse-purchases at these liquidation sales.   The person you are "bidding" against in this small toaster-oven war is likely to be someone who buys it on impulse, not even realizing what these things are worth or what a good price is.  They see the word "sale" and salivate like Pavlov's dog, and just assume they are getting a bargain.   You, the wizened shopper, are shut out.

While you think about whether to wait a week or two to buy that toaster oven, Harriet homeowner comes by and says, "Oh look, a toaster oven for only $45! That's a real bargain!" and snaps it up.  Of course it wasn't a real bargain just a slight discount off of a fictitious retail priceBut her impulse shopping has ruined it for you.

And right there, it illustrates why liquidation sales are no bargains.  You are bidding against other people, in effect, in a weird form of slow-motion reverse auction, where the prices go down the longer you are willing to wait.   Someone else will buy the item, most likely, before it becomes any sort of deal or bargain.

I've been to a number of these liquidation sales over the years.  When both Hechingers and Builders Square went bankrupt, they liquidated their entire inventories.   The only real bargains I could find were specific things that I needed, that other people did not perceive as being worthwhile.  For example, there was several packages of drip irrigation equipment that were all broken open and scattered all over the floor.  I quickly realized that they was well over $100 "worth" of equipment here selling for $5 or $10, mostly because the packaging was damaged.

I was also able to scoop up some lawn light transformers, wiring, and fixtures, that again, were in broken packaging or had been returned in partial sets.  I was able to get these for a few dollars each even though the retail price was well over $50.  Of course, as I noted in my post about solar lawn lights, you can "save" a lot more money just by not buying any of this stuff at all.  It is not like they were selling oxygen.  These were wants, not needs.   Toys, really.

But unless you can perceive a bargain where others do not, chances are you're not going to find very many bargains at liquidation sale.