What Is Consignment: Meaning and Benefits

If you’re a business-savvy entrepreneur looking for new opportunities to boost your bottom line, the consignment model could be an appealing option for you. It comes with many benefits for both consignors and consignees and is prevalent across multiple industries.

To find out what is the meaning of consignment and how you can take advantage of it, keep reading below.

What Is Consignment and How It Works

In the commercial world (note: not in transport, shipping and logistics), consignment is a business model and legal arrangement. This agreement stipulates that the owner of certain goods gives another person or business entity the right to sell and market them on their behalf for a specified period, called the consignment period.

The owner of the goods is called the consignor while the entity selling the goods is called the consignee.

In essence, when the consignee sells the goods, they receive a percentage of the payment. This can be a flat rate fee or a commission payment.

Consignees are often called consignment shops and can be considered a consignor’s best friend because, as sales partners, they not only store, manage inventory, showcase and market the products but also handle all the sales-related activities.

It is also worth noting here that the main difference between operating on a consignment and a wholesale business model is that in consignment deals, the consignor retains ownership of the items until they sell. In contrast, in wholesale, the buyer acquires ownership once payment has been affected. In traditional retail, most stores buy a merchant’s product in bulk first and then resell onto customers later.

Types of Consignment Agreements

In the world of consignment selling, the categorization of the arrangement is mainly differentiated based on the ownership of the consigned goods. 

You are likely to encounter two main types of consignment agreements:

• Consignment shop contract: in such consignment arrangements, the consignor and consignee enter into an agreement where the latter puts their goods up for sale in the consignee’s shop. The consignor retains full ownership of the goods until sold. This is the point when the title changes hands. The new owner is responsible for any sales tax, unless the parties have entered into another arrangement beforehand.
• Consignee/consignor agreement: in this consignment arrangement, the consignee becomes both the owner of the item and any profits from the sale, which are then shared with the consignor. In some cases, it is possible to enter into an agreement where the consignor buys back any unsold goods by a certain previously agreed-upon date and price.

The consignee/consignor arrangement is the contract most widely used with this business model.

Benefits of Consignment 

The consignment arrangement presents advantages for both parties involved in the agreement and can be a great win-win opportunity. Let us explore the advantages for both consignors and consignees. 

Advantages for Consignors and Consignees

When it comes to selling their goods at a consignment store, consignors can enjoy the benefit of not having to own a physical or online storefront. In the case of the former, the consignor does not need to spend money on renting physical premises. In the latter case, this means doing away with creating listings or maintaining the online shop.

A consignor also gains from the advantageous position of neither having to pay for nor carry out marketing research or advertising activities to attract an audience and customers.

Furthermore, consignors are not usually involved in shipping and delivery as consignees take care of this, including arranging for the collection of the merchandise.

Advantages for Retailers (Consignees)

There are also benefits of consignment for a retailer, or consignee.

Firstly, they can enjoy improved cash flow as they are not required to pay for inventory upfront. In that line of thought, they can also return any products that don’t sell back to the consignor. When such items sell, you can also negotiate favourable terms for your business.

Another advantage is the ability to build a loyal customer base as your business will develop a reputation for sourcing items that are in-demand.

Key Industries Using Consignment

Many industries — both brick-and-mortar and online shops — offer consignment options. A notable example of a company that can be considered to sell on consignment is eBay. eBay offers an online marketplace and takes a percentage of the sale.

Apart from e-commerce marketplaces, physical stores also take advantage of consignment. 

Some popular product categories that are sold include:

• Artwork;
• High-end fashion items;
• Clothingand footwear;
• Athletic equipment and gear;
• Accessories;
• Books;
• Toys and baby accessories;
• Pet care;
• Antiques and collectibles;
• Furniture;
• Musical instruments;
• Jewellery.

In addition, second-hand shops, auction houses, and thrift stores are generally known for selling goods on consignment. Art galleries are also considered a form of consigning where the artist doesn’t pay for the space to display their artwork but the gallery takes a share of the cut if any of the art pieces sell. However, the sale of property is not considered consignment.

Legal Considerations in Consignment Agreements

The word consignment derives from “consigner” in French. It essentially means “handing over” or “transmitting”.

There are several important legal considerations to be aware of when entering into a consignment agreement. 

The following legal aspects are worth considering:

• The possession of goods transfers from one party (consignor) to a second party (consignee). This is not a relationship between a buyer and seller where there is a transfer of ownership. As such, the consignor retains the title to the merchandise.
• The consignor is responsible for all the expenses associated with the consignment.
• The consignee does not bear responsibility for damage to goods during transport and delivery.
• The consignor sells their goods at their own risk. Any profit or loss belongs to them only.
• The consignor is responsible for paying the consignee a flat fee or a commission for merchandise sold.
• Most consignment agreements set a time frame for the sale of the goods, such as 60 to 90 days. After such a period has expired, the item’s availability for sale expires as well. It is possible for consignees to reduce the item’s price during this period to promote its sale.
• Only once the goods are purchased by a buyer does ownership of the product change title.

In cases of bankruptcies or liquidations, it’s worth noting that any consignment stock is considered the ownership of the consignor and not the consignee.

Risks and Challenges in Consignment

Risks and challenges may present themselves for both sides in a consignment. The cons of the consignor and consignee roles can be observed from the point of view of each. 

For consignors, the primary risk is lower revenues as they are not selling directly to buyers. Consignees and consignment shops, indeed, may charge high commissions, reducing profitability. Furthermore, payment terms can be lengthy and consignors have limited customer interactions, reducing access to valuable audience data. As such, it involves ceding a large part of control over to the consignee.

For consignees, the major downsides, which may arise, are supply uncertainty and complex inventorymanagement as they are required to provide space (physical or online). The consignee activity, therefore, presents challenges along the domains of inventory organisation and security, procurement and even extra marketing costs. 

Despite these risks, consignment presents an innovative and profitable opportunity for sellers without a physical store and retailers that can have greater flexibility over payment terms, stock, inventory and storage of the goods.

Case Studies: Successful Consignment Models

We already explored how consignment agreements are applied in a number of domains such as online marketplaces and art. If you are still wondering how you can make use of consignment arrangements, it is worth exploring the second-hand market. 

Two examples of a successful consignment model that are worth exploring include the following: 

• ThredUp: online store providing high-quality second-hand fashion. Their consignment model is based on receiving used clothes from consumers and offering them a percentage of the final sale price. In return, Thredup handles the pricing, marketing, photographing and listing the products for sale. 
• Sign of the Times: online and offline shop for pre-owned luxury goods, namely handbags and jewellery. Their option to sell with consignment comes with a free home collection service. Depending on the product, they work with commissions of up to 80% but present the opportunity for cash upfront for specific items.

There are many consignment shop examples apart from these two. In fact, most are related to the second-hand or thrift store industry and can include a number of item categories, depending on the niche in question.

Conclusion

Although in the past, it could be said that most consignment shops were physical, brick-and-mortar locations, today, the online world is changing that.

With the ability to earn more sales with less risk, goods that are consigned offer the two parties a special arrangement for the exchange and distribution of goods, giving them both the chance to improve their revenue with less risk.

Frequently Asked Questions

What is involved in the consignment process?

A consignor and a consignee act together in the resale of goods. The consignee provides a storefront service and marketing for the merchandise until the item sells and once the item is sold, its sale value is shared between the consignor and consignee based on their arrangement. A consignee may engage in invoicing the consignor and the consignor may give the consignee a credit note, depending on the terms of their contractual agreement.

What are the typical clauses in a consignment agreement?

The typical consignment agreement is a special form of business structure where product owners offer consignees the chance to possess their goods until there is a purchase. As such, it will contain details such as the date and parties involved, a description of the goods and terms of sale, the consignee’s responsibilities, commission rates or flat payment terms, limitations on the time frame for selling goods, clauses related to breach of contract or disagreements, etc.

What is the crime when a consignee breaches a consignment agreement?

If a consignee breaches a consignment agreement by altering the goods to a use not contemplated in the agreement or keeps the proceeds of the sale, this is known as a crime of conversion.