Consignment in Retail: 7 Pros and Cons
Businesses constantly seek innovative ways to maximise profits while minimising risks.
One such approach is the consignment model, a business arrangement that has gained popularity among retailers and vendors alike.
In this article, we’ll explore what consignment in retail is, how it works, its advantages, disadvantages, and answer some frequently asked questions.
What is Consignment in Retail?
Consignment in retail is a business arrangement where a retailer agrees to sell products on behalf of a vendor or supplier without initially purchasing the goods. Instead, the retailer only pays the vendor after the products are sold. This model allows retailers to offer a wider range of products without the financial burden of purchasing inventory upfront.
The vendor retains ownership of the products until they are sold, and the retailer earns a commission or a percentage of the sale price. This model is commonly used in various retail sectors, including fashion, art, antiques, and even electronics.
How Does the Consignment Model Work in Retail?
The consignment model operates on a simple yet effective principle: the vendor provides the products to the retailer, who then displays and sells them in their store. Here’s a step-by-step breakdown of how consignment works in retail:
1. Agreement:
The retailer and vendor enter into a consignment agreement, outlining the terms, such as the percentage of the sale price that the retailer will keep, the duration of the consignment period, and any conditions for unsold goods.
2. Product Delivery:
The vendor delivers the products to the retailer’s store. The vendor retains ownership of the goods, and the retailer does not pay for them upfront.
3. Product Display and Sale:
The retailer displays the products in their store, promoting them to customers. Retailers may use various marketing strategies to boost retail sales, knowing they will only profit once the items are sold.
4. Sales and Payment:
When a product is sold, the retailer retains an agreed-upon percentage of the sale price as their commission and remits the remainder to the vendor.
5. Unsold Goods:
At the end of the consignment period, if any products remain unsold, the retailer can return them to the vendor or negotiate a new agreement. The retailer bears no financial loss for unsold goods.
7 Advantages of the Consignment Model
The consignment model offers several benefits to both retailers and vendors. Here are some key advantages:
1. Reduced Financial Risk for Retailers
Retailers do not have to invest in purchasing inventory upfront, which significantly reduces their financial risk. They only pay for the products after they are sold, making it an attractive option for businesses with limited capital.
2. Increased Product Variety
Consignment allows retailers to offer a wider range of products without the need to purchase them outright. This can attract more customers, as they have more options to choose from, enhancing the shopping experience.
3. Mutual Benefit for Retailers and Vendors
The consignment model fosters a mutually beneficial relationship between retailers and vendors. Vendors gain access to retail space and exposure, while retailers can diversify their product offerings and earn commissions without financial risk.
4. Flexibility in Inventory Management
Retailers can easily adjust their inventory based on what sells and what doesn’t. Unsold items can be returned to the vendor or replaced with different products, allowing retailers to adapt quickly to changing consumer preferences.
5. Low Initial Investment
For vendors, consignment offers a low-cost way to enter the retail market. They can place their products in stores without the upfront costs associated with traditional wholesale arrangements.
6. Test Market Potential
Consignment provides a platform for vendors to test new products in the market without committing to large-scale production. This can help vendors gauge consumer interest and make informed decisions about future production.
7. Shared Marketing Efforts
Both retailers and vendors have a vested interest in selling the products. This often leads to shared marketing efforts, with vendors providing promotional materials and retailers using their customer base to drive sales.
7 Disadvantages of the Consignment Model
While the consignment model has many advantages, it also comes with certain drawbacks that retailers and vendors should consider:
1. Lower Profit Margins for Retailers
Since retailers only earn a commission on the sale of consigned products, their profit margins may be lower compared to selling products they own outright. The commission split can vary, but it’s usually less than what retailers would make from selling their own inventory.
2. Uncertainty for Vendors
Vendors bear the risk of their products not selling. If products remain unsold, they must be returned, which can be costly and time-consuming. Additionally, vendors do not receive payment until the product is sold, which can affect cash flow.
3. Inventory Management Challenges
For retailers, managing consigned inventory can be more complex than handling owned inventory. Consigned goods require careful tracking to ensure accurate payment to vendors and to prevent losses or discrepancies.
4. Limited Control Over Sales Strategy
Vendors may have limited control over how their products are displayed, marketed, or sold in the retail environment. Retailers may prioritise their own inventory over consigned goods, potentially leading to slower sales.
5. Risk of Damaged or Stolen Goods
Since the vendor retains ownership of the consigned goods until they are sold, any loss, damage, or theft of the products in the retail store can be a significant risk for the vendor. Retailers may not always be liable for such incidents, depending on the terms of the consignment agreement.
6. Potential for Complex Agreements
Consignment agreements could be complex and need careful negotiation. Both parties must clearly define terms such as payment, returns, and duration to avoid misunderstandings and disputes.
7. Delayed Payments for Vendors
Vendors may experience delayed payments, as they only receive their share after the product is sold. This can impact cash flow, especially for small businesses that rely on quick turnover.
Businesses Using the Consignment Model in Australia
1. Online Marketplaces
eBay Australia: eBay is a well-known online marketplace that allows individuals and businesses to sell items on consignment. Sellers list their items on the platform, and eBay takes a commission on each sale. This model is particularly popular for fashion, electronics, and collectibles.
Gumtree: Gumtree is a popular online classifieds platform in Australia where users can sell items on consignment. It facilitates transactions between sellers and buyers, with sellers often listing items such as furniture, electronics, and vehicles.
2. Recycle Boutique
Many stores across Australia that buys and sells pre-loved clothing on consignment. Sellers bring in their items, which are displayed in the store, and receive a portion of the sale price once their items are sold. This model promotes sustainable fashion and provides a platform for selling quality second-hand clothing.
3. Antique and Vintage Stores
Many antique and vintage stores in Australia use the consignment model to stock their inventory. Vendors provide items to the stores, which are sold on their behalf. This allows stores to offer a variety of unique and rare items without the financial risk of purchasing them outright.
4. Art Galleries
Numerous art galleries in Australia operate on a consignment basis, where artists provide their work to be displayed and sold by the gallery. The gallery takes a commission from each sale, allowing artists to reach potential buyers without the need for their own retail space.
How a POS System Can Help in Consignment?
1. Inventory Management
A POS system like POSApt can streamline inventory management by automatically tracking consigned goods. It ensures accurate record-keeping, helps avoid overstocking, and makes it easy to monitor which items are selling and which are not.
2. Sales Tracking
With a POS system, retailers can efficiently track sales data in real-time. This helps in providing consignors with accurate sales reports, making the payment process transparent and straightforward.
3. Enhanced Customer Experience
A POS system can enhance the customer experience by providing quick and efficient checkout processes. This can lead to higher customer satisfaction and increased sales of consigned goods.
4. Data Analytics
POS systems provide valuable data analytics that can help retailers understand sales trends, customer preferences, and inventory turnover rates. This information is crucial for making informed decisions about which consigned products to continue offering.
5. Marketing and Promotions
POS systems can help retailers execute targeted marketing campaigns and promotions for consigned goods. By analysing customer purchase history, retailers can create personalised promotions that boost sales.
FAQs
1. What types of products are commonly sold on consignment?
Consignment is commonly used for products such as clothing, artwork, antiques, jewellery, and handmade crafts. However, it can be applied to any product where the vendor wants to test market potential without upfront investment.
2. How is the consignment commission determined?
The commission rate in a consignment agreement is typically negotiated between the retailer and the vendor. It can vary widely but usually ranges from 20% to 50% of the sale price.
3. Who sets the price for consigned goods?
In most cases, the vendor sets the price for consigned goods, but the retailer may provide input based on market conditions and their customer base.
4. Can consignment be used for online retail?
Yes, consignment can be used for online retail. Many online marketplaces and e-commerce platforms offer consignment options, allowing vendors to reach a broader audience.
5. What happens to unsold consigned goods?
Unsold goods are usually returned to the vendor at the end of the consignment period. Alternatively, the retailer and vendor may renegotiate the terms or offer discounts to encourage sales.
6. Is consignment suitable for new businesses?
Consignment can be an excellent option for new businesses, especially those with limited capital. It allows retailers to offer a diverse product range without significant upfront costs and provides vendors with market exposure.
Conclusion
The consignment in retail offers a unique blend of advantages and challenges. It allows retailers to diversify their inventory without financial risk and provides vendors with a cost-effective way to reach customers. However, it also requires careful management and clear agreements to ensure both parties benefit. By understanding the pros and cons of consignment, retailers and vendors can make informed decisions about whether this model is the right fit for their business.
More Resources:
How to Ask Vendors for a Discount?