Brick-and-mortar retailers are always performing a delicate balance between offering an exciting and diverse product selection, and executing efficient operations. Inventory management strategies are a key aspect of retail operational efficiency that directly affect margins and cashflow, making this a fundamental part of supplier-retailer partnerships. Two tactics used by retailers to avoid inventory bloat are return-to-vendor (RTV) clauses consignment agreements. These models each have unique benefits and challenges and can substantially impact the bottom line for both the retailer and supplier.
RTV: Return to Vendor
RTV, or Return-to-Vendor, is a practice in retail where unsold merchandise is returned to the supplier. This occurs under an RTV agreement, a contract between a product’s manufacturer and its retailer, establishing terms for returning unsold inventory such as quantity, return price per unit, the timeline for returns, and other stipulations.
Suppose a department store buys 10,000 units of a skincare product at wholesale with an RTV agreement, and 6,000 units are sold after one year. An example RTV agreement may specify that the supplier has one month to buy back the 4,000 unsold units at $0.90 on the dollar, and pay for shipping and logistics. While this is not the most favorable situation for the supplier, the RTV agreement protects the retailer from carrying excessive slow-moving inventory on their books and in their warehouses.
Benefits and challenges of RTV
For retailers, the most obvious benefit of an RTV agreement is security. They can take risks and stock a wider variety of products without suffering a total loss on unsold inventory. It also saves them from wasting precious floor and warehouse space. However, because RTV agreements present a risk to the supplier’s cashflow, they often result in higher negotiated wholesale prices which the retailer ultimately passes on to the customer. The execution of an RTV may also pose practical challenges when timelines, condition of returned products, and other key factors are considered.
For suppliers, two advantages are image management and retailer goodwill. RTV agreements can ensure that unsold inventory doesn’t end up in off-price retailers, and the willingness of a supplier to participate in RTV may be especially important when a retailer evaluates a new, unproven brand. The major downside for suppliers is the cashflow uncertainty, as mentioned earlier. Enacting an RTV clause results in a relatively large, immediate expense for the supplier which may be difficult to anticipate and plan for.
Consignment inventory is an alternative to RTV agreements. In this model, the consignor (supplier) retains ownership of the merchandise until it’s sold, at which point the consignee (retailer) pays the supplier an agreed-upon fraction of the sale. Consignment agreements usually include an agreement to return unsold products to the supplier after an agreed-upon amount of time. The main contrast with RTV is that the retailer pays nothing upfront, while the supplier is paid over time as sales occur.
Benefits and challenges of consignment
The chief advantage of consignment inventory for retailers is the reduced financial risk – zero capital is trapped in upfront costs. Carrying costs on the warehouse and floor are nominally unchanged from traditional wholesale (with or without RTV), while the potential shipping expenses and increased complexity of stock and invoice management are downsides. Although the purest form of consignment (individual accounts receivable and accounts payable are simultaneously created for every transaction) can add complexity for less tech-savvy retailers, all the benefits of consignment are retained if accounts receivable and payable are simply determined on e.g. a monthly basis.
For suppliers, the benefits of consignment to the retailer can shorten and simplify negotiation cycles to enable rapid introduction of new products to retail, potentially opening new sales channels. The supplier’s cashflow mirrors retail sales, as opposed to the upfront payment in wholesale with RTV. Whether upfront payment with the possibility of a large RTV cost is more or less palatable than consignment will vary from supplier to supplier.
Which you should choose
The choice between RTV and consignment will depend on each retailer and supplier’s unique circumstances, including their risk tolerance, financial capabilities, and operational competencies. For those willing to embrace consignment’s complexity, the rewards can be substantial. Retailers can massively reduce inventory and upfront expenses to more nimbly serve their customers, while suppliers can reap the benefits of a financially-unburdened retail partner. For those who prefer a straightforward approach with more predictability, wholesale with RTV might be a better fit.