Ray Armendariz and Mark Caplan from Hilco Wholesale Solutions Join Steve Katz to discuss inventory monetization options for retailers and manufacturers during the Covid-19 crisis in the latest Hilco Global Smarter Perspectives Series podcast.
Hello again and welcome to the Hilco Global Smarter Perspective Podcast Series. I'm your host Steve Katz. Today we're speaking to two of the leaders from Hilco Wholesale Solutions, Mark Caplan, the company's president, and Ray Armendariz, it's Chief Operating Officer about how important it is during the ongoing COVID-19 crisis for retailers and manufacturers to be thoroughly weighing their inventory monetization options. Just as a little bit of background for those of you who may not be familiar with Hilco Wholesale Solutions, the company and its dedicated team assist retailers, manufacturers and trademark holders in remarketing, unproductive aged and out of season inventory. So with that said, Mark, and Ray, welcome to the podcast.
Marc Caplan 0:52
Hi, Steve. Glad to be here.
Ray Armendariz 0:54
Hello, Steve. Thanks for having me on today.
Steve Katz 0:56
Yeah, great to have you guys. You know, this inventory focused topic has such relevance in the market right now. Because essentially, everybody, businesses and consumers alike sees what's happening with things like limited stock and stores and greater options available online and how the pandemic overall is really now shifting consumer preferences and buying habits. Right? So Mark, with that in mind, let me first address a question to you on this. Because of the lockdown, there was so much excess spring and summer inventory, that we've seen some really big discounts like 40% or more at some upscale retailers right over the past few months. So is that something that's likely to continue moving into the fall and winter months? And if so, how do retailers balance decisions like that with maintaining the operational liquidity that they're going to need moving ahead?
Marc Caplan 1:46
So that is a great question Steve and I think to address it, I want to step back a second and mention that let's talk about what happened at every level, almost instantly in the supply chain, both at the wholesale level, and at the retail level. Because we saw an unprecedented stop in supply chain and consumer buying habits with a lockdown and it lasted almost six weeks. So therefore, new product was not really being received by the retailers who could sell it; whether it's brick-and-mortar or e-commerce, except with a few exceptions. And that being said, it was included anything that was made offshore in at the factory levels and being shipped in or was being made domestically at the factory level and shipped in. So logistics itself stopped. There was no flow going into the stores. We saw consumers adjust their purchases to either what they called essentials or shifted over of course, to ecommerce. But it left large amount of inventory sitting in the retail chain with no liquidity coming in. And as a matter of fact, yes, I think it will continue into the third quarter. But I think there'll be adjustments made at every level. That's at the supply chain level, at the logistics level, and most importantly at the direct to consumer level. So the spring/summer product might be at the same mark down levels. But those might not sell or feel less as well compelling, as the product that is now going to be as seasonally appropriate, which has to be weighed by the consumers. Discretionary income versus needs might also shift their patterns a little bit. So, we'll see markdowns. But for those who are facing liquidity crunches, those markdowns will get greater and greater. However, they'll be offset with what type of purchases the consumer wants to make, when they're faced with something that's really a spring/summer item versus say an item for the home. And that being said, I think it'll be not as strong as what we saw and a little bit more on a specific case by case basis as we head into this all important third, and now fourth quarter.
Steve Katz 4:02
Thank you very much. Very interesting. Just in terms of understanding the markdowns that the retailers themselves are looking to make versus what maybe the consumer is looking for. So very, very good insight. Ray, why don't you take this next one. You know, way before we all ever even heard about COVID-19, manufacturers and retailers were making critical changes to their businesses just to keep up with the growth in popularity of online shopping. So I'm talking about things like building out e-commerce platforms and omnichannel infrastructure. Can you talk a little bit about how these kinds of efforts are paying off now for those who made them and then also whether those who didn't make those types of changes ahead of this crisis are wishing that they had?
Ray Armendariz 4:48
Yes, of course Steve, thank you for the question. You know, as all of us transition into not only working from home but also limiting our everyday lives being confined to our homes, consumer shopping habits had a direct impact to retailers across the spectrum. Everyday necessities were prioritized for all the right reasons. Basic needs that include food and health categories saw a surge of consumer spending, as the outlook for all of us was a fear and so we stocked up on those necessities that we felt could either run out or were important to have with some degree of depth in our homes. So, well-positioned companies with e-commerce platforms benefited from this shift. As customers were already accustomed to shopping via these recognizable sites that all of us know. The infrastructure was already in place to support what was to become a surge of online shopping. Because this took place the early part of the year, inventories were comprised of what I would call seasonally appropriate products, as from finding ourselves within our homes became the norm most of us now working from home, traded in our sports coats, our dress pants, for leisure wear/summer wear. Many of us were working from home in gym gear. So companies in the apparel space, with robust e-commerce platforms were able to meet this demand. Those who failed at capitalizing from this new consumer group for those who had less advanced systems in place. This was the key was helping offset the severe revenue drop-off that we all saw on a daily basis on the business channels coming from traditional brick-and-mortar business dying off and as malls and other retailers were closed to the public. So we did see ingenuity at it's best coming from some retailers. As e-commerce platforms were strained by demand coupled with labor challenges, we saw them go to now closed or even low traffic, brick- and-mortar stores, and leverage them to fill online orders direct from their in-store inventory. And so what they were doing, if foot traffic was such that it was costing retailers to keep stores open, they were simply transitioning and turning them into a fulfillment center, if you will. We further saw retailers at yet another level of service by introducing and or expanding curbside pickup something that was really not the norm, you know, pre-COVID days. And yet, another tool to help offset loss revenue streams, many of the retailers expanded, providing services that otherwise was not part of their plan. So as a result of all this, we saw varying needs from our consumer base. Those without a robust online platform are now sitting on what was soon to become out of season product, summer/spring apparel in most cases, and with an eye on the future looking to find a solution to monetize these inventories with more appropriate fall products as things pointed towards a transitional and a measured path towards reopening retail stores. We started to field many calls from our consumer base. Many of these customers came to us for help and yet on the opposite side, those with robust e-commerce platforms started to scour the marketplace looking for inventories to fill in late summer demand that we saw. And I believe that was as a result of consumers working from home looking for that as leisure wear, that I spoke about earlier. We were successful here at Hilco Wholesale with being able to shift inventories from those that had too much to those that were in need. And Steve, this is what we here at Hilco Wholesale excel at. With a vast number of relationships that we have in the marketplace, we're always well positioned to quickly monetize inventory, whether you are procuring inventory, or looking for solutions to address the excess or out of season goods.
Steve Katz 8:38
All right, well, I guess some tough decisions ahead for those who didn't invest, given that they're not only sitting on inventory now, but they've also probably got a significant investment to make in those platforms. Thanks for that insight. I appreciate it. Mark as as a follow up to that, I know when you guys speak with clients about the importance of understanding and weighing their inventory monetization options, the topic of augmentation is one that brings a lot of interest in discussion. Can you talk for just a couple minutes about first off how Hilco's augmentation capability and its relevance to the pandemic is critical right now? And also about whether you've been seeing any kind of an uptick in interest for equity position deals during the pandemic and how Hilco is able to do those and how you approach those as well.
Marc Caplan 9:30
Sure, Steve, let me sort of jump in on that one. It is true that we're really lucky because at Hilco Wholesale, we have a lot of tools to work with our clients on and that means that we in our wholesale division are mostly bulk resellers. So we have to always view a large inventory as we're going to take it in and in some form, help them monetize it. But one of the tools that we have that is not prevalent to everyone or really very few in the marketplace is during the pandemic, but even a little bit normal times, we're always running a fair number of going out of business sales or closing store sales. And with those, we're able to supplement or what we call augments the inventory in those stores from the marketplace. So specific to our clients who say, you know, I can't take all kinds of massive hits, but I need other options to maximize my inventory when I'm going to sell it to you in a bulk wholesale form. What other tools do you have? An augment is a perfect one. What that means is, we buy it but directly sell it within our going out of business sales and they, get a higher price paid by us, because it brings a retail price. And that is a tool that has been extremely well received, especially during the pandemic. That has also opened the doors to clients who say, "Well, okay, if you can't put on an augment, what else can you do for me? How else can you help me get through my liquidity crunch, I need to move this inventory?" And that leads to the second part of your question Steve, which is equity positions during the pandemic. A lot of these clients, whether there have run a you know, asset-based loans, or have short, some sort of short liquidity crunch, or simply need to move that product in some manner, then we will at Hilco be happy to step up and take an equity position. In other words, we're willing to put our own capital at risk, to help them sell that inventories through. And even there in an equity position, we have a few different variations that are particular to and can be tailored to specific clients. So that we can in this pandemic, help them get the liquidity that they need or hoping to get, and at the same time, be able to position those buyers to do well as we resell them in the marketplace. And lastly on that Steve is when we take an equity position, and we've provided liquidity to the seller, a client, we're able to put it into our own warehouse, and be able to possibly hold it till six months or a year later, when it again the marketplace will bear a higher price for that. And that's how those two dynamics have played sort of a strong role for Hilco Wholesale during the pandemic.
Steve Katz 9:58
Very interesting. I can imagine that being able to bring that retail price via augmenting during this downturn is a pretty big differentiator in the market as must be having that liquidity yourselves to take the equity position. So that's really interesting stuff. Thanks. All right. Now, let's go back to Ray. Ray, I've heard you specifically talk about the rule that creativity plays in developing strategies to protect your client specific interests, when you're redirecting products into off price or other discounters things like channeling geographic exclusions, things like that. I'm wondering if you could share some details on how those work and also maybe touch on Wholesale Solutions 3PL distribution network, and how that fits into the equation for providing clients with efficient tailored solutions.
Ray Armendariz 13:24
You bet Steve, happy to do so. So brand protection is a buzzword here at Hilco. We have long standing relationships with our customer base. Trust is a pillar by which we have such long standing relationships. As you know we work with clients, we look to understand what brand sensitivity exists in order to provide strategies that address those concerns. And as you mentioned, some of the things we do on some channel exclusions, our clients may have healthy and active relationships from which we stay away from. We identify those at the onset, when when we hold our initial discussions. Our broad customer listing in most cases, allow us to bring value to our customers by still having a broad listing of channels that we can go out to market inventories to. Our customer base is made up of not only top and middle, but also lower tiered retailers. In some cases, those with footprints within geographical sections of the U.S. So it allows us to be creative in the approach of where we're going to take product out to the market. Our customer reach also goes beyond the continental U.S. Our customer list expands well into Canada, Europe, Latin America, and on the smaller scale even into Africa. This allows us to monetize inventories having to be sold outside of the United States. We truly have a global reach either through our customer contacts, or through our worldwide affiliates within Hilco Global. Breaking it down to scale and actually we also develop an optimization plans where we restrict sales to retailers within a specific radius to where customers do business. This of course prevents market penetration or branded goods that they themselves carry into active and robust markets. Allow me to speak also to yet another strategy that we employ. Customers have expressed a concern over customer returns. The fear arises from a customer making a purchase at a competitor's location, and then simply looking to return the product at one of our customers place of business. Here's an example of where our 3PL partnerships come into play. We employ the branding strategies by where we blackline merchandise. This basically simply means that we place a black line across the product label, or perhaps even on the hang tag, making it simple for an employee to determine if that product was purchased at another location, should a customer be looked at, again to return a product that was purchased elsewhere. Likewise, a similar strategy consists of pulling existing hangtags and simply applying a new one. The facilities that we work with these 3PL facilities that you referenced, are very well versed with with these processes that we employ. As we engage with a customer, we then transition to all the startup calls with the outside change that through these three PL facilities to ensure that there is a clear understanding of what the scope of work with every new engagement we take on it's comprised of. We further then follow up with weekly progress calls, and or request sample photographs simply to ensure that the work is being executed as we laid it out at the beginning. So in conclusion, all of the strategies that we employ are contractually agreed to with both parties executing a an agreement with terms clearly laid out for both sides. This is just a small sample of the steps we take to ensure that we address all of our customer's concerns, Steve.
Marc Caplan 16:58
That's a lot of good stuff. I tell you having such an extensive track record must really help you pull those strategies together and customize them for clients. So thanks again for sharing that as well. Well believe it or not, guys, I think we're just about out of time. So thanks for sitting with us today and explaining that to our listeners. And for those of you who joined us today if you're facing or feel that you may soon be facing some critical decisions related to inventory and are looking for guidance on options to best monetize those assets, certainly sounds to me like it would be to your advantage to reach out to the team and Wholesale Solutions which you can do simply by emailing Mark at firstname.lastname@example.org. That's email@example.com. Mark, Ray, thanks again for joining us.
Ray Armendariz 17:50
Marc Caplan 17:51
Thanks for having us.
Steve Katz 17:52
Yeah, absolutely and listeners we hope that today's Hilco Global 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. Until next time for Hilco Global, I'm Steve Katz.