Drop Shipping: A New Opportunity for Retailers and Suppliers

The real Miracle on 34^th Street this year would be if retail sales in Macy’s famous flagship store in New York’s Herald Square and in brick-and-mortar stores across the country took off like the reindeer pulling Santa’s sleigh.

Instead, as 2017 draws to a close, more than 8,600 brick-and-mortar stores that were open for business as the new year dawned last January have closed before we gather to sing Auld Lang Syne. To appreciate just how bleak that number is, consider that the previous high of 6,163 store closings in one year took place in 2008, as the worst Recession since the Great Depression took hold.

It’s not that all brick-and-mortar retail stores are on the verge of padlocking their doors. At this point, only about 15 percent of retail sales are going to e-commerce. The vast majority of us still leave our homes and go to a physical store to make our purchases. But all of the growth now is in e-commerce.

By the year 2020, Forrester Research predicts that online sales will top $523 billion in the United States alone. That’s up 56 percent from $335 million in 2015, and represents an increase from 244 million consumers browsing or buying online to 270 million—with most of the increase driven by activity on mobile devices.

In fact, millennials—those between the ages of 21 and 34—are already doing most of their online shopping on their smartphones and other mobile devices. In 2017, they will do 44 percent of their shopping online, and 67 percent of that will be done on mobile devices.

This is clearly a difficult time for brick-and-mortar retailers and suppliers fighting for their share of the burgeoning online sales pie. But in recent years, a radical new solution has emerged.

It’s called drop shipping. And you’ve probably done it without even knowing.

The concept is pretty simple: A customer goes online to shop at a favorite store’s site. Let’s say the retail price of the product is $200. The store collects the money, and forwards the customer’s order to a supplier, paying the vendor a hypothetical $150 wholesale price, while pocketing a cool $50 profit.

The vendor then ships the product directly to the customer. At no time is the product ever actually in the store’s inventory. And at no time does the retailer actually handle the product.

Most customers who shop at the online sites of their favorite brand name stores are glad they can order from a much larger selection than is available in-store. And they are likely blissfully unaware of how the product they ordered arrives at their door. Currently, 25 to 30 percent of all e-commerce transactions are drop shipped.

Tuning Into the Omnichannel

Drop shipping has quickly become an integral part of what’s called an omnichannel sales approach, which means providing an integrated experience for customers wherever they are—whether in the store, at work, at home, or traveling, and whether on their telephone, mobile app, laptop, desktop, or any other platform.

Walmart is a good example of a major store chain that established strong web sales by leveraging its stores as convenient places for shoppers to pick up items they ordered online. And the retail giant also purchased Jet.com, a popular online site that sells everything from organic groceries to furniture; ModCloth, a women’s fashion site; and Bonobos, a men’s fashion site.

Amid all the turmoil, Amazon—the behemoth that stands astride the online shopping world by elevating market share over profits—spent $13.7 billion to buy the Whole Foods grocery chain, and immediately slashed prices by 43 percent. The company has also opened several brick-and-mortar bookstores, campus bookstores, and convenience stores.

With most retail sales still taking place in brick-and-mortar stores and all of the growth happening in e-commerce, it’s no wonder that omnichannel shoppers spend a whopping 76 percent more than shoppers who only make purchases in store.

That’s why drop shipping is such an elegant solution. For example, even the remaining large mall anchor stores rarely have the space to carry every color and every size of all the clothes and shoes they sell, not to mention the thousands of home goods, appliances, toys, and other merchandise they may want to sell. Drop shipping removes that barrier.

And it works for vendors as well. Stores may be reluctant to stock a large quantity of a product they ’re not sure will sell. And vendors have difficulty getting higher-risk products in front of potential customers.  Drop shipping removes those barriers.

Recently, the Center for Supply Chain Research at Lehigh conducted a series of half-hour interviews with retailers, manufacturers and suppliers to learn what they see as the opportunities and barriers to drop shipping. One of our interview subjects told us that, for retailers and vendors, a successful drop shipping strategy “is all about realizing that we’re codependent.”

Another succinctly summed up the situation:

“Neither one of us will survive or it won't be as easy to survive unless we work together, which seems like such a simple thing, but it's just not historically how businesses worked."

Risk and Reward

As in all business partnerships, there is risk. Retailers need real-time inventory data from vendors they work with so they know if items listed on their website are actually in stock when a customer places an order. They also know they will be blamed if vendors are out of stock, or ship goods that are damaged or arrive late—and possibly lose a customer for life. The eft (EyeforTransport) Supply Chain Intelligence Report found that 70 percent of consumers will abandon a retailer completely after just one bad delivery.

Vendors, meanwhile, need accurate projections from retailers to ensure they have the inventory they need to fulfill orders. And in a business environment in which shipping in bulk is the key to success, vendors face the high costs associated with serving a single customer ordering through a retailer.

To forge a seamlessly functioning partnership requires investing in state-of-the-art technology and real-time data sharing. But more than that, it requires trust, authenticity, and transparency. Both retailers and vendors need to share data and provide visibility into their businesses. All supply chain partners need to see all relevant data as quickly as possible to ensure an optimized supply chain.

It’s a new retail world, and that requires new solutions and a new mindset for all involved. And there are certainly rewards to be reaped. Drop shipping is projected to grow into 15 to 20 percent of all retail sales—roughly the same percentage that total e-commerce now represents.

Retailers and suppliers who want to not only survive, but thrive, should make a New Year’s Resolution to set aside historical conflicts and barriers to working together and build a strong, collaborative relationship that benefits both sides.

As one of our interview subjects told us:

“With the way the consumer buying patterns are changing, you can't do business as you’ve always done and expect to have the same sales that you always did. You have to be adaptable and willing to change.”