Business Anomaly- need some help with a Q

Okay I need the collective brain power of L-Power to help me understand an anomaly that just doesn't make any sense.

 

Quick background. I'm an investor in a small company. This company basically acts as a liquidation tool for small and medium ticket items (think middle class toys: Cars, motorcycles, guns, boats, high-end tools, A/V equipment, computers, furniture from $1000 to $10,000 max. I call it a high-end, private pawn shop where you don't get your crap back) Our guys scour Craig's List and Fleabay looking for easy take-downs, vultures circling. Blood in the water. Nasty stuff.

 

Anyway, we measure a lot of different things, but I've never laid these three things on top of each other until this week.

 

Blue line is market:bid. Our guys have to do a market research on every item, and bid is the amount that we offer to pay for the item.

 

Green Line is Average ticket. Just the average ticket/$1000 (so that I could track it on the same scale)

 

Yellow Line is Close Ratio is the number of BIDS to the number of BUYS.

 

What I’m looking at is Q1 and Q2 2011. Something very strange is going on. We aren’t getting more aggressive, in fact we are getting less aggressive on the bids. We aren’t staffing up, or staffing down. Just sort of plugging along, not making any waves. We aren't high on capital or low on capital. No staffing changes. No advertising, nothing has changed at all.

 

Anecdotally, the guys tell me that people are closing much faster and are much more frantic on the high ticket items. This is probably 10,000 transactions, so I don’t think we’ve got some sort of statistical anomaly.

 

What do you think is going on here?

People who are treading water are running out of steam?

 

Lots held onto what they could for as long as they could, with the hope that they'd be able to "ride out the storm". Shit hasn't got as good as they'd hoped for yet and these people are finally forced to shed what few assets they have. It's getting to the point where more people are more desperate and willing to take less...

Pretty cool way to track your closing ratio. Please keep us posted on the next quarters. I would have to possibly agree with Arancio12.

People who are treading water are running out of steam?

 

Lots held onto what they could for as long as they could, with the hope that they'd be able to "ride out the storm". Shit hasn't got as good as they'd hoped for yet and these people are finally forced to shed what few assets they have. It's getting to the point where more people are more desperate and willing to take less...

 

 

X 100.

 

I am hoping that what you are seeing is just a blip caused by Xmas shoppers trying to raise short term money to pay for some of their Holiday season overspending.

 

It could however be the "final flush" for those average families that were living beyond their means. If the choice is keeping the boat, jet ski etc. vs. keeping the house, most will choose to do what they can to keep a roof over their heads.

 

As a counterpoint, the prices of some exotic cars seem to have come up recently, which may mean that for those who have the capability to generate higher levels of income through better sales or higher margins on sales, the economy is actually starting to improve and they feel confident in starting to spend again. If this is the case, perhaps over the next year or two the average family will start to feel the positive effects of an economy that is finally starting to grow again.

X 100.

 

I am hoping that what you are seeing is just a blip caused by Xmas shoppers trying to raise short term money to pay for some of their Holiday season overspending.

 

It could however be the "final flush" for those average families that were living beyond their means. If the choice is keeping the boat, jet ski etc. vs. keeping the house, most will choose to do what they can to keep a roof over their heads.

 

As a counterpoint, the prices of some exotic cars seem to have come up recently, which may mean that for those who have the capability to generate higher levels of income through better sales or higher margins on sales, the economy is actually starting to improve and they feel confident in starting to spend again. If this is the case, perhaps over the next year or two the average family will start to feel the positive effects of an economy that is finally starting to grow again.

 

These are people who were, generally, pretty comfortable hanging on to assets they considered expensive. Call it 50% of their discretionary income. Anyway, today what we are seeing is a mass sell-off of these assets. It's only in the past 4-6 weeks. What's interesting is on the "sell" side we are seeing no friction in the marketplace @ previously normal prices. We aren't discounting or selling cheap.

 

Cautious opinion:

 

I would be keeping a close eye to the slope of the green and teal lines, if all of a sudden the bottom falls your guys will buy out a whole lot of things. I don't know if the "sell" side is a step behind, but make sure they are not close to their limit in the ability to buy from you.

Also did the inventory change lately? May be your sharks found some things that were working better - may be things that worked well before are not anymore (say expensive boats - people are keeping them now) and hence going for something else was the next choice.

I was reading some interesting statistics last week on the mean duration of unemployment in the US. It is fast approaching 40 weeks. That is a new record. The graph showed that, previously, going back to 1960, the maximum it ever reached was around 22 weeks in 1983. You can see the seriousness of this "recession" for some of the folks out there. A long time being unemployed is what is most damaging for society, as wealth, expertise and morale is slowly destroyed by inactivity.

A long time being unemployed is what is most damaging for society, as wealth, expertise and morale is slowly destroyed by inactivity.

 

I think that's a big part of the problem. The inactivity does something to people's brains, it really slows them down. Sitting around playing Angry Birds and sucking down sugar drinks just seems to make the problem worse.

 

WRT to our STR, I don't think it's a problem at all. In fact, as our bids get lower and our close ratio goes up on the buy side, we are able to extend discounts that gives us a pretty serious competitive advantage (though we've chosen not to do that, thus far). We've got technology that tracks pricing trends, and it's edging upwards. To that end, there's a disconnect between what people need and are willing to do to maximize their disposition. It's almost like they are flat broke, but they are too lazy to sell the stuff themselves. They get frantic and unload on the cheap. I'm running out of cash towards the first of the month, and that's never happened before. Strangely, we've been selling to a lot more dealers lately who are understaffed to buy. I can't make heads or tails of it all.

 

 

Also did the inventory change lately? May be your sharks found some things that were working better - may be things that worked well before are not anymore (say expensive boats - people are keeping them now) and hence going for something else was the next choice.

 

Nope, hasn't changed much. We pulled the plug on Jet Skiis and PWCs (about 2% of the business) but that's it. What's really concerning me is that my "source" of assets are also who I sell to, and if things are really trending like they seem I'm going to run out of people to buy my stuff.

 

I had a guy bring me a $72,000 boat the other day for $25K. I had a phone call in 30 minutes from a buyer in Dubai, sold in 3 hours. Now, if I could just do that every day. :-)

Are you buying stuff locally are around the entire US?

 

With my business metrics I record pretty much every piece of data I can get a hold of. Then later on I just keep breaking things down until I can figure out the specific demographics the "anomaly" applies to. Despite the detailed metrics, 95% of the time if there is a big change something is broken on my end (or something was broken and now works, haha) or there is a real major external change, which is possibly what you have.

Are you buying stuff locally are around the entire US?

 

With my business metrics I record pretty much every piece of data I can get a hold of. Then later on I just keep breaking things down until I can figure out the specific demographics the "anomaly" applies to. Despite the detailed metrics, 95% of the time if there is a big change something is broken on my end (or something was broken and now works, haha) or there is a real major external change, which is possibly what you have.

 

I'd go so far as to say that 98% of the anomaly is internal. I wouldn't bug you guys with something that I believe is an internal problem.

 

What doesn't make sense is the rate that this has changed. The economy has been bad for a long time, and in fact in Austin what we've seen is a pretty level supply of people moving in so there's always a fresh demo to work with.

 

Our area is Austin Texas +100 mile radius (about 6 million people). The more I look at it, the more I think we're dealing with a macro problem. What it means is that the vultures and sharks are gonna need sharper teeth, because if my demo is running out of money to KEEP toys, they are certainly going to run out of money to BUY new toys.

 

 

I would tend to agree with Arancio12, that people were holding out as long as they could and all of a sudden have come to the point where they simply need to cash out of those items. However, for it to be happening en masse simultaneously is a little odd. Doubly odd given that you guys aren't seeing a lowering of what people are willing to pay when you turn around and re-sell these items.

 

It's only one quarter where you've really seen this big downward blip though. Could just be an anomaly for whatever reason. Watching it for another quarter or two might be more telling. Who knows -- maybe that chart will turn back up to previous levels in Q3 of this year. Sometimes strange, random shit just happens.

 

Based on the blue/green lines, it looks like your margins have gone from single digit to 50%. Is that so?

Shouldn't you normalize the bid cost to the "retail" value of the item?

Based on the blue/green lines, it looks like your margins have gone from single digit to 50%. Is that so?

Shouldn't you normalize the bid cost to the "retail" value of the item?

 

The lines are actually two separate metrics, with the $ amount being division by 1,000 to overlay properly on the same scale.

 

Margin isn't really accounted for here, obviously that's measured independently.

 

Normalizing the "bid" to retail is completely impractical, because we can't predict with certainty what we can sell an item for. It's hard enough to standardize what to pay for an item.

 

Our margin has shot through the roof lately, but I am thinking it's a temporary boost based on the close ratio. Thinking that this trend is sustainable is foolish.

 

Eventually we'll see downward pressure on the sell side, after all it's the same demo buying as it is selling. Unless we can find a bunch of rich guys that want to scoop up 5 year old toys, and they don't know what things are worth. Yeah, that'll happen.

For anybody interested in this, we have seen a huge surge in closing ratio. Lot of people unloading stuff cheap.

For anybody interested in this, we have seen a huge surge in closing ratio. Lot of people unloading stuff cheap.

 

 

Are there still buyers out there for the products your team is buying?

 

You mentioned that one of your purchases went overseas. Are you finding that your buying demographic has shifted (from North America to other continents) ?

 

Given the monetary brinksmanship between your political parties, is it possible some are dumping assets at any cost just to increase their liquidity in case of a possible monetary meltdown ?

 

 

 

 

 

 

Are there still buyers out there for the products your team is buying?

 

You mentioned that one of your purchases went overseas. Are you finding that your buying demographic has shifted (from North America to other continents) ?

 

Given the monetary brinksmanship between your political parties, is it possible some are dumping assets at any cost just to increase their liquidity in case of a possible monetary meltdown ?

 

Yeah, no idea on the larger geo-political stuff honestly. Could be anything, I can just control what I see in front of me.

 

Yes, the buyers have shifted. I see very, very few buyers in California and more and more in Texas/Florida and the Midwest. We're starting to get calls from the middle east for the more unique products. But something is wrong, here. I am watching closing ratios shoot up even after telling everybody to pull in the reigns on buying deep. Yikes. Hope we can adjust quickly to this.

 

What I'm really worried about is getting hung with inventory. I am selling to the same demo as I'm buying from. Not good. Need to wholesale out of some stuff, maybe dump some of the 30 day stuff at auction or put it on Fleabay.