Tuesday, February 10, 2009

Circuit City Liquidation: What You Need to Know

Circuit City Liquidation: What You Need to Know

After going into bankruptcy, Circuit City was unable to find a buyer and is going out of business. This means that all of its stores must be shut down. There's a massive liquidation underway of all of its products. So what does this mean for you, the consumer? We poked around the web to see what we could learn and have compiled a list of information below.

First Off, the Numbers.

Consider the following: Four firms that specialize in liquidation events purchased Circuit City's assets (the products it sells) at a discount to their retail and wholesale values with the hope of selling the items for more than what they paid for them. Here's how it breaks down:

$1.8 billion -- the full estimated retail price of all of the goods acquired by the liquidation firms
$1.2 billion -- the full estiamted wholesale price of all of the goods acquired by the liquidation firms
$846 million -- the price the liquidation firms paid for all of the assets (70.5% of the wholesale value)

Okay, so what does this tell us? Well, for one thing, we know that the liquidators paid just 47% of the retail value ($846 million/$1.8 billion). So the liquidators stand to make a decent amount of money. For example, even if they sell all of the items at the wholesale price, they would make over $354 million and get a nice, handsome return of over 40% on their money (and in less than one year -- a pretty amazing annualized return, no matter what the economic environment!).

But to be fair, the liquidators do have expenses, both their own operating expenses as well as the costs to operate the Circuit City stores while they liquidate (they are on the hook for all of the store operating costs). And in some cases, liquidators have arrangements to give some of the profits to the bankrupt company. Still, they should do reasonably well if they can move all of their merchandise.

What the Numbers Mean for You

For the consumer, this is good to know, because you can see that the liquidators have a fair amount of wiggle room to lower prices and still get a hefty return on their investment. The liquidators have an incentive to sell these items as quickly as possible, too. They incur costs when the stores are open, and they have their own operating costs, all of which eat into their margins. So at some point, it's more cost-effective for them to lower the prices of the items and get them sold than to hold out hope that all of their products will sell at the current prices.

You can't ever be sure how supply and demand will work together. If consumers are afraid that the products will be gone tomorrow and thus feel compelled to buy today, then demand trumps supply and prices won't fall further. But in a slowing economy like the one we're in now, this is probably less likely than at other times. A lot of people just can't afford to buy the goods at the current prices. Period.

Be Knowledgeable About Prices

The website Consumerist.com posted an 
article about Circuit City recently that quotes a reader who says he is a current employee. Among the interesting things he has to say is this quote: "All of what you have seen is correct, not much is actually on sale. Looking at items I remember from a couple weeks before, most everything is more expensive. Especially things like blank CDs, flash drives, and anything in the computer area. Cables are less expensive than usual, but still way more than online. Game systems are not a bad deal either." 

So one tip is: Don't assume that just because you're walking into a store that is in liquidation and must sell their entire inventory, everything is a "deal". Some items may not be discounted at all, or their discount may be less than a discount that was offered weeks ago -- particularly around the holidays when big sales were in place.

Shop around online before you hit Circuit City and make sure you know the price ranges for items of interest, and make sure that you don't get caught up in the excitement of a going out of business sale and overpay.

Discounts Vary

Also keep in mind that products are discounted differently. Apparently, big-ticket items like TVs haven't been discounted much so far -- maybe 10% at most. Other items, like game systems, as the employee cited above notes, might be discounted as much as 30%-40%. As a recent 
Business Week article noted, "liquidation sales trim the price of items that normally don't go on sale, such as the game accessories ... or leftover iPods, which are rarely discounted."

An iPod that is discounted at 10% might be a great bargain, because iPods are rarely discounted and will probably be scooped up quickly. So it might be worth it to pick up an item like this at a small discount, just because there will be more demand than supply and you might not see the discount go below 10%.

As the Business Week article notes, the "psychology, typical of going-out-of-business sales, is heightened by the recession that has consumers paring back. Liquidators acknowledge that they'll sweeten the deals as the sale goes on, but they also warn that items in demand will move before then. Still, liquidators worry they may have paid too much for inventory that newly thrifty shoppers may not buy."

When to Buy

Okay, so nobody has a crystal ball and it's tough to know with certainty when to buy a product and when to wait. A discount of any kind is tempting, particularly large ones. But what if prices drop further? It's really a roll of the dice, and at some point you have to take in all of the facts and then go with your gut. 
Time magazine notedthat the liquidation "will likely take eight weeks". So if that's true, it might be worth swinging through the store a month from now to see what's left, as it might be massively discounted by that point.

And the liquidators are ready to drop prices should they get the sense that items aren't moving as hoped. Again, according to Time magazine (referring to a liquidator involved with a Circuit City store), "in a stockroom, he's got hundreds of additional discount stickers piled up — 40%, 50%, all the way through 80% off. Electronics are rarely discounted as desperately as, say, clothes, so 10-20% deals alone could move the merchandise. According to the liquidation firms, Circuit City sales are beating projections thus far. But with consumer spending so dismal, and so many stores desperate for dollars, Fried [the liquidator being referenced] might need to shift those stickers to the sales floor. 'It used to be that if you were doing a liquidation, you were the only one out there,' Fried says. 'Now, there's much more competition. You have to be sharper.' And ready to sell a 40-inch plasma for chump change."

Buyer Beware

One final note: In most -- if not all -- cases, once you purchase an item from Circuit City, you cannot return it. So make sure that you really want the item, and understand that if you run into a problem, you're stuck with it.

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