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Web retailers have an edge when building ties with suppliers.
Associate Director of Research
In 2005, the founder of promotional products retailer Branders.com packed up his family and moved to Asia in search of cheap pens and coffee mugs. What Jerry McLaughlin discovered in his four-year stint that included many visits to Chinese factories was that direct sourcing from Asia is surprisingly straightforward—and that it's a strategy that could boost his profits dramatically.
"There is so much money to be saved in direct sourcing that it's just mind-boggling," says McLaughlin, CEO of Branders.com, a web-only retailer that sells promotional items to businesses. "In our industry, if a U.S. supplier says this product costs $1, I know that it will be about 30 cents in China. It just makes sense."
Whether dealing directly with manufacturers or buying through distributors, typically the more a retailer buys, the bigger the price break. And that suits the business model of many niche, web-only retailers that sell a limited range of very specialized products, but sell a lot of them because the Internet allows them to reach a broad audience. "There is really a food chain to distribution and it relates to volume," says Paul Shrater, CEO of Minimus.biz, which sells travel-size food and personal care products on the web. "The more volume, the higher up the food chain and the better the pricing."
Besides being able to buy in bulk, web retailers also require less lead time on their orders from suppliers, says Piyush Sampat, a senior manager at Deloitte Consulting LLP. That's because it's quicker to have entire orders shipped to a single fulfillment center than to break up orders into allotments for distribution centers serving a large number of individual stores, where merchandise then has to be unpacked and shelved. As a result, Sampat says, online-only buyers buy their products later, in smaller amounts and more frequently than those buying for retail chains. That makes it less likely web retailers will get stuck with merchandise that they can't sell.
But securing lower prices has been the biggest advantage for Branders.com in buying direct, as it's able to sell to customers for 20% less than its competitors.
McLaughlin has learned that negotiating over price is the norm with Asian manufacturers. "If their first offer is $1, just ignore that because it's not unusual for the price that they'll accept to be one-third of their first price," he says. "If you are focusing on that $1 and you get that down to 75 cents, you are feeling really good, but you don't realize that they will actually sell it for 35 cents."
Nor do orders need to be big, he says. "Some people think you need $50,000, but actually $5,000 is the minimum," McLaughlin says. "Do that three, four or five times and you'll feel more confident in placing larger orders."
McLaughlin's strategy has allowed him to build a business that attracts 400,000 unique visitors a month to Branders.com, which sells customized coffee mugs, pens, T-shirts and other promotional products. While he would not disclose sales, he says they have doubled in the past two years.
For Minimus.biz, the most effective sourcing strategy has been to identify distributors, most of them domestic, that don't have a strong Internet presence, and thus may not be known to rivals. "If you find a place like that, you may be at a competitive advantage," says Shrater. "If you find something on the Internet, so did your competitors."
From there, retailers are able move up the food chain and secure relationships with larger distributors and eventually manufacturers, which will have the lowest prices of all, he says.
Since 2004, Minimus.biz has grown from a one-man operation in an office with four shelves to 30 employees, 30,000 square feet and several million dollars in annual sales. The retailer sells directly to consumers on its web site, sells wholesale to corporations and government agencies, and drop ships to consumers on behalf of other retailers.
Once a web-only retailer has the product customers want at an attractive price, there are plenty of ways to sell it online. The first step is establishing favorable supplier relationships that enable an e-retailer to get the goods at the lowest possible prices.