Barneys New York launched its liquidation sale this week to some fanfare: Signs in the windows of its Madison Avenue storefront announce “Store Closing Sale” and “Everything Must Be Sold!” and, on social media, eager shoppers have been mapping out their holiday shopping plans at the store.
On Monday, though, some bargain hunters were disappointed to find that the bankrupt retailer, which last week was sold to Authentic Brands Group and B. Riley Financial Inc., was only offering discounts of 5% to 10% off regular prices, percentages rarely seen in today’s promotion-heavy retail environment.
Where were the “eye-popping” sales promised by one New York Times headline, some wondered? Why would shoppers spend $1,197 for a pair of Chloé’s Rylee lace-up ankle boots (original price: $1,260) when they could buy them from Neiman Marcus-owned Mytheresa for $882? As journalist Alexandra Mondalek pointed out on Twitter, even signing up for the department store’s email list garnered a higher discount — 10% — than the liquidation sale offered on most merchandise.
What’s behind the confusion? In part, a misunderstanding of what a liquidation sale actually entails. Here’s what you need to know:
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Barneys — At Least Barneys as Consumers Know it — Isn’t Running the Sale
As part of the bankruptcy deal, the retailer granted liquidators Great American Group (a B. Riley subsidiary) and Tiger Capital Group control of the sale of its remaining inventory. The firms are two of four major liquidators currently operating in the U.S., and they’ve been hired to wind down operations for numerous bankrupt retailers in recent years, including Payless ShoeSource, Bon-Ton Stores and Gymboree.
Because of this experience, they have ample data at their disposal about what tactics to employ when liquidating a retailer’s inventory. “You’d be amazed if you saw their spreadsheets,” said David Berliner, who leads the business restructuring and turnaround services practice of the consulting group BDO. Speaking of the liquidation firms generally, he said, “They track all these sales over all these liquidations. They know typically when consumers come and the discounts they need to offer to get the consumers to buy. They’ve tracked it all.”
While savvy consumers might do a double-take at a 10% discount, particularly since a troubled retailer has typically been running deep sales in the lead-up to bankruptcy in order to generate funds, liquidators understand that they can offer more modest deals in the beginning weeks of a sale and still get shoppers in the door. “People see ‘going-out-of-business sale’ and their eyes open and they start buying,” said Berliner.
The strategy is hardly unique to Barneys. Shoppers encountered similar situations at Sears’ and Toys ‘R’ Us’ going-out-of-business sales, yet the myth that “liquidation” is synonymous with bargain-basement prices persists.
The Deals Will Get Steeper As the Weeks Wear On
“Shoppers can expect discounts to deepen over the next couple weeks and through the end of the holiday shopping season,” a spokesperson for Great American Group told FN. The timing of the bankruptcy sale lines up with retail’s busiest — and more promotional — time of year, which means Barneys won’t be the only place shoppers can find deals. According to the spokesperson, “The difference between the Barneys sale and other retailers’ regular discount promotions is that the Barneys sale includes discounts on [nearly] every item throughout the store, whereas other retailers’ promotions, as in the case of a Black Friday special, will only have a selection of items at discount for one or two days.”
Scott Stuart, CEO of Turnaround Management Association, a corporate restructuring organization, said shoppers likely won’t have to wait long for markdowns. “Normally these liquidation sales get into an aggressive mode very quickly, with both existing and supplemented inventory to try to generate as much money to bring into a bankrupt estate as possible.”
When it Comes to Price-Slashing, Some Brands Have an Out
Brands under the LVMH Moët Hennessy Louis Vuitton umbrella will be excluded from the sale entirely due to a deal the group struck with Barneys after the retailer filed for bankruptcy, the Times first reported. The luxury group, which owns brands including Givenchy, Celine and Louis Vuitton, also has the right to pull its inventory outright, though it has not done so. According to the Great American Group spokesperson, LVMH is the only vendor with such an agreement, though consignment vendors also may or may not participate in the sale. Under typical consignment terms, brands provide goods to a retailer in exchange for a portion of eventual sales. Unlike wholesalers, they maintain ownership of their inventory and don’t receive payment for the goods upfront.
Some wholesale vendors have also approached the firms about buying back their inventory, the spokesperson continued, but no agreements have been made yet.
The Liquidators Could Add Outside Merchandise
According to the deal with Barneys, the liquidation firms have the right to supplement the stores’ existing inventory with other merchandise, which could include runoff from prior liquidations or products they purchase independently.
“What liquidators like to do is, rather than the store starting to look sparse at the beginning of the sale as the good stuff sells off, augment or bring in new goods that are not the retailer’s goods,” Berliner said.
Depending on the inventory, this may or may not be good news for consumers, who aren’t necessarily aware that what they’re buying might not be original Barneys stock, and luxury brands, which typically want control over what brands their merchandise is sold alongside.
But, said Stuart, the strategy helps liquidators generate revenues. “That’s part of their deal: ‘We’re going to support you with money, but when we get to the point of liquidation, we have the right to put in our inventory to supplement yours.’ “
The Stores With Slower Sales Will Likely Be the First to Close
Currently, closing sales are underway at five flagship Barneys stores and two Barneys Warehouse locations, as well as online, and Great American Group says they will continue until “every last item [is] sold.”
Generally, according to Berliner, firms will try to minimize expenses such as rent and staffing costs by shuttering underperforming stores before the next round of bills is due and reallocating inventory into more profitable locations.
“So the game is, if I’ve got 10 stores, I want to get out of as many stores in month one as I can to avoid the rent in month two. But then I’m going to transfer some of that inventory from the stores that I want to close into the other stores … the ones that are maybe doing better in the liquidation,” he explained. That way, the stores with more shoppers are also the ones with the best stock.
The Madison Avenue flagship, at least, is scheduled to remain open in some form until the bitter end: ABG has said that, after it winds down liquidation sales in the store at the end of February, it will shut the location down for a few weeks to transform the space into “a pop-up retail experience” that will include “boutiques, art and cultural installations and exhibits and entertainment.”
In an interview with FN, ABG CEO Jamie Salter said the company has committed to keeping 100,000 square feet (down from the current 275,000 square feet) and testing new concepts within a smaller footprint.
“If we can make enough money driving traffic through that location with our pop-up stores and experiential [offerings], then we may take the space for longer.” It is also working with Saks Fifth Avenue on a licensing deal that will add a 50,000-square-foot Barneys boutique on the fifth floor of Saks’ flagship.