Retail Dogma

Consignment Store : How It Really Works

Consignment stores are often associated with second hand or old stuff that is being sold by normal people through a store to generate cash or dispose unwanted items. What most people don’t know however, is the fact that the concept of consigning can be applied to normal retail stores, boutiques or even big box retailers. In this article we will explain in details how does consignment work in retail.

What is a Consignment Store?

A consignment store is a store that sells merchandise that belongs to other people or vendors in return for a commission.

How Does Consignment Work in Retail?

Consignment starts with an agreement that is drafted between the two parties (the shop owner and the merchandise owner) and specifies the commission rate and the terms that are related to damage, risk or associated expenses.

The owner then proceeds to delivering the items to the retailer, and only receives the proceeds after the sale has been made. Usually the retailer will give the owner a monthly report on how many items have been sold, and based on that the owner will invoice the retailer and receive his money.

Commissions go all the way from 25% to 60%, with 40% being and industry average.

Does The Whole Store Have To Be on Consignment?

Not at all.

You can incorporate consignment as a product sourcing strategy that you apply in addition to your normal sourcing & buying activities.

I usually use consignment as way to test new product lines before diving deeper into them or as a way to broaden my product offering with non-competing products that are related to my niche.

Is It Worth It?

From my experience, consignment is really a win win situation for the owner and the retailer.

Benefits for the retailers

  • Not investing any money on the inventory, other than warehousing it if any.
  • Not carrying any risk on the damage & theft
  • Not having to bother about aging of the products
  • Cash flow positive; they pay owners only after they sell
  • Removing the product line quickly if proved unpopular with your customers

Benefits for the owners

  • Not spending anything on rent
  • Not spending anything on marketing
  • Benefiting from the traffic coming to the retailer
  • Mostly passive, where they don’t have to manage employees or cash or daily operations

Drawbacks

The main drawback of consignment is the lower margin for both the owner & the retailer, considering that they share the proceeds.

Due to the lower margins I don’t give consignment a bigger space in my stores, and prefer to think about it as a way to capitalize on extra space that is otherwise not used, and at a very low risk and investment from my side.

The other reason I cannot fully depend on it is that you don’t want to be at the mercy of other people providing you with inventory to sell. You have to be in charge for your buying, so you won’t run out of stocks or newness if other sellers didn’t develop new products.

Read Also: Open to Buy: The Complete Guide

Is Consignment Equivalent To Second Hand?

This is another misconception by people from outside the industry.

You will be surprised how many big box retailers use consignment regularly as part of their sourcing strategy. In this case they are selling brand new merchandise and not used or old ones.

It comes down to the agreement between the retailer and the place he sources the products from. If they agree that the owner only gets paid after selling and that the retailer doesn’t have any ownership over the products, then it is automatically a consignment by definition.

Can I Start a Consignment Store Online?

Absolutely! Actually the Fulfilled by Amazon program is a form of consignment.

However; if you are planning to launch an online consignment store you need to be aware of the following points.

  • You will carry all the costs of storing & warehousing the merchandise
  • You will carry all the risks associated with payment fraud and chargebacks
  • You will carry all the risks/costs associated with delivery & returns
  • You will carry all the costs of order fulfillment and customer support

So if you want your operation to be profitable you should be charging fees for all of the above situations, just like Amazon.

Considering that your consignment commission will be much lower than if you bought and sold the products yourself and also lower than typical brick & mortar consignment fees, you will not be able to turn a profit without lowering your costs on all the above points by charging those fees.

Read More: Starting a Retail business

Considerations For a Consignment Store

If you are planning to include consignment into your store you should consider the following points

  • Consult a lawyer to draft the consignment agreement for you
  • Consult an accountant because recording consignment transactions has a special treatment
  • Determine how long you are willing to keep & stock the merchandise so that you don’t carry costs for stocking items that are aging, not selling and taking space on your floor. Should be stated in the agreement.
  • Check if the owner is willing to provide fixtures for displaying & marketing their products (in my case they did)

Bottom Line

Consignment is definitely a good sourcing strategy to include in your arsenal as a retailer, as long as you don’t rely entirely on it for your business. You can use it to your advantage to test new product lines while lowering your risk on new inventory investments. You can also use it to maximize your return from your store space from areas that are not currently utilized to their maximum potential.

The best way to benefit from it like a pro is to use the sales data of these new products to develop or source your own in the future if you find enough demand on them.

That’s exactly what Amazon does!

Read also: Why Buying is The Most Important Retail Function?