Photo: REI
REI ventures into drop shipping
REI has become the latest retailer to roll out vendor direct shipments to help expand its online offerings.
Initially, a few footwear brands will be involved. Apparel and additional categories will be added over the next year. REI said customers should not notice any difference shopping REI.com. Orders fulfilled directly from vendors can only be shipped to home addresses.
“This functionality opens up so many doors for our customers and gives them access to new sizes and styles of products that we could not stock previously,” said Curtis Kopf, REI’s chief digital officer, in a statement. “Now it will be easier to support our customers when they are asking for extended sizes, new styles, or additional colors.”
At Macy’s, vendor direct and mobile have been “two of the big accelerants” behind the retailer’s recent double-digit online growth streak, Jeff Gennette, CEO, said on the retailer’s second-quarter conference call. Vendor direct shipments accounted for 10 percent of Macy’s online orders in 2018, and the retailer was halfway towards adding one million SKUs to the program in 2019.
“Vendor direct only has upside,” said Mr. Gennette. “It adds sales and gross margin, and increases both customer satisfaction and traffic to the site. The zero capital and inventory investment make for a very high ROIC rate.”
The proportion of online goods being shipped directly by vendors isn’t readily known because retailers generally don’t discuss the fulfillment method, also called drop shipping.
A study from Lehigh University from December 2017 stated that 25 to 30 percent of all e-commerce transactions are drop shipped.
For retailers, the pros of drop shipping are reduced inventory risk and being able to offer an enhanced “endless aisle” of products online. The cons include providing information on best customers to vendors as well as loss of control of the delivery process.
A recent survey of retailers as part of a study from DiCentral, a provider of supply chain integration services, found 87 percent experienced increased revenue and 84 percent improved customer service after adopting drop shipping.
- REI brings customers broader product selection, more sizes and color options online – REI
- Macy’s, Inc.’s Q2 2019 Earnings Call Transcript – Seeking Alpha
- Drop Shipping: A New Opportunity for Retailers and Suppliers – Lehigh University
- A New Study on Dropship and Omnichannel Trends – DiCentral
- Survey: Dropshipping Drives the Future of Omnichannel – My Total Retail
- Will drop shipments become a major online fulfillment tool? – RetailWire
- Where are the pain points for suppliers engaged in drop shipping?–- RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Does drop shipping make more sense for retailers such as REI and Macy’s and less for others? Do you overall see more benefits for retailers than drawbacks from vendor direct fulfillment?
Poll
BrainTrust
Neil Saunders
Managing Director, GlobalData
Jasmine Glasheen
Content Marketing Manager, Surefront
For a retailer like REI, which operates in categories with an enormous amount of choice, drop shipping makes sense. There is little point holding inventory of every outdoor gadget and widget under the sun – especially as many will be low-volume sellers – when they can be shipped direct.
Independent retailers have done this for decades. My only question is what took them so long?
Any product category that involves color and size permutations is a candidate for vendor-direct drop shipping. The vendors should have a wider assortment, access, or resources to fulfill a customer order for a specific SKU. The next best recourse is for the retailer to locate the SKU in another store and have it shipped from there.
Vendor direct sounds like a double-edged sword to me. A very sharp double-edged sword. Sure, initially the REI or Macy’s shopper gets access to a broader range of product. Win win. But it also seems that the shopper is pretty quickly taught to bypass the retailer and go — vendor direct. Literally. Very efficient in the beginning, but not without some downside over time.
Drop ship does and has made sense for some time. Advertising it is the big difference. Footwear has been done this way for many years and it is a win for the customer, the retailer and the vendor. If a retailer doesn’t own the product they don’t have to invest in the inventory, carry it for a season or more and mark it down when it doesn’t sell. The big deal in clothing is size but every store has a different profile and it almost impossible to customize the optimal size run for all locations. This gives retailers the opportunity to show but not necessarily stock in all locations. We should see more of this going forward.
Endless aisle is a key buzzword in the industry, however, it’s not for everyone. For fashion retailers, sometimes “less is more” is a better strategy to tell compelling stories and not overwhelm the customers with too many choices.
For specialty retailers that have limited space in-store, the ability to offer a wider range of product, size and color online is a very attractive proposition. What they need to ensure is that they have rules of engagement and delivery standards that will not detract from their brand value. This is the biggest danger for these retailers as the whole experience will reflect on their brand so it has to be good. The upside is huge with better sales, profit and customer satisfaction with very small impact on their business.
Would this be appropriate for all retailers? Probably most but not all and what is critical is making sure that the retailer maintains control and sets the rules and standards. They also need to make sure that they do not get seduced into areas that are not their core business and outside their area of expertise as consumers will quickly distrust retailers who try to become what they are not.
The fight against Amazon is strong and well with this sort of initiative from specialty retailers like REI. If they build the brand and the trust correctly they will win. Who would you go to for unique products if the experience is the same – a specialist like REI or a generalist like Amazon?
Dropshipping makes perfect sense for a retailer like REI where customers need specific parts for gear. There is not much sense in stocking each of these items in-store or even in-warehouse for the very occasional shopper. However, it’s important for these pieces to be available from a customer service standpoint. So dropshipping is the logical solution. Dropshipping doesn’t make sense for every retailer, but for REI it seems to be a no-brainer.
Today’s empowered shoppers want to choose from a multitude of products and delivery options and expect immediacy, convenience and simplicity. Competing against Amazon and other retailers with extensive product offerings is driving more retailers to offer drop ship services from their trading partners. The end result is broader product offerings, on-time, accurate shipments to customers, improved customer service and business growth opportunities.
Drop shipping provides an effective way for omnichannel retailers to drive additional sales with very little expense or risk. The potential risks of drop ship fulfillment can be mitigated by actively monitoring and managing order tracking, shipping costs and service level agreements (SLAs) with vendors.
Vendor direct shipping can help compete with Amazon’s delivery time frames. But this means REI will also face Amazon’s problems, such as vendors trying to recruit customers directly, vendors trying to incentivize (buy) reviews, products being shipped late/defective/not at all, mixed branding messages, etc.
Essentially, the success or failure of this venture is dependent upon whether REI can trust each individual vendor to represent their brand, and whether they have a system in place to nip issues in the bud as they arise.
Drop shipping makes a lot of sense for many retailers, especially where the variety of options prohibit maintaining inventory of all sizes and styles. But it’s not for everyone — food retailers in particular would be creating more problems than they solve, except in some special-order instances.
Many retailers are using the drop shipping model because of efficiency. Selling online and through social media has created the perfect environment to implement it. I think it can work well for businesses anywhere from boutique to big-box retailers.