Consignment Gold Rush: The Ultimate Startup Guide

Introduction: Now is the time to open a consignment shop

In 1849 James Marshall found gold at Sutter's Mill, California, kicking off the California Gold Rush. In the beginning, gold was picked up off the ground. A year later, all the surface gold was gone, forcing prospectors to dig with pick and shovel. Gold production peaked in 1852, then declined until 1857. The five years between 1852 and 1857 saw thousands of miners abandon their claims—and their dreams—to seek their fortunes elsewhere.

Another gold rush has begun in America, but this time the gold is disguised as second-hand goods. These goods are valuable, plentiful, and can—like gold being picked up off the ground—be had for next to nothing. Unneeded household decor, clothing, electronics, musical instruments, antiques, artwork and more are being consigned to resellers at a fraction of their original retail value. And, the revenues generated by resellers are astounding: In February 2019, the research company IBISWorld[1] reported that used merchandise sales in the U.S. totaled $19 billion. $19 billion! That's over nine times the value of the gold taken from California during the Gold Rush (which was around $2 billion, adjusted for inflation). This figure doesn’t include online sales, which are harder to track. But:

According to the 2019 Fashion Resale Market and Trend Report[2], in the past three years the resale market for clothing has grown twenty-one times faster than the retail apparel market. In the next four years, the online clothing market is predicted to grow from $24 to $51 billion.

Thousands of resale, antique, consignment, and online marketplace sellers affirm that resale is a mainstream economic force.

While sales at new-consumer-goods retail stores are shrinking, resale shop sales are growing. In a November 2017 whitepaper[3], Cascade Alliance reported: "Whether the economy is shrinking or expanding, used merchandise sales outperform that of the broader retail sector. Sales at resale stores increased over fifty percent between 2008-2016, at the same time discount department store revenues fell by half and traditional department stores lost one quarter of their sales, according to the U.S. Census Bureau statistics.

Coresight Research[4] reports: "US full-price retailers are suffering while re-commerce is thriving, and re-commerce is currently one of the fastest-growing sectors in retail...Key factors driving continued growth...include millennial penetration, desire for value and cost savings, the entertainment factor of the treasure hunt for unique items, decluttering, environmental concerns, greater interest from higher-income shoppers and male customers, as well as resellers opening physical locations.

The American Furniture Industry Watch Update of October 2013[5], a publication for furniture retailers and manufacturers, professed that a deep and growing concern for the environment among consumers has led to an interest in used furniture. In the past decade, there has been a resurgence in 'retro' mid-century modern furniture. This interest in recycled furniture has led to a trend called 'shabby chic', which has infused perceived value into furniture that might otherwise be discarded and replaced. Among the emerging younger market—consumers who are buying their first home or condominium or renting their first apartment—this interest in vintage furniture circumvents the manufacturing process, as consumers opt to forego the purchase of new furniture.

The furniture manufacturer's fears are fact driven. In 2013, Furniture Brands International—parent company of Broyhill, Drexel Heritage, Lane, Hickory, Henredon and others—was forced to remove their stock from the New York Stock Exchange when they didn’t meet the exchange's capitalization requirements. Furniture Brands was forced to file for Chapter 11 bankruptcy protection. Ikea, whose products fit the Millennials need for functional and portable furnishings, seems to do well

The bottom line? Newer generations—Gen X (born 1965-1984) and Millennials (born 1985 and on)—aren't interested in filling their homes with matching sets of furniture purchased at a fancy retail store. Instead, they are interested in finding unique second-hand, recycled and re-purposed items that express their individual tastes. The modern consumer's outlook is no longer out with the old and in with the new; it's out with the new and in with the old.

Furniture isn't the only second-hand goods market that's doing well. In June 2019, the consignment shop The Real Real debuted on the Nasdaq[6] with a $300 million initial public offering (IPO). Their stock rose forty-five percent on the first day from $20 to $29. Vintage is going legit, in a big way.

In cities all over America, besides the usual assortment of pawn and thrift shops, one can find privately owned resale specialty shops offering:

Apparel (women’s, teen, children’s, plus-sized)

Sporting goods

Musical Instruments

Books and Media (records, movies, etc.)

Vintage high-end audio

Estate art and decor

Used furniture and appliances

The franchise development company Winmark Corporation[7] is so sold on the resale concept that they offer five separate resale franchises with over a thousand stores in the U.S. and Canada.

Each store offers a mix of new, used, and consigned goods, and is owned by individual franchisees:

Once Upon A Child (children’s clothing)

Play It Again Sports (sporting goods)

Style Encore (women's fashions)

Music-Go-Round (used musical instruments)

Plato's Closet (teen fashion)

Consumers are hot for consignment and resale businesses. But how does consignment stack up as a profitable business model? Consider:

The barriers to entry are low. Becoming a consignment dealer doesn't require a professional or tradesperson license, or a specialized degree. Successful consignment entrepreneurs have come from all walks of life, economic backgrounds, and educational levels.

Low startup costs compared to other retail businesses. The largest single expense for any retailer is the cost of inventory, and consignment dealers get their inventory for free.

Recession-proof. When the economy is bad, folks buy where prices are low, and prices at consignment shops are thirty to eighty-five percent lower than comparable new retail. When the economy is good, consumers move into new houses and new jobs, filling their bigger houses with new and used furnishings.

High selling margins. According to published benchmarks[8], used merchandise retailers have out-performed most other retailers in three major categories every year for the past five years. Vintage dealers get better profit margins for their wares than almost any other retail category.

High profits: The Retail Owner’s Institute reports[9] that pre-tax profits of used merchandise stores for 2018 was just over six percent. Walmart’s pre-tax profits[10] for the first quarter of 2019 were a bit under three percent. On average, resale shops earn double what Walmart earns.

That's right; DOUBLE. No wonder the big guys worry about the resale trend.

Today, entrepreneurs flock to capitalize on the used-goods consignment bonanza. In the coming decade, hundreds of consignment shops will open across America. As with the California Gold Rush, many who come for the easy money in consignment won't prepare, and they will soon be out of business. Novice consignment dealers may sign a bad lease, take the wrong items on consignment, offer the wrong terms, not manage their inventory or cash well, mis-spend their advertising dollars, or merchandise their stores poorly. There are dozens more missteps that a new consignment dealer can make. This book can remedy those problems.

Dealers who plan well operate shops that will survive in the long run. The first step to becoming a successful consignment shop operator is to wrap your head around the big picture, and understand how all of the pieces of the consignment shop puzzle fit together; not just what do I sell and where do I get it, but the realities of taxes, insurance, sales, marketing, websites, leases, employees, cash flow, financial statements, and much more. Would-be shop owners can either learn as they go or prepare in advance. One's chance of success is much greater with planning.

Throughout the planning process, you will face choices: what if I choose lease A over lease B? Is keystone pricing better than benchmark pricing? Which credit card processor should I use? What operating software is the best fit? Should I buy estates or just cherry-pick consignments? You’ll make hundreds of decisions, and with each decision comes the possibility of an expensive misstep.

Consignment dealers make missteps when they don't understand the consequences of their decisions. In this book, I will explain the options that you will face so you won't be ambushed by unexpected consequences.

Will this book prevent failure? No, but it will increase your chance of success. My advice to would-be consignment dealers is to use this book to inspire research and reflection. Read everything you can on mom-and-pop retailing, consignment or not. It's better to spend money on books and educational materials than on attorney fees.

As you read and plan, keep a loose-leaf notebook nearby and take notes. Create a tabbed section for each of the setup steps covered in the book and write your thoughts and decisions about each of the topics. Thumb through magazines that pertain to your specialty (fashion, furniture, or whatever), cut out advertisements that  appeal to you, and add them to your notebook. As you walk through department stores, notice the merchandise and signage. Department store merchandisers are pros, and you can learn a lot observing what they do with their displays. Take pictures of displays and signage and add them to your notebook.

Most of all: Dream big. Visualize how you want your store to be as you drop off to sleep at night. Talk up the store with close friends or a significant other (but avoid nay-sayers, they are poison).

What you can expect from this book

In my experience, starting a new business of any sort is divided into two distinct processes: imagineering and engineering. Both are necessary for a successful startup. You've likely been imagineering your business for some time now: dreaming about the shop you want; how it will look, what you will sell, how the merchandise will be displayed. All that is good; you can't move forward without those basics. But to complete the vision of your shop, you must drill-down and visualize details you might not have thought about. When you have a detailed working blueprint, you can move forward with setting up your shop.

Think of your startup as if it were a jigsaw puzzle: first, you must know what the big picture looks like. Then, you count the puzzle pieces to make sure they are all there. If you're missing some, you won't be able to complete the puzzle. Next, you organize the pieces to determine how they will fit together; you sort them by edges, colors, patterns, and so on. Only when you have done the visualizing, counting, and sorting and are happy with the results (imagineering) can you assemble the puzzle (engineering). First know what you want to do, then decide if it’s possible, and then do it.

This book guides you through both imagineering and engineering. When you have finished reading it, you will have a detailed plan for establishing and operating your unique shop in your town. Every town is different, and every marketplace different; there is no one size fits all business plan for consignment shops. This book will guide you to your plan. My promise to you is this: if you grasp these materials and apply the processes I suggest, you will have all the tools you need to open and run a successful consignment shop.

Let's inspect the imagineering and engineering processes:

Imagineering

We will start by learning ways to analyze your local market. No matter how nice your store is, how well located, or how well stocked, you must generate enough sales and profits to pay the bills and keep the doors open. Some towns can support multiple consignment shops; others can't. Fortunately, the information you need to make a sales and profit forecast is available, if you know where to look.

Wouldn't it be nice to know, for example:

How much money was spent in your niche in your town last year?

How many competitors you have? What and how much they are selling?

Where your competitors are located?

How many new consignment stores opened in your town in recent years?

How many consignment stores went out of business in the same period?

Statistically, what your chances of success are?

If you knew in advance that the failure rate for new consignment shops in your town was twenty-five percent, would you not open your shop? I hope not, because a twenty-five percent failure rate means that three out of four new shops succeed. But what if the reverse were true? What if seventy-five percent of shops failed and your chance of success was only twenty-five percent? Would you attempt to open a store when three out of four new stores failed?

It's not enough to have dazzling displays and a clever business name. Business is about supply & demand, bringing products to market, and selling them at a price that will pay your bills and earn you a decent living.

Besides your local market snapshot, you must understand your personal strengths and weaknesses and the strengths and weaknesses inherent in the consignment business model. The more detailed your vision, the more powerful it becomes. Soon, you'll be an entrepreneurial juggernaut, and nothing will stop you from achieving your goal. Here are a few more puzzle pieces that you will assemble through imagineering:

What to sell and what not to sell

What the ideal location looks like

How much money you need to get started

What equipment and fixtures you must have

How to open a shop that’s stocked from day one

How to calculate what your profits will be under various scenarios

As you investigate these topics, write your assessments in your planning notebook. As you do, you'll discover other topics to consider. You might also need to re-think some of your earlier choices. Take your time. Better to spend money on pen and ink than to get three months into setting up your store, have paid deposits, signed a lease, created tax obligations, and bought equipment, only to realize that the store you have rented is too big, you can't get the domain name you want, or some other annoying problem.

Engineering:

The engineering process covered in this book discusses the how-to of getting set up, and the basics of running a retail operation. Here's a sample of the topics:

Dealing with The Man: licenses, permits, leases, taxes, lawyers, accountants, banking, and the IRS

How to keep a steady flow of customers coming into your store

Pricing tactics that will keep your inventory moving