The State of eBay Drop-Off Stores By Frank Fortunato
September 11, 2006
In June 2005, we covered the then white-hot business concept of the eBay consignment drop-off store. Virtually nonexistent prior to 2003, by 2005 "Entrepreneur" magazine was touting the drop-offs as "One of the 13 hot businesses of 2005," and, by mid-year, there were thousands of independent and franchise eBay drop-off stores across America.
Now, 16 months later, we have revisited the eBay drop-off store industry to discover if it is a modern day tulip craze or a business model with legs.
The History… In January 2003, when eBay drop-off stores were still a gleam in the eye of nearly all current franchisees and independent store owners, eBay had its own entrenched consignment program. It was known as "Trading Assistants," at the time numbering about 50,000 eBay sellers who took other members' merchandise and sold it for a commission on eBay's auction site. The program thrives, and while the requirements have been tightened, most eBay sellers still qualify: potential assistants must have sold at least 10 items on eBay over the previous 90 days, have a feedback score of at least 100 and a rather mediocre positive feedback score of 97 percent or better.
EBay is careful to note that this is a caveat emptor program in that trading assistants are neither employees, agents or independent contractors of eBay, and that all negotiations are strictly between the two parties.
Further, eBay sponsors its own drop-off consignment store program known as "Trading Posts," with more stringent requirements including a staffed, storefront location with regular drop-off hours, a feedback total of at least 500 with a 98 percent or better positive feedback and average monthly sales of at least $25,000 on eBay.
However, all this barely dented the potential consignment market for the eBay auction colossus. Given that by various estimates just 2-8 percent of eBay users are sellers, most people either did not have a friend or acquaintance who sold on eBay, were not themselves eBay members with access to the sites trading assistants, and/or are too busy or disinclined to do the work required to sell on eBay. Couple this with the emergence of the PBS "Antiques Roadshow" and word-of-mouth touting to people the value of their possessions, there existed an enormous market waiting to be exploited.
And so the inevitable came to pass. In January 2003 the first independent drop-off consignment store opened in Connecticut, in August 2003 QuikDrop sold its first drop-off franchise and in 2004 iSoldit, currently the leading U.S. drop-off store franchiser, opened six stores. Then came the stampede. By mid 2005 there were reportedly 7,000 eBay drop-off stores across the nation.
Simultaneously, there were skeptics. They believed that the amount of quality consignments that could be attracted to brick-and-mortar stores was limited, and this coupled with the overhead, marketing and labor costs, did not project to long term success for the business model. Even some eBay management software makers, such as MarketBlast, did not include drop-off store functions in their product, feeling the jury was still out — way out, on the long term viability of the drop-offs.
Nevertheless, "Entrepreneur" magazine again designated drop-off stores as a hot business for 2006, and at first glance the franchise drop-off store market appeared healthy, growing internationally and continuing to attract venture capitol. Consider the following developments:
ISoldit, the largest U.S. and Canadian franchiser with more 900 stores under contract, scheduled to expand to 3,000 stores, reported in January that it also planned to open 200 stores in the UK and Ireland by 2010; the company attracted $7 million in capitol this year.
In Europe, ISoldit will be facing off against Auctioning4u, the largest UK eBay franchiser, which had attracted $4 million in venture capitol in May, based on its previous performance.
WePaYou has no less than 600 locations in the Netherlands where consignors can drop off goods for eBay listing.
Earlier in the year, QuikDrop ran a 30-day national cable TV ad campaign, the company claimed to have sold more than $22 million worth of merchandise on eBay for 34,000 customers.
In April, Auction it Today announced a store-within-a store kiosk service offering training, software and equipment as part of the package. Auction it Today claims the kiosk can be operational within two weeks and that it offers existing small business owners the opportunity to sell stale store merchandise as well as accepting drop-off items from the public. In April, the company reported that it sold 50 kiosks. In July, the company announced it had partnered with Packing And Shipping Specialists (P.A.S.S.,) an 800-store international company specializing in a mix of services including photo and passport processing and eBay trading assistants.
Further, eBay through aggressive lobbying, has fought back and defeated a number of bills in state legislatures attempting to license and regulate consignment stores — both brick and mortar and on the eBay site. The company's actions even earned the stamp of approval from the Federal Trade Commission after it successfully lobbied for an exemption bill in Louisiana, which the FTC termed "good for commerce."
A Closer Look: Tepid Growth, Closings, Dashed Dreams While all this seems to bode well for the franchise industry, a closer examination tells a different story. For instance, iSoldit widely boasts having "sold" 900 stores, and that the company plans to expand to 3,000 stores in the 50 states. But iSoldit Senior Vice President of Marketing David Crocket acknowledges that of the 900 "sold" stores, only 182 stores are currently operating. The remainder are "under contract" to individuals either as single stores or territories ranging up to five stores. When pressed, iSoldit acknowledges that they are still "conducting studies" as to the overall expansion feasibility of the industry within a 1,000 to 3,000 store range.
Crocket maintains that iSoldit has only had to close one store, and regarding store failures and transfers, he refers to the companies UFOC filing (Uniform Franchise Offering Circular required by the Federal Trade Commission to be shown all potential franchisees before contracts are signed and payments made.) A check of iSoldit's 2006 UFOC showed that in deed the Company had closed only one store ( total closings, cancellations and transfers numbering under 20,) with 165 stores operational at the end of 2005. Operating stores now number 182, but this is nevertheless a far cry from the 900 under contract, and casts serious doubt as to their projections of ever expanding to 1,000 stores, let alone 3,000.
Meanwhile, in January 2006 the oldest dedicated eBay drop-ff store, Sellers Market in Danbury, Conn., went out of business. Beginning operations on January 2, 2003, owner Andy Balbus claimed his store never took in enough consignments to cover the cost of overhead, labor and marketing.
Indies v.s. Franchises Some drop-off store owners have become activists, such as Karen McGinn a former iSoldit territory franchisee in Georgia who was dropped by the company and was so disgruntled she and her partner started a website, Am I The Only One?, dealing with eBay drop-off store problems. McGinn, who claims to have lost much of her retirement savings with iSoldit, states, "We thought we were buying a turn-key store system but we were sold a concept." The site lists 90 franchise stores that have failed, compiled from UFOC filings, calls and e-mails she has received. McGinn claims one store fails a week and that the overall franchise store failure rate ranges between 30-40 percent.
These stats are difficult to confirm, as are those comparing the relative success rates of franchise drop-off stores verses the independents, but the general consensus gives franchises that enjoy advertising exposure and name recognition the edge. In fact, the count on McGinn's site of store closings shows 50 independent store failures verses 40 franchises. Online surveys have given franchise stores a small edge over independents in sell-through rates and average selling price per item.
Low Profit Margins, High Operating Costs, Weak Inventory Flow Partially to Blame Besides faulty software and constant workarounds, one of the main complaints by McGinn and many others are the tight profit margins in the business. Dedicated drop-off stores deal in one-of-a-kind items rather than the easy repetition and predictable economics of niche items. With an average consignment fee ranging between 25-40 percent, the time consuming process of receiving, researching, photographing, writing up, posting, packing, shipping and paying the consignor, makes for a labor intensive business with little profit, whether dealing in $50 items or autos and boats.
Attracting quality consignments has always been a problem for the drop-offs, signs indicate it is getting worse. Robin Etchinson and partner Jim Coady are offering an affiliate program for their store, We Sell It 4U, in Maryland. People who refer customers receive 3 percent of the net of any items the client sells through the store, including all future sales. Other drop-off stores are offering "house call" pick-up service for consignments. Increasingly, store owners are acquiring and selling their own items while continuing to accept consignments. Some owners have begun selling in other venues besides eBay, and offline.
The initial outlay and working capitol for a franchise drop-off range from approximately $15,000 for an Auction it TODAY kiosk to $105,000-$155,000 for an iSoldit franchise with the "store in a box" module and recommended working capitol. On top of this there are royalties, overhead labor and promotional costs.
Tips If You Decide to Take the Plunge Not all is gloom and doom. Many eBay drop-off stores continue to prosper. But given the initial outlay, the tight profit margins and overhead in the brick-and-mortar model, the drop-off store business is not for eBay or business neophytes. Owners, consultants and common sense dictate the following:
Experience: One successful eBay drop-off store owner notes, "If you're going to open a bakery, you'd better know how to bake." The same applies to eBay selling. Those inexperienced on eBay who plop down a pile of money and think they will live off of the eBay name-sizzle are in for a big disappointment. An owner must have a deep working sense of what sells and what does not on the site, as well as every other aspect of the eBay auction process. Learning to separate the eBay wheat from the chaff once a store is opened can take six months or longer — by which time it could be too late.
Diversify: After experience, this may be the most important factor in today's drop-off store market. Relying solely on walk-in consignments may lead the wolf to your door before it pays the rent. ePowersellers, who opened their first store in December, 2002, and have since expanded to three stores, claim their success rests in purchasing items for resale from sources as varied as estate sales to liquidation lots. Michael Banks, who runs a consulting business for independent drop-off stores, recommends cutting deals with wholesalers, distributors and manufacturers to find items that will sell redundantly on eBay or other outlets. Selling your own merchandise and taking 100 percent of the net can keep a store afloat when consignments, paying 25 to 40 percent, become lean.
Location, Location, Location: Most franchise companies require their approval on potential sites before they will accept a potential franchisee. Many recommend good traffic flow in a prime retail location, others emphasize market density, rather than being the only drop off store in a town. On the other hand, Michael Banks opts for isolation. He recommends getting a warehouse location in an industrial park that offers cheaper rents and shorter lease commitments. "The shorter the lease period," says Banks, "the better."
Labor: One survey found that the average time it takes to process a consignment from receiving the item to posting it to eBay is just a bit more than 20 minutes. However, this does not include packing and shipping and paying the consignor. From personal experience this may be on the short side when it comes to one-of-a kind-items, which are the stock and trade of consignment stores. Owners who think they can handle the entire process by themselves are asking for trouble. For those who do not have large families they can recruit to help at the store, part-time help with eBay selling experience, is a minimum requirement.
Promotion: Many owners recommend a minimum advertising allowance of $500 a month. While some newspapers have been known to eschew ads from drop-off stores as competition for their classifieds, most will accept them. In some markets, TV time can be purchased inexpensively. When there is difficulty in attracting consignors, ad promotion can make the difference between success and failure.
Qualify (and Quality) Consignments: Taking in marginal or junk items that require processing but do not sell, can spell death for a drop-off store. Some eBay sellers will dump their failed eBay items in consignment stores, willing to take whatever the items generate. One method of qualifying, according to owners, is to charge a listing fee to consignors regardless of whether an item sells or flops. This tends to attract better merchandise.
There are formidable speed bumps, some would say tire spikes, on the entry road to the present eBay drop-off store market. They are not insurmountable, but the best strategy appears to be go slow — examine every aspect of the business before deciding whether this model will work for you.
Frank Fortunato is a regular contributor to ECommerce-Guide.com.
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