By Tim Anderson

Much of the growth occurring today in ecommerce inventory valuations is taking place as part of “Omnichannel” appraisals.  These 360-degree retail valuations are modeled to include retail store locations, company-owned website assets and, where appropriate, traditional catalog and wholesale operations. In fact, Omnichannel appraisals are more the norm today than those performed for traditional brick-and-mortar stores only.

Given that the purpose of conducting a valuation exercise is to mimic a potential liquidation scenario, the analysis delivered is meant to serve as a blueprint for the business and lender to follow should a liquidation be required. To provide optimal valuation, it is essential to model for the scenario that gives best overall outcome based upon utilization of an optimal mix of channels available.  Accordingly, when appraising businesses within their retail portfolios, lenders/ABLs must be certain that they engage a valuation partner that possesses the proper retail expertise required to accomplish this task. 

Learning Curve

Although many retailers have been engaged in ecommerce for some years now, the practice is still essentially in its infancy, particularly when compared alongside the traditional brick and mortar retail model. In fact, approximately 80 percent of retail ecommerce today is an offshoot of an original brick-and-mortar-only business. While some retailers have developed sound practices and mastery of ecommerce as a part of their overall mix, others continue to grapple with the many nuances and complexities of conducting business in this “Direct” channel.  Not surprisingly, the lending community, too, has struggled to some degree with how to assess risk and maintain a watchful eye on inventory valuations within their retail portfolios which operate an ecommerce component; and with good reason. 

Because there is no singular established best practice utilized by retailers for managing inventories across channels, retailers operating in both worlds still present a bit of a quandary for lenders. We have found in our engagements, for example, that it is particularly meaningful and appreciated when we take the time to clearly explain to our lender customers how and why the Omnichannel appraisal we are delivering is likely very different from the hundreds of brick-and-mortar or ecommerce-only valuations they have seen previously over the course of their careers. It is critical that we, and other firms engaged to provide Omnichannel valuation analysis and liquidation services, be highly proficient at conducting a thorough assessment of the costs, benefits, limitations and performance characteristics of each relevant retail channel and communicating the findings to our customers.  Only then can the inventory pool be effectively directed to the end user to ensure the most advantageous outcome for both business and lender.  

Inventories and a IP

At a high level, Ecommerce retail inventories model very similarly to their brick-and-mortar counterparts, with Net Orderly Liquidation Value (NOLV) being determined by gross sales, less expenses to conduct the liquidation.  When conducting Omnichannel appraisals, however, there are unique considerations regarding the interplay of these two retail channels and how they can best be utilized together to ensure a successful liquidation.  

The use of Intellectual Property (IP) in disposition is often a key driver behind a successful liquidation. In our appraisal efforts, we often find that the primary lender holds a lien on both the inventory and the intellectual property, which enables use of the website for liquidation purposes. When a third party holds a lien on the URL of a company, however, things typically become more complex as the holder’s focus at that point in time is most likely on selling the IP to ensure they recoup their investment. In such cases, it is not likely that the URL IP will be made available for use in selling the inventory.  That is why we promote to our clients the best practice of securing both the inventory and the IP whenever possible.  

That said, even when the same lender does hold liens on both, during the pre-liquidation wind-down period we have witnessed the tendency to cut back on costs including those that drive “eyeballs” to the website. For this reason, we model based on an agreement that the customer will remain committed to both driving traffic to the website and maintaining it during this period.  This includes search, server, ecommerce, website maintenance and other related costs that don’t even exist in the brick-and-mortar world and vary widely from retailer to retailer.   

Customer Base and Loyalty

For both in-store and ecommerce, the size of the active customer base is important as well as the level of customer loyalty to the brand.  These are best measured for purposes of appraisal primarily based upon data the company itself has collected over time, which they provide to us for assessment based on the terms of our contractual agreement.  The loyalty of a customer is somewhat more difficult to gauge and often easier to determine once liquidation is underway.  We have seen first-hand through our work with customers including Coldwater Creek and others, however, that thorough due diligence can also help crack the loyalty “code” and drive values to even higher than expected levels.

Cracking the Customer Loyalty Code

1. How long has the brand been around? 

2. Did it fail due to a change in customer focus? 

3. Who is the customer now vs. during the most successful years? 

4. Is that customer likely to remember the brand and be enticed to buy if we can:

  • Reach out to their active email?
  • Present them with the magic of a discount?
  • Convey the message that this is their “last chance ever opportunity” to buy from the brand?

Determining Whether to Sell Through the Website 

Deciding if and how to sell inventory through the direct/ecommerce channel is, understandably, a critical decision in Omnichannel appraisals and liquidations.  Not only is the direct liquidation expense structure mix typically quite different from traditional retail, but the expense structure of one ecommerce company can differ wildly from the next. In making this determination, the maturity of the channel, its historical sales concentration (10% of total retail sales is a loosely defined low-end threshold), and profitability are each key consideration. For example: If the ecommerce P&L has been bleeding money, then it is safe to say that it will continue to do so during a liquidation, and no liquidator will be able to make it a profitable undertaking.  Is the site within its first couple years of operation where building an online user base is still a heavy portion of the monthly spend?  Are online inventories maintained at, and shipped directly by, vendor distribution centers?  Are some orders shipped from retail store locations or made available for pickup at those locations? Is online/direct utilized historically as a discounted channel to sell through slow-moving inventory?  

On the other side of the modeling equation are considerations such as retail store capacity and merchandising space.  Can the company’s retail stores physically accommodate the added influx of online merchandise?  Can it be properly merchandised on top of the existing store inventory to avoid the need for further discounting?  Will it take longer to move in the store than it would online, resulting in the need for added sales staff and distribution center cost?  

As a general rule, liquidation sales achieved should exceed the prior year’s results over the same period.  If use of the direct channel as part of the mix doesn’t model as being capable of delivering on that expectation, then we may take another path to ensure success for our customers.

Ecommerce Systems Efficiency

In an Omnichannel scenario, understanding the proficiency of a company’s systems for content and ecommerce management is critically important.  For example, how easily can pricing and other information be updated on the website?  Are there discount capabilities built into their content management system currently or would this be an all- manual process?  Is there an initiative in place or on the horizon that will address any of these gaps? Interviews, company documentation and company data all should be reviewed to make an informed determination.    

Return Rates & Freight

Because liquidation is essentially retailing without replenishment, it is equally as important to have a full understanding of traditional return rates via the direct channel.  Will consumers’  inability to return product during the Going-Out-Of-Business (GOB) sale because it’s damaged, doesn’t fit, is the wrong color, or has expired, have an impact on what the company’s historic purchase level data indicates?  What about the lack of a retail warranty?  When we review sales concentration on a case-by-case basis, product categories such as furniture, workout equipment, jewelry and grocery are less likely to have the direct channel utilized in the appraisal or GOB process.  Additionally, companies operating in rural markets and those selling products that are freight-cost prohibitive are also less likely to be considered because in most cases the liquidator will pay for shipping and that will impact GOLV.    

Additional Considerations for the Direct Channel:

  • Credit card fees, given 100% credit card usage online, will be higher than in retail stores  
  • The liquidating agent should be given access to the customer database to market the inventory
  • Any monies owed to maintain the website and related IT infrastructure must be kept current  
  • The website must remain operational and accessible throughout the course of the GOB 
  • Recovery vs. expense analysis should be conducted as the GOB progresses to determine the appropriate time to end the online sale  
  • A wholesale component should be modeled for disposition of remaining online inventory balance  
  • Approximately one additional week beyond the GOB will be needed for shipment of those orders placed at the end of the GOB.

If, for whatever reason, the liquidator chooses not to use the website for transaction purposes during the Omnichannel GOB, it is likely that the website can still be used effectively to advertise the event provided that the domain remains accessible and operational during the course of the sale.  TSL



About the Author

Tim Anderson is senior vice president, Hilco Valuation Services. He joined Hilco Valuation Services in 2001. He has conducted and managed thousands of retail, wholesale and industrial appraisals on behalf of lending institutions worldwide. Anderson’s tenure at Hilco provides a diversified background to assist these institutions in recognizing collateral value and potential exit strategies for their portfolio companies. He currently oversees consumer and retail appraisal operations and is responsible for the overall vertical’s growth as well as ensuring the delivery of high quality, dependable services to clients within and beyond the New England region. Prior to joining Hilco, Anderson worked with GE Plastics, where he was a graduate of the GE financial management program. He holds a bachelor’s degree in finance and accounting from the University of Massachusetts, Amherst, MA. He can be reached at