Consignment Shops Carry Unique Risks 

A couple of weeks ago, I found myself in a conversation with a woman who had decided to open a consignment store to lower her investment cost.

This sounds like a good idea, but hopeful entrepreneurs should understand that there are some risks in this kind of operation.

Consignment shops generally are stocked with merchandise the store owner did not buy. The owner seeks out or is approached by local crafters, clothing designers and even cooks to carry their merchandise for a percentage of each item sold.

If the merchandise does not sell, it is the crafter's merchandise to markdown, put on sale, or remove. But it is still the store owner's job to run the store, promote, pay sales taxes and handle customer problems.

The major benefits of running a consignment shop are lower initial cost, little or no buying, and little to no merchandise maintenance. Because the largest investment for most retailers is stock, consignment can save the retailer a considerable amount of money.

But running a full-scale consignment business can be tricky. Although you may not be buying the merchandise, you still need to know all about it. And then there is the reliability problem faced by most consignment shops.

Let's say that you have been carrying hand-crafted shelves, and they have been selling well. The crafter only does this as a hobby and works full-time at another job. One day he tells you that he has been transferred to another state and will not have the time to build any more shelves. You have just lost your hottest-selling item, and there is nothing you can do about it.

Even with those kinds of problems, this type of retailing is not something to dismiss. Consignment does not need to encompass your entire shop -- many small specialty shops carry consignment merchandise and their customers don't even realize it.

By combining both the full-service traditional store and the consignment shop, you can in effect increase your profits and lower your overhead.

My best advice for those who wish to bring in consignment goods or open a full-scale shop is as follows:

• Test the merchandise before committing to a large amount of sales space. You have a business to run like any other retailer, and whether you are a full consignment shop or a mixture, you still have sales goals to make. Using valuable sales space for items that will not move only hurts you and your other vendors. 
  
• Make sure you can rely on the supplier. You may not get any guarantee as to what colors and sizes will come in, but as long as the display is maintained and the merchandise comes in on time, you can work with them. 
  
• Make sure you have all your consignment goods on contract that spells out what percentage each party receives for a sale, how often the display will be maintained and by whom and insurance informed. 

Elements of Success is a weekly newspaper column written by David Wing. Copyright (c) Elements of Success. 

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