Going-Out-of-Business Sales Not Always Such a Bargain

Nov. 25, 2008 — -- Several big chains have announced they will go out of business by the end of the year. So now come the liquidation sales. Could their bad luck be your lucky day? "Good Morning America" went shopping to find out.

The Liquidators

So, for example, the sign says Linens 'n Things, but it's really not. Six of the largest professional liquidators run the stores now: Hilco Merchant Resources, Hudson Capital, Gordon Brothers Retail Partners, Great American Group, SB Capital Group and Tiger Capital Group. For these companies, going out of business is a business.

Labels on Top of Labels

When we shopped at the Linens 'n Things liquidation sale, we noticed something strange.

On product after product we could peel back the surface price tags to reveal the old prices below. For example, the surface price tag on a Calphalon saucepan said $124.99. But the one underneath said $109.99. Rachael Ray cookware? $199 on the new label, $179 on the old. The tag on a curtain scarf said $39.99 on the top, but peel it back carefully and there was another price tag for $27.99 below.

Carrying a hidden camera, we asked a clerk why there were price tags on top of price tags. She said that they were instructed to cover up old Linens 'n Things prices and replace them with the liquidators' prices. Liquidators hire many of the original store clerks like her to stay on, so they are familiar with how the pricing changes.

When we pointed out that the product originally was cheaper, the clerk said, "It used to be when it was on clearance. Right now, it's not clearance, it's just a discount. Not great deals at all."

How It Works

Several clerks explained that the liquidators come in before a going-out-of-business sale and raise many prices up to the regular selling price. Then they discount from there, starting with small percentages off and deepening the discounts as the sale goes on.

"We had [the] best deals before," a clerk told us. "Now, 20 percent, 10 percent, it's nothing."

Raising prices before lowering them again can result in some odd situations. We found a curtain that the liquidator priced at $79.99 minus 40 percent, so we paid $47.99 for it, which seemed pretty good. But when Linens 'n Things had that same curtain on clearance, we could have gotten it for $19.99, according to the hidden price tag."Contrary to popular belief, liquidation sales aren't a great deal for the consumer," said retail industry analyst Stephen Baker of the NPD Group. "The liquidator is there to make money."

Baker explained that liquidators have less leeway than regular retailers in pricing their products because they have no factory-to-dealer incentives to fall back on.

In other words, when manufacturers are trying to get their products onto store shelves and gain market share, they may discount the price they charge to retailers or provide factory rebates. Retailers can then advertise those rebates and pass the savings along to customers. Liquidators don't have options like that because their store is not going to stick around.

Despite what the public might think, Baker said liquidators rarely sell merchandise at a loss, even near the end of the sale. He said there are other ways to sell it off, like to overseas markets hungry for merchandise. So rather than trying to empty a store to the bare walls, Baker explained that going-out-of-business sales are more of a play upon human psychology.

"Retail is all about excitement, to get people into a store and get them into a mood to spend money," he said.

Outside Goods

Liquidators often try to take advantage of that excitement by bringing in extra outside goods that were never sold at the store that is closing.

We spotted one example at a Linens 'n Things in Fairfax, Va. Hundreds of handmade Oriental rugs were brought in as the rest of the store was emptying out. A salesman told a member of our undercover team, "They ship it after going out of business."

Problem is, even though the rugs were never sold at Linens 'n Things, they still came with tags that said what the price supposedly "was" and what "you will pay."

"If I can sell it, they send some more," the salesman told us. He even offered to bargain over prices and make us a deal. So we found two things never before seen at Linens 'n Things: hand-knotted Oriental rugs — and haggling.

Store Closing Sales

We also visited a Circuit City store that is closing. It's a different situation there. Only 21 percent of Circuit City stores are going under, while the rest of the chain tries to stay afloat. In that case, Circuit City has hired two liquidation companies, Hilco and Gordon Brothers, to run its going-out-of-business sales.

At Circuit City you could see where the old price tags had been cut out of the product displays with a pair of scissors. Once again, just asking as regular shoppers, we spoke to a clerk and asked why they had gotten rid of the old prices.

"We don't go by the Circuit City price anymore," she told us. "It's the liquidators' prices now."

By now the description sounded familiar. She said the liquidator had raised many rates up to the regular price before the sale began, "and then deducted the, like, 30 [percent] to 20 [percent] or 10 percent," she told us.

So how do the liquidation prices compare overall? Because only part of the Circuit City chain is going out of business, it was a rare opportunity to compare prices at regular stores run by the company with those at closing stores run by the liquidators. The two are not connected.

One example: We saw a Samsung HDTV that was only available as an open box item at the liquidation store and cost $1,799 with all sales final. But at Circuit City's regular stores it was available for $1,599 brand new — $200 less, plus we could return it.

The clerk in the liquidation sale TV department gave us some advice.

"To be honest, I would go to a normal Circuit City for bigger TVs," she said. "But you didn't hear it from me."

Of the 60 electronics products we compared, a third were the same price or less at regular Circuit City stores. And the majority of those that were cheaper at the liquidation sale were only 5 percent to 15 percent less.

When we told consumers outside of a going-out-of-business sale about our findings they were amazed, but not surprised.

"What does going out of business mean if you are jacking up the price rather than lowering the price?" said one woman.

"I think anything that they put a 'sale' sign on, people are going to be more inclined to buy," another said.

The Companies Respond

Circuit City told us its closing stores are in the hands of the liquidators now and directed us to them.

Linens N Things dissolved itself in bankruptcy court and doesn't really exist anymore. Hilco Merchant Resources spoke for the six liquidators that are now selling Linens N Things' merchandise and the two running the Circuit City liquidations.

Hilco said, "Federal and state laws exist to guide liquidators in going-out-of-business sales and they abide by these laws in every respect."

Hilco acknowledged that liquidators often raise prices back to the regular selling price and then discount from there. To explain why we found prices at regular Circuit City stores were the same or lower for a third of products we checked, Hilco said, "[Circuit City is] continuing to price their merchandise to be as competitive as possible with other retailers. As a result of aggressive pricing by Circuit City, it is very possible that prices on certain items in the closing stores could be higher..."

Hilco acknowledged it is common to bring in outside merchandise for a going-out-of-business sale. Liquidators call it "product augmentation."

Hilco said it was not aware that the Virginia Linens 'n Things we visited was using "before" and "after" comparison prices on its rugs.

Bagging a Bargain

So what's the best strategy to bag a bargain? It's not that you can't get good deals at going-out-of-business sales. You can. Just don't assume the prices are lower there. You need to shop around as you would with any other purchase. For the products we priced, we often could find cheaper deals online.

Sometimes competitors that are not going out of business will drop their prices to compete with the liquidation sale, so check them out too.

And keep in mind that the discounts get deeper as the liquidation sale goes on, but the merchandise gets thinner too, so it's a balancing act.

If you have gift cards for Linens 'n Things or Circuit City, both chains are still accepting them at their liquidation sales.