Consignment or buy outright

In retail, a distribution model revolves around consignment and outright purchase, which includes the wholesaler, manufacturer and retailer. Merchandise/inventory that a retailer sells from the outlet either comes as a consignment or through outright purchase. And one wrong decision at this stage can directly have long lasting effect on the functioning of the retailer.

Consignment merchandise

Under consignment, a manufacturer or wholesaler places some of his merchandise in the retail store and allows the retailer to sell the stock. Manufacturers or suppliers usually retail newly launched or unproven merchandise through consignment. Rajiv Nair, Business Head, General Merchandise, HyperCity Retail Ltd states, “Consignment is a means to reduce the risk of the retailer, but it comes at a lower margin & lesser control for the retailer, in planning the product mix.”  If the product gets sold then the retailer and manufacturer share the amount that they earn from that particular product. But what happens if the initial payment is done and unsold goods are to be returned? Ambeek Khemka, Group President, Vishal Retail Ltd says, “It depends on terms negotiated. There are no industry benchmarks or set guidelines. It also depends on the shelf life/stock turnover ratio prescribed or negotiated with the vendor.”   

Pros:

Manufacturers or wholesalers are able to test new and unproven products in the market. It enables them to understand the customer response regarding a particular product and ever changing trends. In case the retailer does not have enough capital, he purchases the goods through consignment. Moreover, funds don’t get stuck in inventory as the products can be returned to the manufacturer under an agreement.

Cons:

There are many hurdles that make consignment inventory a difficult task to perform and require agreements between both the parties to make it profitable. There are many questions that pop up such as: What if the merchandise does not get sold? Can the retailer sell unsold products at a discount? What percentage of margin is to be shared on sold products? But the biggest problem is logistics, as unsold goods need to be sent back to the supplier/manufacturer on time to add additional inventory in outlets. Khemka shares, “Both the vendor and the retailer take a hit in such cases depending on terms settled and on the point of delivery v/s point of sale v/s point of return.” Separate data has to be maintained by the parties involved because all the merchandise retailed is not through consignment.   

Buy outright

A retailer purchases the merchandise by making complete payment for the merchandise in the beginning itself. He specifically selects only those goods, which he believes can be retailed within a particular time frame, and attracts huge customer response without leaving anything to chance. Nair states, “We believe that a planned approach and calculated risk helps us maximise returns through outright buys.” Organised retailers prefer buying merchandise outright as this gives them a chance to negotiate better with the manufacturer/supplier and get the best bargain on the products. Says Khemka, “In outright, one negotiates better on prices and doubly checks on the quality and quantity of what one buys.”

Pros:

Retailers having enough capital in hand mainly go with buy outright inventory as this enables them good deals/margins if inventory is purchased in bulk. A retailer gets market tested and proven products to sell that do not require plenty of marketing and have already created a brand name for themselves. He has the final authority on whether he wants to sell the product through discount or not.

Cons:

The biggest risk that a retailer faces if he buys merchandise outright is that it might remain unsold due to various reasons such as un-seasonal or damaged products. Khemka opines, “In case a wrong decision is made, you cannot return the stock except to put it on discount which directly affects your top-line and bottom-line.”

Wrap up

Buying outright is a straightforward model but stocking merchandise through consignment requires lots of understanding and agreement between the parties involved. The nature of product introduced, area and duration of the year are some of the factors that influence retailers’ and manufacturers’ buying and retailing patterns. Hence, consignment inventory should only be used when demand is reasonably known and stable.