Drop-shipping: the competitive advantage of pure-players over bricks and mortar

I recently had a chance to briefly speak with Adam Jacobs, MD and founder of The Iconic. He’s a young and bullish entrepreneur who is doing a great job at cracking the serfdom of Australian shoppers created by the likes of David Jones and Myer.

I asked him how he manages his “free three-hour same day delivery” service for those products that are on demand, i.e. not physically stored in the warehouse but still available on the website. I admit the question was thought-provoking because it brings up one of the challenges retailers face when they have a drop shipping program in place.

But what's drop-shipping anyway?

Imagine the possibilities for retailers to display a product on their digital channels without having it in their inventory. Exciting? Welcome to drop shipping!

What has it got to do with The Long Tail?

For those who have missed out the debate on ‘the long tail’, this is my capsule summary: retailers can grow sales in two ways, a) selling fewer popular items in large quantities (the head) and/or, b) selling relatively small quantities of a large number of less popular products (the long tail).

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Now, and this is just an example, the ‘tail’ could be implemented with a drop shipping program, i.e. the niches will be part of product assortments of inventory on demand. We had a chance to see that the major challenges for retailers to implement the long tail strategy is to have access to a vast assortment of inventory on demand but this challenge can be overcome by a proper PIM solution.

Drop-shipping pitfalls

However, the problem to manage inventory on demand, compounded by the challenge of maintaining multiple supplier relationships, does not just require a proper PIM solution. The problem is broader and more complex. Firstly, I will breeze through the obvious advantages of drop-shipping, and secondly, I will dig a bit deeper in the potential pitfalls associated with it.

For those retailers not in full control of their supply chain, the benefits of such service range from less capital required given you don't have to purchase a product unless you already made the sale and have been paid by the customer, to scalability, given most of the work to process additional orders will be borne by the suppliers, allowing you to expand with fewer growing pains and less incremental work. All this convenience and flexibility comes at a price, though. And that bring us once at the important considerations that retailers have to contemplate before embarking on a “drop-shipping program”.

Let's take a look at some of them.

1. Choosing the "right" drop-ship supplier. Have you ever been blamed for something that wasn't your fault, but you had to accept responsibility for the mistake anyway? This is why retailers have to face this hurdle earlier than later to avoid losing customer loyalty and experience brand erosion.
   Remember: the drop-shipping wholesaler doesn't exist to the end customer. Its sole responsibility is to stock and ship products.
2. Shopping complexities. What happens when your customer place an order for three items, all of which are available only from separate suppliers, and all are eligible for drop-shipping? As you’ll incur three separate charges, are you passing them along to the customer? What about shipping time? Are you shipping them separately or you think it’s wise to bundle them and ship once?
   Remember: you are not in full control of the supply chain and this has consequences that you have to factor in your business model.
3. Inventory issues. You should realise that your drop-shipping wholesaler also fulfill orders for other merchants hence its inventory changes on a daily basis. Can you see the problem?
   Unless your inventory is synced up with your drop-shipping wholesalers’, your customers will be misled by your offer.
   Remember: virtual integration to tightly coordinate supply chain parties is imperative to share knowledge across time and space boundaries. I am already hearing you saying that “my suppliers don’t always support the technology required”…you’d better fix it now.

I personally think that the biggest hurdle is picking a niche and a product to focus on. This brings us back to the long tail concept. To rephrase Ted Hurlbut, there are opportunities in carefully select items that deepen assortments in a retailer’s niche that appeal specifically to the customer’s imagination.

This is likely the most pregnant of long-term consequences decision that any retailers will do. Failure or success will depend on this decision because all other pitfalls are known problems with known solutions.

Advantage over brick-and-mortar stores

If you have been following this blog, you know that I consider the very idea of “channel” muddle-headed. As the digital literacy rises at incredible pace, shoppers expectations rises at even faster pace forcing retailers to fundamentally review their business models and services. One of the challenges is to ditch the idea that pure-players have an enviable advantage over brick-and-mortar stores. This is non-sense (see here). However, physical and digital though inseparable are distinct with discrete features that differentiate them. The drop-shipping service, and more generally, the long tail concept, is simply foreigner to brick-and-mortar stores. In fact, by definition, they must limit selection, choosing to carry some things, rejecting others, in other words, cutting off The Long Tail at some point or another.

Can you see the potential when combining these two worlds? I do and I long to see Australian retailers embracing it.

Curiosity.

I spent two months last year in the Netherlands (obviously doing PIM) and I noticed that Perry Sport has a creative variant of drop-shipping. It’s called ship-from-shop. Basically, consumer orders do not come from the e-commerce DC, but from the store. Thus stores change into mini-warehouses from which orders are picked on behalf of the web shop and the stores. 
I am also aware that Macy's claims that the company is converting sales floor in department stores to storage space to enable efficient handling of consumer orders...ship-from-shop!