The environmental and financial dangers of liquidation mismanagement

Imagine having to throw away $30M of  toys because your excess inventory costs are so high it's cheaper to dispose of than store them. While that financial write-off hurts, the unknown environmental costs of dumping that many toys into a landfill are a cost to us all.

'CEO Brian Mariotti said during an investors call that one distribution centre was so full that Funko was renting shipping containers to hold the excess stock.' source

Donations catering to children could benefit from toys, as well as struggling consumers who could otherwise not afford to pay full value. Ultimately, this is a classic example where a lack of data causes easy - but bad- decisions to be made and leads to unsustainable liquidation. Brands like Funko aren't to be blamed, in as much as the current liquidation practices are.

No matter what Adidas does, Powell said, “they’re losing all the way around — there are no winners in this one.”

Adidas with $500 million of excess shoes inventory

When brands don't have a proactive and data-driven approach to liquidation it can lead to a triple loss. A loss for Adidas, the brand/retailer, a loss for the consumer, and a loss for the environment.

Like with any product launch, there is a risk that the forecasted demand may be less than expected, or as with the Yeezy branded shoes canceled altogether. Investors and founders alike always optimistically predict that AI or ChatGPT can solve all forecasting modeling, but the reality is that human behavior will always be unpredictable. For instance, sales were going great - until racist messaging from Kanye West prompted the cancellation of the brand. Not many engines are trained to predict such instances and even if such engines existed, it's unclear how any given brand will respond.

Most financial teams have modeling to account for write-off situations, but when it comes down to hitting the liquidation market, the best that the finance team can offer is a desired cost recovery (how much money to lose per sale) to mitigate the expected loss. This reactive approach constantly puts unfair pressure on the decision-makers in the supply chain and brand managers where idleness just causes even greater loss.

Take into account that the average billion-dollar revenue FMCG company in the US has fewer than 5 customers to even sell liquidated inventory to. Imagine having to go to 3-5 parties with a $500M opportunity, in which the receiving party- the buyers/brokers- know that you literally have no other options other than disposal.

Ultimately, financial teams may prefer to pay to dispose of, then handle the back and forth and lowball offers under their recovery expectations. As with the Funko example, Adidas and its finance and supply chain teams can't be blamed when the common practices are to dispose of such products. They are in effect working within the playbook presented to them.

The financial loss over time becomes acceptable, but what about the environmental loss, who is keeping the score?

consumers are demanding more accountability

One company trying to help keep score is Reuters  who asked a very basic question. Where do these shoes that are promised to be recycled (and not destroyed or illegally resold) end up?

For industry insiders who are familiar with Amazon practices in the past to dispose of returned products rather than reuse or resale, the report from Reuters shouldn't be shocking.

What happens when we return items to Amazon? "Perfectly good items are being liquidated by the truckload — and even destroyed or sent to landfill," according to Marketplace, an investigative consumer program on Canada's public TV:Experts say hundreds of thousands of returns don't end up back on the e-commerce giant's website for resale, as customers might think. Marketplace journalists posing as potential new clients went undercover for a tour at a Toronto e-waste recycling and product destruction facility with hidden cameras. During that meeting, a representative revealed they get "tons and tons of Amazon returns," and that every week their facility breaks apart and shreds at least one tractor-trailer load of Amazon returns, sometimes even up to three to five truckloads.. source

This is particularly true given that responsibility for the recycling was in effect outsourced to third parties. Unlike Funko and Adidas who took ownership of their decisions, companies such as Dow continue to outsource such decision-making, to much smaller businesses like Yok Imprex. This highlights another glaring problem in current unsustainable liquidation practices where outsourcing to brokers and middlemen is used. In the case of this particular example, Dow has the ability to point the finger at this much smaller company - the same for retail partner Decathlon.

Without having a data trail of collection to destination, an understanding of batch and SKU level data, and any analytics and controls in place, outsourced liquidation doesn't always lead to a better financial and environmental outcome than throwing away the products directly.

Media companies aren't the only organizations taking notice, in Australia the government has announced even more responsibility and oversight needed for managing liquidation due to another botched outsourced recycling program called REDcycle . Now Australians are having to foot the bill for those retailers' outsourced decisions to the tune of 5200 tonnes of plastic waste forced to go to landfills - as storing such plastic too long in warehouses is a fire hazard.

Another example of loss-loss-loss.

The NSW EPA has asked supermarkets to either dispose of the waste in landfill, reprocess it, or export it internationally. Landfill is the only viable option as other nations are unwilling to accept contaminated soft plastic and that volume of plastic cannot be reprocessed domestically.

It's time to make liquidation sustainable

With reports of up to $300 billion dollar in funding for climate, it's interesting to note that for many VCs, even those in markets with some of the world's largest landfills- there is a belief by some that no products end up getting destroyed or thrown to landfills.

Such beliefs can be rationalized when there is a lack of verifiable industry data about preventable business waste - such as tracking the number of products marked for disposal that were able to be recovered. Investors, media, and consumers are all reacting to an industry that works offline and out of sight. Large companies continue to shirk responsibility when they rely on third-party companies that don't offer any data to back up their delivery claims.

Having proactive and data-driven liquidation practices in place, not only ensures better outcomes whenever excess inventory does need to be liquidated. These practices also provide a digital playbook for product creation and risk mitigation planning for demand planners and finance professionals.

The triple loss economics don't end with just the cost of shoes, toys, or products lost by the brand or retailer. They extend to the loss of use and long-term environmental losses from bulk disposals.  

Data exists now to calculate these environmental costs, as well as automation and AI to provide better optionality for distribution.

Therefore, the future is bright even if the immediate future remains bumpy- help in the form of sustainable liquidation practices and systems are getting funded, deployed, and utilized.

Solutions like are here, data is available, and a number of advanced supply chain teams are investing in sustainability and data.

In the coming days ahead, we'll continue exploring opportunities to make liquidation more sustainable.

David Ng

David Ng