Article by Ted Hurlbut
In these difficult economic times, with some pretty tough headlines lately about how poorly retailers have been performing, there’s been one segment that’s been getting an unusual amount of attention. In this retail environment, consignment and resale stores have been getting a lot of press. The real story, however, is that these stores have been doing very well all along.
The consignment and resale business is a unique part of the retail landscape. These stores come in all shapes and sizes, from local church operated thrift stores, to designer boutiques and high end home décor shops. I’ve been exploring quite a few lately, and for me the most intriguing, and most instructive, are the high-end consignment shops. I found that spending some time shopping in the very best of these stores highlights and reinforces several classic retail fundamentals.
First, let’s make the distinction between consignment shops and resale stores. The defining characteristic of a consignment shop is that the store rarely takes ownership of the merchandise. For the most part, merchandise comes to the shop from the local community. In some cases, consignment merchandise is augmented from estate sales and auctions to round out assortments.
Because consignment shops don’t take ownership of their merchandise, their financial structure is very different from a regular retailer. They don’t carry a large inventory on their books, so they don’t have the same financing or accounts payables issues that a regular retailer does. They are not paying for merchandise upfront, they merely distribute the consigner’s portion of the proceeds after the sale has been made.
Most consignment agreements call for the consigner and consignment shop to split the proceeds of the sale fifty-fifty. For the consignment shop, this guarantees a 50% margin on everything that’s sold. In addition, most consignment shops have an automatic price reduction program, with reductions taken automatically at 30 and 60 days, with merchandise coming off sale after 90 days.
With the margin locked in at 50%, regardless of the ultimate selling price, the consignment shop’s primary objective is to drive sales per square foot. This leads to the first point that independent retailers can take note of.
One of the critical skills in the consignment business is to price each item to maximize the overall sales per square foot. This is achieved by pricing to strike a balance between retail price and rate of turnover. If the price is too high, it may take 30 or 60 days before the automatic price reduction moves the item. If the price is too low, the item will move very quickly, but not generate as much cash as it might have. The key is finding the right balance. These pricing decisions represent classic retailing at its purest. Pricing isn’t based on cost (in fact, cost is determined by price), price is based on retail market fundamentals.
The next critical skill is in knowing what to accept for consignment, and what to take a pass on. Unlike traditional retailers who have to take ownership of their inventory, and are constrained by financial realities, consignment shops have no such constraints. The only thing constraining them is space, and for many that’s no constraint at all. But the best of the best are very selective, only offering merchandise in carefully defined categories, and accepting only the most desirable merchandise, in only the very best condition.
This leads to the second point for independent retailers to note. A retailer serves many functions, but one of the most important is as a filter between vendors and customers. A large number of vendors will try to sell a retailer their line, but a retailer will select a small portion of what they’re shown. In doing this, the retailer is recognizing that they can only effectively represent and market a select group of items.
An independent retailer that doesn’t effectively perform this filtering function ends up with too many items in their store, making the store difficult to shop, and, in effect, asking their customers to sort it out themselves. Customers are only willing to do this so much before they give up. You can see this clearly in many lesser consignment shops, where merchandise is literally overflowing, making it next to impossible for a customer to take it all in, much less find the item that captures their imagination.
An independent retailer must know how selective they must be, in order to provide a compelling merchandise assortment and presentation that maximizes sales while turning the inventory quickly. This is classic retail merchandising. In very well-run consignment shops, the right balance has been struck, where every item is presented to its best effect.
A well-run high-end consignment shop is an ever changing collection of exquisite treasures, appealing to a discerning clientele. These shops are imaginatively merchandised and have successfully created a very warm and inviting atmosphere. They have a very high percentage of loyal customers, customers who come in at least once a month, customers they know on a first name basis. Many are regular consigners as well.
Because every item is a one-of-a-kind, and because each item is priced to turn over quickly, these shops are able to convey a powerful sense of urgency to their customers. It’s this sense of urgency, and the thrill their customers get from discovering the next treasure, that have enabled the very best consignment shops, under the retail radar, to become retail jewels.
Shopping your competition, and studying your competition, is one of the keys to retail success. When it comes to the consignments shops, however, there’s a lot that any independent retailer can learn from studying the very best consignment shops in their area, regardless of whether they carry similar merchandise or not.
About the Author
Ted Hurlbut is the Principal of Hurlbut & Associates, a retail consulting and business advisory firm based in Foxboro, Massachusetts. He is focused on helping his clients increase sales, margins, profitability, and cash flow, and is particularly attuned to the challenges facing smaller, independent, entrepreneurial retailers. You can learn more about Ted, and Hurlbut & Associates, at http://www.hurlbutassociates.com.
Find More Independent Retail Articles
