Buyer beware at liquidation sales

Nick Perez was a Circuit City salesman for just a few months before the company went into bankruptcy and launched a going-out-of-business sale. But it wasn't long before the 25-year-old Churchville man learned a lesson about liquidation fever.

"There's a sucker everywhere," said Perez, a college student and Air National Guardsman whose store on Route 611 closed a week ago.

The day after the financially distressed retailer announced in January that it would shut down, it launched liquidation sales. And guess what happened at the Warrington store, Perez said: Sale prices actually went up. And people bought, bought, bought.

"It was probably three or four weeks into this before you started getting [back] to actual Circuit City prices," said the former part-timer.

As store closings spread during this recession, liquidation sales and their urgent declarations - EVERYTHING MUST GO! - are tantalizing shoppers in growing numbers. But they are seldom the bricks-and-mortar equivalent of a guy in hock willing to sell his Rolex for pennies.

Au contraire, dear shopper. A liquidation is a counterintuitive consumer experience.

Liquidations are often sophisticated moneymaking operations, especially when run by professional firms whose primary goal is not to play Santa Claus but to make the most money possible for a distressed company.

Lawmakers and advocates have sought to protect gullible consumers for decades from the frenzy of these high-decibel events. (Pennsylvania's law hit the books in 1937.) But many shoppers still get seduced by the lure of bold-faced banners, blaring TV advertisements, and the prospect of fire-sale prices.

"They think that the store is desperate and is willing to let things go for whatever it can, because it's got to close its doors," said Anthony Giorgianni, associate finance editor at Consumer Reports Money Advisor, a subscription newsletter. "The reverse is really true."

"The going-out-of-business sign, the psychology is so strong that the liquidators know that they're probably going to command a pretty good price for those items."

In the case of a bankrupt retailer, liquidators are hired with a primary mission: to generate cash so that creditors can be paid.

That is what is going on now with local company Oskar Huber Fine Furniture, which declared bankruptcy in September. With federal judicial approval from New Jersey, the Huber family hired Planned Furniture Promotions Inc., or PFP, of Connecticut, to run its going-out-of-business sales.

PFP appraised and then paid for Huber's existing inventory and agreed to sell it while covering all rent, utility, employee salary, and other costs associated with keeping the stores open to conduct the sales.

PFP also paid a $500,000 "augment fee" for the right to bring in additional furniture and extend the sale.

Ordering supplemental merchandise can help bolster the value of the uneven inventory selection that retailers tend to have when they go into bankruptcy.

"If you've got a dining-room table and a china cabinet and you don't have the chairs, then the value goes way down," said Roy Hester, vice president of sales for PFP.

The extra stash of merchandise also helps generate enough cash for the liquidator to complete and deliver customer orders that were made before the company went into bankruptcy.

Huber attorney Hal Baume of Lawrenceville, N.J., said liquidators cut down on operating costs so that a bankruptcy ends quickly and creditors are paid.

"The idea is to get things done before you eat up too much money," said Baume, a longtime bankruptcy lawyer with Fox Rothschild L.L.P.

The Huber family had little choice but to hire a liquidator.

"If they kept going the way they were going, they would have just built up more unpaid vendor debt, they wouldn't have had the wherewithal to fill all their orders anyway, and things just would have gotten worse," Baume said.

In today's distressed retailing environment, in which furniture sales have dropped considerably, manufacturers are happy to sell their wares to liquidators.

"It's a buyer's market right now," Hester said. "Manufacturers need business just like anybody."

But to consumers, the idea of stumbling upon unfamiliar merchandise in a well-known showroom can be confusing.

Barbara Uecker of Lawndale in Northeast Philadelphia has been an Oskar Huber customer for decades. "My mother-in-law bought furniture there, I did when I got married, and my daughter's home is all Oskar Huber Furniture," Uecker said. "I trust them."

So when she heard about the liquidation sale, she phoned the Southampton, Bucks County, store to see whether it had a particular bed her daughter had bought there some time ago.

As Uecker described the furniture over the phone, the woman on the other line provided a startling answer.

"She said, 'We're not selling Huber furniture.' I said, 'Oh, OK,' " Uecker said. "It wasn't until I hung up that I thought, 'Then what are they selling?' "

Hester said his company told customers of the merchandise mix. "When you walk in, there are signs that show what is original Oskar Huber inventory and what is being supplemented," he said. "And there is a different sales tag on each thing. We don't want anyone to be misled."

Pricing is another way liquidators make money for a company either in bankruptcy or just closing down after a good run.

Giorgianni visited a Manhattan Circuit City store on the Sunday after the company went into bankruptcy liquidation two months ago. He held in his hand a Sunday circular that had been stuffed into newspapers before the company announced it was going out of business. The circular would have gone into effect that Sunday, but was not being honored.

The store, packed with shoppers, was filled with sale prices above what had been advertised in the pre-liquidation circular, he said.

A 50-inch Panasonic plasma TV on sale in the store that day for $1,799.99 had been scheduled to go on sale - according to the circular - for $1,499.99, he said. "I found it at another retailer [online] for $1,364.96 with free shipping," Giorgianni said.

Guitar Hero, however, proved to be a good deal.

To help consumers, Pennsylvania passed a law in 1937 that was amended in 1963 requiring, among other things, that a business apply for a license from the local municipality where such a liquidation sale will be held.

The goal, according to the statute, is to prevent such sales from misleading and defrauding the public.

In the Oskar Huber case, the law is irrelevant because a bankruptcy judge approved the company's request to waive it.

State officials have received few consumer complaints about liquidation sales in recent years, but they urge shoppers to do their homework, said Nils Frederiksen, spokesman for the Pennsylvania Attorney General's Office.

"You may be better off going down the street," Frederiksen said, "or you may end up with a fantastic deal."

Deal Hunting

Comparison shop. From the store, call and have a friend search online for what you see on the shelf.

Leave the store and do research. Don't buy on impulse.

Prices in the first weeks may be higher than at competing stores.

Discounts improve toward the end, but at the expense of selection.

Dangers of "As-is"

Check over a product thoroughly before buying. Are there scratches? Dents?

Plug it in. Does it work?

Open the box. Are all accessories there?

Warranty alert

Consider buying the same product somewhere else if the prices are competitive. It could get you a warranty.

Use a credit card. That might help if the product is defective when you get it home.

SOURCE: Consumer Reports Money Advisor associate finance editor Anthony GiorgianniEndText