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Lending to a Retail E-Commerce Enterprise -- What You Should Know

Date: Sep 02, 2015 @ 07:00 AM
Filed Under: Retail

Lending to a retail-focused e-commerce platform -- whether it’s a stand-alone enterprise or a component of a traditional brick-and-mortar retail organization -- can be a far greater challenge than lending to a pure play brick-and-mortar retailer. Unique methods are required to accurately establish the liquidation value of an e-commerce platform’s inventory in order to determine a reasonable borrowing base. Similarly, the lender must adhere to an ongoing process for monitoring company operations, the objective being to mitigate its risk in the event of a business failure and eventual liquidation.

As retail e-commerce continues to grow, a greater portion of a lender’s collateral will comprise an e-commerce channel and that channel will become more vital in connection with a liquidation sale. Consider these marketplace statistics:

  • Currently, between 8.0% and 9.0% of all retail purchases are made online. In 2014, web sales surpassed $300 billion according to the U.S. Department of Commerce.
  • Online retail sales are expected to grow to 11% of all retail sales by 2018 according to a study released in 2014 by Forrester Research, Inc. That’s a 57% increase and an annual compounded growth rate of 9.5%.
  • Interestingly, consumers still love their brick-and-mortar stores by an overwhelming percentage. In fact, as online purchasing grows, consumers tend to choose their favorite retailers’ online platforms versus pure-play e-tailers. About 55% of consumers who purchase online prefer to buy from a retailer with a brick-and-mortar presence.

It’s no wonder there’s a growing interest among lenders in the online sector of retailing. So, what are the challenges of lending to an online retailer or online unit of a brick-and-mortar retailer? How should their inventory be properly appraised? How should the inventory disposition process be managed in the event of trouble? Here are the factors driving valuation and liquidation.

Understand the Feasibility of Liquidation

First and foremost, the relative ease or difficulty of liquidating through an e-commerce platform must be established. This requires a review of several factors:

  • If the platform is a stand-alone business, is it a viable liquidation channel?
  • If the online platform is part of a failed brick-and-mortar retail organization, what is the percentage of sales conducted via the Internet? A reasonable assumption is that a number greater than 10% is significant, which suggests the e-commerce channel is meaningful to the company. Therefore, it could be used as part of the inventory disposition strategy.
  • In either case, if the e-commerce platform must be shut down and the inventory liquidated, the attributes of the inventory itself play a key role in determining if it can be liquidated through the e-commerce platform as well as the ultimate recoverable value. As examples, what are the return percentages, warranties, sizes and installation needs of the inventory? What are the costs associated with shipping?
  • As a rule of thumb, the easier it is to sell the inventory in normal-course operations, the easier it will be to sell it in a liquidation. For example, branded watches sell well online because they are easily researched and cross-referenced for price, there are no sizing issues and there are no other variables that could cause consumer hesitation. Ergo, branded watches will usually sell well in an online inventory liquidation.

In recent retail e-commerce liquidation sales conducted by Hilco, results suggest ecommerce inventory recovers more similarly to brick-and-mortar retail than to wholesale. Liquidation expenses are typically less than those for brick-and-mortar, which will usually improve the net recovery.

Experience also shows that consumers react to a retail e-commerce liquidation sale in the same manner as they approach a liquidation sale at a brick-and-mortar store. This usually results in strong multipliers.

However, in order to optimize liquidation sale results, it is almost always necessary to transform the existing look and feel of the website to convey “urgency” to the consumer. Initial and follow-on pricing must be developed. Pricing strategies may follow the cadence of a traditional GOB sale. Relevant sale messages must also be developed and delivered through a well-orchestrated marketing campaign involving deft use of email, social media, and search engine strategies.

Establish the Appraisal/Liquidation Model

When conducting appraisals of e-commerce platforms, it is typical to use an exit strategy that mirrors a conventional brick-and-mortar liquidation. A model is created wherein the direct-to-consumer online channel is utilized, but not for the entire term typically assigned in a brick-and-mortar sale. The model also anticipates that the liquidator will need additional time on the back end for fulfillment of e-commerce orders in the pipeline. The strength of a company’s customer database is also an important variable in the model in order to optimize the liquidation strategy with respect to marketing, particularly direct marketing.

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