Insolvencies, shifts in consumer behaviour keep liquidators busy

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The merchandise that Jeremy Dodd sells is a mixed bag: Just in the past few months, his company has advertised sales on everything from geodes to high-end purses, electric bikes and 2,000 pairs of cowboy boots.

The variety is nothing unusual for Vancouver-based Able Auctions, an online clearance house for retailers who need to clear out underperforming inventory, and for others who are going out of business. But what is unusual is the scale of goods coming through the door.

“It’s really amplified in the last eight months, for sure,” Mr. Dodd said.

The trend goes beyond his company. Over the past year, liquidators across the industry have been fielding more calls and cramming their warehouses with more products, as businesses look for a way to get rid of their goods. In some cases, a pullback in consumer spending has left retailers with slow-selling merchandise they cannot afford to hold on to. In others, businesses have been forced to shut down altogether: Insolvencies in Canada have ballooned in recent months.

“Our phones won’t stop ringing, basically,” said Alex Hennick, chief executive officer of Toronto-based A.D. Hennick & Associates Inc., which sells off excess inventory for retailers, manufacturers and distributors, and also handles liquidation sales for companies going out of business. “I’ve never seen anything like this,” he added.

Recently, for example, Mr. Hennick’s firm has been running the liquidation sales on behalf of Factory Direct, a discount retailer that sells electronics and home goods. While retailers in these categories did brisk business during the pandemic, Factory Direct has seen its sales decline since, as inflation has caused people to cut back on non-essential purchases. The company has been winding down the business and shutting all 14 of its stores in Ontario.

While not all retailers have been forced to liquidate or clear out inventory, the shift in consumer behaviour is having an impact across the industry. For example, Toronto-based Canadian Tire Corp. Ltd. CTC-T reported a sharp drop in sales and profit in its most recent quarter, and saw traffic to its stores decline noticeably. Even Vancouver-based Lululemon Athletica Inc. LULU-Q – which had been relatively buoyant last year – reported this month that it has seen a slowdown in its U.S. business.

This kind of pullback can pose a problem because it does not always make sense for retailers to hold on to goods that aren’t selling. Some may deal in fashions that will be out of date by the following season. And, when retailers respond to slumping sales by cancelling orders, manufacturers face similar challenges.

Even for more evergreen goods, the cost to retailers of packing up and transporting items back to a distribution centre – and the cost of that warehouse space itself – is sometimes too high for the math to make sense. And many simply do not have the storage capacity.

“They don’t have the space to hold aged inventory,” said Lisa Hutcheson, managing partner with retail consultancy J.C. Williams Group. Distribution centres often are not designed to act as storage warehouses. Instead, they are there to break up bulk orders and manage shipping out to stores.

“So when they are not getting the sell-through, then they have to look for avenues in which they can actually liquidate their goods and not bulk up their stores.”

For retailers shedding stock, this is a delicate balance. In Mr. Hennick’s case, it is not uncommon for clients who want to protect their brand value to specify that he cannot sell off their products at a deep discount in a certain geographical area, for example.

“A lot of day-to-day business we see is last year’s model, cancelled orders, and stuff that we’re buying in larger quantities and then selling to discount retailers,” he said.

The rise of e-commerce has also contributed to the influx of goods, Ms. Hutcheson said, because some online-only retailers decline to take back merchandise. Instead, they use liquidators to handle their returns.

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Also keeping liquidators busy are the businesses shutting down for good. Business insolvencies in Canada rose by 41.4 per cent last year, according to the Office of the Superintendent of Bankruptcy – and then shot up by 129.3 per cent on an annual basis in January. Retail trade was among the industries that recorded the largest increase in the number of insolvencies, along with accommodation and food services, and construction.

Recent high-profile examples include furniture retailer Bad Boy, which announced its closing and liquidation of all of its $25-million inventory last November; Mastermind Toys, which liquidated 18 of its 66 stores late last year after filing for creditor protection; and The Body Shop Canada Ltd., which sought protection from creditors earlier this month and is closing 33 of its 105 stores in Canada.

Smaller retailers are also feeling the pain: Mr. Hennick recently cleared out a 50,000-square-foot barbecue retailer in Vaughan, Ont. – selling everything from forklifts and racks, to pizza ovens and patio furniture. The company partnered up with liquidation and auction company Danbury Global to handle the project, and the two firms also collaborated on the Factory Direct liquidation.

Danbury has been busy on its own as well: It recently received a contract to liquidate a chain of costume jewellery stores in the Greater Toronto Area, and has been in talks with some fashion retailers who are struggling.

“Maybe as a result of Christmas sales not being where they wanted them to be, or rent renewals, or other debts that are coming due – there seems to be a lot of calls in the first quarter of 2024, from all sectors of our business,” said Jonathan Ordon, Danbury’s president. “We’ve seen it busier than we have in many years.”

In some cases, businesses were kept afloat by government support during the pandemic, and are facing up to underlying problems now that the additional funding has gone away, said Jeffrey Berger, managing director of Toronto-based restructuring and insolvency firm TDB Restructuring Ltd. In addition, other economic factors such as increases in rent and borrowing rates, as well as shifts in consumer habits, are affecting retailers.

“People are starting to readjust their budgets and come to terms with the new normal,” Mr. Berger said, speculating that as that process unfolds, there will be some pain in the industry – and possibly further insolvencies.

“I don’t think that anybody can say with any degree of certainty what the levels of issues we’ll see going forward are,” he said. “But I wouldn’t be surprised if we see some more activity in the next year or so.”