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The retail industry’s inventory glut has metastasized into a significant drag on the US economy, depressing economic growth by nearly 2 percent in the second quarter, according to a recent Federal Reserve report.

Warehouses across the country are bursting at the seams with excess merchandise, a record $732 billion worth, according to the Census Bureau.

That’s a staggering increase over last year of 21 percent and represents more than 10% of all US retail sales in 2021 ($6.6 trillion).

Add to this crushing burden another, less obvious pileup of goods in the form of returns, simultaneous with the growing popularity of the circular economy and luxury resale, and you have the makings of a massive pre-holiday markdown.

The Great Retail Destocking has begun.

Companies are scrambling to clear this massive backlog at the worst possible time in the business cycle. The economy appears to be heading for a slowdown, inflation is digging in for the long term, a recession looms, and wary consumers are clutching their wallets close to the vest. Just about everything, it seems, is going to be on sale this holiday season, and that means there will be red ink in the streets come 2023.

“There is an increasing smell of desperation in the air,” retail consultant Elaine Kwon recently told the Washington Post.

Kwon, a former manager at Amazon Fashion, predicted that brands that never discount, “are going to start discounting, especially outerwear, winter wear, cold weather items, inventory from last winter … trying to get rid of that before their new stuff comes in.”

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All this excess merchandise — plus an astonishing rate of returns last year (16.6 percent of purchases, up 56% from 2020) — has ignited a gold rush in the liquidation industry, estimated last winter by Colorado State University’s College of Business Supply Chain Management to be a $644 billion category, and undoubtedly even bigger today.

Every major retailer has consigned their returns along with unsold goods, referred to sometimes as “luxury lost cargo” and “shelf pulls,” to companies like Bethesda, MD-based Liquidity Services, Inc.

Evidence of the boom in the liquidation business is everywhere. Liquidity Services’ earnings report for its most recent quarter showed a 33% jump in gross merchandise value to $325 million, a record. Liquidity is one of a small clutch of players in the field that break consignments down into pallets that are shrink wrapped and snapped up by the eBay crowd for anywhere from $500 to $5,000 or more per pallet, depending on the category.

A search for “liquidation pallet” on YouTube.com serves up several hundred videos of individual entrepreneurs who’ve bought pallets of unopened returns, giddy with excitement as they unpack them like treasure chests hoping to find overlooked gems they can resell at a profit.

According to a CNBC report aired last February, the cornucopia of returns and overstock has inspired pop-up bargain stores across the country with names like Dirt Cheap and Treasure Hunt Liquidators.

Savvy consumers pay attention to shipping schedules and have been known to camp out overnight to be first in line to scavenge the newest arrivals.

Perhaps the most significant result of all this housecleaning may be a sea change in consumer expectations. Much like the aftermath of the Great Meltdown of 2008, when virtually all asset values crashed, the legacy of the pandemic, the supply chain tangle, and inflation may be conditioning shoppers to expect discounts and sales – creating an environment that will challenge retailers and brands that don’t have a finger on the pulse of consumers.

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