Surplus Industry Adapts to Low-Inventory Markets

THE recession from which the nation is now emerging may have transformed a little-known business: the surplus and salvage industry. Although signs of recovery appear in other higher-profile sectors, this obscure but influential segment is rising with a Phoenix-like intensity, but with a new face. A dearth of excess inventories, which are seen as the backbone of this segment, has sparked fundamental repositioning.

The convention of the Associated Salvage Dealers/Associated Merchandise Dealers (ASD/AMD) in Las Vegas earlier this year saw record numbers of buyers, 40,000, and sellers, 4,000.

But the amount of surplus available for sales has slipped noticeably. Many exhibitors reported a 15 to 25 percent decrease from inventories a year ago. Dealers say they never expect to see this trend reverse itself. "Previously, we used to see inventories build up even in recessions," said one Chicago vendor. "But these times everyone is cutting back on inventory, even overseas merchants."

"In a market you basically have two ways to react when you have excess inventory," said Barry Stregevsky, an economics professor at the Central Michigan University. "You can either cut back on production or you can lower prices."

As producers move to cut production, odd-lot vendors are finding a survival theme of their own: promotions. Instead of discounting castoffs, they are looking for ways to interject lower-cost versions of higher-profile products into the marketplace. "I sell to expensive department stores" through an intermediary, one vendor explained. The stores "run specials on my lower-cost jogging suits, which look just like the high-ticket ones. Everyone wins."

The landscape of buyers has also changed. An increasing number of buyers come from dollar stores. Once the domain of the small town and rural America, the stores are popping up in bigger cities. Promotional items and closeouts are staples for these retailers.

"You are starting to see more and more of these dollar stores," says Marianne Knue, a University of Cincinnati marketing professor. "They rely on impulse buying. In many cases you really don't end up with bargains.... Everything is priced so low that you are more willing to buy things you may not want if you saw it in another environment."

Despite the transition in the surplus-goods industry, "business is good for our members," said Walter Fletcher, ASD/AMD executive director, "because people are looking for bargains. This is a place where small stores and buying cooperatives can buy bargains and pass them on to customers."

Buyers came to this year's convention from all over the world, including for the first time Russia. The event is considered one of the country's 10 largest trade shows. Both buyers and sellers reported a general increase in trading over last year's show, mostly in the range of 10 to 20 percent. Much of this merchandise will start appearing in stores by summer.

The salvage and surplus industry is subject to fads. Gas masks, last year's hot item among the military surplus contingent of the industry, were passe.

"The Gulf war made them popular," Mr. Fletcher said. This year, he said, reasonably priced clothing dominated the show. "All of the small stores are looking for a way to compete with K-Mart and Wal-Mart."