Will drop shipping become a major catalyst of online growth?

Discussion
Photo: UPS
Mar 29, 2021
Tom Ryan

Foot Locker recently began piloting a drop ship program with Nike to provide customers with access to inventory beyond its stores and warehouses.

Dick Johnson, CEO, said on Foot Locker’s fourth quarter earnings call, “While it’s early on, the program aims to provide more of the right product at the right time to better satisfy customer demand in shortened lead times.”

In the Q&A session, he said the program was in the “early, early stages” and wasn’t yet helping mitigate inventory shortages due to congestion at West Coast ports.

Drop shipping use is believed to have accelerated over the last year in line with online growth. Macy’s, Nordstrom, Kohl’s, Target, Lowe’s, Best Buy, REI, Chewy, DSW, Wayfair and Williams-Sonoma are among those offering drop shipments. Prada recently created waves in the luxury space by inking a drop ship deal with Net-a-Porter.

For retailers, the pros of drop shipping are lower inventory risk and the ability to offer an “endless aisle” of products online. Retailers gain more control over pricing, promotion and service versus a marketplace arrangement.

The cons for retailers include the need to provide information on their best customers to vendors as well as the loss of complete control of delivery. Retailers earn a commission on the sale rather than the typically higher retail markup.

At its recent investor event, Nordstrom said it sees the possibility of expanding its online assortment to 20 times that offered in stores, up from three times currently, as it leans into drop shipments, concessions and revenue share deals. At Nordstrom’s Anniversary Sale in August, over one quarter of online sales were fulfilled by drop ship.

According to WWD, Pete Nordstrom, president, told investors, “We are moving from a transactional way of doing business and more into a collaborative way, which in a lot of ways share the risk.”

Niraj Shah, Wayfair’s CEO, told analysts last November, “When it comes to those suppliers who drop ship to our customers, we are working hand-in-hand to share best practices on how to manage the complexities of elevated demand, even if we’re not directly handling the parcel. We’re also closely tracking our suppliers inventory positions and backlogs to diagnose and, together, troubleshoot logistics issues before they become bigger problems.”

DISCUSSION QUESTIONS: Do you see more positives than negatives in drop shipping for retailers? Is it a better option for retailers than setting up a marketplace?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"This is very good news for the large retailers, especially department stores under a ton of pressure."
"In addition to the noted advantages of drop shipping, this reduces the need for in-store picking, assembling and shipping. Not to mention the “final mile” savings..."
"Drop shipping by established retailers needs to be weighed against the loss of control of customer experience."

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22 Comments on "Will drop shipping become a major catalyst of online growth?"


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Mark Ryski
BrainTrust

Retailers should do drop ship – if they can do it effectively. Shoppers are different and their needs are different. While there are no doubt challenges to successfully executing drop shipping, I believe the advantages of offering it provide retailers with an important way to better control the customer experience. While retailers will always need to make trade-offs and prioritize which services they offers, drop shipping is likely one they should keep at the top of the list.

David Naumann
BrainTrust

Drop shipping is a great strategy to extend product offering, eliminate inventory risk, reduce shipping costs and manage profit margins. While the margin potential is lower than traditional inventory models, it does eliminate the risk of obsolete inventory and markdowns due to lower than forecasted demand. Drop shipping is also a great way for retail start-ups to offer a full product line without investing in inventory or stores.

Christine Russo
BrainTrust

This is very good news for the large retailers, especially department stores under a ton of pressure. It’s also good news for the end-consumer. The middle man suffers because they bear all of the inventory risk. But department stores have been avoiding risks for years with massive RTVs for unsold product – which is also devastating to a brand. So this is the lesser of two evils for the brand. Second point is that the online shopping experience becomes less and less curated and more and more like a marketplace. Not a bad thing but gone will be the days of a curated POV by merchants and a store. Lastly, this broader product offering will give these stores better SEO.

Bob Amster
BrainTrust

Manufacturers drop shipping orders taken online by the retailer can promote e-commerce, but only if the manufacturer can guarantee that it will have product available for drop shipping or if manufacturers make real-time inventory available to those retailers so that retailers don’t sell that which can’t be had. Let us remember that, in many categories, manufacturers only produce a product line once and move on to the next product line or season; they don’t want to be stuck with over-inventoried items either. In categories of basic or staple products, the challenge of inventory management by manufacturers is easier to take on because both manufacture and sales are more fluid, less seasonal and there is a great likelihood that the manufacturer can fill a retailer’s voids.

Gene Detroyer
BrainTrust

The retailer has a choice. If a customer desires a size, color, or style they don’t have the retailer can say “sorry” and the customer can step out of the store and order the item they want directly from the manufacturer. Or the retailer can say, “Wait a moment. let’s get you what you want and we can have it sent directly to you. You will get it by tomorrow.” If I am the retailer, I know which interaction I choose — the one that makes the stronger customer connection.

And, not only is there a stronger customer connection, but as Nordstrom said, “…expanding its online assortment to 20 times that offered in stores.” Imagine expanding one’s offering without adding a penny to the cost of inventory. In fact, saving pennies with on-hand inventory and increasing ROI.

Kathleen Fischer
BrainTrust

Dropshipping offers customers additional products and delivery options to help meet their expectations of convenience, immediacy, and simplicity. Competing against Amazon and other retailers with extensive product offerings is driving more retailers to offer dropship services from their trading partners. The end result is generally broader product offerings, on-time delivery, accurate shipments, improved customer services, and business growth opportunities.

Ken Lonyai
BrainTrust

Drop shipping will be a catalyst of online growth, but ultimately not for retailers. D2C is a huge opportunity as brands are using many channels to have dialog with consumers and are starting to offer direct fulfillment. As they put infrastructure in place to ship orders effectively, they will more and more look at retailers as an unneeded drain on profits and obfuscation of their brand messaging. All retailers are doing with dropshipping now is providing brands a test case for D2C mechanisms and time to build out their fulfillment systems.

When in a few years we’re discussing the rise of D2C at the expense of retailers, expect me to reference these comments.

Perry Kramer
BrainTrust

Drop ship should be looked at as standard function for most tier 1 and tier 2 retailers with their key suppliers. However retailers need to pick and choose which suppliers they establish this model with. There is not an established and accepted industry relationship and transaction set, with each supplier trying to dictate their own processes. As a result, retailers are often forced to have unique processes for each supplier and the overhead of establishing this relationship with every supplier would not be cost productive. For key suppliers who have mature processes it is a very viable model for certain merchandise mixes for all of the reasons stated and more.

Ricardo Belmar
BrainTrust

If properly managed yes, drop shipping is a great way for retailers to curate a broader selection of products that will retain customers while providing them with what they want. But as with any retail “feature,” the key is in the execution! Customers see these purchases as coming from the retailer, not the product source, and any issues that pop up in the fulfillment process will likewise reflect on the retailer. That means having the right tools in place to manage this process and provide the level of transparency and communication customers expect from the retailer. Whether or not this is a better choice than a marketplace depends on many factors. Certain transactional aspects are controlled and defined better with one format or the other, and retailers need to consider each carefully to determine what is best for them. The answer could, in fact, be both depending on product categories!

Yogesh Kulkarni
BrainTrust

The footwear market for brands such as Nike and Adidas has changed quite a bit recently during the pandemic. The “Limited Edition, Limited Supply” collab products have become the tip of the spear to now draw huge customer demand with sneakerheads trading for these products on StockX and Goat like it were GME or Tesla stock. Companies like Foot Locker cannot neither predict the demand nor miss this action and so drop ship becomes a great option for them. Broadly though, the drop ship fulfillment model isn’t good for retailers as brands have the cachet, increasing DTC reach and will eventually render the retailer channel superfluous.

Venky Ramesh
BrainTrust

Retailers can complement their current fulfillment model with drop shipping selectively to drive higher customer satisfaction. It makes sense, for example, when demand for the product is unpredictable, e.g. during the launch of a new product, for a promoted product, etc. when it presents inventory carrying risk for the retailer.

Mark Price
BrainTrust

Given the rapidly changing marketplace that we are facing today during and coming out of the pandemic, drop shipping makes more sense than ever. The big thing that retailers need is flexibility to change their assortment based on evolving consumer needs, and drop shipping permits those retailers to have that flexibility without incurring additional financial risk.

The risk to the retailer is that drop shipping places the responsibility for the end customer experience of receiving the product in the hands of a third-party. When that is executed in a highly controlled and measured fashion, it is not an issue; when you deal with smaller manufacturers who may not have such systems in place, the risk is not to the manufacture but to the brand which will be damaged should the delivery experience go awry.

Richard J. George, Ph.D.
BrainTrust

In addition to the noted advantages of drop shipping, this reduces the need for in-store picking, assembling and shipping. Not to mention the “final mile” savings for retailers.

Gene Detroyer
BrainTrust

Countless benefits, Professor!

David Mascitto
Guest

With drop-shipping, the retailer has a higher degree of control over the customer experience and the customer retains the convenience of a relationship with the retailer (for example, you can’t return a marketplace product to a Best Buy store). Therefore, brand promise is kept more or less intact. The biggest challenge I can see arising from marketplaces is differentiation. As the proliferation of marketplaces continues, they risk becoming commoditized, diluting the power of the brand.

Liza Amlani
BrainTrust

There are definitely more positives than negatives to drop shipping, but it all comes down to the relationship the retailers have with their vendors/suppliers.

If we look at these relationships as partnerships, where visibility into supply chain, sourcing, and ethical practices are encouraged, this could be a game changer for retail. Especially those that want to truly be sustainable and transparent in their practices.

Speed to market, fewer touch points between supplier and end customer, and giving vendors/suppliers the opportunity to partner and come along the retailers journey are all positives. For example, as the retailer advances in track and trace technology, so would the vendor partner.

The downfall is that the retailers will have less control on the customer experience and if vendors/suppliers will execute with the same standard of execution as the retailer would. The retailer could have to manage a lot more than they intended, especially if they don’t have visibility to a vendor’s practices at all times.

Karen S. Herman
BrainTrust

Nimble and quick is the advantage of drop ship. I see more positives for an established retailer to integrate drop ship programs that allow for collaboration with emerging and popular brands that increase their online presence and expand product offerings. The quote from Pete Nordstrom to investors is spot-on … “We are moving from a transactional way of doing business and more into a collaborative way, which in a lot of ways share the risk.” Better to work with new or existing partners on collaborative programs such as drop ship then go all-in on a marketplace that may offer less reach, fewer product offerings and carries the burden of greater inventory and fulfillment responsibilities.

Jeff Sward
BrainTrust

Drop shipping done well is a tool for the retailer to maintain and build its relationship with the customer. Drop shipping done poorly is a reason for the customer to ultimately bypass the retailer completely and go direct to the brand. Ditto for setting up a marketplace. The relationship with the customer is the retailers to manage. If the retailer can’t add value during the whole transaction, then time and evolution have a way of sorting that out.

Harley Feldman
BrainTrust

Retailers will benefit from drop shipping as it gives them more options to satisfy customer demand. They will need to manage the drop shipping smartly in order to have a worthwhile margin since they will lose some of their ability to manage the order. Drop shipping is less expensive, more flexible and much easier to set up than creating their own marketplace.

Kenneth Leung
BrainTrust

Drop shipping by established retailers needs to be weighed against the loss of control of customer experience. Retailers need to decide whether they are to be a marketplace like Amazon or Walmart or be a provider of a curated shopping experience with easier to understand assortments and best product/customer knowledge at point of service. I don’t think drop shipping is the universal solution for all department stores or retailers.

Verlin Youd
BrainTrust

First, why hasn’t this been the case for years already? In a world where customer experience, including product availability, has been the focus for a long time, this should be old hat by now. Second, it’s been done very successfully in the B2B world for years, so there are many lessons learned and experience available to accelerate implementations. Finally, partnership will become even more critical in order to set correct expectations for customers and deliver consistently.

KimberleyBaudry
Guest

Drop ship options will support retailers’ omnichannel strategies and improve customer experiences in many ways, like increasing availability to more SKUs. As stated, it will also allow spreading of risk between retailers and suppliers.

One thing that needs to be considered though is how this will impact the supply chain and distribution network of suppliers. eCommerce orders significantly increase the complexity of filling orders. Instead of shipping cases or pallets of products to retailers, these companies will now be challenged with shipping eaches to a person. It is going to be the way of the future as eCommerce channels continue to grow, but it requires careful planning.

wpDiscuz
Braintrust
"This is very good news for the large retailers, especially department stores under a ton of pressure."
"In addition to the noted advantages of drop shipping, this reduces the need for in-store picking, assembling and shipping. Not to mention the “final mile” savings..."
"Drop shipping by established retailers needs to be weighed against the loss of control of customer experience."

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