You can make money with a consignment shop, if you plan carefully.
Wherever you establish your shop, you will get consignments. Most homeowners have goods they no longer need, and many would much rather consign them to you for resale than donate them to a thrift shop. The crucial question is whether you can sell enough of them to make a living. A little time and a few dollars spent on market research will help you decide if your goal is attainable. Market research answers the question, “is it possible to do what I want to do?” Without research, you’re flying blind. Below I discuss six ways to research your market. Some of the methods are free, and some entail a modest cost. I suspect that you can get the information you need for an investment of a few hundred dollars and a few days of your time.
Keep a planning notebook handy as you research, and write down any questions that come to mind as you investigate. The more you learn, the more questions you will have. Not all of your questions will have answers. Still, as you work through the “Imagineering” phase of your project, you will either gain confidence that your consignment shop can succeed as you have envisioned it or that your chance of success is low. Either way, you will be glad you spent the time researching your project.
For your consignment shop to be successful, your local market area must have:
- An adequately-sized population with a satisfactory income level and
- Social and cultural support systems that will create buying activity in your niche.
In other words, you must match your niche to your market. For example, if you want to open a sporting goods consignment shop, it would be helpful to know:
- The population of school-age children and young adults (those most likely to be playing sports)
- The extent to which there are organized community and school athletic programs
- Which major youth sports are represented in community activities
- The availability of adult sports facilities; for example, are there tennis courts and golf courses?
Likewise, some niches – like used books, musical instruments, and art – do better in communities with cultural support systems like colleges, libraries, public school music programs, museums, and concert venues.
The issue of “adequately sized population” is related to the gross dollar amount of sales you hope to make. At this stage, a ballpark population number is all you need. According to America’s Research Group, http://argconsumer.com/ roughly 15% of the population buys at a consignment shop (though the percentage is growing). So, suppose you estimate that you need to make one-hundred sales per week at a certain gross profit in order to pay your bills, and that each customer will buy twice a month. In that case, you will need 2,600 paying customers per year. If 2,600 equals 15% of your local population, you need a local market size of at least 17,000 people.
Of course, if you’re selling online as well, your local market doesn’t have to be as big. Suppose your shop is located in a rural area with a limited population and income. In that case, you can still make a go of a consignment shop, but you will have to do a lot of selling online. If you’re mostly selling online, you have to ask yourself if you need a storefront at all. Are you beginning to see why starting with market research is an essential first step? What if you had leased a building and later discovered that there weren’t enough people in your market area to pay your rent?
“Satisfactory income level” relates to your inventory. Consignment shop buyers come from all income levels; some buy resale because they don’t have a lot of money to spend, others for the thrill of discovery. A detailed “why people buy resale” discussion will be part of the chapter on marketing. In general, the lower the average income in your market area, the lower the median price of items in your inventory will have to be. Lower average sales mean you will need more customers to hit your budget numbers, which means you’ll need to have a larger general population to draw from. Shops in areas with a high average income can stock more high-end inventory, make larger and more profitable sales, and may need fewer customers to hit their budget numbers.
Where do you find consignment shop market research data?
Where do you find statistics on your market, and what specifics should you be looking for? A consignment shop needs two things: consignments and buying customers. Consignments come from people experiencing a change in their lives: changing residences, consolidating households, liquidating an estate, downsizing, upgrading, redecorating, and a host of other reasons. Customers come from everywhere, but some groups are more likely to buy resale merchandise.
In their article “Profiling a new wave of op shoppers,” Australian company “id.the population experts” cites some consignment shop buyer demographics that you want to be aware of: (“op shop” is Australian slang for “opportunity” or resale shop) .
- Young families: Couples with kids under 15 years old.
- Older people: Aged 65 and older.
- Hipsters: Young adults aged 18 to 24 years.
- New residents: Suburbs with high proportions of people moving house within the last five years.
- Treasure hunters: Low-income households.
- Pedestrians: Residents who live near shopping strips and linked through modes of transport.
- Good Samaritans: Volunteers.
The larger these cohorts in your area, the more potential customers you have. Of course, you won’t find published demographics for “hipsters.” Still, the intent is clear: young adults are often enthusiastic resale shoppers. Demographics that show above-average income (the national average household income being about $56,000), advanced educational level (greater than high school), increased homeownership percentage, and low unemployment are ideal demographics for a consignment business.
Six ways to find consignors and buyers
Here are six ways to discover how many consignors and buyers there might be in your market area:
- The place to start is with “boots on the ground.” In other words, go out into the community, look around, and talk to people. Ask a real estate broker what the housing turnover is in your town. Do an online search to find other consignment shops, and visit each several times. Don’t be intimidated by a lot of competition; in the resale businesses (consignment, antiques, collectibles), competition is good because it generates awareness and interest in second-hand goods. Carefully curated consignment inventories will differ from store to store, so competition will be selection-based rather than price-based. I’d much rather set up shop in a highly competitive, healthy resale market than in an area with no other resale shops at all. When you browse through a store, take note of the following, and write down your responses and impressions. Create a “Competitors” section in your planning notebook and keep track of all the information you collect. Take photos of each store’s outside as a “memory jog” when you later refer to your notes. While you are visiting competitor’s shops, get a copy of their consignment agreement.
- Were you verbally greeted within fifteen seconds of entering the store?
- Did the store smell musty or mildewy, as some consignment and thrift stores do?
- Was the store well lit?
- Was the store clean?
- Was the merchandise well organized and displayed?
- Was the signage hand-written or printed?
- Were prices and discounts clearly marked?
- Were store personnel helpful?
Clean, well-lit, well organized, and merchandised stores with helpful employees make for a pleasant shopping experience. To the extent that your store meets these criteria (and your competitors don’t), you will have a competitive edge.
Stop by your local Chamber of Commerce and speak with the Director. Chamber personnel can tell you if a consignment shop like yours has been tried before, and how successful it was. Some of the “old-timers” at the Chamber may be able to connect you with someone who has done what you want to do, who could advise you. The Chamber may also have statistical information for your market area. While you are there, ask if there are any incentive programs for start-up businesses.
If your community has a SCORE (Service Corp of Retired Executives) or Small Business Development Center, pay them a visit. Tell them what your plans are, and ask them how they can help you; that’s what they are there for.
Go to the local County Clerk’s Office to see if any liens or lawsuits are pending against the other consignment stores in town. Such filings are public information, and you are entitled to view them. If a consignor, landlord, phone company, or other creditor has filed a lien against a shop, then the shop isn’t paying their bills. If business is bad for them, it may be bad for you as well. Or, it may mean that they weren’t as careful organizing their business as you are being.
2. Next, read the online reviews of your competitor’s businesses. Reviews will tell you what they are doing well and what they are doing poorly. You’ll know how high the bar is set and what your performance level will have to be. Print out the reviews and add them to your planning notebook.
3. When you have completed your “boots on the ground” survey, assemble statistical data for your market. Your starting point will be the United States Census Bureau, which collects data on virtually every aspect of the U.S. economy. The USCB has a data access portal titled Census Business Builder: Small Business Edition that allows easy access to census data for your locale and most business types. The site “provides easy access to information about the residents and businesses to help you open or expand your business. The tool presents key information that entrepreneurs and small business owners need to better understand their market.” The Business Builder landing page links to video tutorials (“Help & FAQs”) and downloadable instructions (“Overview”).
The Business Builder software is not particularly intuitive, but it is easy to use. The only information you’ll need to begin is the County or City that you intend to operate in, relevant zip codes, and the Standard Industrial Code (SIC) for consignment shops (453310). It may take multiple searches to find all the information you want because the data is sometimes sorted by zip code. Your market area may cross numerous zip codes.
Unfortunately, the Business Builder doesn’t (at this time) provide data for towns with fewer than 20,000 people. Also, data on consignment shops are sometimes unavailable because there are fewer consignment shops than other businesses (pizza shops, for example). Where only a limited number of shops exist in a given area, the Bureau has chosen to respect these businesses’ privacy by not publishing sales revenue and other sensitive data. Don’t let this shortcoming deter you, though. There are other ways to get the information you need. But, why pay for it when the Census Bureau gives it to you for free?
Here’s an example of using the Small Business Builder. I have chosen Harrisonburg, Virginia, as my sample location and Used Merchandise Stores – Consignment Shops (SIC classification code 453310) as my business type. I enter my business type and location on the software’s landing page, then select the Create Report button. The data tool then creates a report that includes the following content headings and data (an explanation of the individual data lines can be had by hovering your cursor over the line).
- My Potential Customers: this section “provides summarized demographic information for Harrisonburg city, Virginia. This information provides a snapshot of the makeup of the community of potential customers in the area.” Here you will find Harrisonburg’s total population with a breakdown by age and ethnic group; median household income; education level; percent employed; average household size; housing data such as percent rented and owner-occupied; vacancy rates, and more.
- Business Summary: the “Businesses Like Mine” section provides summarized information about Used Merchandise Stores businesses in Harrisonburg, Virginia. This information provides insight into the sales volume, finance, and diversity of ownership of the companies in the area.” Statistics for Harrisonburg are scant because there are only eight consignment shops in the area. Eight is a good number and suggests that Harrisonburg has a healthy resale environment. Other information like payroll, number of employees, and sales revenue has been suppressed. Reports on larger cities (Chicago, for example) with more consignment shops will list sales revenue and employment data.
- Consumer Spending: the Consumer Spending section “provides a high-level overview of consumers’ spending patterns in Harrisonburg city, Virginia.” The report lists an average spent by all households and then breaks the average down into more than fifty spending categories. If you are selling in some of these categories (children’s’ clothing, for example), this section provides useful data.
- Retail Trade Potential (RTP) reports are used by cities to promote business opportunities in their town. It’s likely that your Chamber of Commerce has already done such a report and can provide you with a copy for free. If not, Google “retail trade potential report” (without quotation marks) and the name of your city to see if such a report is available. If not, you can either pay to have such a report developed or develop one yourself using Census Bureau data (typically, a report’s supply and demand information comes from the U.S. Census Bureau).
An RTP report has four columns: Type of retail store; Demand (consumer expenditures); Supply (inventories); and Opportunity Gap (surplus). Opportunity Gap is the difference between how much was sold and how much is available for sale. Whenever there is more available for sale (inventory) than was actually sold, supply outstrips demand. There is little opportunity for selling in that niche. Whenever the demand for a product outstrips the supply, an opportunity exists. Opportunity Gap is the difference between how much of an item is expected to sell and how much is available to be sold; in other words, the shortfall. The shortfall (opportunity) is what you should be interested in. RTP reports are valuable because they show opportunity gaps that need to be filled.
As you review the data, look closely at the SIC codes listed; sometimes, retailers report under a wrong SIC code, which throws off any analysis. For example, in the report discussed below, under the code beginning 451, is the category Sporting Goods, Hobby, Book, Music Stores wherein the demand shown is $505,123 and the supply $1,647,885, resulting in a negative opportunity gap of ($1,142,762). These four inventory types shouldn’t be grouped together. A sixty-year-old might play guitar, but it’s unlikely that he would play football.
Also, be aware that most of the categories listed are for new, not used goods. But don’t let this deter you; today’s consumers have shown a willingness to buy quality used goods sold at an attractive price by a local dealer. As you review the data, total the amounts for the type of merchandise (by SIC code) you intend to offer for sale to determine the real opportunity in your area.
Let’s analyze an RTP report for the town of Three Way, Tennessee.
Here are a few sample lines from the Three Way RTP report:
Used Merchandise Stores
Opportunity Gap: $71,939
There are no used merchandise stores in Three Way. Plus, $71,939 is not enough sales volume to run a profitable store (when analyzing sales revenue, remember that your consignors will get forty to fifty percent of the total). But, if a store in Three Way were to sell quality used furnishings (for which there is an opportunity gap of over half a million dollars) or vintage clothing (with an opportunity gap of over a million dollars), then there is clearly enough business in Three Way to start a consignment shop.
Furniture and Home Furnishings Stores
Opportunity Gap: $568,623
There were no independent furniture stores in Three Way. Again, a vintage furniture and decor shop might do quite well.
Clothing and Clothing Accessories Stores:
Opportunity Gap: $1,102,429
The demand for clothing was more than five times greater than the local supply. Consumers were traveling out-of-town to buy clothing (probably at a regional shopping mall). If you operated an upscale women’s & children’s clothing consignment shop in Three Way, you would likely do quite well.
- Profit and Loss Benchmarks are useful for budget building and financial analysis. Industry benchmarks offer you a way to compare your store’s financial performance with that of similar stores. Although they are national in scope rather than for your local market, they can give you a clue as to your local competitors’ financial strength. For example, benchmarks can tell you what profit margins most used goods dealers are getting, their inventory turnover, their return on investment, and other financial strength measures. The Retail Owners Institute (ROI) regularly compiles and publishes such information. ROI offers benchmarks and additional management information by subscription. I believe it is well worth the price (about $30/month as of this writing).
Suppose a comprehensive single-source report on the used merchandise business appeals to you. In that case, you can buy one from Dun & Bradstreet for $139.00. A similar report can be purchased from IbisWorld.
The Ibis report is pricey compared to the other data options I’ve listed here; a single report sells for $990.00. Sometimes these expensive reports can be had for free at your public library. Libraries subscribe to many types of databases; for example, the Lancaster, PA library offers access to four top-tier business databases. Accessing these reports for free is certainly worth a trip to your library.
- Trade Associations pop up around clearly identifiable niches, like antiques, musical instruments, crafts and hobbies, toys, and so on. Associations sometimes collect and publish benchmark data. To see if a trade association exists for your particular specialty, Google the specialty (for example, “toys”) and the words “trade association.” Before you join an association, weigh the benefits against the cost. Some associations offer very little beyond a pricey membership. First-rate trade associations provide ongoing education, market research reports, insurance products, legislative advocacy, and networking events. To get you started, here is a brief list:
Trade Associations and Periodicals
Once you are satisfied that your project can produce enough sales to be profitable, it’s time to establish your business’ identity: who are you, what should you sell, and where you should set up your store.