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Daniel Romero eyed a wall of flat-screen TVs on the second floor of Circuit City's 26,000-square-foot store on Fifth Avenue in midtown Manhattan during his lunch break Jan. 22. Drawn by the bankrupt chain's liquidation sale, the 28-year-old print manager at Macy's (M) had already picked up a new controller for his Xbox 360 at a 30% markdown that day, and he was considering getting an extra Wii game controller as well.
The store was busy but not packed, and like most shoppers there, Romero wasn't about to buy a 46-inch Sony Bravia TV because a 10% discount cut the price from $1,699 to $1,529. "As far as all this high-end stuff," he said, "you can still probably find better online."
The liquidators who bought those TVs and the rest of Circuit City's inventory, estimated at a $1.8 billion retail value, are gambling that Romero and other shoppers will come around. After failing to find a buyer to take Circuit City out of bankruptcy, the 60-year-old Richmond (Va.) electronics giant announced Jan. 16 it would close its 567 remaining U.S. stores, lay off its 34,000 employees, and sell off its assets to pay back creditors.
The next morning the four liquidation firms that won the bid to sell Circuit City's inventory started going-out-of-business sales, advertising 10% to 30% discounts in what they say is the largest electronics liquidation ever.
These are busy days for the liquidation industry, which consists of about a half-dozen big firms and scattered smaller players, as companies that in other times might have reorganized in bankruptcy are being forced by the ailing economy to liquidate. "It is the most active time that I've seen in this business," says Jim Schaye, president and CEO of Boston-based Hudson Capital Partners, one of the four liquidation firms handling the Circuit City sales.
Following a disastrous holiday shopping season in which many retailers seemed eager to almost give goods away in last-minute sales, the prices at Circuit City are evoking some disappointment, to judge by comments posted on Web sites frequented by bargain hunters. "Discounts are small," wrote one poster on insidesocal.com.
But, say liquidators, the discounts are about standard for this type of sale.
Hudson, in a joint venture with Great American Group, SB Capital Group, and Tiger Capital Group, successfully bid on Circuit City's inventory. They will pay 70.5% of the estimated $1.2 billion wholesale value for the merchandise. Liquidators assume the risk that the goods they buy may not sell in the time or at the price they expect. They also take over the cost of running the stores during the sale, including payroll, rent, and advertising. In exchange, they're acquiring goods that would fetch $1.8 billion at full retail price for about half that amount.
Both the sale price and operating costs affect the kind of discounts consumers can expect to see on store shelves. Shoppers accustomed to seeing 30% to 40% discounts on last season's clothes shouldn't expect the same kind of fire sale for lower-margin gadgets. And while some of the prices aren't cut as deeply as some shoppers might hope, Schaye said liquidation sales trim the price of items that normally don't go on sale, such as the game accessories Romero picked up, or leftover iPods, which are rarely discounted. "How often do you see iPods at 10% off?" Schaye asks.
Indeed, at the Fifth Avenue Circuit City, bright red signs with yellow type advertised "Entire Store On Sale!" and "Nothing Held Back!" The signs promoted discounts of 10% to 30% off, although big-ticket items were nearly all 10%. Still, some shoppers weren't convinced. Ed Shelly, a student from Manhattan, dropped by the store in search of an HP (HPQ) wireless printer, after checking the Best Buy (BBY) store next door, which didn't have it in stock. Circuit City had the printer on sale for $117, 10% off the regular $130 price. Shelly held off to see whether the price goes down in the next couple of weeks. He said he'd buy it when it reaches $100 or less.
That 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. "You certainly, after the next week and a half, won't be able to go in and buy an iPod," says Sandy Feldman, senior vice-president at Great American Group.
Still, liquidators worry they may have paid too much for inventory that newly thrifty shoppers may not buy. "We have to be very careful," Schaye says. "We can lose money very easily."
Tozzi covers small business for BusinessWeek.com.