Consignment agreements - the benefits and pitfalls
It is a common problem for suppliers at all levels of the fashion industry to go through times where they are faced with a surplus of stock which they need to shift but a lack of interest from retailers willing to purchase the stock upfront, writes Andrew Petale.
It may be the case that the brand has not yet established a market or that the retailer simply does not wish to invest in a product which they may not be able to sell.
A consignment agreement can provide a solution to this problem, although both parties should be aware of the potential difficulties which can occur and the ways in which an effectively crafted agreement can minimize the potential for disaster.
Before embarking upon the task of crafting a consignment agreement, it is important to establish the motivations of both parties. For the retailer, the incentive will often be the lack of financial risk. It allows them to test the market for a particular line or brand and gain a commission on sales without having to purchase the stock outright.
The motivations of the supplier can be more varied. For established suppliers, it can be a way to offload surplus stock. For newcomers, it can be a way to get their wares out into the marketplace and benefit from the goodwill of the retailer.
Integrity of Stock
Whilst the supplier obtains the benefit of the use of the retailer's space, they should consider how their goods will be represented to potential customers by the retailer. The last thing a supplier will want is for their stock to be relegated to a bargain bin in an unseen corner in the back of the store. Consideration should therefore be given to factors such as:
* Where the stock is to be displayed
* Whether the stock will be able to be easily identified by customers and kept separate from other stock
* How the stock will be promoted by the retailer
Retailers should make enquires with their insurer to make sure that consigned goods are covered by their policy, and more importantly, that accepting a consignment will not invalidate their insurance. If not, the supplier may need to be added as a party to the insurance policy.
On the flip side, the supplier should also obtain a copy of the insurance policy from the retailer and make sure that they are covered for loss or damage to their goods.
Accounting for stock on consignment
It is important for both parties to make sure the other has solid procedures in place to account for incoming and outgoing stock. The retailer should be required to report regularly to the supplier as to the quantity of stock sold and payments should be submitted periodically.
The consignment will inevitably terminate after a certain period, so consideration should be given as to what will happen to the surplus stock after this time. Either, the retailer will agree to purchase any excess or the stock will be returned to the supplier. In the case of the latter, you will need to decide who pays the costs associated with returning the stock. The supplier will also want to ensure that the stock is returned in its original condition.
Ultimately, there are benefits and pitfalls to both parties entering into a consignment arrangement. But, as with any business relationship, by gaining an appreciation of who are dealing with at the outset and formalizing the relationship by way of an agreement, it is possible to minimize the risks to your business and create a profitable association for both parties.
By Andrew Petale