Closeouts as competitive strategy - Brief Article

Home Channel News, Feb 7, 2000 by John Caulfield

My first brush with closeout merchandise came in the early 1980s at the headquarters store of Gee Lumber in Chicago, which near its entrance sold hand tools at deep discounts out of crates. Included in that mix were measuring tapes that bore the well-known Scotman logo of Scotty's, the Florida-based chain. I remember asking myself at the time why a retailer would want to carry the products of another retailer, even if they didn't compete. And what, if anything, did the Scotty's label mean to Chicagoans?

I've dredged up this memory not as proof of my naivete -- although it does show that -- but to put into context what is emerging as the latest vogue among some dealers: the use of closeout merchandise as a competitive strategy.

Two decades later, Scotty's is now experimenting with closeout departments in several of its stores, with a possible rollout of those departments to as many as 75 outlets. In a state overrun by Home Depots and Lowe's, Scotty's is attempting to make more productive use of the selling space in stores that don't fit its preferred 35,000-square-foot format. And eyewitness accounts confirm that Floridians have been flocking to the stores in which Scotty's began selling all kinds of closeout stuff, from toys to household appliances.

This sudden attraction to merchandise that other dealers have liquidated is not all that sudden, actually. For several years, Goodman Lumber in San Francisco has featured closeouts in categories ranging from paint to furniture. During all the travails that Grossman's and Contractors' Warehouse endured, the one constant has been the ongoing survival of the company's Mr. 2nds and Bargain Outlets closeout centers. And there probably isn't a retailer in this business whose stores, at one time or another, haven't promoted "special buys" which are nothing more than thinly disguised closeouts.

TruServ, the industry's largest buying group, is giving serious consideration to offering its members a program the co-op is tentatively calling "The Closeout Coiner." Rob Liebgott, TruServ's vp-merchandising, said the co-op got the idea for this after it successfully liquidated inventory from some of its distribution centers to dealers through Internet auctions.

No one doubts that TruServ, Scotty's or any other dealer has a seemingly endless supply of liquidated merchandise from which to draw. Industry consolidation has caused many dealers to rethink what they can sell profitably and has led many stores to drop departments and product categories entirely. In addition, getting shelf space inside leading retailers' stores has never been tougher for vendors, and I suspect that buybacks -- suppliers paying dealers for the inventory of the vendors their products are replacing -- haven't disappeared completely as a marketing tactic.

But that same consolidation raises questions about just how effective closeout merchandising is as a competitive alternative. As this newspaper has reported, DIY Home Warehouse's closeout department, FrugalBees, turned out to be an expensive mistake for that struggling retailer. And in the early 1990s, Handy Andy Home Improvement Center's closeout venture, called HOBO, never really got off the ground and did little to keep that company from going out of business.

Tom Morris, Scotty's CEO, told NHCN associate editor Monica Toriello that dealers have failed when the closeouts they sell are within the same categories of a store's regular merchandise. That sounds right. But are consumers really so sophisticated that they can separate, within the same store, the various "images" that store is projecting with the merchandise it's selling?

Scotty's, which has operated in Florida since 1924, will have its work cut out for it trying to change the shopping habits of its customers as it changes its persona.