Last year’s serious dip in consumer demand gave CFOs headaches over bloated inventory levels and forced companies to absorb big discounts — to the benefit of their customers but to the detriment of their earnings. But just as one person’s trash is another’s treasure, the dilemma for CFOs with swollen balance sheets was good for the margins of Bill Morrison, CFO of Genco Marketplace, which liquidates other companies’ excess inventory.
The recession has given Morrison’s company more options to buy better-quality goods to sell to wholesalers, which in turn sell the products to discount retailers. Higher-quality products “generated higher recoveries, and oftentimes that brings with it a little higher margin,” he told CFO.com.
Morrison became CFO of privately held Genco Marketplace two years ago, after holding various finance roles for its parent company, Genco Supply Chain Solutions, since 1994. The subsidiary, which supplies about 15% of the parent’s revenue on its consolidated financial statements, liquidates more than $5 million worth of merchandise every day. The parent company generates more than $788 million in annual sales. Morrison declined to publicly disclose Genco Marketplace’s financial results.
To be sure, the finance chief also has to deal with inventory issues himself, particularly now that companies like his are increasingly agreeing to purchase products outright from the retailers and manufacturers that desperately want to get rid of slow-moving items — rather than cutting commission deals with these sellers. With decisions over whether to purchase another company’s inventory coming up every day, Morrison has to act as both a budget taskmaster and risk manager.
In a recent interview with CFO.com, Morrison talked about the risk of taking on other companies’ inventories and the common mistake businesses are making when it comes to managing their own inventory levels.
What are some of the issues the downturn has created for you?
Keeping up with it. There’s been a different kind of growth in that there are new sources of product available to us. And there’s more of a shift toward owning some of the product as opposed to more commission-based selling, so we’ve had to take an inventory position [in those cases].
Is most of your business still based on consignment?
It’s now approximately 50/50, where for years it was 90% commission-based. In the past couple of years, we found it to be advantageous for the buyers and sellers — as long as we can manage to a particular model that gives us a recovery once we’ve taken the inventory. We don’t want to be in the liquidate-after-liquidation mode, either, so we want to have a pretty good idea of what the financial model looks like before we take a position. We work up a financial projection for every deal that we purchase.
Do you take a role in these transactions?
I’m kind of a business partner. My role is making sure our sourcing people and sellers are aware of the risks. A lot of times there’s a freight component to consider. Who’s paying the freight? Where are the goods located? Where do we think the ultimate market will be? We have to make sure we’re prepared to consider how limited our buyers are when we have to export goods — that can change the whole outlook for the recoveries through the secondary market. I can trump some deals and say it doesn’t look good. But most of the time, I’m along to provide support and make sure everybody’s thinking about the right risks.
Does Genco have to make quick decisions when products become available?
There’s usually a deadline. Sometimes there are end-of-the-month considerations in which a seller needs to get inventory off their books and needs it sold and shipped. We have to do a comprehensive review with them and sometimes try to buy a little more time. There are times when you’re forced to have a quick huddle with a bunch of people, and we have to stop what we’re working on to make a quick decision on whether to buy the products or not.
When do you take part in these decisions?
Usually when there’s a transaction worth more than $100,000, I get involved. With lower amounts, such as under $50,000, our group has more latitude. They know our parameters for managing risk. We have certain requirements to get a financial plan approved before they can move forward on a deal.
Are companies getting better at forecasting their ability to offload their own inventory?
With excess goods, you’re generally dealing with errors in the supply chain, because a company has made or bought too much of something. There is room for improvement, though. I think CFOs are reluctant to take write-downs from inventories and take a loss to liquidate, but they can turn that inventory into cash. Plus, there’s some tax savings by taking the write-downs. The longer a product sits on the shelf, it’s likely to decline in the amount of recovery that’s available. You’re not dealing with wine and scotch that gets better with age.
Will companies’ way of managing their supply chain shift as we come out of the downturn?
It’s going to be a cautious environment. There’s a reluctance to expect this holiday season to be robust, but history has told us that there’s pent-up demand during slowdowns that eventually gets released. It’ll be interesting if the holiday sales run better than expected and we see some bare shelves.
Is your CFO role more challenging since you are dealing with obsolete inventory?
The one advantage we have is the authority to liquidate. We have a network of buyers. If we have to take a write-down on something we’ve taken a position in, we can also be a liquidator. We know how to do that well. Certainly we realize that if we’re sitting on inventory for longer than a couple of months, waiting for it to recover what we had hoped to get, then something’s not working as it should. We rely on aging of inventory to tell us where our risk points are in that regard.
Has your own inventory increased over the past year?
I would say the amount of the goods available to us has gone up some. There was a lot of excess inventory during the first part of this year following a soft holiday. But things are pretty much where they were a year ago, as a lot of the froth has worked itself out in the last five months.
Have you made any changes to how you manage working capital?
The biggest working capital need for us is funding of inventory. We rely on our parent company for that. [Genco Marketplace piggybacks on its parent company's credit agreements.] We also work on a capital model that has a limitation; if we exceed a certain level of inventory, we want to give the parent company the opportunity to know about that ahead of time. So far our parent company has been very accommodating in allowing us to increase our inventory levels when the opportunities arise.
What kinds of situations would qualify for such a request?
An example is seasonality. We’re kind of countercyclical. When companies want to put bathing suits on the shelf and take winter coats off in June or July, no one wants those coats. We may take an inventory position for a few months and make a financial model to hold that inventory until there is a higher demand in the fall. We will do it if we can get it for the right price — after factoring in the storage and carrying costs we would incur, as well as freight cost. Sometimes it works and sometimes it doesn’t.
How does the transport of goods factor into the price?
It can depend on the cost of oil. With freight, it’s challenging to get the goods from where they are to where they can be liquidated. A trailer load can be $1,500 one year and $500 a year later. But sometimes the goods on that trailer aren’t worth $1,500. The cost of freight is one of the market factors we watch, as it affects our ultimate recovery.
You must always have to be recalculating prices of goods.
For instance, you can only get six to eight pool tables on a trailer load. If they’re 500 miles away from your buyer, the freight cost might actually be more per pool table than what the pool table is actually worth. The size of an item is another factor in our whole economic calculation.
When would you pass on buying a product?
There’s been a lot of bankruptcy activity in the last year or two at retailers. A lot of times we stay out of those situations because you’re bidding for inventory almost in an auction environment. We know that those bids can be pushed up to the point where it just doesn’t make economic sense to take a position in it.
What is it about your job that keeps you returning to work every day?
It’s a hands-on and fast-paced environment. I’m not a CPA, so I’m not necessarily turned on by working on numbers all the time or doing tax returns. I like the trading environment, and the fact I’m involved in the transactions and decisions on a daily basis is something that interests me a lot.