Executive Briefings

Q&A: How Retailers Are Facing an Evolving Secondary Sales Market

An awful lot of ink is spilled in the business press about the pressure brick-and-mortar retailers feel from Amazon and e-commerce in general, but not nearly as much attention is paid to the challenge they feel from the secondary market.

Q&A: How Retailers Are Facing an Evolving Secondary Sales Market

This post-retail market comprises a number of players, from pawnshops to outlets stores. Usually, we think of these entities moving unwanted goods, but the multibillion-dollar sales argue just the opposite: consumers do indeed want the products they find in bargain stores, they just didn’t want them from primary outlets at full price.

Zac Rogers, assistant professor of operations and supply chain management at Colorado State University, sat down with SupplyChainBrain editors at the annual WERC conference, held this year in Fort Worth, to discuss how traditional retailers are dealing with the challenge of the secondary sales market.

SCB: If we understand your research, there has been quite a bit of growth in the secondary market over the last eight years or so. Characterize for us what’s been going on.

Rogers: We’ve been tracking the size of that market, in terms of sales, since 2008, and we believe the market is made up of lot of different parts. So that includes pawn shops, outlet stores, salvage dealers, value retail — about eight channels total that we track. When we started in ‘08, sales were about $309bn, and it was growing about 8 percent every year.

We thought, well, this is probably a result of the recession, it’s growing now because people aren’t going to regular stores, and this will drop back when people start going back to stores, but it hasn’t. We continued to see 7.5- to 8-percent growth through 2016, our most recent numbers. And in 2016, we saw the size of the secondary market hit $554bn dollars.

SCB: So, close to double.

Rogers: Well, to put that in context, that’s 3 percent of U.S. GDP and about 1 percent of global GDP. That’s more than we spent on used cars last year or gas or all kinds of stuff. It’s a really gigantic piece of the economy and not something anyone was really paying a lot of attention to until maybe the last 10 or so years.

SCB: Why? Those are big numbers. Why didn’t folks see that and sit up?

Rogers: Companies are starting to realize what’s happening. You know, I used to work at a warehouse and we would have pallets of stuff sitting there that didn’t sell at the store or had been returned, and the boss rode around in a golf cart and said get rid of it, that stuff’s just sitting there on the dock and it’s costing me money. Well, that attitude has shifted today. Instead of giving things to a salvage dealer and getting three cents on the dollar, what if we give it to an outlet or a value retailer or even start our own secondary market channel, like Nordstrom has? Yeah, we’re still not making a ton of money on it, but instead of making three cents on the dollar, we’re making 40 or 50 cents on the dollar. So it’s gone from being a cost center to a profit center. That’s partially because consumer attitudes have changed. People are more willing to buy something now from these channels even if they know it couldn’t sell through the original channel it was intended for.

SCB: So let’s talk about the drivers on both the B2B side and the consumer side? But first, walk us though the difference between those two sectors.

Rogers: On the B2C side, the secondary market hasn’t grown quite as quickly. Actually, it should be called the C2B side in the secondary market channels where the inventory comes from consumer returns. We’ve seen, since the economy has gotten better, the trickle of inventory is getting smaller.

Pawn shops are the only channel that’s gone down, mostly in the last five years. It went up like crazy the first five years.

Interesting, charities are the inverse. Nobody was giving money to charities from ‘08 to ’11, but since 2011, it’s gone way up.

SCB: B2B channels?

Rogers: If it’s Macy’s giving inventory to T.J. Maxx or to dollar stores, something like that, we’ve seen that continue to grow and grow because even if consumers forgot the lessons of the last recession, businesses did not. So when Nordstrom realized that instead of giving a shirt to a salvage dealer for three cents on the dollar, it can give it to Ross and get 40 or 50 cents on the dollar — just because the recession went away, doesn’t mean they stopped doing that.

So, in B2B, companies are continuing to use the secondary market and that won’t go away any time soon.

SCB: What role is any of this playing in the closing of so many traditional stores?

Rogers: Right now is an interesting time because we have so many stores closing. If you look at JCPenney, it just announced 140 stores closing, Macy’s is closing 100 stores in the next two years. So you have old-style retailers whose model doesn’t make sense anymore. Whether because of the growth of the secondary market or online, people are shopping differently from the way they used to shop. So we have all these stores closing and seeing retail in an ice age.

SCB: The effect going forward, as you see it?

Rogers: There’s going to be real consolidation in the department store space. Sears just said it doesn’t know if it’s going to last. They have to get rid of their inventory somehow. So we’re seeing a flood of inventory from these primary retail stores into secondary stores.

The stores that added the most footage of space last year — Wal-Mart was No. 1, but after them, it was Dollar General, Dollar Tree and Family Dollar and T.J Maxx and Ross. Of the top seven stores to add square footage last year, five of them are secondary market retailers. So all this space is going away in the primary market, and it’s being filled by space in the secondary market, and that’s a direct reflection not only of customer thinking about goods but about how firms are thinking about managing their inventory.

SCB: So it’s fair to say that change in the economy and a consolidation or closing of the brick-and-mortar stores are two of the major drivers of this market?

Rogers: Two of the major drivers: consolidation and closing of retail stores and a change in the way people shop. That’s not going away any time soon.

SCB: Well, where do you see things going then?

Rogers: I think we will continue to see growth. The difference might be that now that firms are realizing the potential of the secondary market, they’re not as willing to stand on the sidelines. Nordstrom 10 years ago, said, alright we’re going to give clothes to T.J. Maxx and Ross and they will take care of it for us. Last year, Nordstrom Rack sales were about half of what regular Nordstrom sales were. That’s because Nordstrom’s realized about ‘09 and ‘10 that T.J. Maxx and Ross were growing like crazy. Why don’t we take control of our own secondary market, they said. They see there are consumers out there for it. So they started Rack. In 2016, there were 97 more Racks than regular Nordstroms. If you look from 2010 to ‘16, sales at regular Nordstroms were up about $200m in that space. At rack, it’s up almost 4bn in that space, so that’s clearly where the growth is coming from.

SCB: Who else is cashing in on this transformation?

Rogers: Microsoft is doing the same thing. They make Xbox, and they’re trying to get into the used video game market. GameStop, which is the biggest secondary market video retailer in the world, sold $2.5bn worth of used games last year. Microsoft sees this and thinks, that’s our product that we’re not making any money on; there’s money in our product and we don’t have piece of it. To combat that, just in March, they announced the Microsoft Game Pass, which will be like Netflix for video games. It’s a direct attack on GameStop and other secondary market retailers, who are profiting off of the consumer appetite for secondary market goods. So by taking this back into their own hands, Microsoft stands to profit. GameStop, the day this was announced, saw their stock price drop 10 percent. People were thinking, oh, that’s Blockbuster 10 years ago.

SCB: So your prediction?

Rogers: The market will keep growing, but dealers in that space may become slightly more stratified as more companies take their own secondary market in-house, because it has become such a profit center for these firms.

Resource Link:
Colorado State University, College of Business

This post-retail market comprises a number of players, from pawnshops to outlets stores. Usually, we think of these entities moving unwanted goods, but the multibillion-dollar sales argue just the opposite: consumers do indeed want the products they find in bargain stores, they just didn’t want them from primary outlets at full price.

Zac Rogers, assistant professor of operations and supply chain management at Colorado State University, sat down with SupplyChainBrain editors at the annual WERC conference, held this year in Fort Worth, to discuss how traditional retailers are dealing with the challenge of the secondary sales market.

SCB: If we understand your research, there has been quite a bit of growth in the secondary market over the last eight years or so. Characterize for us what’s been going on.

Rogers: We’ve been tracking the size of that market, in terms of sales, since 2008, and we believe the market is made up of lot of different parts. So that includes pawn shops, outlet stores, salvage dealers, value retail — about eight channels total that we track. When we started in ‘08, sales were about $309bn, and it was growing about 8 percent every year.

We thought, well, this is probably a result of the recession, it’s growing now because people aren’t going to regular stores, and this will drop back when people start going back to stores, but it hasn’t. We continued to see 7.5- to 8-percent growth through 2016, our most recent numbers. And in 2016, we saw the size of the secondary market hit $554bn dollars.

SCB: So, close to double.

Rogers: Well, to put that in context, that’s 3 percent of U.S. GDP and about 1 percent of global GDP. That’s more than we spent on used cars last year or gas or all kinds of stuff. It’s a really gigantic piece of the economy and not something anyone was really paying a lot of attention to until maybe the last 10 or so years.

SCB: Why? Those are big numbers. Why didn’t folks see that and sit up?

Rogers: Companies are starting to realize what’s happening. You know, I used to work at a warehouse and we would have pallets of stuff sitting there that didn’t sell at the store or had been returned, and the boss rode around in a golf cart and said get rid of it, that stuff’s just sitting there on the dock and it’s costing me money. Well, that attitude has shifted today. Instead of giving things to a salvage dealer and getting three cents on the dollar, what if we give it to an outlet or a value retailer or even start our own secondary market channel, like Nordstrom has? Yeah, we’re still not making a ton of money on it, but instead of making three cents on the dollar, we’re making 40 or 50 cents on the dollar. So it’s gone from being a cost center to a profit center. That’s partially because consumer attitudes have changed. People are more willing to buy something now from these channels even if they know it couldn’t sell through the original channel it was intended for.

SCB: So let’s talk about the drivers on both the B2B side and the consumer side? But first, walk us though the difference between those two sectors.

Rogers: On the B2C side, the secondary market hasn’t grown quite as quickly. Actually, it should be called the C2B side in the secondary market channels where the inventory comes from consumer returns. We’ve seen, since the economy has gotten better, the trickle of inventory is getting smaller.

Pawn shops are the only channel that’s gone down, mostly in the last five years. It went up like crazy the first five years.

Interesting, charities are the inverse. Nobody was giving money to charities from ‘08 to ’11, but since 2011, it’s gone way up.

SCB: B2B channels?

Rogers: If it’s Macy’s giving inventory to T.J. Maxx or to dollar stores, something like that, we’ve seen that continue to grow and grow because even if consumers forgot the lessons of the last recession, businesses did not. So when Nordstrom realized that instead of giving a shirt to a salvage dealer for three cents on the dollar, it can give it to Ross and get 40 or 50 cents on the dollar — just because the recession went away, doesn’t mean they stopped doing that.

So, in B2B, companies are continuing to use the secondary market and that won’t go away any time soon.

SCB: What role is any of this playing in the closing of so many traditional stores?

Rogers: Right now is an interesting time because we have so many stores closing. If you look at JCPenney, it just announced 140 stores closing, Macy’s is closing 100 stores in the next two years. So you have old-style retailers whose model doesn’t make sense anymore. Whether because of the growth of the secondary market or online, people are shopping differently from the way they used to shop. So we have all these stores closing and seeing retail in an ice age.

SCB: The effect going forward, as you see it?

Rogers: There’s going to be real consolidation in the department store space. Sears just said it doesn’t know if it’s going to last. They have to get rid of their inventory somehow. So we’re seeing a flood of inventory from these primary retail stores into secondary stores.

The stores that added the most footage of space last year — Wal-Mart was No. 1, but after them, it was Dollar General, Dollar Tree and Family Dollar and T.J Maxx and Ross. Of the top seven stores to add square footage last year, five of them are secondary market retailers. So all this space is going away in the primary market, and it’s being filled by space in the secondary market, and that’s a direct reflection not only of customer thinking about goods but about how firms are thinking about managing their inventory.

SCB: So it’s fair to say that change in the economy and a consolidation or closing of the brick-and-mortar stores are two of the major drivers of this market?

Rogers: Two of the major drivers: consolidation and closing of retail stores and a change in the way people shop. That’s not going away any time soon.

SCB: Well, where do you see things going then?

Rogers: I think we will continue to see growth. The difference might be that now that firms are realizing the potential of the secondary market, they’re not as willing to stand on the sidelines. Nordstrom 10 years ago, said, alright we’re going to give clothes to T.J. Maxx and Ross and they will take care of it for us. Last year, Nordstrom Rack sales were about half of what regular Nordstrom sales were. That’s because Nordstrom’s realized about ‘09 and ‘10 that T.J. Maxx and Ross were growing like crazy. Why don’t we take control of our own secondary market, they said. They see there are consumers out there for it. So they started Rack. In 2016, there were 97 more Racks than regular Nordstroms. If you look from 2010 to ‘16, sales at regular Nordstroms were up about $200m in that space. At rack, it’s up almost 4bn in that space, so that’s clearly where the growth is coming from.

SCB: Who else is cashing in on this transformation?

Rogers: Microsoft is doing the same thing. They make Xbox, and they’re trying to get into the used video game market. GameStop, which is the biggest secondary market video retailer in the world, sold $2.5bn worth of used games last year. Microsoft sees this and thinks, that’s our product that we’re not making any money on; there’s money in our product and we don’t have piece of it. To combat that, just in March, they announced the Microsoft Game Pass, which will be like Netflix for video games. It’s a direct attack on GameStop and other secondary market retailers, who are profiting off of the consumer appetite for secondary market goods. So by taking this back into their own hands, Microsoft stands to profit. GameStop, the day this was announced, saw their stock price drop 10 percent. People were thinking, oh, that’s Blockbuster 10 years ago.

SCB: So your prediction?

Rogers: The market will keep growing, but dealers in that space may become slightly more stratified as more companies take their own secondary market in-house, because it has become such a profit center for these firms.

Resource Link:
Colorado State University, College of Business

Q&A: How Retailers Are Facing an Evolving Secondary Sales Market