Clouds Growing Over Online Consigment Store Biz

A CLOSER LOOK: Former Franchisees Tell Story of 'Fatally Flawed' Concept

Is trouble brewing in the online auction consignment store sector? A growing number of franchisees are experiencing problems, including bankruptcies (business and personal) due to a business model that one pair says is "fatally flawed." Are these problems merely the growing pains of a new industry, or are the woes of these heavily-invested owner/operators the result of fraud from unscrupulous franchisors?

A number of companies have risen to some prominence in the auction consignment store game in the past five years, with names like Quick Drop, Auction Drop, ePowerSellers, Snappy Auctions and i-SoldIt, which emerged as the industry leader. The Monrovia, California-based company bills itself as the #1 franchisor in the drop-off store segment and claims to be the number-one seller on eBay. The company and its founder, Elise Wetzel, have been lauded in a variety of media, including a recent feature in Entrepreneur Magazine. This press, inspired in part by i-Soldit's rapid growth from start-up to industry leader, has made it a popular investment for would-be franchisees.

Karen McGinn and Gene Bowen are just such investors. As we detailed in our most recent podcast, they claim to have been among the very first i-SoldIt franchisees. Yet in the fall of 2005 the couple closed their store in Atlanta "rather than continue to lose money."

On their website, www.amitheonlyone.org, the pair claim that as they further investigated what they call "the drop-off store trend," they found something far different than what they say they were promised. At the root of it all is a business model they claim is "fatally flawed."

That model "is complicated," according to i-SoldIt CEO Ken Sully. Speaking to Ina Steiner at AuctionBytes for a piece published today, he said "everyone is trying to figure out what works best."

Sully details his views on some of the challenges his company and franchisees have experienced on the website FranchisePick.com. He admits that 60 stores have closed due, at least in part, to the fact that this company had "a significant number of stores operating below break-even."

As a result, Sully says i-SoldIt has stopped accepting applications for new franchises (and recently sold its owned-and-operated store located not far from its company HQ) and is focusing on helping current franchisees.

To the uninitiated, the drop-off store model (referred to by one purveyor, NextWorth Solutions of Boston, as "eBay Consignment Brokerage" or ECB) might seem fairly straight-forward. The ECB premise is that buying on eBay is easy, but selling can be difficult. Though a great many people enjoy all that is required to successfully sell on eBay - including such mundane chores as packing and shipping, to the more fun aspects such as photographing one's items, to the downright problematic such as handling payment - a far greater number of folks might like to sell things on the auction site but simply lack the time, energy or inclination to do it themselves. Drop-off stores are intended to be the vehicles by which such people can participate as sellers in the great eBay marketplace.

For a percentage of the final sale price - commissions run around 35% or so - drop-off stores will do all the work to move a seller's stuff on eBay. From researching items (including recent eBay sales activity for similar items), taking photos, writing descriptions and posting auctions to packing, shipping and payment processing, stores such as those in the i-SoldIt network have promised to take the hassle out of selling on eBay.

It is the apparent popularity of this idea that has made the drop-off store model an attractive business opportunity to many, including die-hard eBayers looking to turn their hobbies into full-time jobs.

For a look at just how booming the ECB marketplace seems to be, the AuctionBytes site contains a page devoted to drop-off (or consignment) stores that is instructive as to just how many companies wanted into this sector.

Back in September, the E-Commerce Guide website re-visited the matter of drop-off stores it first addressed in June of 2005. The 2006 follow-up, titled "The State of eBay Drop-off Stores," detailed some of the flaws in the business model cited by McGinn and Bowen.

"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," the site found.

Compounding these problems are issues pertaining to software and what Bowen says were hidden fees. All of this has made for a growing discontent with iSoldIt, though Bowen and McGinn say these problems exist, in differing degrees, within the other ECB chains.

"None of them knew how to make this thing work"

"Greedy liars" is how one store owner characterized his franchisor. Speaking on condition of anonymity, this owner, whose store is affiliated with another ECB company, tells ATR that the companies that sold online consignment stores got in the business of selling stores and not the business of developing successful business models for their owner/operators.

"I've spoken to many of my commrades who own stores with the other companies, and it's all the same crap. The companies are more than happy to take our money, but what did they do for us? None of these companies did any real marketing and none of them knew how to make this thing work," he says.

"So what did we all buy?"

Sully tells Steiner that his company moved too fast during the frenzy of 2004 when he says no one was content to buy a single store. (That admission, that his company put undue emphasis on selling stores, is one of the charges leveled against it.) But, he said, iSold It has the best brand awareness out there today.

From all that has been reported so far, as well as what McGinn, Bowen and other franchisees are claiming, the ECB model contains challenges that were not obvious to investors when they signed on with their respective franchisors. But where these impediments merely unforeseen by franchisors or were they actively hidden by them to make the ECB model appear more attractive?

So it comes down to this: Has a group of unscrupulous franchise companies preyed on the dreams and aspirations of small business entrepreneurs, or are the allegations of McGinn, Bowen and others merely a case of sour grapes?

ATR addressed this at some length in our most-recent podcast. You can expect to see, hear and read more about this in the days ahead, here and elsewhere. However, if you are considering this or any other franchise opportunity, the final paragraph of the E-Commerce Guide story is instructive:

"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."