Consignment Considerations in a Retail and Resale Revolution

By: Christian Wolgemuth

Consumer habits and shopping preferences change constantly. Spontaneous trends, social issues, and traditional marketing all influence the types of products that consumers seek and happily spend their money on.  Driven by a desire for vintage goods, unique items, and great deals, consumers are flocking to consignment shops (both brick and mortar and online) to make those purchases.  The consignment industry and individual businesses are growing at a rapid rate in order to keep pace with those consumer demands, creating amazing opportunities for entrepreneurs.

For both consignors and consignees, there are customers to satisfy and profits to be earned, but entrepreneurs looking to jump into the consignment game need to be aware of certain risks and ways to mitigate those risks.

Consignment insurance is a way to mitigate some of those risks.

the business opportunity

There is no shortage of deals to be had at thrift stores like Goodwill or Salvation Army, and yard sales and auctions are not going anywhere anytime soon either.  And while consignment shops are not a new concept, their recent growth has been explosive.  Given the rapid growth, it can be hard to find exact revenue figures; reasonable estimates for total revenue in the United States for 2018 were between $17.5 billion and $24 billion.  Continuing the trend, revenue could surpass $50 billion by 2023.

Research shows that 12-15% of Americans will shop in a consignment or resale shop in a given year, while only 11% will shop in a factory outlet mall.  Realistically, that is not much less than the 19.6% who will shop in a traditional apparel store or the 21.3% who will shop in a major department store.  Consumer interest—and the opportunity for entrepreneurs—is not limited solely to used clothing and apparel.  For example, antiques account for 13% of annual consignment and resale revenue, and new items are commonly being sold on a consignment model as well.

One of the biggest opportunities for entrepreneurs is in the consignment of new, small-batch goods, as well as pre-owned, specially-curated items.  Examples of new products could be hand-made items like artwork, jewelry, and other small housewares; specialty pre-owned items could include antiques of a particular theme or collectibles.  Regardless of what the products are, the consignment business model offers attractive benefits to the entrepreneurs on both sides of the relationship—the consignor and the consignee.

The benefit to the consignment model to the consignor (the party making and/or supplying the goods) is in being able to enter the retail (or resale) world without taking on all of the overhead costs and risks from the beginning.

The consignor can focus on developing a product, a brand, and testing marketability without having to worry about launching an actual store.

Once the consignor acquires or manufactures the goods, they are turned over to the consignee to be sold to the consumer.  Once the sale is made, the consignor gets the proceeds and the consignee takes a commission (the rate of which would be negotiated by the parties ahead of time).  Later on, once the product has proven to be marketable and profitable, the entrepreneurial consignor could choose to open a traditional retail store specific to her brand, should she wish to do so.

The advantages to the consignee are complementary to those of the consignor.  The consignee does not have to worry about the costs or hassle of product development or manufacturing.  Instead, the consignee can focus on running the brick and mortar operations and providing a unique retail experience to the consumer.  The consignee earns his commission when an item is sold and is not burdened with the financial responsibility of acquiring and maintaining inventory.

the risk

It should not be surprising to hear that I love exploring the myriad consignment shops in Central Pennsylvania selling all sorts of interesting items and antiques.  I’m sure you can imagine my surprise when I heard that one of my favorite local establishments was robbed of nearly $10,000 of jewelry, and that got me thinking—when something like this happens, who is financially responsible and how can that risk be mitigated?

the solution

The risk of loss and damage to inventory from theft, fire, and natural disasters is very real to any consignment business—and this risk applies to both the consignee and the consignor.  Ultimately the consignee is financially responsible for the consigned goods once the consignee has taken possession from the consignor.  This means that if inventory in the consignee’s shop is stolen, burnt up in a fire, or washed away in a flood, the consignee is liable to the consignor for the value of the goods.  Consignment insurance provides a way to mitigate this significant risk of loss for both parties.

The consignee is the insured party responsible for maintaining the policy.  The value of the policy must be large enough to cover the value of the goods and inventory on consignment in the consignment shop from all consignors with whom the consignee is doing business.  Depending on the nature of the relationship between the parties, the consignee may be able to pass a portion of the cost of the premium on to the consignor through the consignment agreement.

The consignor would also be left empty-handed in the event that the consignee goes belly-up after the inventory is lost or destroyed.  To make sure this does not happen and to make sure the consignor receives compensation for her products, the consignor should require in the consignment agreement that the consignee maintain adequate insurance.  If the consignee refuses to do so, the consigner may want to consider doing business with another consignment shop.  After all, the number of consignment shops has increased by 7% per year for the last two years.

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Christian Wolgemuth is a recent graduate of Penn State Dickinson Law. He is currently a Law Clerk at McNees Wallace & Nurick LLC helping clients navigate the continuously changing world of cybersecurity and privacy law.

 

 

Sources:

“Used Merchandise Stores Industry Profile” – First Research –  http://www.firstresearch.com/industry-research/Used-Merchandise-Stores.html

“thredUP 2019 Resale Report” – thredUP – https://www.thredup.com/resale

“Industry Statistics & Trends” – NARTS: The Association of Resale Professionals – https://www.narts.org/i4a/pages/index.cfm?pageid=3285

“Ranking the top 10 vintage and consignment shops in central Pa., according to Yelp” – Penn Live – https://www.pennlive.com/life/2019/06/these-are-the-top-10-used-vintage-consignment-stores-in-central-pa-ranked.html

“Police seek people involved in burglary at Burning Bridge Antiques” – Lancaster Online – https://lancasteronline.com/news/local/police-seek-people-involved-in-burglary-at-burning-bridge-antiques/article_750ac604-3af8-11ea-a5d3-bf5353dce322.html