Advantages of Consignment

Article written by EricBank

Merchandizers, retail stores, kiosk operators, artisans, artists and tiny manufacturers can all benefit from the consignment method of selling. It's a useful alternative for selling goods that reduces the retailer's need to pay for inventory in advance. This allows the retailer to use the savings for other purposes, such as expanding its purchases inventory or improving its facilities. It also shifts the risk of an item not selling from the merchandizer, or consignor, to the supplier, or consignee, especially if the merchandizer has extra display capacity that would otherwise lie fallow. Let's take a closer look at the advantages of selling on consignment.

How Consignment Works

Using the consignment method, a retailer is cast in the role of consignor for goods provided by the consignee. The consignee might be a local artist or artisan, such as a sculptor, toy maker, baker or clothing maker. There are dozens of small mom-and-pop operations that would rather sell on consignment than make other, more complicated arrangements. It's the consignee's job to produce or otherwise supply goods for sale but employs the consignor's store to market and sell its wares. The storeowner doesn't have to fork over any money in advance to the consignee -- rather, it just makes some space and time available to display the goods and handle the sales transactions. The consignee doesn't get paid by the consignor until a sale occurs, and the consignor keeps a portion of the sale proceeds, which is usually almost pure profit. If any of the goods don't sell, the consignor returns them to the consignee. In this case, the only cost to the consignor is the opportunity cost of the sales foregone had it instead displayed other, more popular goods; otherwise, there are no out-of-pocket costs to the consignor. It is the consignee's responsibility to deliver and remove its merchandise. It may also need to periodically come to the retail location to dust off the merchandise and check that all items are accounted for.

Cost Savings

 

Consignment conserves the retailer's money, because it doesn't buy the inventory. The consignor thus minimizes overhead costs, such as those for storage, insurance and transportation. In addition, because the retailer doesn't pay for consigned goods, it collects revenue before sharing the proceeds with the consignee. The arrangement reduces the consignor's need to borrow funds to pay for its inventory, thereby reducing interest costs. Of course, this put more of the financial burden on the consignee.

Convenience

 

Consignment selling is a convenient time-saver for the consignor, who doesn't need to reorder stock, because the consignee will quickly replenish sold items. This furthers the consignee's goals by ensuring its goods are always available for sale. For certain merchandisers, such as catalogers and website storefronts, that do not stock inventory but rather order goods only to complete a sale, have fast, easy access to consigned goods because the consignee wants to facilitate a sale. Sometimes, consignees will physically arrange their goods for display in the consignor's facility, saving the retailer both time and labor costs.

Market Penetration

 

A consignee benefits by the opportunity to display its goods to the public and thereby stimulate demand. A retailer might be more willing to show new products from a consignee than from a conventional source because of the various benefits of consignment. For example, it might temporarily display consigned seasonal or holiday items that it would otherwise avoid because of limited demand. By explaining the many benefits of consignment to a retailer, a consignee can gain a foothold to compete with products sold through conventional methods.