Everyone has heard opinions about valuations and liquidations when everyone is allowed to get back to business. Prior to the COVID-19 virus, numerous department stores were closing stores and deciding which stores to close as a means of “rightsizing.” The virus just accelerated and exacerbated the financial dilemma for the large retailers. What is the root of this dilemma? It’s actually very simple: there are just too many stores and too much competition from competitors and online sales.

Too Many Stores

With the influx of malls being constructed in the 1980s through the early 2000s, each mall virtually obtained the same stores as tenants. This has caused companies to split their business between stories while failing to add enough new customers. If you factor in fixed and variable costs, the cost benefit of having the same store in a close proximity has not created enough of an increase in sales to justify the multiple store locations. Logically, if there were to be a reduction of the same stores, it is extremely unlikely that the “chain” would see a proportional reduction in sales.

During the construction boom, developers and mall owners had to acquire tenants to fill up the rentable retail space, so they chose to lease to larger multi-store chains. For the most part, the larger chains decided that if other stores were going to be at the mall then there was a need for them to be there too. Unfortunately, that process has led to numerous multi-store national chains closing and filing for bankruptcy in the past few years.

According to Digital Commerce 360, for the year ended 2019, online sales increased to $601 billion or 16% of total purchases, marking an increase of 14.9% compared with the preceding year. Ecommerce is rapidly increasing with younger generations now aging and using online resources as their choice for buying products.

Shortcomings of Desktop Appraisals

Valuations are generally performed by conducting a physical inspection of the property to be appraised. Sometimes a “desktop” opinion of value is requested as a cost savings measure to expedite the process or obtain a general range of value. Due to social distancing measures, appraisers are not able to travel or visit clients, so desktop appraisals have become acceptable whether it be for an inventory, machinery and equipment, rolling stock or corporate assets. But let us ask ourselves the following questions:

• Can you assume the accurate condition of assets from a list or a couple of digital images?
• How can you accurately determine the age of a retail inventory from a list?

Those are two general conditions that must be considered when requesting a desktop appraisal, but there are more questions to consider as well.

• Is it prudent to value something you haven’t actually seen?
• Is it believable to infer that having a database of prior sales will provide an accurate estimate of value for what is currently being appraised, especially given today’s uncertainty?

The primary factors to consider when performing an appraisal are salability and desirability in the current marketplace, age and condition, quantity of goods to be sold, price point and market conditions.

A professional appraisal firm typically relies on market trends and historical recoveries. The firm must understand current market conditions and specifically know where the product or product line being appraised will be sold. For instance, with the diminished amount of “off price” clothing outlets, where is premium branded clothing able to be sold other than Off Fifth Avenue, Nordstrom’s Rack or Century 21? If they are not the potential buyer for the goods, then the products may be offered to TJX, which is virtually the only remaining outlet for “soft goods” outside of premium outlets. The same thought process is applicable to manufactured goods, corporate assets and rolling stock. It is imperative for a professional appraiser to know and understand the optimal manner of disposition to obtain the recovery stated in the appraisal.

In these times of uncertainty, businesses are closed, retail merchandise is considered a season old and there are no shipments of current products. How will that affect the ability to establish an accurate valuation for both retail and manufactured products? Can we assume the value for the brand new products will be the same as if inspected three months ago? Absolutely not. It is typical for some professional appraisal firms to state that a desktop appraisal will suffice due to historical data reference points, but it is extremely unrealistic that a lender will obtain an accurate valuation through that methodology, especially without the ability to perform a physical inspection.

In regular times it is imperative to physically inspect the assets that are being valued. The economic trends and conditions change rapidly and what something may be worth today, may change by the following week. When the population begins to go back to the new “normality,” what will they be willing to pay for merchandise in brick and mortar stores after probably purchasing goods online at discounted prices? That is the upcoming challenge for the appraiser.

Changes in Spending

The social distancing and stay-at-home measures during the COVID-19 pandemic have created a catastrophic environment for businesses that were teetering on the edge of closing. When stores are allowed to begin opening, can they recover? Will customers come back after being used to buying online? What about the under discussed catastrophic impact that COVID-19 has had on many families outside of the United States? Is it reasonable to assume shopping will not be the main priority for discretionary products? The average person’s “shopping list” will be outweighed by getting back to work, paying past due bills and providing essential needs for their families.

Additionally, during the past few months, retailers have been advertising and emailing cost reductions and sale notices daily. How will that impact store merchandise pricing when openings begin? If merchandise is deeply discounted, will the reflected loss of revenue be passed on to the manufacturer as “markdown money” and born by them? The trickle down effect would then be substantial for the whole supply chain and potentially impact the viability of numerous manufacturers as well.

Slowly Begin Liquidations

We all see the pressure on lenders and retailers, and we understand that numerous businesses have become unviable and are on the verge of closing. As discussed above, is it realistic to assume that a consumer will come to a liquidation immediately after staying at home? There is a likelihood that people will be concerned with prioritizing what is important first. We must allow a gap in time to begin liquidation sales for the consumer to regain their confidence and have a “little extra” cash in their pockets.

When liquidations begin in the near future, how will people react and what will become the norm? Will the standard initial 10-20% off be enough to entice consumers into a liquidation sale considering all other external factors? We as liquidators have to be extremely candid with lenders and businesses to inform them of the deeply diminished recovery expectations. If you factor in daily email blasts, online, print and television advertising, and the current economic climate, there is a distinct possibility that a professionally-run liquidation sale might have to begin with an initial discount close to 50% to attract potential customers. If consumers perceive deals as too good to pass up, then yes, I believe they would participate in the sale and not feel guilty about buying something deemed non-essential.