2017-11-29 00:00:00 Starting a Business English Learn about selling goods on consignment; how it works, what the advantages are, and whether this model is right for your store. https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/12/consignment-store-owner-poses.jpg https://quickbooks.intuit.com/ca/resources/starting-business/operate-consignment-store/ Creative Business Solutions: Operating a Consignment Store

Creative Business Solutions: Operating a Consignment Store

4 min read

In an economy as large and diverse as Canada’s, there are many ways to build a successful retail business. One of the less-traditional ways to organize a business selling goods is to operate it as a consignment store. Consignment shops are in many ways similar to other retailers, but with a few crucial differences that can potentially give your store an advantage in the market.

How Do Consignment Stores Differ From Traditional Retail?

Traditional retail stores follow a an old and familiar business model. They set up a retail space for the public to visit, buy inventory from suppliers at the lowest price they can find, and then sell those goods to customers who visit the store. Consignment differs in that the goods on display in the store are not your purchased inventory. The items continue to be owned by your suppliers until you ring them up for a buyer. On the surface, consignment stores can look just like regular retail shops, and to customers there is usually no obvious difference in the way they shop. You, however, gain several advantages from organizing your business this way.

Advantages of Selling Goods on Consignment

The first advantage of selling goods on consignment is that your store doesn’t have to own anything of its own. In the strictest sense, your store makes its money by renting floor space to other retailers, who then use their spot on your sales floor to display wares. You might also negotiate a share of the sales you make. Once an item sells, you, as the store operator, ring up the purchase and receive payment the way you would if you had owned the item yourself. Under most consignment agreements, you are entitled to keep a share of this revenue, which may exceed the profit margin many brick-and-mortar stores earn.

In addition to the potential for profit, operating as a consignment shop also indemnifies you in case anything goes wrong. Because some of your revenue may come from renting floor space (in addition to splitting profits with sellers), you are likely to feel less pressured to make a sale, which can make a more relaxed environment for your customers and encourage them to come back. This approach also lets you refer warranty and replacement requests to the inventory owners, rather than having to issue refunds or perform service calls yourself.

Consignment stores also typically have more freedom to experiment. Because you’re not buying the goods yourself, there’s very little risk to stocking unusual or niche items for sale. If, for example, you found a supply of alpaca-wool earmuffs on your last vacation to Peru, you might be hesitant to buy 100 units with your own money; there is a chance you won’t sell enough to turn a profit. If a seller approaches your shop with 100 alpaca-wool earmuffs of his own, however, there’s almost no risk to letting him try to sell them in the space he’s renting from you.

Another advantage of the consignment model is financial. Consignment store owners are only loosely tied to their inventory, since their revenue typically comes from space rental and split proceeds. This puts distance between you and the daily ups and downs of retail sales, and it encourages a more strategic approach to cash management and growth. By having a stable cash flow, consignment retailers ensure their revenue is easier to forecast and manage. This can be a big help when presenting financial information to a bank, for example, to take out a loan to expand.

Things to Be Aware of When Selling Consignment Goods

The consignment model isn’t perfect in every way, of course. If it were, there would be no traditional retailers left. Consignment stores invest less in each item of inventory, and so the profits realized on each sale tend to be lower. An Amish quilt that originally cost $200 for you to acquire for sale from a supplier, might bring $250 at retail. If you had bought the quilt yourself and taken the risk it might not have sold at all, the $50 profit would all be yours. Because it was acquired on consignment, however, your share of the eventual sale might be as low as $10, with the other $40 going to the owner, depending on how you’ve negotiated your contracts. Remember that you are responsible for paying the store’s overhead, and that a reduced share of profits may not be enough to cover building upkeep, energy bills, property tax, and so on.

As the owner of a consignment shop, you may also find yourself working what amounts to a second job managing paperwork. In a retail store where you own all the inventory, your interaction with your suppliers usually ends when you buy their products wholesale. Consignment store managers, however, must maintain an ongoing relationship with their sellers and report each sale to them. In a large shop, one with perhaps hundreds of sellers renting space, just keeping track of what sold each day can compel you to hire an extra employee to lighten the load.

Should You or Shouldn’t You?

It’s worth remembering that there’s no firm split between consignment/non-consignment retailers in the real world. As the owner of a store, you are, of course, free to experiment with both models to see which suits you better. You may, for instance, decide to convert 10 percent of your floor space to consignment goods as a test of whether the model works for your shop. If it does, you’re free to gradually replace your own inventory with sellers’ goods as quickly or as gradually as you wish. If consignment turns out not to be a good approach for you, you can always switch back. Either way, the consignment method of selling goods makes this model attractive for many shop owners looking for a new way to do business.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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