The Impact of COVID-19 for Lenders by James Schaye, CEO & Barton Hyte, EVP

Eaton Hudson provides valuations, liquidation services, disposition of surplus assets and strategic solutions for asset based lenders, turnaround professionals and the business community.

By this point I am sure everyone has heard opinions relating to valuations and liquidations when everyone is allowed to go out and get back to business. Let us be honest and remember that just prior to the COVID-19 virus numerous department stores were in the process of closing stores as a means of “rightsizing” and deciding which stores to close. The virus just accelerated and exacerbated the financial dilemma for the large retailers.

What is the root of the problem? It’s actually very easy, there are just too many stores and too much competition from their own stores, competitors and online sales.

  • Let’s address the problem of too many stores first. With the influx of malls being constructed in the 1980’s through the early 2000’s each mall virtually obtained the same stores as tenants. By doing this the stores have not added enough new customers, but have split their business between stores, just making it easier and faster for the consumer to get to. If you factor in fixed and variable costs, the cost benefit of having the same store in a close proximity has not identified enough of an increase in sales to justify the multiple store locations. Logically, if there were to be a reduction of the same stores it is an extremely unlikely scenario that the “chain” would see a proportional reduction in sales.
  • During the construction boom, developers and mall owners had to acquire tenants to fill up the rentable retail space and chose to lease to larger multi-store chains. For the most part, the larger chains decided that if other stores were going to be at the mall than there was a need for them to be there too. Unfortunately, by the continuation of that thought process numerous multi-store national chains have closed and filed for Bankruptcy in the past few years.
  • For the year ended 2019 online sales increased to $601B or 16% of total purchases identifying an increase of 14.9% over the preceding year. It is apparent that ecommerce is rapidly increasing with the younger generation, now aging and using “online” as their choice of buying products.


Valuations are generally performed by conducting a physical inspection of the property to be appraised. At times a “desktop” opinion of value is requested as a cost savings measure, to expedite the process or to obtain a general range of value. During the social distancing COVID-19 virus where appraisers are not able to travel or visit a client’s place of business a desktop appraisal has become acceptable whether it be for an inventory, machinery and equipment, rolling stock or corporate assets. But let us ask ourselves the following questions?

  • Can you really assume the accurate condition of the assets from a list provided or a couple of digital images?
  • How can you accurately determine the age of a retail inventory from a list?


Those are two general conditions that must be considered when requesting a “desktop” appraisal. But let’s be realistic, is it really prudent to value something you haven’t actually seen? Is it really believable to infer that having a database of prior sales will provide an accurate estimate of value for what is currently being appraised, especially in today’s uncertainty? What are the primary factors to consider when performing an appraisal?

  • Salability and desirability in the current marketplace, age and condition, quantity of goods to be sold, price point, market conditions and numerous other factors.

A professional appraisal firm typically relies on market trends and historical recoveries. They must have an understanding of the current market conditions and specifically know where the product or product line being appraised will be sold. For instance, with the diminished amount of “off price” clothing outlets where are premium branded clothing able to be sold other than Off Fifth Avenue, Nordstrom’s Rack or Century 21? If they are not the potential buyer for the goods than the products may be offered to TJX, which is virtually the only remaining outlet for “soft goods” outside of the premium outlets. The same thought process is applicable to manufactured goods, corporate assets and rolling stock. It is imperative for a professional appraiser to know and understand what is the optimal manner of disposition to obtain the recovery stated in the appraisal.

During these times of uncertainty, all businesses being closed, retail merchandise in the stores now considered a season old and no shipments of current products what will be the impact on establishing an accurate valuation for both retail and manufactured products? Can we assume the value for the brand new products will be the same as if inspected three months ago? Absolutely not !!! Is it now considered aged or out of season, even though brand new and probably the most currently received merchandise? It is typical for some professional appraisal firms to state that a “desktop” will suffice due to them having historical data reference points but is extremely unrealistic that a lender will obtain an accurate valuation through that methodology, especially not having the ability to perform a physical inspection. In regular times it is imperative to physically inspect the assets that are subject of being valued. The economic trends and conditions change rapidly and what something may be worth today, may change by the following week. When the population begins to go back to the new “normality” what will they be willing to pay for merchandise in brick and mortar stores after probably purchasing goods online at discounted prices? That is the upcoming challenge for the appraiser.

During the COVID-19 virus and mandate for social distancing having all non-essential people instructed to stay at home has created a catastrophic environment for businesses who were teetering on the edge of closing. When stores are allowed to begin opening can they recover? There are numerous factors that may be considered. Will the customer come back after being used to buying online? Most important and unfortunately not discussed is the catastrophic impact that COVID-19 has had on many families not only in the United States, but globally. Is it reasonable to state that shopping will not be the main priority for discretionary products? Getting back to work, if the job has not disappeared due to a Company being closed for so long, paying past due bills and providing essential needs for their family in my estimation far outweighs the average person going “shopping” first. Additionally, during the past few months’ retailers have been advertising, and emailing cost reductions and sale notices daily. How will that impact store merchandise pricing when openings begin? If merchandise is deeply discounted will the reflected loss of revenue be passed on to the manufacturer as “markdown money” and born by them. The trickledown effect can then be substantial for the whole supply chain and potentially impact the viability of numerous manufacturers as well.

We all see the pressure on lenders and retailers and understand that numerous businesses have become no longer viable and are on the verge of closing. As discussed above, is it realistic to assume that a consumer will come to a liquidation immediately after being able to go out freely without fear of becoming sick in conjunction with all the issues they have faced while having been at home and basically just going out to the supermarket, pharmacy or doctor’s office. There is a likelihood that people will be concerned with prioritizing what is important first. We must allow a gap in time to begin liquidation sales for the consumer to regain their confidence and have a “little extra” funds in their pockets that they can spend without an impact on purchasing necessary essentials.

In conclusion, when a liquidation begins in the near future what will be the reaction and become the norm to expect? Will the standard initial 10% – 20% off be enough to entice consumers in to a liquidation sale considering all the factors we have outlined? We as liquidators have to be extremely candid with lenders and businesses to inform them of the deeply diminished recovery expectations. Factoring in the daily email blasts, online, print and television advertising and current economic climate there is a distinct possibility that a professionally run liquidation sale might have to begin with an initial discount close to 50% off to lure potential customers in to purchase merchandise. If in fact the consumer’s perception was that the “deal” was too good to pass up, then yes, we believe they would participate in the sale and not feel guilty about buying something deemed non-essential or a luxury to them.