NEW YORK — Some asset-based lenders (ABLs) still hesitate to lend against inventory held at Amazon’s warehouses. However, savvy e-tailers, distributors and manufacturers increasingly see the upside of using the e-commerce giant as a closeout channel, write two liquidation and asset appraisal experts from Tiger Group in the November/December issue of ABF Journal.
Typically, lenders cite Amazon’s lack of a collateral access agreement as well as its ban on liquidation language. But Tiger’s Andy Babcock, Director of Transition Services, and Ryan Davis, Director of Appraisals, note a dramatic increase in the amount of inventory moving through the company’s Fulfillment by Amazon (FBA) program. “Lenders would be wise to pay attention, as this shift will affect liquidation strategies, and therefore net recovery values, for a wide variety of companies,” they write in the piece (“Have No Fear: Why the Rise of Amazon Is Good For the ABL Sector”).
Babcock and Davis explain the three avenues available for the sale of merchandise on Amazon. In the first, Amazon purchases and warehouses inventory in its own facilities and ships orders to consumers. “Amazon typically chooses the items it stocks based on historical and projected demand, focusing primarily on branded items with relatively fast turnover,” they write.
In the second, a company can use the marketing-through-Amazon approach. Here, products are listed on Amazon’s website through a seller account. “Unlike websites like eBay, which require sellers to write their own item descriptions, Amazon has developed a simple process: A seller can search for the exact item on Amazon, use that description and input the quantity available,” Babcock and Davis explain.
The third method is Amazon’s FBA program. “Here, Amazon serves not only as a marketing site, but as a third-party warehouse and logistics provider,” write the Tiger Group veterans. “Sellers send their inventory to Amazon’s warehouses and don’t have to deal with warehousing inventory or shipping products. The seller retains ownership of the merchandise, and Amazon automatically maintains the inventory and credits sales to the seller’s account.”
Importantly, FBA merchandise qualifies for Amazon’s popular Prime program, which not only gives participating customers expedited free shipping, but also improves the seller’s placement in the search-results if there are multiple sellers, the authors note. “Amazon handles all packaging, shipping and — crucially — all customer returns,” they explain. “FBA program participants pay warehousing and shipping charges, as well as the standard per-unit sales commissions and fees.”
Today, many disposition specialists prefer to see inventories liquidated through FBA, as opposed to the traditional jobber model, because the revenues and expenses are often more predictable and controllable than running a sale with company employees and facilities, Babcock and Davis write.
Three options are available when liquidating inventory already situated in a FBA facility: a physical transfer out of Amazon’s sites, an ownership transfer and sale through FBA, or continued use of the debtor’s FBA account. According to Babcock and Davis, lenders can realize the best recovery when the liquidator works on a fee basis, selling the merchandise through FBA and utilizing the debtor company’s FBA account. “The total revenues generated under this fee-basis arrangement should, in effect, be the same as in the scenario where the inventory stays at FBA with an ownership transfer to the liquidator,” they write. “This method yields a lower profit for the liquidator, but generates more dollars for the estate.”
The article also addresses ABL lenders’ concerns about the lack of a collateral access agreement with Amazon. “Barring an extremely unlikely scenario — for instance, if the company had so few sales through the FBA channel that it actually owed more in fees than it generated in revenue — Amazon is likely to owe the debtor money and not the other way around,” they note. “Therefore, rather than pulling the inventory out of Amazon, the liquidator could continue to use the FBA service with no additional capital needed.”
Nor should lenders be overly concerned about the ban on liquidation language in this channel: “Selling through Amazon is almost purely about price,” Babcock and Davis explain. “Liquidators can spur demand by simply lowering the prices of a given product — without needing the strong sales language that they’ve used for decades to stir consumer interest in liquidation sales.
While many lenders prefer to make all sales final in liquidations—a practice prohibited by Amazon policies—even this should not prevent liquidators from using Amazon, the authors maintain, citing the efficiency of Amazon’s return system. “The liquidator need only budget properly for the fees associated with returns to account for this factor,” they write.