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DemandDuringStoreLiquidation:LocalEconomicFactorsNateCraig
Ananth Raman
ConsortiumforOperationalExcellenceinRetailing,2016
LocalEconomicFactors
• Local:measuredatastore’s ZIPorblock group
• Income andwealth• Medianhouseholdincome
• Consumer sentiment• “Willtheeconomybebetter,thesame,orworseoverthecomingyear?”
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StoreLiquidation
• Storeliquidation isthetime-constraineddivestmentofretailstoresthroughin-storesalesofinventory
• Retailerssell$Bs ofinventoryviastoreliquidationannually• Goingconcernsconductaround70%ofallstoreliquidations
• 3.4%ofpublicretailersliquidateinbankruptcy(Gauretal.,2013)
• Basedonliquidationvalue,banksextend~$300Bininventory-backedloanstoU.S.retailers(Foleyetal.,2014)
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ExampleStoreLiquidations
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Home Depot
Staples
Zales
Best Buy
Abercrombie
Office Depot
J.C. Penney
Sears
Barnes & Noble
Build−A−Bear
Payless
The Gap
Sweetbay
Fashion Bug
Fresh & EasyBlockbuster
Sports Authority
Kmart
A&P Wet Seal
0% to 10%
10% to 30%
30% to 100%
0500
1,0
00
1,5
00
2,0
00
2,5
00
Num
ber
of U
.S. S
tore
s
0 100 200 300 400 500
Number of U.S. Store Closings
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Questions
• Howdoretailinventoryliquidationvalueschangewithastore’s localeconomicfactors?• Researchers studyliquidationvalueviaproxieslikeredeployability(Benmelech andBergman,2009)
• Store liquidationallowsustoobserveliquidationvaluedirectly
• Canlocaleconomicindicatorsimproveforecastingforretailliquidation?• Informpricingandinventorydecisionsduringliquidation
• Implicationsforpricing,promotion,etc.ingeneral?
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DataCollection• HistoricaldataaboutstoreliquidationsfromGordonBrothersGroup
• 31chains and2,256stores
• $4.5Bofinventory at retail value
• Apparel, books, electronics, grocery, jewelry, …
• Store- level data: address, initial inventory,daily liquidationrevenue, daily revenues for theyear priortoliquidation
• MedianhouseholdincomeinZIPsandblockgroupsfromEsri BusinessAnalyst,measuredyearly
• ConsumersentimentsurveyinZIPsfromSimmonsConsumerInsights,measuredyearly• “Will theeconomy over the coming year besignificantly better off, betteroff, aboutthe
same, worse off, orsignificantly worse off?”
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EmpiricalContext
• Storeliquidationdemandvariesacrossstoresandsegments
• Localconsumersentimentandmedianhouseholdincomevaryacrossstoresandovertime
• Liquidationoperatorheldpricesrelativelyconstantacrossstores
• Operatormanagesinventoryindollarsratherthanbycount
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Liquidation DemandVariesAcrossSegments andStores
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186 Stores 202 Stores 111 Stores 749 Stores 53 Stores
0
1
2
3
4
5
Segment A Segment B Segment C Segment D Segment E
Stor
e Li
quid
atio
n M
ultip
lier
StoreLiquidation Multiplier=StoreRevenueDuringLiquidation
StoreRevenueforSameDaysLastYear
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EmpiricalContext
• Storeliquidationdemandvariesacrossstoresandsegments
• Localconsumersentimentandmedianhouseholdincomevaryacrossstoresandovertime
• Liquidationoperatorheldpricesrelativelyconstantacrossstores
• Operatormanagesinventoryindollarsratherthanbycount
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VariationinHousehold Income
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VariationinHousehold Income
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Mean: $67.4KS.D.: $35.3K
VariationinConsumerSentiment
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ConsumerSentiment: %ofresidentsthatthinkeconomywillbe“significantlybetteroff”or“betteroff”overthenextyear
Mean: 31.7S.D.: 9.0
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VariationoverTime
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Mean HHI of Highes t Quinti le
Mean HHI of Lowes t Quinti le
Mean Sentiment o f Highes t Quinti le
Mean Sentiment o f Lowes t Quinti le
EmpiricalContext
• Storeliquidationdemandvariesacrossstoresandsegments
• Localconsumersentimentandmedianhouseholdincomevaryacrossstoresandovertime
• Liquidationoperatorheldpricesrelativelyconstantacrossstores
• Operatormanagesinventoryindollarsratherthanbycount
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PricesAcrossStores
15
020
4060
8010
0
Rea
lized
Mar
kdow
n (%
)
0 20 40 60 80 100
Time (%)
Realizedmarkdownsduringtheliquidationofachainof100stores
Lowest variation in price across stores
EmpiricalContext
• Storeliquidationdemandvariesacrossstoresandsegments
• Localconsumersentimentandmedianhouseholdincomevaryacrossstoresandovertime
• Liquidationoperatorheldpricesrelativelyconstantacrossstores
• Operatormanagesinventoryindollarsratherthanbycount
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Does Liquidation DemandVarywithLocalEconomic Factors?• Predictoutcomes:
• Liquidation revenue(overall and firstweek)• Asset recoveryrate(ratioofoverall liquidation revenue toinitial inventory)
• Withcontrols:• Initial inventory• Last-yearsalesoverthestore liquidation period• Retail chain fixedeffect
• Withlocaleconomicfactors:• Medianhousehold incomein store’s blockgrouporZIP• Consumer sentiment inZIP
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Results
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Revenue First-WeekRevenue
AssetRecoveryRate
InitialInventory(Retail$) 0.600***(0.171)
0.460***(0.134)
Last-Year Revenue 0.439*(0.210)
0.364(0.247)
0.056*(0.026)
MedianHousehold IncomeinBlockGroup
0.015**(0.006)
0.031*(0.013)
0.009**(0.003)
ConsumerSentimentinZIP
-0.099*(0.040)
-0.21**(0.065)
-0.056***(0.016)
ChainFixedEffects Yes Yes Yes
N 2,217 2,217 2,217
R2 0.96 0.88 0.55
Log-logmodel. Standarderrorsareinparentheses.***p <0.001,**p <0.01,*p <0.05
Interpretation
• Increasinghouseholdincomeby$35,000(oneS.D.)fortheaveragestoreisassociatedwith• 4.2%increaseinliquidationrevenue
• 7.4%increaseinfirst-weekliquidationrevenue• 3.2%increaseinassetrecovery rate
• Increasingconsumersentimentby9pointsfortheaveragestoreisassociatedwith• 2.9%decrease inliquidationrevenue
• 5.6%decrease infirst-weekliquidationrevenue• 1.8%decrease inassetrecovery rate
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Summary• Acrossretailsegments,revenueandassetrecoveryratesduringstoreliquidationarepositivelyassociated withlocalmedianhouseholdincome
• Revenue andassetrecoveryrates arenegativelyassociated withlocal consumersentiment
• Initialinventory,last-yearrevenue,localmedianhouseholdincome,localconsumersentiment,andchaineffectsexplainmuchofthevarianceinliquidationrevenue(R2 =0.96)
• Futureresearch: Howdolocaleconomicfactorsaffectotherretailcontexts,suchasseasonalsales?
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