OFF-PRICE OPERATORS ARE RISING TO THE CHALLENGE

Ray Armendariz and Katie Feodoroff of Hilco Wholesale Solutions discuss the kinds of innovative strategies that are helping off-price operators remain competitive amid continued supply chain constraints.

Transcript

Steve Katz:
Hi everybody. And thanks for taking time out of your busy schedule to listen in on our Hilco Global Smarter Perspective Podcast today, as return listeners know by now, I'm your host, Steve Katz. And if this is your first time with us, well, then welcome. We're glad that you could tune in. And for those of you who do tune infrequently, you could probably tell, I have a little bit of a cold. So I apologize for that.
Steve Katz:
Our discussion today is centered around the off-price channel and some of the struggles that those operators have been working to overcome in recent months, particularly finding ways to make sure that they have the types of recognizable brands on their shelves that consumers have come to know and expect when shopping in their stores. And for that conversation, we have two guests with us from Hilco Wholesale Solutions, which specializes in developing customized solutions for monetizing unwanted and unproductive inventory across a really broad range of asset classes. And those guests are Ray Armendariz, who's chief executive officer at wholesale solutions, and Katie Feodoroff, the company's senior vice president and general merchandising manager. So welcome to you both.
Ray Armendariz:
Thank you, Steve. Great to be here.
Katie Feodoroff :
Thank you so much for having us on.
Steve Katz:
Yeah, absolutely. Thanks for making time to join us. I know you're both pretty busy with various client engagements right now. So you've been working to help resolve some of the very issues that we're going to be talking about today. I'm sure. So let's dig right in. Ray, obviously we're all aware of the overall supply chain situation right now, but I'm wondering what specifically is creating the biggest dilemma for off-price operators and how would you summarize their current predicament and its level of severity moving ahead?
Ray Armendariz:
Yeah, so Steve, great question. Everybody's aware of the supply chain bottleneck that has taken place for quite some time now and the cascading effects of this bottleneck really stem all the way back when you look all the way back to manufacturing. There's timeliness with getting the raw materials to manufacture goods. There have been delays with that because of warehouses that cannot operate because of the lack of labor. So that obviously sets the timetable and delays the manufacturing of goods. There is a shortage of vessels not to mention the pricing that has increased alarmingly, but there's a shortage of vessels.
Ray Armendariz:
And so all this adds into the timeline, right, that retailers are typically counting on to get product on to their selling floors time for different seasons if you will. And so they may be lucky enough to have the manufacturing hit the right timeline, get it on a vessel, but then you face the problem that we're seeing primarily out on the West Coast, as well as in the East Coast, but out in Long Beach, as an example where you have vessels that typically would go in into port within a matter of three to five of days. Now we're hearing of vessels that are out at port up to 30 days at a time.
Ray Armendariz:
And so these delays obviously have cascaded into product missing the target dates for delivery. In many cases, as we look back at this holiday season that just passed by, there was product that didn't land in time. And so as retailers were seeing what was developing, one of the things that started happening is that they started holding onto goods, that they would typically monetize through the off-price channels as product comes out of season. And so they started holding onto that inventory out of fear of not receiving the goods on time to ensure that they have product on their selling floors. And so we've been impacted on our side because there's been a lack of supply again, that the off prices are typically looking forward to seeing post-holiday. And so that product just frankly, isn't there. The product that does make its way out into the more marketplace we're seeing the high demand for these products and as such the pricing of that product is extremely high. And so it's basically just a cascading effect, all starting from timelines being missed through the supply chain.
Steve Katz:
Okay. A very good perspective to kick it off. Thank you. And Katie let's turn to you. In addition to the supply chain, there have also been some other factors that have further complicated matters for these operators as well, such as the changing face of retail that was actually taking place even before COVID and then has now accelerated during the pandemic significantly. So can you talk about that and help our listeners understand that a bit more?
Katie Feodoroff :
Sure. So what's unique about the off-price business model is that they consider themselves somewhat protected from economic swing. So when the economy is good, business is good. When the economy sees an overall downturn business tends to not still be fairly good for off-pricers because you have customers that had typically shopped, maybe full-line department stores start shopping the off-price market and in doing so, they typically gain and retain those customers once they discover the off-price channel. So you had another thing going on that was accelerated during the pandemic where certain malls were, interior malls were closed and many of the off-price stores in strip malls remained open, therefore another opportunity to gain and retain a new customer. So off pricers have been challenged with customers out to spend their stimulus checks, as well as these new customers factored with a need for inventory and slow processing with the labor shortage and transportation issues, getting goods to the stores. So it has been a challenging time, but it's also been a unique opportunity for the off-price channel to maximize on these opportunities.
Steve Katz:
Yeah. Interesting. So I'd be careful what you wish for, I guess, right. The situation was contributed to the problem in this case, right? Because you have these interior malls and other sorts of locations closing. And so people came but also depleted the inventory that was there, which creates a further issue.
Katie Feodoroff :
Yeah. Speaking to buyers during that time, last March and April when stores were closed and they were getting ready for them to reopen, they were reopening with the inventory that was left on the rack back in March. Now it's post-Easter and they don't know, is this stuff not going to move? They're holding tight. They're not buying new inventory because they don't know what's going to happen. Are people going to go back out to stores? And then when they did and all that inventory within a week or two was gone, you just saw empty racks at many stores waiting to see new buys.
Steve Katz:
Yeah. Tough to decide, right. Because there's a lot of risk in going out and acquiring that new inventory if you don't know what's going to happen and you think the merchandise is there is too out of date to sell. So very interesting. Ray, I know that you and the team have excellent visibility into what happens behind the scenes in situations like this. And I'm curious as to what types of steps you're seeing off-price operators take right now to write the ship during this period, so to speak.
Ray Armendariz:
Yeah, sure. So they've gotten pretty creative into how to address the low inventory levels that are typically accessible to them. We're seeing the off-price companies establish new specialized buying groups that we refer to as strike force teams. These are teams that are comprised of cross-section of highly experienced buyers that have been with the company, understand the business, the categories extremely well. And collectively as a group, they're basically authorized to go out, evaluate an inventory and make a very quick decision on the purchase of that product. Obviously, they understand their customer, they understand the product needs within their business. And so they've taken a different approach to what is typically a very time-consuming category, specific buying cycle, where product is basically filtered through the different buyers that are responsible for specific categories. That obviously takes a lot of time. And so they recognize that these inventories that are out there in the marketplace if it goes through the typical cycle, that inventory will very quickly disappear from the marketplace.
Ray Armendariz:
So these strike force teams are there to analyze, evaluate, and make a purchase very quickly. And so one of the things that they're armed with is that they're able to take funds that are designated for a category within the buying group. And when they make a purchase, those funds are basically reduced from the existing budget of that category budget. And so they have the Liberty to do that because again, of their skillset, their recognition of the advantageous buying opportunities that are in the marketplace, recognizing that the product will not be available for an extended period of time. And so they've taken these steps again, as a result of knowing that the product is there today gone tomorrow.
Steve Katz:
Yeah. That's pretty interesting and smart at the same time, obviously taking your own people who have that specialized expertise and then putting them into more of a versatile position of being able to go out and basically get what they need no matter what it takes to get it in the store. So Katie, I'm wondering, so that's an example of innovation, right? I mean, cutthroat environment, given this sort of constantly changing landscape, I would imagine that making the right choices, given resources, because everybody's struggling with resources right now, isn't an easy task. So how do you advise businesses to approach innovation right now, not just to stay afloat, but to ultimately get ahead?
Katie Feodoroff :
So what the off-price buyers do well is taking advantage of opportunities. I mean the entire business model is based on opportunistic buying and staying liquid. So you have open to buy to spend on the right deals. Also, if you think about a typical off-price store, it's a flexible store space. All those racks and four ways are on wheels. So it's not a set planned matrix that you have to have this much men's. If there isn't that product in the market, yet a deal comes their way, that an amazing kid's apparel deal, they can flex that open to buy and that physical floor space to accommodate the best opportunistic deals that come their way. So I think that's something that off pricers do well and have had to do even better during this time. You have distribution centers in warehouses operating at a less than full force in the processing time of inventory, we've seen taking almost double. It's usually four to five weeks to get onto a seller's floor.
Katie Feodoroff :
It's been more around eight to nine. So you have a longer lead time. You also have the cost of merchandise and the cost of freight going up. However, given both of these factors, you still haven't seen much willingness for stores to raise the prices yet. So it's more important than ever that off pricers have that liquidity to take advantage of the best deals at the right time. At Hilco what we do is we have the ability to actually proactively deploy our own capital to acquire large quantities of merchandise, whether it's branded apparel or other inventory opportunities that come our way. So we are able to take advantage of current availability. We can hold those goods if the seasonality isn't at the right time. We could sell them in smaller lots to certain off pricers that don't have the capacity to take advantage of the economies of scale that we can at Hilco.
Katie Feodoroff :
So we always have current availability where buyers can come to us to fill these voids and look for the best deal out there. And this works both ways. We also have seen in the last few months, healthy, full-price retailers coming to us, looking for inventory in certain constrained categories. If they typically manufacture their own goods overseas and they're having trouble getting the raw materials, they're dealing with the freight expenses and issues with importing, they're turning to us saying, do you have immediate availability in this category? And they're not even a typical off-price customer, but they're just looking for that current availability of product.
Steve Katz:
Yeah. Interesting. And that's pretty unique in the industry. There aren't a lot of businesses on your side of the equation who offer that sort of diversity for the buyers. Yeah.
Katie Feodoroff :
Correct. That will take a position and store goods so we have availability for buyers when the timing is right.
Steve Katz:
Right. And so you have those 3PL facilities in different locations around the country and makes it easy for them to, regardless of-
Katie Feodoroff :
We do, we work with partner 3PLs East Coast, West Coast, Midwest. So we can house inventory close to the stores where they need to end up at.
Steve Katz:
Amazing. Great capability. And Ray, back to you. Not being able to get product in-store and on the shelf in time for a selling season, and I know that's kind of where we started, is just part of the story, right? What other sorts of challenges does situation that we're in right now create and how is your team able to help?
Ray Armendariz:
Yeah, thanks. Great question. Look a tremendous number of purchase orders were delayed and missed this past holiday season as we're all very well aware. And as we look forward, this is about to happen for the Easter season, the spring and summer merchandise season. In many cases, these retailers don't want to take possession of that merchandise because it's coming in too late. They will not have time to process the product and put it onto their shelves. And so at the same time, they're not looking forward to taking this product and pushing it back to the warehouses or sending it back to factories. Obviously, that is not an option that makes sense for anybody. So as a result, our wholesale team here at Hilco has been very actively involved starting back in Q4 2021. And we're continuing to review the types of inventories and making strategic purchases, which we can hold by the way. Katie spoke about the 3PL relationships that we have throughout the country.
Ray Armendariz:
We can hold this product in our warehouses and then sell it off as it comes back into season. Obviously, our customer base of off pricers and e-commerce customers are looking to get product landing prior to the season. And so we have that capability by holding onto it. And by the way, we do have also other capabilities that we offer our customers. That basically includes defacing product application of new tags, ticketing that is required. And then the beauty of this is we're also looking at cost-effective strategies to where instead of shipping directly to a retailer's distribution center, we have the capabilities of parsing out shipments and going store direct. So there is a leg, if you will, of transportation that is removed from the process here. And obviously, there's some cost savings there, come as a consequence of that.
Steve Katz:
Okay, well listen guys, great info. A number of insights there, a couple of absolutely key takeaways. I'd say one-off price and other operators are getting very proactive and good cause to help ensure their own futures right now. And two, they and others across the retail landscape as Katie said can really benefit from the type of innovation tailored and flexible solutions that a partner like Hilco Wholesale Solutions is able to bring to the table with capital resources and other sorts of resources at a time like that. All right. Well, Ray and Katie, we really appreciate you joining us today. And how can listeners get in touch with each of you? Ray, you want to go first?
Ray Armendariz:
Sure. Email is fine. Rarmendariz@hilcoglobal.com. That's R-A-R-M-E-N-D-A-R-I-Z@Hilcoglobal.com. Katie.
Katie Feodoroff :
Sure. I can be reached by email as well. It's KFeodoroff@Hilcoglobal.com. That's K-F-E-O-D-O-R-O-F-F@Hilcoglobal.com.
Steve Katz:
Okay, great. Thanks again. And listeners, these seasonal selling periods will keep coming and the supply chain is quite frankly, still a mess. So don't hesitate to reach out to either of these two great resources for their perspective. Know they will both welcome your calls. And we hope is always that this 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.