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Purchasing Liquidaton Pallets of Returned Items

Posted by Zack Kram on

Return pallets contain merchandise that was sold to a customer and then returned to the store. This means that you will receive damaged items on these pallets. The extent of that damage varies depending on several factors including the source of the product. There are large differences in damage rates from one retailer to another and even between different programs from the same retailer. Another factor that affects the damage rate is the category of product. Returned toys and returned electronics tend to have higher damage rates than some other categories such as softlines. This makes sense if you think about why items get returned. Toys usually get returned when they break and electronics are usually returned when they stop working. Of course, there are exceptions to this and the most obvious is the large influx of brand new items that are returned after Christmas due to purchasing the wrong item for a gift or purchasing duplicate items. Other categories of items tend to have much lower damage rates such as softlines which include items like clothes and bedding. These items are regularly returned with no damage because buyers just decide that they don't like the fit or style and choose to bring the items back for a refund or exchange in perfect condition often with the tags still attached. There's one additional category of items that's worth discussing and those are items that are regularly returned after a single-use. These are items that are purchased for a specific project and the buyer decides that they will not continue to use the item so they return it even though the item is still in good working condition. Common items that you find in this condition are chainsaws, pumps, dehumidifiers, or any type of specialty tool. These items can be highly profitable for a liquidator because they often just need to be cleaned up and can be sold in excellent used condition.

It's also important to note that in-store returns tend to have much higher damage rates than items purchased online, these are referred to as dot com returns. These "cleaner" dot com loads have lower damage rates because items purchased through a website are returned more often due to mistakes when purchasing than items that people were able to see in person and handle before purchasing. It is more common for items purchased online to be returned due to ordering the wrong model, color, size, type, style, etc... this results in lower damage rates overall, however, dot com returns tend to be sold at a higher percentage of retail than in-store returns.

So how much damage can you realistically expect on a pallet?

Well, that's a difficult question to answer but on average most in-store return programs have between 25% and 50% damage and most dot com return programs have between 10% and 30% damage. It's important to note that the level of damage on each product can vary significantly from a small scratch to a completely destroyed item. So just because an item is damaged does not mean that it can't be sold or that parts off of it can't be salvaged and sold for a profit.

Another important consideration is the fact that average damage rates are determined across a large volume of product which could be hundreds or thousands of truckloads. So just because a program has a known damage rate that does not mean that a single pallet or even a single truckload will have the same damage rate. For example, if a particular program is advertised as having a 30% damage rate that means that over the thousands of pallets from that program 30% of the total product is damaged. It does not mean that purchasing a single pallet will have that 30% damage rate. The variance in damage rates is very high when looking at single pallets. If a random pallet is chosen from that particular program it could have a 0% damage rate, a 100% damage rate, or anything in between. Also, it is important to consider how many items are on a particular pallet. If you are looking at a pallet from a program with an advertised damage rate of 30% and that pallet only has 2 items on it then it is impossible for that pallet to contain the expected damage rate of 30%. There's only three possible options; 0% damage, 50% damage, or 100% damage. This example illustrates an important concept and that is that the key to this business is volume. The variance in damage rates is much higher with less product but as more product is purchased the variance in damage rates is decreased and we start to see damage rates that come closer to the advertised damage rates.

This concept can be used to help you understand the numbers when purchasing pallets and to mitigate risk. By purchasing pallets with more items per pallet and purchasing more pallets at a time the risk of receiving product with higher damage rates than expected is decreased. Experienced pallet buyers understand this concept and never judge their success from a single pallet or even a single truckload but rather from overall profits across a set time period. They know that they are going to buy some pallets that turn a profit, some pallets that break-even, and some pallets that they are going to take a loss on. That's the nature of the business, but the goal is to turn a profit overall and in order to tip the scales in their favor they use several specific strategies. These include things such as salvaging the damaged items instead of throwing them away by repairing them or parting them out, purchasing pallets with a higher item count to reduce the variance in expected damage rates, purchasing multiple pallets or multiple truckloads at one time to spread that damage across more products to reduce the variance, knowing their market and what type of products they can successfully sell, understanding where to sell specific products for the highest possible amount, and marketing their products extensively to the correct buyer pool to bring in the highest possible price.

There's always a risk when purchasing liquidated product and particularly when purchasing returns so why would a buyer choose to purchase a pallet of returned items instead of purchasing new product?

Return pallets tend to contain more desirable items overall than pallets of new product. At some point, somebody decided that they wanted that particular product which is why it was initially purchased. Once it is returned the stores usually can't resell it as first-line product so it gets liquidated on the secondary market. This provides buyers of liquidation pallets the opportunity to obtain highly desirable products that they may otherwise not have access to due to distributor regulations, high wholesale cost for independent retailers, large minimum order quantities, long lead times, and a lack of variety. This is in contrast to pallets of overstock or shelf-pull items. Those are items that the retailer couldn't sell or couldn't sell for enough money to justify taking up space in their stores or warehouses so they decided to liquidate the items for pennies on the dollar. Those items tend to be much less desirable products or out-of-season items. They don't usually contain damage unless they are a shelf pull due to box damage, but in order for a reseller to sell that product, they may have to heavily discount it from retail value. If the big box retailers weren't able to sell it at retail price then it is expected that it will be very difficult for a reseller to sell that product near the retail price. For this reason, many liquidators prefer returned product over brand new product. They know that they will deal with damaged items, but they figure damage into their numbers when evaluating pallets and they understand how to turn a profit off of items that are damaged. In this industry, there is definitely money to be made on either type of product but the business model is different and understanding the pros and cons of buying pallets of returned items vs. pallets of new items is key to making money with return pallets.


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