After buying out his father's Concord, Ont., liquidation business last December, Mike Israel's next move was unexpected. With brother Steven and wife Sharlene Cohan, he formed a new company and convinced 22 other shareholders to buy into it - including 10 competitors.
The new company, Merchants Exchange Inc., now owns the original company, Brad-Lee Trading. By August, it had launched www.merchantsexchange.com, an online liquidator that sells not just Brad-Lee's inventory of manufacturers' unsold merchandise, but its competitors' as well.
"We married the industry together," says Mike Israel, 32. "Our competitors partly own us, but I believe that to take advantage of the Internet, you have to work with other companies."
It's a marriage of convenience - their customers', that is. The dollar stores and small independent retailers that buy clearance merchandise normally spend a lot of time visiting different liquidators who specialize in the eclectic variety of goods they need: giftware, appliances, toys, confectioneries, beauty aids, cosmetics and more.
At Merchants Exchange, they simply call up a photo, check that an appropriate quantity is available and place an order. And for that reason, Mr. Israel believes he will soon become the number one selling tool for all the members of the consortium.
"Retailers love it," he says, "because they're only dealing with one person. It's one guy to yell at, one guy to give credit."
Merchants Exchange is not an auction site. When a retailer places an order, Merchants Exchange buys the merchandise from its partners, then assembles and makes the shipment with about a 10% markup. If Brad-Lee supplies the order, it gets the 25% markup that Mr. Israel gets in his traditional business.
"No one in my vertical [category of consumer product liquidation] is doing this in Canada," he says, "and all my US competitors are using an auction model." At these US sites, manufacturers post inventory and buyers place bids over a limited period. The auctioneer takes a commission of about 5% on sales.
Mr. Israel believes suppliers will much prefer his model. He says manufacturers ridding themselves of excess inventory will not want it taking up warehouse space for 30 days or the duration of an auction. And because the purchasers tend to be shops and dollar stores that buy small quantities, manufacturers are subjected to the hassles of making numerous shipments and chasing down relatively small payments. Says Mr. Israel: "They'd rather just have the cash."
With modest sales of about $250,000 since its launch, Merchants Exchange is still in the test-and-build stage. Indeed, until recently, employees manually completed and faxed orders for its partners' products. Now, sophisticated supply chain management and shopping-cart software automatically sends orders to partners and alerts managers if they are now downloaded promptly.
Merchants Exchange will now begin more concentrated marketing efforts, and Mr. Israel predicts revenues of $16 million and profitability in 2001. Ultimately, he foresees that US buyers may jump at the chance to buy inventories in Canadian dollars. With the consortium already controlling as much as 50% of the Canadian marketplace, it could occupy an excellent bargaining position.
"Control equals income," says Mr. Israel. "If we can control the Canadian market, and I think we can, we can control the flow of product into the United States."