Growing secondary markets new link in supply chains

Every December 26, hordes of consumers head back to retailers to return sweaters that didn't fit, electronic gadgets that fizzled and the gifts from Uncle Frank that were just plain awful.

Likewise, retailers purge their shelves of holiday lights, hot toys that weren't, and whatever merchandise shoppers also regarded as just plain awful.

Thirty-some years ago, those unwanted or unsold products might have ended their all-too-brief lives by being dumped in landfills. Today they are the basis of what professor of supply chain management Dale Rogers calls a growing slice of the U.S. Gross Domestic Product: secondary markets.

"The secondary market is a huge part of the global economy and by now probably over 3 percent of the U.S. economy," Rogers said. "And there's a ton of growth in the sector. I mean, how many Rosses and Marshalls and 99-cent stores have popped up … in the last 10 years?"

Secondary markets, as Rogers defines them, are post-retail channels that provide outlets for unwanted goods so that they can be bought and sold. The channels form a network of marketplaces that Rogers estimates grew 35 percent over a recent five-year span.

Research by Rogers and colleagues conservatively estimates that secondary markets totaled $314.3 billion, or 2.28 percent of U.S. GDP, in 2008. By 2012, they totaled $424 billion, or 2.88 percent of GDP. Secondary markets outpaced overall GDP during that period, he found, expanding consistently at 7 to 8 percent a year.

Secondary markets are so different from the usual way that supply chain managers get products to market that they have spawned the new, more complex field of reverse logistics. Over the past few decades, the business world has gotten forward logistics down pat: products are manufactured, shipped to sellers and purchased by consumers, generally through established channels and on predictable schedules.

Reversing the process, however, is not as simple. Consumers return items whenever they please. Some items might have nothing wrong, some might have plenty wrong, or their packaging is damaged or shopworn. Besides varying in quality, the value of returned items and their position in the product life cycle also vary widely. Perfectly saleable items might return to the shelves, and the rest are sent in many directions — back to manufacturers or on to value retailers, salvage dealers, charities, and more.

Further back in the supply chain, but even bigger than consumer returns, are products that retailers return to manufacturers. Called marketing returns, this flow of goods occurs not just in the weeks after Christmas but throughout the year when stores ship back products that aren't moving or when manufacturers introduce new packaging.

Other categories of returns are product recalls, especially big in the automotive and pharmaceutical industries; asset returns, usually of expensive industrial equipment; and environmental returns, designed to control the disposition of products containing hazardous materials.

Where do all these returns go?

Rogers has identified nearly a dozen segments within the secondary market. Factory outlet stores account for the largest share, followed by online auction houses and value retailers. Dollar stores, salvage dealers who buy in bulk and resell smaller quantities, pawn shops, flea markets and charities are other significant players. Niches are filled by international disposition, recyclers, and that last resort — the landfills.

Driven by two kinds of 'green'

Rogers became interested in reverse logistics in the mid-1990s when he was consulting for a logistics company that had just won a contract to handle returns for a national discount retailer. Sending things to landfills had become less socially acceptable, and e-waste laws had started making electronics manufacturers responsible for where their products went to die. But Rogers thought something stronger was driving the trend: finances.

"I thought this was more about money and less about environmental stuff," he said. "The environmental part is important, but usually green and environmental and sustainability work best when there's money there."

Research confirmed that the biggest driver of secondary markets' growth is the realization that businesses can salvage some profit — or at least minimize financial losses — from returns and other unsold goods. Secondary markets reduce the cost of unsold inventory to retailers and manufacturers, Rogers notes, and they offer multiple channels for disposing of unsold goods.

Growth also is being driven by desire to manage brands, concern for corporate social responsibility, executive mandates and regulatory requirements, Rogers found. Secondary markets give sellers greater cradle-to-grave oversight of their products and brands.

A retailer's first choice is to send extra products back to the manufacturers, usually under a pre-arranged contract that specifies the amount of goods that can be returned and credited. When that is not an option, alternative channels abound. An overrun of pink parkas or plaid shirts could sell at factory outlet stores, likely at higher margins than what department stores pay. Pumpkin-spice cookies with looming "sell-by" dates look like a deal to dollar stores. A passé pallet of Hunger Games lunch boxes could at least bring pennies on the dollar from salvage dealers.

Besides financial incentives, businesses also sensed a cultural shift that began long before Great Recession frugality. High school students in the 1970s might have shunned shopping anywhere but department stores, but their children love finding clothes at the Salvation Army and Goodwill.

"It used to be that used products and stuff that didn't sell had a stigma attached to it. But it doesn't anymore," Rogers said. "It's a cool thing to do. The younger generation wants to feel like things are authentic and real, plus they like the idea of sustainability."

The more government and industry data on secondary markets that Rogers' team gathered, the more they were surprised by the scope. "We started comparing it to U.S. GDP and we thought, 'Wow, this is gigantic. This is important,'" he said.

Retailers, for example, might sell to salvage dealers, who sell to auction houses, who sell to entrepreneurs who use flea markets or online auctions to sell to consumers. Many Americans probably have never heard of reverse logistics, but considering that many supplement their household incomes by reselling unwanted items, secondary markets are obviously important to them.

Planning ahead for returns

Just as retailers and manufacturers have improved their supply chain management, Rogers says, they need to better manage their reverse logistics, because returns will happen.

"Every system needs drains, where you get rid of things that didn't work out," he said. "Way too many companies don't think about drains when they go to market. They really think everything will work and there won't be any waste, but there always is. So an important part of this is really being strategic and thinking, 'OK, what should happen here?'"

He recommends that companies set goals for managing returns, such as maximizing profitability or protecting brand names. The next step is to identify options: what channel or channels are the best fit for the unwanted or unsold products? Some manufacturers have centralized operations to take back defective items, refurbish them and arrange for resale. High volumes of lower-value goods might go to dollar stores, while small volumes of higher-value goods might go to value retailers or auction houses.

Companies have to analyze the cost, profit and impact on the brand of each reverse-logistics option. More importantly, Rogers says, they should decide on dispositions quickly, because the longer companies take to decide the destiny of their products destiny, the faster the products lose value.

In such a new and under-studied field, Rogers says there is plenty more to research. He is intrigued by the booming interest in vintage clothing and the growing popularity of grocery auctions. He also wants to examine global flows of unwanted and unsold goods, a task he acknowledges could be tricky because the international disposition of goods may in some cases link to money-laundering schemes.

"We're going to continue this work," he said. "We keep finding new things ... and some really interesting niches."

The bottom line

Rogers has this advice for stakeholders:

  • Retailers should consider secondary markets as a way to make money from merchandise that is not as fresh as it once was. Devise a reverse-logistics process that's simple, and make decisions quickly.
  • Manufacturers must look at their ability to handle returns and devote resources to managing them. It's expensive, and wrong, to treat returns as embarrassments to bury in landfills.
  • Businesses big and small are getting their slice of the secondary market pie. Insurance-related firms handle items damaged in natural disasters, drugstore chains buy small pharmacies and sell the inventory, and equipment buyers find bargains when grocery stores shutter. With barriers to entry low, many Americans start secondary-market businesses to make a living.
  • Consumers should realize they have many shopping options. Traditional shopping malls are no longer the only places to buy products.

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