For entrepreneurs searching for low-cost merchandise to resell, one of the most plentiful categories of goods is retail store returns. With the right approach, you can turn these returns into big profits.

Why do retailers liquidate returns?

Retailers are not able to put store returns back on the shelf and sell them as new. So, they return product to the vendor, dispose of it or liquidate it. Even if a vendor issues a credit for the merchandise, the company will sometimes tell the retailer to keep the goods to avoid freight and processing costs. Disposal of returned merchandise was once very common, but re-marketing of returns and other distressed inventory has become a large and growing industry. Retailers now know there is demand for store returns and try to maximize their recovery value on these goods through liquidation.

A critical factor in maximizing recovery is the retailers’ ability to liquidate merchandise quickly. For every day the product sits in a warehouse, retailers incur costs for storage, taxes and inventory financing. At the same time the product is depreciating in value. For these reasons, retailers are anxious to move returns out of their warehouse quickly and are particularly receptive to bulk purchases.

Why are returns a good money maker?

Returned merchandise can be a good source of profit for two reasons: It’s cheaper than distressed merchandise that is new and there’s lots of it.

People will pay more for new products, such as closeouts, shelf pulls and irregulars. But these products are also more costly to source. Wholesale buyers typically pay 15% to 50% more for new product than returned goods. The right load of returned goods can generate a higher profit margin.

Returns also offer a steady source of distressed merchandise. Think about it. An excess of new products means someone made a mistake and either manufactured or bought too much inventory. Every day companies get better at predicting demand and fixing these mistakes, resulting in less “new” product available in the after-market. Returns represent the majority of distressed inventory. There will always be a regular flow of returns for after-market buyers who need a steady supply of product to sell.

What is the “waste factor”

There is a reason why retail store returns are sold as low as 5% of retail. They are offered “as is, where is,” meaning the product is available in its current condition from its current location. While most returns are in like-new condition – perhaps the product was returned because it was the wrong size or color – some products in return goods loads cannot be resold in their current condition. Perhaps they are broken, missing a part or have some other irregularity. This “waste factor” is typically 15% to 25% of the load. The price for the load reflects this waste factor. If you can repair items, you can minimize this waste factor and realize more profit on your investment.

Re-marketing returns: key success factors

GENCO Marketplace has worked with many buyers who have consistently made money from returns. Here are some tips based on the factors that have made these buyers successful.

• Understand your costs and your market. The most successful buyers we know have been in business for at least eight to ten years. Over time, they’ve developed a good understanding of their direct and indirect costs and the price they can get for certain commodities. As a result, they understand the target load price that will bring them a reasonable profit.

• Take a long-term view. Some store return loads will lose you money. You must have the commitment, and financial resources, to withstand loads with an unexpectedly high waste factor. Over time, as you become more familiar with your sources of supply (who gives you the highest-quality merchandise at the best price) and your market (where is demand highest for certain products), store returns can yield a healthy profit. Buying and selling returns is not a good business for entrepreneurs looking to make a quick buck.

• Diversify products and vendors. In this business, there is no guarantee that product will be available or that you can always outbid competing buyers. It’s wise to start off with a product category you know and then diversify. For similar reasons you should build relationships with multiple sources of supply. With so many sources in the marketplace for store returns, there’s no reason to rely on just one.

• Forge close relationships with good sources of supply. Successful buyers aren’t waiting by the phone for liquidators to call. They are proactively building relationships with liquidators so they can identify and purchase the best loads before competing buyers.

Retail store returns are the largest category of distressed inventory and are offered at the lowest price point. For entrepreneurs who know their business and their market, returns offer a solid profit opportunity.

This article was developed by GENCO Marketplace – www.gencomarketplace.com, the leading B2B wholesaler of distressed inventories. GENCO Marketplace liquidates $5 million worth of product every day.