How Amazon’s Liquidation Restrictions Led to a New Appraisal Approach

Steve Katz 

Hi, everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco global smarter perspective podcasts. As returning listeners know by now I’m your host, Steve Katz. And if this is your first time with us, well, then welcome we’re really glad that you could tune in. Today we are joined by a distinguished triad of professionals from across the Hilco global platform. For what I think everyone will find is a very eye opening conversation, we’re going to be talking about how the increasing relevance of Amazon sellers in the retail space has created a need for a new approach to field exams, appraisals and liquidation that incorporates a deep understanding of the nuances that are associated with conducting business within the world’s largest online marketplace. So Ian Fredericks, Dominick Keefe, from Hilcos retail group and Doug Jung from Hilco diligence services, welcome to the podcast.

Ian Fredericks 

Great. Thanks for having me back. Steve. Always a pleasure.

Dominick Keefe 

Yeah. Thanks, Steve. Really appreciate it. And happy to be on.

Steve Katz 

All right. Ian, can you kick us off with a quick top line of the core issue that’s driving the need for a new approach in this space?

Ian Fredericks 

Steve. So if I think back and obviously Amazon has been a ever growing and larger and larger player in the retail space, and I think what really, you know, sort of accentuated that was when COVID, the onset of COVID. And so when COVID started, you know, they were obviously, stoppers flocked to Amazon and other places that could deliver goods to them during the pandemic, since early on, everything was shut down, except for essential retail. And as a result of that, you also had an increase in third party sellers. So you have more businesses trying to sell through Amazon in order to capture their sales. And you also at the same time, have been having this consolidation of third party sellers into businesses like THRASS. CO, where they’re taking a bunch of smaller Amazon sellers and trying to roll them up and aggregate them. And as a result of this, the capital needs were becoming, you know, greater than greater. And what we identified was, there was a real need in order to properly appraise the value for really become experts in the Amazon area. And you know, together with Dominic, and Doug and some others on our team, what we did was really doing extreme deep dive into all things Amazon, the inner workings of the marketplace. And then what we built off of the back of that was essentially methods for how to appraise Amazon inventory, because while there are aspects that are similar to some traditional brick and mortar, or ecommerce appraisals, there are many differences. And then also, you know, how would you conduct the field exam because obviously, it’s different, you know, some, some marketplace users will use just amazon seller central, while others may use, you know, some combination of amazon seller central and their own, you know, software solutions. And then you know, exactly what you also have to figure out was exactly how you would liquidate this stuff. And what would those no RVs II so required a lot of testing of a lot of different things. But that’s what drove this. And that’s how we kind of got to where we are here was we did a deep dive really became experts in it and then build out the product set for how we would support you know, lenders and an inventory appraisal, field examined liquidation context. Okay, that’s

Steve Katz 

a great starting point. Makes a lot of sense. Obviously, it’s a complicated landscape, sort of a different approach is clearly necessary. So Dominick, as I understand it, Amazon does allow liquidation of inventory and even talked about that a little bit through its website. And they even provide a variety of tools to assist in the sale of excess and underperforming inventory. But the nature of the activity is permitted, is a lot different, more restrictive, than what you typically find in a in a gob event. So what additional light can you shed, what those differences are, and kind of build on why have a different sort of approach is necessary?

Dominick Keefe 

Yeah, and I think even to sort of set the stage here, and I’m gonna invite Ian to jump in to add to this, but, you know, I think we should cover sort of how a liquidation takes place in normal course, right. So before even getting into the differences of what makes is Amazon unique. And when you think about a retail liquidation, you generally have a couple of tools at your disposal to generate a recovery and to sell as much inventory as is necessary at the best possible price. And so and to ultimately achieve the best recovery. And so, you know, in the case of a brick and mortar liquidation, for instance, you know, he, most of the consumers that are listening to this podcast and people more familiar with the industry have been very familiar with, with the signs that go up. And that sign package has an effect because the consumer recognizes that and, in those signs mean something and so the messaging that you use on those signs, like going out of business and store closing event, and everything must go can be a very powerful tool in the context of a liquidation. And so, you know, that kind of messaging is used prominently in stores. But even on a sellers own e commerce platform, you use very similar messaging, and it has been, you know, it has a powerful effect. Amazon is unique in this one way, among many, because you cannot use that same kind of language. And so, you know, because of that, you don’t have the ability to promote the sale in the same way, it’s very difficult to create that same level and sense of urgency on Amazon that you could across these other platforms that, you know, we’re more familiar with as as, you know, consumers in and liquidators and so, you know, that in and of itself, you know, poses a challenge for recoveries. And so understanding how to maximize other tools, pull other levers, and get attention to a sale on Amazon is a difficult thing. Now, we’ll say that you generally, again, have less ability to promote the sale using traditional means. But there are other, there are other ways to promote it. And that includes some things that Amazon provides for, like Lightning Deals, you know, Amazon liquidation tools and these other sorts of tactics that you can leverage. But you know, perhaps most of all, one of the things that makes Amazon unique is the pricing model, and in how you’re able to discount to generate sales and sales volume. And so, you know, Amazon has the ability to allow you as the seller to discount with, you know, very small increments. So let’s say 2% 3% 4% 5%. And that can be very meaningful. And it certainly is different than what you would otherwise find sort of in a traditional brick and mortar retail store. And so, you know, there are there are pros and cons to the platform in terms of how you generate the highest and best recovering. And it’s really a takes a deep understanding of what those are, and how to leverage them to maximize sales, because it’s unlike anything else that’s out there. It makes up for a huge part of ecommerce sales, right? I mean, you think about it, Amazon is about 40% of the entire US, US retail e commerce market. And that’s greater than the next 14 largest e commerce sellers combined. And we’re talking you know, Walmart, eBay, Target, you know, Home Depot, Costco, etc. And so it’s massive, and it’s it’s massive, and it’s unique. So a deep understanding of those nuances is invaluable in though that’s what we’ve spent a lot of time over the last, you know, handful of years getting familiar with.

Ian Fredericks 

So just to dovetail off of what Dominick said, you think about a traditional brick and mortar or even traditional ecommerce liquidation. You’re much more focused on the sort of nameplate and the goodwill associated with that nameplate. So Sears or RadioShack, or any of those old liquidations that have happened. You’re focused on whatever Goodwill’s associated with that nameplate on Amazon. It’s all about the product, product and pricing. So you’re gonna be a lot more surgical and also a lot more thoughtful about how you’re going to price different things. And you can give a lot of tools to help compare price but Amazon’s focused on the product and the price and a traditional liquidation is focused much more on the nameplate and what’s happening with that nameplate.

Steve Katz 

Yeah, interesting. And, and then we talked a little bit previously just in some discussions that we’ve had Ian about this idea of, you know, violations, that there are a lot of sort of missteps that companies can make when trying to conduct a liquidation on Amazon did you want to just touch on that a little bit?

Ian Fredericks 

Sure, and I think this goes to, there are a lot more ways for lenders to track how a retailer is doing from a data standpoint, there’s actually an Account Health section of, you know, Seller Central, there are violation sections where you can actually track how many violations there are. And violations can be both at a stellar level where there are things that that sellers doing better improper that needs to be corrected, that could affect whether or not that seller is allowed to continue selling on Amazon. And then there are more, more regularly you have product specific violations. And those can be you know, hyper technical, or they can be big issues like violating, you know, in selling something that violates someone else’s intellectual property. But understanding the universe of those and how a seller reacts and how quickly they react to those is critical. And one of the things that we that we found to ensure that we could get those things resolved quickly is we’ve actually, you know, we partnered with an Amazon specialist, they were former Amazon employees, they know exactly where to go to get help on resolving those issues. Because sometimes it’s not so clear exactly where that violation lines, but we’re a lender, unlike other typical retail where you have to track everything off simply the financial information, there’s a lot of ways to be able to track account help Seller Ratings, you know, get those things potentially added to the borrowing base and create thresholds, where if a, you know if a borrower violates, or trips below a certain threshold that can cause covenant violations or things like that. So I think there are a lot of ways for lenders to protect themselves, but you got to know the universe of what you should be protecting against. And violations, like you said, Stephen, one of the key ones that can affect the count Hell,

Steve Katz 

yeah, good points. Good points. So lots of complexity, obviously. But, Doug, you know, there’s some good news here, too, right. As long as you’ve got proper understanding of risk and appropriate monitoring, I assume.

Doug Jung 

Yes, obviously. And as you just heard, both Dominick and Ian say, there are a lot of rules and regulations, if you will, in managing in managing Amazon. And in the field exam process, one of the things that we do is we you know, we’re not looking at it from a liquidation standpoint, per se, we’re looking to see if the company itself is monitoring is Amazon performance adequately. There are a lot of metrics that, you know, that’s already been mentioned, mentioned, that need to be monitored and tracked. Most importantly, the, you know, the seller needs to have SKU level, very accurate SKU level inventory information, and compare that with what Amazon is showing for, for this that same inventory, is that, you know, underlying the, this whole concept here is that the seller still holds title to the inventory, even though it’s physically out of their control. So they need to make sure that they have SKU level inventory record keeping that tracks to, to Amazon’s. In addition, they really, you know, one of the things that we would do on the field exam side is analyze not just inventory, but also receivables. Amazon would pay its sellers every two weeks based on their their recorded sell through, they remit on a net basis, taking all fees associated with the arrangement out of the top. And it also returns. And that’s a key, a key metric also to analyze historically, to see out of the gross receivables owed to the seller, how much do they actually net historically, and that’s obviously the you know, at the end of the day, that’s, you know, that’s how the inventory gets converted to cash true through that, you know, Amazon submission. So we would analyze that as in as well as the inventory record keeping and build that into the, into the borrowing base accordingly.

Ian Fredericks 

Dvetailiing off what Doug said, around returns. And I think there’s two critical points that I think are worth making here. First is you have a very different level of detail on returns with Amazon. So you can again track down to the product or SKU level. So it’s very easy, or I shouldn’t say it’s very easy, it’s easier and you have much richer data than you may historically have with a traditional retailer to be able to dig deep into which use drive most of the returns, whether they’re seasonality associated with return. And whether it’s pretty steady over a 12 month period or it fluctuates, your return building a return reserve is something that lenders should really consider. And I know that anytime anybody hears reserves, it’s all it’s less that we can loan. And it’s, you know, means the borrower has less liquidity. One of the good things about Amazon though, is, you don’t need a gift card reserve. So unlike returning reserves, unlike regular retail, where you’re going to have outstanding gift card liabilities, for a retailer that sells on it on the Amazon marketplace, a gift card is as good as cash. Because they’re amazon gift cards. That’s what’s accepted. And so when it’s tendered by the consumer to Amazon, for the retailer that’s selling the actual good on the marketplace, it’s just as good as cash. So you don’t have need to have a gift card reserved in the context of your Amazon selling space. The other point that I wanted to make off of returns are in a liquidation context, you can’t return goods, it’s fairly standard that returns aren’t accepted, All sales are final in the context of Amazon, you have to return goods, the good news is that you shouldn’t have an increase in your overall returns. Because again, as Dominick talked about early on, to the consumer, they don’t know that the retailer that selling a particular good is going out of business, they just see that the price is better than anybody else price. And so they’re able to then, you know, they’re not buying in that same sense of urgency that goes along with a liquidation sale. So they’re not any more likely to return the goods than they otherwise would be.

Steve Katz 

Good. Yeah. Great. Sorry. Go ahead. Yeah.

Doug Jung 

I was gonna say yes, there’s, there’s, you know, roughly a 30 day tail on returns that you need to need to think think about in the barring based context.

Steve Katz 

And do you need, like in the event of less than 100% sell through need? Is there something specific about disposition strategy that goes into an overall plan that’s focused on Amazon liquidation? Or is that a consideration?

Ian Fredericks 

Yeah, there are a couple of different options for you here, Amazon, as I think Dominick mentioned earlier on, they have some tools for you to be able to dispose of inventory that’s remaining at the end, you know, those can be where you can donate it, you can sell it to third parties in bulk for fixed values, or you can have it returned, you know, interestingly, before COVID, used to take Amazon about two weeks, on average, to return goods out of their fulfillment centers. Now, it’s, they’re saying it’s about 90 days. So you know, in that, and those goods come back in from several different fulfillment centers, because Amazon’s going to optimize where they placed the inventory, to meet demand, and get it there as quickly as possible. As we all know, we’d like Amazon prime site, they’re even doing same days, you know, one day, second day now is almost too long, which was the original prime destination. So you know, there’s, they’re always to do it, Amazon has some built in ones. And then if you really want your inventory back, then you can ask her to come back. You know, the nice thing is that, you know, save long, long term storage fees, there’s a minimal cost to having your inventory continue to sit there. So as you’re selling down, you should be able to optimize price to really optimize your sell through and shouldn’t have much left at the end, that that’s one of the areas where we really have focused our attention. And, you know, and then using some of Amazon’s additional tools, like Dominic mentioned, you know, whether it’s a coupon or bundling more of the goods, you know, there are a lot of different options to try to increase your sell through so that you have very little if anything left at the end, to be able to they have to dispose off.

Steve Katz 

Perfect, perfect, great, great additional information there. And what about, you know, kind of running a little short on time here, but in terms of lenders, any thoughts? And anybody can take this question, specific to how lenders should be approaching this market when making an asset, asset based loan to an Amazon seller?

Ian Fredericks 

So I know this is gonna sound a little bit like a plug in, I’m gonna first pick the right appraisal and field exam partner. And there’s nobody out there that has more experience or a more fine tuned model, you know, than Hilco. And, you know, that’s because we spent a couple of years becoming experts on it, and then we’ve run the largest liquidation, you know, in the context of an Amazon third party marketplace seller that’s given us just a tremendous amount of knowledge that nobody else has or even come close to. And so picking the right partner is the most critical. And I’ll let Doug go next on anything you’d like to add.

Doug Jung 

Yeah, I would agree 100%, it’s picking the right partner, it’s an analogy I’ll draw is asset based lenders who seek to make loans to operating companies, in other in foreign jurisdictions, foreign to the United States. In those cases, asset based lenders rely on on local counsel in the UK, in Germany, in, in the Netherlands, etc, to help them structure their deals in accordance with local securities laws. And similarly, in the in the Amazon space, you need experts who are familiar with Amazon and partnering with them in performing diligence. And appraisals isn’t really important part of the part of the equation is when they’re dipping their toes into this into these waters.

Steve Katz 

All right, Dominick, anything else you want to add there?

Dominick Keefe 

No, I would just say, you know, the reality is like, selling on Amazon is not easy. There are a lot of Amazon sellers. It’s a massive platform, but it’s difficult. And with that, there comes certain risks. And so, you know, some sellers have managed to be incredibly successful leveraging the platform and others, less so. And so you know, we’ve become intimately familiar with what some of the good habits the bad habits are. And from the perspective of both looking at it from an appraisal and field exam, and then on the other side to a liquidation there, there are a lot of complexities to it, in its ever changing, you know, on unlike stores, where you can sort of, you know, what your lease is, you know, where your store is located, you know, what you decide what your marketing and branding is, and, and how you promote the store, all that stuff is sort of fixed, or at least you’re part of that decision making process. Whereas Amazon, a lot of those decisions are made for you without your input. And so it’s fluid and ever changing. And so, you know, it does take a great understanding in a current understanding of what’s going on and what the environment and marketplace looks like. And I think that’s one of the things that we’ve gotten really good at here. And so you know, because of that, it’s it you know, all of this can be done, it just can’t be done with a with a sort of flick of the wand, it takes expertise in, that’s something that we’ve really come to know both through a ton of time spent on the front end, but then also, with a lot of real world real world experience to see, you know, what, which decisions are the right ones? And in how do you actually maximize value in the world of Amazon? And so, you know, I would just add that in addition to everything that we’ve said here, the one thing that you sort of can’t replace or can’t learn on the fly is the experience that comes with everything that we’ve done over the last couple of years, getting into familiar intimately familiar with this platform.

Steve Katz 

Yeah, I could not agree more. Listen, guys, thanks so much for joining us. Amazon’s definitely a very different environment in many ways. And particularly, obviously, as we discussed here, when it comes to liquidations, and obviously, you guys have developed a tremendous expertise in this space. So I’m sure there’s going to be a lot of questions from listeners who have tuned in, that just want to really dig into their specific situations with you. Who wants to be the point person here for some follow up from listeners and how should they get a hold? Yeah.

Dominick Keefe 

Yeah, I would say all, you know, for the across the three of us here, our emails, our first initial last name at Hilcoglobal.com. And so I’m DKeefe, Ian and is IFredericks and then Doug is DJong. And so, you know, across the board, we’re all happy to answer any questions, and discuss and continue the conversation as much as possible. You know, we’re, we’re happy to help and we’re always available.

Steve Katz 

Super. All right, thanks. Dominick, Doug, Ian. Really appreciate it. Great information. Hopefully, we’ll get you back on again soon.

Ian Fredericks 

Great. Thanks, Steve. Thanks.

Doug Jung 

Thank you. Thanks, everyone.

Steve Katz 

Absolutely, guys and listeners. As always, we hope that this smarter perspective podcast provided you with at least one key takeaway that you can put to good use in your business or share with a colleague or client to help make them that much more successful moving forward. And if you found today’s discussion insightful, please be sure to check out our library of other podcasts and you can find those at Hilcoglobal.com forward slash smarter dash perspectives or on your favorite podcast platform. Till next time for Hilco global. I’m Steve Katz.