If you pitch your microgreens to a grocery store owner or a produce manager, they might offer to sell them "on consignment." "Consignment" is a common buyer-seller relationship in retail sales. We'll cover how consignment works, the benefits and drawbacks, and why it's common with retail sales.
In consignment selling, the consignor owns the goods, which would be the farmer in this case. The farmer provides their goods to a consignee, the seller, to sell on their behalf. In this model, the consignee doesn't purchase the inventory, but instead sells it for a commission.
For example, let’s say you have a consignment agreement with a local grocery store to sell your microgreens. A container of your microgreens retails for $5.00. You bring the store 10 containers. The consignment agreement is to split the revenue 60% to you and 40% to the store. After a week, the store sold 6 containers, grossing $30.00 in revenue. On your next delivery of 10 containers, you get $18.00, the store gets $12.00, and you take back the 4 unsold containers. Your expenses include production costs for the microgreens, as well as delivery and pickup of unsold containers. The store could also expect you to provide marketing materials for them to use. The store’s expenses include warehousing, inventory management, advertising, and general overhead.
There’s an incentive issue called the "Principal-Agent Problem.” The store is the Agent and you are the Principal. As the Principal, you are giving the store your microgreens. You expect them to act in your best interest. You want the store to sell as many containers as possible of your microgreens. In a non-consignment scenario, your and the store's incentives are aligned. You want to sell microgreens to the store for a profit. You earn more the more containers they sell. The store wants to profit from selling your microgreens. They are incentivized to sell them because they paid for them. If the store no longer fronts the cost of your microgreens, their incentive to sell the microgreens is significantly less. Whether they paid for your product or not, they will incur overhead, like inventory management. That cost is negligible compared to the cost of purchasing the microgreens, though. Why does this matter? If the store doesn’t pay for your product up front, they might place your product in a worse spot on the shelves. Eye-level placement is objectively better than being placed down low. They might not restock your microgreens promptly. They might not cycle out expired or wilted product with fresh product. These small actions hurt sales and hurt your brand. If they're not trying to make your brand and products shine, where are they putting their efforts? Before we answer that, let's examine how consignment affects your business.
If the sales split was 60/40 and 30 went unsold, your gross profit margin is now 28.6%. If the sales split was 70/30 and 40 went unsold, your gross profit margin is now 28.6%. If we want to be blindly optimistic, we can assume 100% of the product sells and you get a generous 70% of the revenue. Under that scenario, your gross profit margin is 57.1%.
As you can see, the details of the consignment agreement and the amount of containers going unsold can have a huge impact on your profits. In effect, the store is shifting the risk of unsold product from themselves to you.
Running a grocery store is incredibly difficult. The average grocery store has a net profit margin of 1-3%. That’s razor-thin and worse than nearly any industry. The grocery store needs to ensure it’s putting its efforts toward products that sell well. More importantly, they need to put their efforts toward brands that pay to have a spot on their shelves. Retailers will charge various fees. These include stocking, handling, advertising, and promotional fees. The big one, though, is called a slotting fee. One-time slotting fees, and their pay-to-stay fees, are fees a brand pays per item and per store to have shelf space. For example, a brand might pay a one-time $250 fee per SKU for 10 SKUs to be sold at just one store in a retail chain. A SKU is another word for product or product variant. For example, sunflower shoots, pea shoots, and cilantro microgreens would be three SKUs. That means the brand is paying $2,500 ($250 * 10) to have its products on the shelves. If they want their brand present at the ten stores in that chain in its local market, that number jumps to $25,000. Slotting fees can go up from $250 depending on the strength of the retailer and the strength of the local market. Here’s the kicker, though. If a brand is paying slotting fees, they’re not selling on consignment. Let’s do more math.
If the slotting fee jumps to $350 per SKU, your new gross profit margin is 37.9% ($6,900/$18,200 * 100%). If you sell the store only 80 containers per week at a slotting fee of $250, your gross profit margin is 40% ($5,820/$14,560 * 100%). If the slotting fee increases and sales decline, your gross profit margin is now 33.1% ($4,820/$14,560 * 100%).
What sounds better to you? Option 1: Sell on consignment with no fees but uncertain sales. Option 2: Pay slotting and other fees for each item, but get guaranteed payment. In reality, you don't get to pick which option you want, nor do you have much leverage to dictate the terms.
I assume you, the reader, are selling under $1,000,000 a year in product, your company is under 5 years old, and customers aren't begging supermarkets to stock your microgreens. These are relatively arbitrary parameters. The point is that a supermarket sees an unproven company selling a niche product in a new category. We haven’t worked with too many grocery stores at my company, Piedmont Microgreens, but I’m going to venture a guess. The smaller and less proven your brand, and the more coveted the retailer, the more likely you'll be asked to sell on consignment. The more in-demand your brand and the less coveted the retailer, the better your chance of getting a non-consignment spot on the shelves. Why? Retailers like Whole Foods won't pay for your product or use shelf space for your brand if they're not sure you'll sell well. Think of consignment like an opportunity to audition for a permanent spot on the shelves. If your brand and product fit the market, the store can confidently offer you a permanent spot before or during the consignment phase. Of course, this is all grand and large-scale, but what about the local co-op or mom-and-pop grocery store? Smaller retailers will struggle with the same challenges of low profit margins. Per my guess above, your ability to negotiate for consignment or not should be much greater. For example, we sell to the local Durham Food Co-op without consignment. We use a standard weekly recurring order. Another corner store wants to sell our product on consignment. We countered by requesting the same arrangement as the Co-op. Each store is going to be different.
I also want to be clear that slotting and other store fees are less common with smaller retailers. We don’t pay any fees to have our products at the Durham Food Co-op. The absence of slotting and other fees at smaller retailers is another reason to push for a non-consignment agreement. You get the best of both worlds.
Selling on consignment means giving your products to a retailer to sell. The revenue from sold product gets split between you and the retailer. You’re expected to take back unsold product at no charge. Selling on consignment is risky. You bear the cost of producing microgreens without a guarantee of payment. You can choose to pay fees for placement on the shelves instead of using consignment, but at least you’ll receive payment for all delivered products. Stores will likely offer consignment because your brand is unproven, the product category doesn’t have healthy profit margins, or the product category is new or unproven. The store might also offer consignment because they want to fill a literal gap in their shelves while they find a stronger and more reliable brand willing to pay slotting and other fees.
The decision to sell on consignment can be difficult. Your success with consignment selling will depend on the public's desire for microgreens, the strength of your brand, and the specific terms of your consignment agreement. Always know, though, that you can pull out from a consignment agreement if the economics don’t end up working.
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