Consignment sales entail a trade agreement between manufacturers and retailers whereby the retailer is only obliged to pay the seller if the goods in question sell. This offers the seller a way to get manufacturing inventory some exposure to the buying market, and also protects retailers from risk.
In this article, we outline what consignment sales are, how they work and the benefits and advantages they entail for both the consignor and the consignee.
Breaking down consignment sales
Under consignment, goods are shipped to a dealer (or retailer) who pays you, the consignor, only for the merchandise when it sells. In this situation, the dealer (consignee) has the right to return to you any products which do not sell, free from any obligation to pay you. There are many products which are routinely sold on consignment because of their nature. These include things like light bulbs, produce, eggs, poultry, magazines, newspapers, Christmas decorations, garden seeds, batteries for flashlights, and potted plants.Why should businesses sell their stock on consignment?
Dealers are often inclined to purchase such goods, particularly perishable items, on a consignment basis because if the items do not sell they can avoid any great threat of financial loss. The same goes for items which are mostly in seasonal demand, such as Christmas decorations. Consignment agreements may also be a useful tool when manufacturers are looking to get a new product without a sales record on to the shelves. Consignment deals may give retailers an incentive to buy the product since there is little financial risk involved.Advantages of consignment sales
For manufacturers, consignment sales can be a great way to gain new exposure or additional exposure to the buying market. This is particularly useful for small businesses or businesses which have just started up and need to increase the market exposure of their manufacturing inventory. This can be a productive place for a manufacturers’ products, as it increases the likelihood that consumers will purchase your goods. This is a much more productive option compared to having your manufacturing inventory stored and isolated in a warehouse while waiting for an order from a buyer. For the retailer, since no capital of theirs is tied up in inventory, consignment sales can encourage them to stock goods in inventory. Likewise, it also provides retailers with an incentive to stock seasonal or otherwise newly introduced merchandise which might otherwise be overlooked for lack of demand.Disadvantages of consignment sales
The first obvious disadvantage to consignment sales for the manufacturer is that, although your products are getting exposure on the retailers’ shelves, you make no money on them until they are sold. This means that you must ensure you have enough cash on hand to tide you over, as you may have to wait for extended periods of time before the goods are sold and the retailer pays you. Selling on consignment can also be a risk to the manufacturer since this agreement puts your products out of your physical control. This means that you will not be able to control the damage and shopper abuse that inventory merchandise can be prone to. Likewise, you may not be able to affect shelving decisions according to where and how your products are presented in the retailer’s store. Consignees may be more inclined to give precedence to merchandise which they have outright ownership of, rather than the goods you have sold them on a consignment basis.