Consignment is a business arrangement in which a person or company (the consignor) entrusts goods to another person or company (the consignee) for the purpose of selling, storage, or shipment, without transferring the legal ownership of the goods. The consignee acts as an agent or intermediary responsible for holding, displaying, storing, or selling the consigned goods on behalf of the consignor.
In a consignment arrangement, the consignor retains ownership of the goods until they are sold to an end customer. The consignee typically earns a commission or a percentage of the sales revenue for selling the consigned goods. Once the goods are sold, the consignee remits the proceeds (less their commission) to the consignor.
Key features of consignment include:
- Ownership: The consignor remains the legal owner of the goods until they are sold to an end customer.
- Risk: The consignor usually bears the risk of loss, damage, or obsolescence of the consigned goods until they are sold.
- Payments: The consignee earns a commission or a percentage of the sales revenue for selling the consigned goods.
- Unsold goods: If the consigned goods remain unsold after a specified period, they may be returned to the consignor, depending on the terms of the consignment agreement.
Consignment arrangements are commonly used in various industries, such as retail, art, and wholesale businesses. The consignment model can be beneficial for both parties: the consignor gets a wider audience and increased sales opportunities for their products, while the consignee does not have to invest in inventory upfront, reducing their financial risk.
Example of a Consignment
Let’s consider a hypothetical example to illustrate the concept of consignment:
Imagine that John, a furniture maker, designs and creates unique, handcrafted wooden chairs. He wants to sell his chairs but does not have a physical store or the resources to market his products effectively. John approaches “Elegant Home,” a local furniture store, with a proposal to sell his chairs on consignment.
After discussing the terms and conditions, John (the consignor) and Elegant Home (the consignee) sign a consignment agreement. The agreement outlines the responsibilities of each party, the commission rates, and the duration of the consignment arrangement.
In this consignment arrangement:
- Ownership: John retains ownership of the chairs until they are sold to an end customer. Elegant Home takes possession of the chairs and displays them in the store but does not become the legal owner of the chairs.
- Risk: John bears the risk of loss, damage, or obsolescence of the chairs while they are displayed at Elegant Home. If the chairs remain unsold or are damaged during the consignment period, John may incur financial losses.
- Payments: Elegant Home earns a 25% commission on the sales revenue of each chair sold. Once a chair is sold, Elegant Home remits the remaining 75% of the sales proceeds to John.
- Unsold goods: The agreement stipulates that if any of John’s chairs remain unsold after three months, Elegant Home will return the unsold items to John.
In this example, the consignment arrangement allows John to reach a wider audience and potentially increase his sales, while Elegant Home can offer unique, handcrafted furniture to their customers without having to invest in inventory upfront, reducing their financial risk.