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What Is a Consignment Agreement?

By Ray Hawk
Updated May 16, 2024
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A consignment agreement is usually a formal or informal contract between a person who produces a particular product and a retailer who agrees to stock it on their shelves for sale, in exchange for a portion of the profits. The product ownership is retained by the creator, not the retailer, and all responsibility for loss, damage, and expenses of delivery and custom display are usually those of the creator of the product. The retailer, or consignee, is generally offering the business location as a point of contact with customers for the sale of the product and otherwise not assuming responsibility for expenses incurred.

Displaying inventory based on a consignment agreement is often of benefit to both small producers of products and small retail locations that otherwise might have difficulty locating vendors of products for their store space. The store also benefits by not having capital tied up in inventory, and, if a product does not sell, it can end the consignment agreement with the consignor with little perceived loss on its part. In contrast, the small business product producer benefits by the fact that he or she can locate his or her product in multiple outlets without having to actually own and manage the outlets themselves. This provides widespread exposure to customers in various market environments and offers a fast, convenient way to get a start up business going.

It is estimated that over $3 billion US Dollars (USD) alone are spent in the United States every year to purchase craft-related items sold on consignment. Gauging the consignment market overall, however, is a difficult proposition, because consignment sales are often lumped in together with sales data for resale shops that sell used products such as clothing, and charitable organizations that take donations and then sell them for whatever profit they can make. The consignment agreement is also used for durable goods sales, such as those of automobiles, furniture, and heavy machinery.

For small businesses considering a consignment sales agreement, there are certain key points for which to look. The retail business needs to be a good match for the type of product being consigned and in a location that receives adequate customer traffic, as a consignment agreement reduces profit margins much more than selling goods outright. The consignor or creator of the product also needs to be aware of how his or her products are being displayed in the store, what fees the store might decide to charge for this, and how excess inventory will be treated. Small shops often have limited storage space, yet, if a product is selling well, they also require enough inventory to keep displays fully stocked at all times.

Every consignment contract should be negotiated independently and an exact fee and payment structure clearly laid out in writing. A store that specializes in consigned goods may be reluctant to take on a new vendor without a proven track record of product sales at other locations, or it may offer consignment on a trial basis first to see if the product will sell. Regardless, it is estimated that the consignment agreement will continue to be a popular way to get small production runs of products into retail locations, with 12-15% of Americans doing their shopping at consignment-based stores as of 2009.

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