Caution: Consignment Purchases Are Dangerous

How can a consignment purchase possibly be dangerous? Have you lost your mind Mr. Brown? It’s a hot deal and without risk. Bring the goods into the store and do not have to pay for it until it’s sold. This is a no risk, no cost deal. Not!

First off, every time you bring inventory into your store, there is a cost for doing so beyond the cost of the inventory. When you pay for merchandise is generally not a component of inventory carrying costs. As soon as product enters through the back door the cost meter switches on.

Consider the following costs associated with inventory: insurance, handling and warehousing costs, shrinkage (e.g. theft), obsolescence and opportunity costs (if you own “X” you can’t buy “Y”). Additionally, if you are not under pressure to move the inventory (because it’s on consignment), you have no incentive to promote or feature the item or take other steps to sell the inventory on a timely basis.

Then if the items in question are not selling and you exercise your option to return the merchandise, you will have incremental handling and shipping costs. If the vendor says you are short by a certain amount or certain goods came back damaged, and they want to invoice you for the short or damaged amount you will incur these additional charges.

If you as a buyer are not entirely committed to the salability of certain items, you simply shouldn’t buy it. There is both a cost and risk associated with buying goods on consignment.

Knowing the risks

Buying on consignment is similar to placing large preseason orders with “dating” terms, e.g. order in February, take delivery in May and pay for it on October 10th. Often the due date is well before the prime selling period. In doing so, you the buyer, presume to know what the weather will be like, what competing products will be on the market, how much and how effective the vendor’s advertising will be, which competitors will be selling the same merchandise, what the state of the economy will be and what geo/political forces will be at play to help or hinder sales.

Ordering and taking delivery six months before the prime selling season is risky at best. The usual result is stock outs, stock excesses, unnecessary markdowns and disappointed customers who want to buy “this” instead of “that” which you purchased. Retailers are just not good at prognostications.

Both you and your business would be money and markdowns ahead by ordering for short periods of time or, at the very least, placing a series of orders with scheduled ship dates and hard cancellation dates.

A San Diego consignment store

Business is tough enough without buying on consignment or placing large dated orders. As mentioned above, once inventory enters the store, the cost meter clicks on. In either instance, consignment or dated orders, the dealer is performing a great favor for the vendor: the cost of warehousing, handling and insuring is passed from vendor to dealer and without cost to the vendor nor benefit to the retailer.

Moreover, excess or slow moving inventory, consignment or otherwise, will lower turns, lower margins and increase costs.

All store inventory is in competition with all other inventory in the store. It competes for shelf space, consumer spendable dollars, sales staff time and attention and reduces purchasing opportunities (if you already own this, you can’t buy that). The issue of when inventory is paid for is not a part of evaluating the margin return on inventory.

When a retailer “owns” the inventory, then appropriate attention is given. But when it’s “on consignment”, then attention is lacking. Unfortunately, all of the normal carrying costs associated with inventory continue.

Should you ever buy on consignment? Generally speaking, the answer is no. If you do not have the conviction that the product will sell, then you should not invest in the goods. Remember, when you own it and have paid for it, there is a much stronger incentive to monitor the sales and make sure the inventory sells out on a timely basis.