Amazon has a fairly generous return policy, as its millions of loyal customers know. The company allows customers to return orders within 30 days of receipt; as long as they’re unopened, customers get a full refund processed in two to three weeks. All items shipped in November and December can be returned until Jan. 31. Customers assume the cost of shipping.

For customers returning items, that’s where the process ends — they put the package in the mail and wait for their refund.

But for Amazon, the liquidation process is just starting.

According to recent reports in Yahoo Finance and The Atlantic, many of these returned items end up being sold at liquidation. Warehouse liquidation is an old sales process, in which warehouse owners basically throw open the doors and sell items at rock-bottom discounts. Now that process is digital.

Amazon sells returned inventory to e-commerce liquidation websites, like Liquidation.com and Direct Liquidation. Those sites sell them to pretty much anyone who will buy them — from hustling e-commerce entrepreneurs who think they can buy low and sell high to treasure hunters hoping for one great find.

How Does the Liquidation Process Work?

Two Yahoo Finance reporters got an inside look at the liquidation process by buying a pallet of liquidated goods themselves.

When customers buy items on Amazon, they are shipped from impeccably organized warehouses, dominated by algorithms and fully optimized staff. But when customers return those items, they end up loosely categorized, thrown in boxes with items in the same broad categories — appliances, electronics, or apparel, for example.

Amazon then sells those boxes on pallets to online liquidators. Even sitting in warehouses, those boxes cost Amazon money, in the form of labor and space. So it’s cheaper, in the long run, to unload them rather than keep them around.

Pallets include manifests that list their products and suggested prices for those products in brand-new condition. Auctioneers like Liquidation.com list the value of the box based on those numbers. Yahoo Finance writer Krystal Hu notes that she paid $170 at auction on Liquidation.com for a box with a stated value of $1,516 — but then had to pay an additional $220 to ship it from Indiana to New York City. No shipping discounts at liquidation.

When the reporters tried to resell their liquidated items, shipping remained a challenge. The pair sold a $15 tiller, but then had to pay $20 to send it to North Carolina. Listing them on eBay was one thing, they wrote; convincing buyers to pay for shipping in an environment where free shipping in the norm was something else altogether.

What Do Liquidation Sales Tell Us About Online Retail?

To be clear, we’re quite literally talking about tons of inventory passing through these liquidators. According to Yahoo Finance’s reporting, online retailers may have return rates of up to 30 percent. For clothing, that can climb to 40 percent.

Liquidity Services, one liquidation company to which Amazon sells, has made sales totaling $626.4 million in the last fiscal year, according to The Atlantic. The company spent just $33.7 million on Amazon liquidation inventory. They have nearly 3.4 million registered buyers.

Those numbers suggest that Amazon is liquidating billions of dollars worth of inventory every year. That means Amazon is making enough sales to turn a handsome profit even when many items are returned and refunded. The e-commerce giant doesn’t need to try to re-list these items, although a handful of used products do end up on Amazon Warehouse, a discounted sales arm of Amazon.

Some of those savings come, undoubtedly, from the fact that Amazon makes customers assume shipping costs for returns. Amazon already loses a ton of money on free shipping, but they’ve won the loyalty of millions upon millions of people — asking customers to pay for returns isn’t going to lose them any future sales.

Liquidation sales, too, show us something important about online retail. In 2019, everyone can be an e-commerce seller. In The Atlantic, Alexis Madrigal describes YouTube videos with millions of views, showing people opening liquidation pallets and being thrilled by what they find. Anyone can buy a steeply discounted pallet and find some treasures inside, right?

As the Yahoo Finance report explains, that’s not exactly true. Not every product will be high-quality. Not every product will have a market. Shipping costs can sink sales before they happen, or leave sellers in the red, giving them an impossible choice — make buyers pay for shipping when they could buy the same product on Amazon Prime and have it shipped for free, or assume the cost of shipping and risk losing money.

Amazon has succeeded in part because it operates at scale. Hugely profitable parts of its business can subsidize more expensive parts, like shipping. And that’s why Amazon is Amazon, and so many other online sellers are still scrambling to establish their niches outside it.

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