Appraising for E-Tailers

The Internet's impact on inventory valuation recovery values seems to be the hottest topic of conversation in retail lending these days. And for good reason: online shopping increased 15% and accounted for 20% of total holiday sales in 2012 within the United States. Only 1/3 of the world's population has internet access; the U.S. has approximately 78% penetration.

Going back only 5 to 6 years ago with respect to inventory valuations of e-tailers or traditional brick & mortar retailers that had an online sales component to their business, inventory valuations typically had limited online liquidation reference points which led to relatively conservative recovery values in this space.  Flash forward to today, there have been numerous successful liquidations that have occurred within the online space leading to stronger recovery values for companies with an online component to their business.

When appraising inventories of online businesses one in the key metrics of determining how they would perform in the event of liquidation includes a detailed analysis of the company’s current sales channels and customer activity.  Sales avenues and customer patterns that should be explored include: 

Sales Channels

Customer Activity

The companies’ own websites

Visits

Affiliate programs

Category/Product  Page Visits

Drop ship/e-marketplace partner programs

Add to Carts

Daily deal sites

Conversion Percentage

 

Website marketing, advertising, and promotional activities are other important variables to analyze online businesses. The following are typical strategies that would potentially be employed in the event of a liquidation:

  • Highly targeted pay-per-click (PPC)
  • Ongoing organic search advertising (SEO)
  • Targeted re-marketing through different Internet display networks
  • Comparison-shopping engines (CSEs)

To run a successful online liquidation it would be vital for all outside services, which, in essence, are fixed costs, to remain in effect and available during the sale. These services typically include a hosting service providing Internet connectivity for web servers, a voice-over-Internet-protocol (VOIP) phone system, and an email system. Another important variable to analyze with online businesses includes fulfillment process and whether companies are utilizing their own facilities or a third party logistics provider (“3PL”). The challenge with a third party logistics provider can be that some of or the entire inventory may be out of the companies physical control and if there is a payable due to the 3PL, some of the inventory may be held hostage.

Learning from liquidations Hilco has conducted within the online space, there can also be considerable recoverable value beyond the inventory from other assets including the Customer List as well as the company's domain name(s) or any brands they may own.