Consignment

What Is Consignment?

Consignment is a business finance arrangement where goods are delivered by an owner (the consignor) to another party (the consignee) for sale. The consignee holds the goods and sells them on behalf of the consignor, typically for a commission, without taking immediate ownership of the items. Crucially, the consignor retains legal title and ownership of the goods until they are sold to a third-party buyer²⁴. This distinct characteristic makes consignment a popular business model for businesses looking to expand their sales channels or manage inventory without incurring upfront purchasing costs.

Consignment differs from traditional sales because the consignee does not pay for the goods until they are sold, transferring a significant portion of the risk management to the consignor. This arrangement allows consignees, such as retail stores or online platforms, to offer a wider variety of products without the immediate financial burden of purchasing and storing stock²³.

History and Origin

The concept of consignment has deep roots in trade, predating modern commercial practices. Its origins can be traced back to early forms of commerce where goods were entrusted to agents for sale in distant markets, reducing the need for merchants to travel with their entire stock²². This model allowed for a broader distribution of goods and enabled access to new consumer bases.

The modern incarnation of consignment began to take shape with the rise of specialty boutiques in the 20th century, providing a flexible way for smaller stores to offer unique products without the burden of unsold inventory²¹. The advent of the internet in the early 2000s further revolutionized the industry, leading to the emergence of dedicated online consignment platforms that provided broader reach and authentication services, particularly for high-value items like designer apparel²⁰.

Key Takeaways

• Consignment is a business arrangement where a consignor provides goods to a consignee for sale, but retains ownership until the goods are sold.
• The consignee typically earns a commission on sold items and is not required to pay for goods upfront, reducing their financial risk.
• It's a common model in industries like fashion resale, art, and furniture, where inventory costs can be high.
• Properly drafted legal agreements are essential to define responsibilities, payment terms, and risk allocation between the consignor and consignee.
• Revenue recognition for the consignor occurs only when the goods are sold to the end customer, not when they are delivered to the consignee.

Interpreting the Consignment

In a consignment arrangement, understanding the underlying dynamics of risk and reward is crucial. For the consignor, placing goods on consignment means extending credit, in a sense, as payment is deferred until a sale occurs¹⁹. The consignor bears the risk of the goods not selling, or being damaged or lost while in the consignee's possession, although a well-drafted contract typically shifts the risk of loss to the consignee upon delivery¹⁷, ¹⁸.

For the consignee, interpreting a consignment deal means recognizing it as an opportunity to expand product offerings with minimal impact on working capital. Their success hinges on their ability to effectively market and sell the consigned items, as their compensation (commission) is directly tied to sales performance. Both parties must monitor cash flow carefully, as income generation is contingent on sales to the end customer.

Hypothetical Example

Consider "Artisan Furnishings," a small, high-end furniture maker (consignor) that wants to reach more customers without opening its own physical store. Artisan Furnishings enters into a consignment agreement with "Design Loft," a spacious furniture showroom (consignee) in a busy urban area.

1. Agreement: They sign a contract stating that Design Loft will display Artisan Furnishings' custom-made dining tables. Artisan Furnishings retains ownership, and Design Loft will receive a 30% commission on each table sold. Design Loft is responsible for insuring the tables against damage or theft.
2. Delivery: Artisan Furnishings delivers three dining tables, each valued at $5,000, to Design Loft. No money changes hands at this point.
3. Sale: A customer visits Design Loft and purchases one of Artisan Furnishings' dining tables for $5,000.
4. Payment: Design Loft collects the $5,000 from the customer. According to the consignment agreement, Design Loft keeps its 30% commission ($1,500) and remits the remaining 70% ($3,500) to Artisan Furnishings.
5. Inventory Adjustment: Artisan Furnishings updates its inventory records to reflect one table sold, and Design Loft updates its sales figures. The remaining two tables continue to be displayed under the consignment arrangement.

This scenario illustrates how consignment allows both parties to leverage each other's strengths—Artisan Furnishings gains market access, and Design Loft expands its offerings—while managing financial exposure.

Practical Applications

Consignment is widely used across various industries, providing flexible arrangements for both suppliers and sellers. One of the most prominent applications is in the fashion resale market, particularly for luxury and secondhand apparel. Platforms and boutiques specializing in resale often operate on a consignment basis, allowing individuals to sell pre-owned items while the platform handles marketing, sales, and logistics. This sector has seen significant growth, with the global secondhand apparel market projected to reach $350 billion by 2028.

B¹⁶eyond fashion, consignment is common in:

• Art Galleries: Artists often place their works in galleries on consignment, with the gallery earning a commission upon sale. This enables artists to showcase their work without requiring the gallery to purchase all pieces upfront.
• Furniture and Home Decor: For bulky and high-value items, consignment helps retailers manage high inventory costs and allows suppliers to reach customers through established showrooms.
• ¹⁵ Automobiles: Some used car dealerships or specialty vehicle sellers may operate on a consignment model, especially for classic or high-value cars.
• E-commerce Platforms: Many online marketplaces facilitate consignment by connecting sellers with buyers and managing payment processing, though the underlying principle of delayed ownership transfer remains.

This model provides advantages like reduced financial strain for retailers, diversified product offerings, and lower storage costs for suppliers, enhancing the efficiency of the overall supply chain.

#¹⁴# Limitations and Criticisms

Despite its benefits, consignment arrangements come with specific limitations and risks for both consignors and consignees. One major concern for consignors is the potential loss of control over their goods once they are in the consignee's possession. Wh¹³ile the consignor retains legal title, the physical separation of goods can lead to challenges in inventory tracking, potential damage, or theft.

From a legal standpoint, consignors face significant risks, particularly if the consignee's business encounters financial difficulties, such as bankruptcy. Under Article 9 of the Uniform Commercial Code (UCC) in the United States, consigned goods in the consignee's possession can become subject to the claims of the consignee's creditors unless the consignor takes specific steps to perfect their security interest. Fa¹¹, ¹²ilure to properly file a UCC Financing Statement and provide notice can relegate the consignor to the status of an unsecured creditor, potentially losing their goods in a bankruptcy proceeding.

F⁹, ¹⁰or consignees, while the lack of upfront working capital investment is an advantage, managing and reporting consigned inventory can add complexity to their accounting and financial statements. Furthermore, their profit margin is directly tied to the commission rate and sales volume, which might be lower than traditional wholesale markups. Accounting for revenue recognition also requires careful attention, as revenue should only be recognized when the goods are sold to the end customer, not upon receipt of goods from the consignor.

#⁷, ⁸# Consignment vs. Wholesale

Consignment and wholesale are both common strategies for product distribution, but they differ fundamentally in terms of ownership and risk.

In a consignment arrangement, the consignor (the original owner) retains ownership of the goods even after they are delivered to the consignee (the seller). The consignee acts as an agent, selling the goods on the consignor's behalf and typically earning a commission only when a sale occurs. This means the consignee does not purchase the inventory upfront, thereby absorbing less financial risk for unsold items. Unsold goods can often be returned to the consignor.

In wholesale, a retailer (the buyer) purchases goods directly from a manufacturer or distributor (the seller) at a reduced bulk price. The retailer takes immediate ownership of the goods upon purchase. This means the retailer assumes the full risk of selling the inventory; if items do not sell, the retailer bears the loss. The retailer's profit comes from the markup applied when selling the goods to the end consumer. Wholesale typically involves higher upfront costs for the retailer but often offers greater profit margin potential if the goods sell well.

The primary distinction lies in when ownership transfers and who bears the inventory risk. Consignment delays ownership transfer and shifts much of the risk to the supplier, while wholesale involves immediate ownership transfer and places inventory risk squarely on the retailer.

FAQs

What types of goods are typically sold on consignment?

A wide range of goods can be sold on consignment, but it's particularly common for items with higher individual values, limited runs, or those that might otherwise incur significant storage costs. This includes designer clothing, art, antique furniture, jewelry, musical instruments, and sometimes even cars. It⁶ is also a popular option for small business owners or individuals selling unique or secondhand items.

How does a consignee make money in a consignment arrangement?

A consignee earns money through a commission, which is a predetermined percentage of the sale price of each item sold. For example, if a consignment agreement specifies a 30% commission, and an item sells for $100, the consignee keeps $30 and remits $70 to the consignor. Th⁵is incentivizes the consignee to actively sell the goods.

What happens to unsold items in a consignment agreement?

The handling of unsold items is typically outlined in the consignment agreement. Common scenarios include the consignee returning the unsold goods to the consignor after a specified period, or the consignor agreeing to a price reduction to encourage sales. The agreement should also cover the duration of the consignment period.

#⁴## What are the main benefits of consignment for the consignor?

For the consignor, key benefits include accessing new sales channels without the overhead of opening their own retail space, testing market demand for new products with less risk, and potentially reducing storage costs. It³ allows them to leverage the consignee's existing customer base and marketing efforts.

How does consignment impact revenue recognition for the consignor?

For the consignor, revenue from consignment sales is recognized only when the goods are sold to the end customer, not when they are delivered to the consignee. Th¹, ²is is because the consignor retains control and ownership of the goods until the final sale, and there is no unconditional obligation for the consignee to pay until that point.