Retail fashion can be a tricky industry. Buyers who supply the retail chains with inventory have to keep ahead of popular fashion trends before they become popular, and plan out purchasing to make sure that stores have enough in stock to meet demand. Don’t buy enough and the stores miss out on potential sales that they could have made; buy too much and they’ve wasted money on product they can’t move. On top of that there are also items that customers return after purchase, and goods that brands produce but which never make it to retailers in the first place. All of these contribute to excess inventory known in the industry as overstock.
Overstock represents an opportunity cost for retailers and brand stores because it takes up space that could be used for merchandise that people are actually buying. Getting rid of overstock items by discounting prices can be a problem for retailers. It can send the wrong signal to customers, implying that the goods aren’t as valuable as they used to be and casting bringing down the perceived value of the inventory as a whole. Even if a retailer chose to discount its overstock items, there is no guarantee that they would sell at a lower price point. Overstock is costly to brands as well because they have already spent the money to produce the goods in the first place.
If only there were some way for brands to recoup some of their expenses on overstock. There is! Overstock inventory can be liquidated – converted back into capital – to help recoup some of these sunk costs. A wholesale closeout is when overstock goods are sold at reduced prices to other retailers for resale in different markets.
Industry experts estimate that as much as 20% of overall inventory goes unsold (this figure factors in overstock, returns, as well as stock that is never shipped to retailers in the first place.)
To put that into perspective, if the global garment and apparel industry were worth $1 trillion (this is likely a conservative estimate) and only 1% of garments went unsold (the real figure is almost certainly closer to 20%), then the potential value lost to the market would be over $25 billion. Even from this absurdly low illustration, it is clear that there is a lot of money to be made by someone who knows how to get this excess stock in front of the right consumers.
In the US much of this excess inventory can find a second life at off-price retailers such as TJ Maxx, Marshall’s, Ross, and many others. Since the financial crisis of 2008/2009, the off-price market has seen dramatic growth as consumers looked for ways to get more for their money. Even as the economy recovers, the growth of the off-price market continues to outpace that of the full-price retailers who dominated before the recession.
Many of the overstock from the United States is shipped overseas to fuel overstock markets all around the world. The growth of the global overstock market is one way in which developing countries can get high-quality clothing for relatively cheap prices.
Product makes its way from manufacturers to off-price retailers through a variety of distribution channels including intermediaries such as wholesalers and jobbers (a specific type of wholesaler that specializes in selling to retailers.) Although some brands do produce special lines of products specifically for off-price retailers, most of the merchandise moving through these distribution channels is part of a grey economy.
There are many factors to bear in mind when operating a business in a grey-market industry to make sure that you don’t run afoul of local governments or the brands whose goods you traffic. It goes without saying that businesses that work in this space must comply with the trade laws of the countries in which they operate. But it is also important to abide by the regulations that brands put in place to protect their brand equity, or the value that they will be able to extract from projected sales in the future.