When starting a retail store or a business, there are many questions that arise for the new entrepreneur. For example, which business model to choose? Some are considering consignment sales, which raises new questions, such as ownership of the merchandise sold on consignment. Who is the owner of consignment?
The owner of consignment products is the person or party who entrusts their merchandise to a retailer. The one who delegates their products to be sold by the retailer is the consignor. The person who is entrusted with the responsibility of selling the products is the consignee and the products do not belong to them. The merchandise belongs to the consignor until it is sold.
In this article, we will touch on what consignment sales are, who is the owner of the consignment items and some examples of vendor-retailer relationships. We will then see what the consignment agreement is and the reasons why vendors and retailers choose to sell on consignment.
Consignment Sales: What Is It?
Consignment is an arrangement between a vendor (consignor) and a retailer (consignee). It is an agreement in which the vendor entrusts their merchandise to a retailer so that the latter sells them on the vendor’s behalf in exchange for a portion of the profits. Typically, the retailer pays the vendor the sales amount of their products, while retaining a portion of the profit (a commission).
The Owner of the Goods in the Consignment Sale Model
The consignor is the owner of consignment produits. They remain the owner of the goods until they are sold to the consumer. The retailer receives compensation for their efforts to stock, display, promote and sell the products. The commission is usually the only source of revenue for the retailer in this business model.
Some Examples of Relationships Between a Consignor and a Consignee
In some fields, consignment sales are a widely used business model. Here are some examples where consignment sales can be very beneficial for both parties:
1. Clothing Stores
Fashion designers or people who want to sell clothes they no longer want to wear (consignors) sometimes entrust their items to a clothing store (consignee). The store displays the consignor’s clothing and sells it to customers. The store earns a commission on each sale and pays the consignor their fair share of the revenue. The designer or seller remains the owner of their clothes until the item is sold to the consumer.
2. Furniture Stores
Here is an example of a consignment sales partnership in the furniture industry. A manufacturer sells unique handmade furniture. This manufacturer is looking to expand its customer base. They therefore sign consignment agreements with a few retailers. The manufacturer puts together a selection of furniture, including coffee tables, chairs and dressers, then sends them to the retailers with whom they do business.
These retailers have taken on the responsibility of showcasing the furniture in an appealing way within their store. They also include the manufacturer’s furniture on their website and in their flyers to promote it.
When a customer in the retail store purchases a manufacturer’s piece, the retailer in question deduct the agreed commission from the sales price. The rest of the revenue is paid to the manufacturer on a regular basis, often monthly.
This agreement with retailers allows the furniture manufacturer to benefit from increased visibility and access to new customers through storefronts. Retailers have the opportunity to offer their customers unique, handcrafted furniture without the upfront costs of purchasing the merchandise.
3. Book Stores
Some authors, especially independent or self-published authors (consignors), entrust their books to a local bookstore (consignee). The bookstore stocks, showcases and sells the books. The author can thus benefit from the storefront of the book retailer who provides them with the service of selling their books in exchange for part of the profits made on the sales.
Books are also ideal items to share. People will entrust books they want to get rid of to book stores that sell on consignment. So people can share their books with others while earning some money.
To discover more products often sold on consignment, click here.
These examples illustrate how the vendor/retailer relationship can be applied across various industries and businesses. The key concept is that the vendor entrusts their merchandise to the retailer, who then sells them on the vendor’s behalf, with a commission structure to compensate the retailer for their services. The vendor retains ownership of their products throughout this process.
The Consignment Agreement
Before beginning to sell on consignment, the parties involved should always sign a consignment agreement. The consignment agreement is a legally binding contract between the consignor (the owner of consignment products) and the consignee (the entity responsible for managing and selling the merchandise on behalf of the vendor). This agreement describes the conditions under which the vendor entrusts their goods to the retailer for sale or other purposes. This document also serves to prevent misunderstandings and disputes.
The main purpose of a consignment agreement is to define the rights, responsibilities and obligations of both parties involved. This contract should first include provisions for the resolution of disputes and any other legal issues that may arise as well as for the termination of the contract.
This contract should include who is responsible for storing, displaying and promoting the products. It should also describe the payment terms (when and how the retailer must make payment to the vendor as well as how the retailer must dispose of unsold merchandise, if any).
Here is a non-exhaustive list of what the contract should contain:
- The identification of the consignor and the consignee (their name and contact details).
- A detailed description of the consignment products (their quantity, condition and unique characteristics that can be used to identify them).
- The contract duration (Period during which the retailer is authorized to sell the vendor’s merchandise. This contract duration can be fixed or end when certain conditions are met. For example, until all items are sold).
- The selling price of the products.
- The percentage or amount of the commission.
- Payment terms (details of how payments will be made to the vendor and when these payments should be made. For example, every 15th of the month).
- The responsibilities of the vendor and the retailer (which of the two entities must provide marketing and the transport and storage of the goods).
- Provisions regarding insurance coverage of consignment products and the allocation of liabilities in the event of loss, damage or theft.
- The terms of termination of the contract and return of unsold products to the consignor.
- The actions to be taken to resolve disputes that may arise between the parties.
- The jurisdiction and laws that govern the contract.
- The date and signatures by both parties.
The consignment agreement must be signed by both the vendor and the retailer to indicate their agreement to the terms of the contract. Both parties are responsible for ensuring they understand the contract before committing to signing it. They should have all their questions and concerns answered before signing, to ensure that everyone is happy with the consignment partnership.
The consignment agreement is essential to protect the interests of both the vendor and the retailer and to ensure that both parties understand the terms of the consignment sale. Both parties benefit from consulting legal counsel or professional advice when drafting or entering into such contracts. This ensures that they comply with applicable laws and that everyone understands the specifics of the contract and what it means for them.
Why Do Vendors Choose Consignment?
Many vendors choose consignment sales to sell their merchandise because this model allows them to benefit from the storefront of a retailer better known and more experienced than themselves while reducing costs. Here are some reasons why a vendor chooses to sell their merchandise on consignment.
Access to a Wider Customer Base
By entrusting their merchandise to a retailer, vendors can take advantage of the retailer’s already established storefronts to sell their products.
Retailers often have an established customer base and a physical or online presence that allows them to reach a wider audience than vendors if they sold their products alone. Retailers often handle marketing and promotion, which can lead to increased visibility of the vendor’s products. Retailers may have established customer relationships and marketing channels that vendors can leverage. Vendors can thus increase their sales.
Also, selling on consignment is advantageous for a vendor who wishes to sell to a very specialized public. Some retailers specialize in certain niches or markets, making it easier for vendors to reach a specific audience. They might not be able to reach those people in other ways.
Retailer’s Experience and Expertise
Retailers often have some expertise in marketing and selling specific types of products. Vendors thus benefit from the retailer’s knowledge and experience to effectively promote and sell their merchandise.
Also, the fact that the risks and profits are shared between the vendor and the retailer encourages the latter to actively promote and sell items on consignment, because they earn a commission on each sale.
Energy and Money Savings for Inventory Management and Warehousing
Vendors can free up storage space by consigning goods and therefore avoid storing them indefinitely. In fact, it is generally the retailer who takes care of storing the products on consignment and managing the inventory, which means that the vendor does not have to take care of it. This is particularly beneficial for businesses with limited storage capacity.
Reduction of Overhead Costs
Vendors can save on overhead costs related to maintaining their own physical retail space, staffing and marketing efforts. This can lead to money savings and increased profitability.
Also, for new or unproven products, consignment can be used to test market demand without committing to large production runs or significant inventory expenses.
Why Do Retailers Choose to Sell on Consignment?
Retailers choose to sell products on consignment because this model allows them to have a more varied product line, have a constant stream of income, minimize risk to themselves and save money. This is all possible because they are not the owner of the products on consignment. Here are the reasons why consignment is beneficial for some retailers.
Diverse Product Range
Consignment allows retailers to offer a wider range of products without the need to invest in purchasing inventory upfront. This can make the retail space more attractive to customers and increase traffic in the store.
Also, consignment often brings unique items, unlike any other or handmade, which may not be readily available from wholesalers or other distributors. This can attract customers looking for certain specific products.
In the consignment model, retailers do not need to purchase inventory, reducing the financial risk.
The risks of unsold items, loss, damage or theft are shared between the vendor and the retailer. The vendor is responsible for supplying the goods in good condition and as described in the contract. If the products are of poor quality or do not meet the expectations of the retailer or customers, this can lead to customer complaints, returns and damage to the reputation of both parties.
Steady Stream of Income
Retailers generally earn a commission on the sale of items on consignment. This provides an additional source of income for the store. They only pay for products once they have been sold, making it easier to manage cash flow.
Retailers save money because they don’t have to pay upfront for the merchandise. If it doesn’t sell, the retailer doesn’t lose money.
Consignment sales have some disadvantages, but vendors and retailers make the decision to sell on consignment because the benefits can outweigh the downsides and because this business model can be very profitable for all parties involved.
In conclusion, in a consignment sales partnership, the vendor (or consignor) retains ownership of the merchandise until it is sold to the customer. The owner of consignment is, then, the vendor. The consignment sales business model sometimes proves very profitable for both the vendor and the retailer. The different business models can be very beneficial or disastrous for a retailer. They must therefore ensure that they choose the ideal model according to their target audience, the products and their industry.