A growing number of wholesale retailers are adopting consignment arrangements. But just what does that mean? In this concise guide, we’ll provide a short definition of consignment agreements and what they are. We’ll discuss their advantages for retailers and what both consignors and consignees can get out of the deal.
In addition, we’ll discuss the challenges retail stores face in adopting the consignment model. By the end, you should have a much clearer idea of what consignment is, what it can do for eCommerce and other retail businesses—including wholesalers—and what your business could potentially stand to gain from it. Let’s get started.
What is a consignment?
In short, consignment is a type of business arrangement where one business (the consignor) agrees to place its goods into the inventory of a second party (the consignee) either for a specified period of time or simply until they are sold. The term is originally derived from the French verb, ‘consigner’—meaning ‘to deposit’.
So, usually, a wholesaler would be the consignor, and a retail store would be the consignee. The consignment store agrees to pay the wholesaler a cut as and when the goods are sold. While direct possession of the goods is tasked to the consignee, in the act of consigning, the consigner retains legal ownership of the goods until they are sold.
A typical consignment arrangement might work like this: A wholesaler consigns goods to a retailer that specialises in selling the particular items involved (whether it be children’s clothing and toys, sportswear, or antiques, for example). The two parties agree that they each take a set share of the proceeds when an item sells.
Consignors and consignment shops often agree to split the proceeds of the consignment sale 50/50, although it might sometimes be 60/40 one way or the other. More successful and established retailers can cut more favourable deals; for pop-up stores and other small retailers, the terms may be less advantageous.
The advantages of the consignment business model
There are numerous advantages to the consignment business model to both consignors and consignees. We’ll delve into these in more detail in subsequent sections, but suffice it to say for now that they provide both parties with a degree of flexibility and convenience that other types of inventory arrangements can’t.
Let’s take a closer look at how consignment can benefit the parties involved. We’ll start by looking at what it can do for consignors—including helping them cut costs—before moving on to look at the potential benefits for consignees.
What’s in it for consignors?
For the consignor, or wholesaler, the arrangement saves the trouble of dispatch and delivering the items involved; the consignee takes responsibility for this. Also, it means the consignor doesn’t have to create its own retail storefront, host listings on eBay or Etsy, or even visit auction houses to sell goods.
Consignors also avoid having to stump up for inventory carrying costs, which can be financially draining. Inventory management is expensive and comes with many costs attached—renting warehouse space, paying utility bills, hiring employees, etc. Consignment allows wholesalers to leave goods with retailers instead.
Following on from this point, consignment can help wholesalers streamline their supply chain arrangements. As inventory is supplier-consigned, there is no need to coordinate shipment to the warehouse and then, from there, to individual retailers. Goods can be sent directly to retailers from the point of manufacture, saving time, effort, and expense.
In addition, they can use consignment to test the water and see how popular certain items prove to be with consumers. If a consignor launches a new product line or sales channel, it can introduce it via consignment without risking substantial monetary losses. In this way, they can better understand whether or not particular items are viable in the marketplace.
What’s in it for consignees?
For the consignee, there are also several benefits of consignment. Firstly, retailers don’t have to pay upfront for inventory, and any unsold goods can be returned to the consignor. Consignees can also pay for sold items days or weeks after the event, which helps them to ensure a healthier cash flow.
Consignment helps retailers reduce the risk of stock shortages. A lot of the time, consignors replenish stock after consignees report that a certain proportion of their existing goods have been sold. This saves them the stress that comes when a popular product runs low on stock—the consignor can take care of it.
Another important advantage of the consignment is that it allows retailers to expand their product offerings. In the modern retail environment, consumers have a huge choice—and with it, great power—at their disposal. Customer experience is key: If they find that one retailer doesn’t offer them the kind of variety they expect, they can quite easily shop elsewhere.
With consignment, retailers can broaden their selection of products, thereby attracting more customers and hopefully generating more sales and revenue. It also means they have the flexibility to reconfigure their product selection according to consumer demand and taste changes, bringing in new product lines with the minimum of delay.
Challenges of selling on consignment
For all its benefits, it’s important to note that there are also challenges that come with selling on consignment. If you’re aware of these, you should be well-placed to handle them if and when they emerge. Both consignors and consignees are subject to these challenges, although the bulk of the risk lies with the former.
In particular, wholesalers who choose to consign goods are putting a great deal of trust in the consignee. As we’ve mentioned, retailers who sell goods on consignment only pay for them once they’ve been sold. While this helps the retailers with their cash flow, it potentially leaves the consignor at risk of losing money.
Of course, it’s not guaranteed that goods sent to retailers on consignment will actually sell. If they don’t, the consignor still has to cover the production costs incurred while at the same time being lumbered with dead stock. This can amount to a substantial financial burden on the consignor while the consignee takes responsibility for selling stock.
It is incumbent upon consignors, therefore, to ensure that they manage inventory very carefully. There must be a reasonably quick flow from the production line to the retailer and then onto consumers themselves. Unless this process is relatively smooth, there is a danger that it could result in significant inventory issues—which can come at a sizable financial cost.
Consignors need to be as sure as possible that their chosen consignees are doing what they can to sell items. This is why consignors commonly choose specialist retailers focused on the particular kinds of goods being sold. They already have the relevant expertise in this area and a ready-made customer base looking for these items.
Another problem with selling on consignment is that it provides relatively low visibility overstock. This is because the goods sent out on consignment are effectively in no man’s land. They’re not officially part of the consignor’s inventory (though it retains ownership of them until they sell), but at the same time, haven’t yet been sold by the consignee.
This makes it difficult for consignors to keep track of the status of consigned goods. It’s tempting to assume that the retailer will take care of the problem and sell all the relevant items, but—as we mentioned—there are no cast-iron guarantees of this. Monitoring inventory movement is, therefore, a frequent challenge for consignors.
How to make the most out of consigning
Having addressed the pluses, minuses, and challenges of selling on consignment, let’s discuss how to get the most out of these arrangements. You should bear in mind; to be forewarned is to be forearmed, as they say. Let’s inspect some of them in closer detail.
First and foremost, strong working relationships are crucial to making consignment work. Both consignors and consignees have to be able to trust one another. Without this trust, the chances are that the whole arrangement will fall apart. Good communication is particularly vital: Both parties must be candid with one another at all times.
That said, the agreement terms must be unambiguous so that everyone concerned knows what’s expected of them. Make sure that you’ve covered all (realistic) eventualities, such as responsibility for damaged goods and pricing points. Likewise, terms and conditions—including how the proceeds are shared—must be stated clearly and in detail.
Clearly stated terms and conditions could help to bolster working relationships between consignor and consignee so that everyone knows where they stand. From there, both sides can benefit from the exchange of new promotion ideas and sales techniques. This can help to build long-standing, mutually beneficial business partnerships.
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Originally published Aug 09, 2021, updated Aug 10, 2021
