- November 25, 2020
- Posted by: Stratford Team
- Category: Markets
JD warehouse in Beijing.
AP Photo/Mark Schiefelbein
- Major retailers are using a fulfillment method known as “dropshipping” that enables them to list products on their websites without buying inventory.
- With dropshipping, suppliers and retailers form agreements in which the supplier handles the inventory and shipment of sales.
- As a result, retailers are able to expand their online inventory to compete with massive marketplaces like Amazon, and suppliers are able to get their products in front of more shoppers.
- According to market research company Forrester, at least 40% of retailers were using a form of dropshipping in 2019. That percentage has likely increased due to the increase in e-commerce this year.
- Visit Business Insider’s homepage for more stories.
The shadow of Amazon falls across all online retailers.
Because of Amazon, consumers expect fast, free shipping, and nearly limitless options available on a single site. For competing retailers, having a wide range of products available on their websites is essential, because if a shopper can’t find what they’re looking for on one site, they’ll likely go and search for it on Amazon.
These pressures have led retailers to rapidly expand their online inventories and streamline their shipping logistics. To do this, nearly every retailer has turned to dropshipping.
“Dropshipping basically just means that a retailer or a marketplace website is selling an item to a customer, but the item is owned and shipped directly to the customer by a supplier, not the retailer that sold it,” Emily Pfeiffer, a senior analyst at Forrester told Business Insider.
What that means is that retailers — like Nordtrom or Kohl’s, for example — are able to add more products to their websites without having to take on the risk of buying inventory from suppliers, or taking up precious space in a warehouse.
To do this, retailers create contracts with suppliers that outline the terms of the dropshipping relationship — for example, Nordstrom might create a dropshipping relationship with Gucci. When a customer buys a Gucci product from Nordstrom’s website, the order gets sent directly to Gucci (the supplier), who handles the shipping of the product. Nordstrom essentially becomes a digital middleman.
With dropshipping, “all retailers do is focus on marketing and sales,” Saba Mohebpour, the CEO of a dropshipping marketplace called Spocket told Business Insider. “Retailers are saved from holding inventory which is really costly.”
To consumers, it’s often impossible to tell whether a product is actually owned by the retailer or the supplier. And, as long as they get the product they want delivered quickly to their door, they also might not care.
Dropshipping is now a major force in retail — at least 40% of retailers use it
“Dropshipping used to be seen as a lot more taboo,” Pfeiffer said, because retailers have less control over the goods they’re selling, and consumers are unaware of the digital sleight of hand. But now “it’s a huge portion of digital sales.”
According to Forrester’s data from 2019, over 40% of retailers are already dropshipping, which doesn’t take into account any increases caused by the growth in e-commerce fueled by the pandemic.
“Many more have it in the works,” Pfeiffer said. “Dropshipping has gained popularity quite a bit with the huge increase in online shopping. In some cases, according to the tech vendors that support these sales, more than half of the revenue on some major retail websites is attributed to the dropship inventory.”
Pfeiffer said she consults with retailers who are looking to build out their online assortment as quickly as possible, as well as from brands or suppliers who are looking to find more platforms for their products, especially as stores have closed. “It’s no longer taboo, it’s table stakes,” Pfeiffer said.
Why retailers love dropshipping (and its potential downsides)
For retailers who use dropshipping, the biggest advantage is flexible expansion. Retailers are able to quickly expand their online offerings without taking on the upfront cost of buying the products at wholesale price, the cost of warehousing the products, or the risks of a product not selling.
“It’s really agile,” Mohebpour said. Retailers can add new brands to their website, as well as expanded size range and color options. “You can add thousands of products to your store.”
If something doesn’t sell, it’s not a financial hit, so retailers are able to test out different products and brands. “You can figure out what works and what doesn’t work,” Mohebpour said.
Pfeiffer said it’s also a way for retailers to add related products to its site in hopes customers will buy extra items that wouldn’t have made it to store shelves.
But the downside is some loss of control over the experience. Retailers don’t actually see or handle the products they’re selling, which could lead to customer satisfaction issues. And the retailer is the one managing customer service.
It can also lead to a muddy online shopping experience for the shopper. “It’s challenging sometimes to take non-owned items and really bring them into the model in which the guest on that website is used to shopping,” Pfeiffer said. The items might not feel like they belong to the website on which the shopper found them, which could be jarring. Or a retailer might be offering a promotion that can’t be applied to dropshipped items, which could frustrate customers.
The pros and cons of using dropshipping as a supplier
Pfeiffer said that through dropshipping partnerships with retailers, suppliers get “more products into more sales channels, more eyeballs on their products, and more brand exposure — maybe to audiences who wouldn’t have encountered them otherwise.”
Some brands also see it as a brand equity strategy — their products get associated with a trusted retailer that could elevate their brand image.
Suppliers are also closer to the action. Because they’re the ones shipping out the products, they see firsthand which colors and styles are more popular, versus which ones need to be discounted to move. In a traditional relationship, getting this information from a retailer can be “like pulling teeth,” Pfeiffer said. Suppliers often don’t get useful sales information until it’s too late and the season is over. With dropshipping Pfeiffer said, “they have instantaneous data soon enough to act on it.”
But the downside is that all of the risk on inventory falls to the supplier. “They have to decide what to make, what to bring in and have in stock, they have to do a really good job of keeping it in stock if it happens to sell well, and then they have 100% responsibility for it, if it doesn’t,” Pfeiffer said.
Though suppliers get a much bigger audience for their products, more of the labor falls to them than it would with a wholesale deal, which can be costly.
“The costs to do all of that, and then to pick, pack, and ship it, and sometimes to pay the shipping as well, erode the margin,” Pfeiffer said.
Retailers experimenting with dropshipping are considering moving to Amazon’s marketplace model
The dropshipping model is similar to an e-commerce model called “the marketplace model” made popular by Amazon. But there are some important distinctions.
In the marketplace model, “usually by rule it is clear that an item is being sold by someone other than the owner of the website,” Pfeiffer said. On Amazon, the seller is clearly listed on every product page, so consumers know they’re buying from a company that sells its products on Amazon, but is not Amazon. With marketplaces, Pfeiffer said the supplier generally has more control over what products they want to put up, the content on the product pages, and they’re able to set the retail price that the customer pays. Amazon, Walmart, and Overstock are all examples of marketplaces. Other retailers are considering the option, too.
“Some retailers that are currently using dropship suppliers are evaluating whether they should move to more of a marketplace model,” Pfeiffer said. “Although they lose some control, it does give them more protections.”
With the dropshipping model, the retailer — not the supplier — has more control over which products they carry, what the product page content looks like, and the price of the product. But the marketplace model offers retailers more protections thanks to a piece of legislature called Section 230. When it’s made clear that consumers are buying from a seller who is not the retailer — as is the case with Amazon — the retailer can use Section 230 to claim it’s an intermediary that is not responsible for any issues with the transaction.
Amazon has been able to use Section 230 to claim successfully in the past that it’s not liable for faulty or counterfeit products using the same argument that tech companies like Uber, Airbnb, Facebook, and Twitter do: it’s just a platform.
“Section 230 protects the website to a fault and absolves it of responsibility in the marketplace model,” Pfeiffer said.
So while retailers might lose some control over the products being sold on their site, they might decide the protections of the marketplace model outweigh the loss of control.