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Cautious web retailers turn to drop shipping to sell more goods without risking more capital.
Associate Director of Research
Topics: Accessory Geeks, Adam Berkowitz, AllBrands LLC, David Byun, drop shipping, ebags inc., EDI, Jiffy Steamer Co., Jim Frome, John Douthat, Paula Rosenblum, Retail Systems Research LLC, Rob Cassidy, SPS Commerce, Stockn'Go
For small appliance retail chain AllBrands LLC, the best-selling item since the 70's has been the hand-held personal steamer from Jiffy Steamer Co. About 10 years ago, hoping to build on the product's success, the multichannel retailer decided to sell additional Jiffy Steamer products on its web site. Instead of ordering lots of new products, the retailer set up a drop-shipping arrangement in which Jiffy Steamer shipped the additional items directly to consumers.
"We only carried one Jiffy Steamer product for almost 20 years and we did $1 million in total sales on that one product," says president and CEO John Douthat. "But by putting all of their products on the web, we were able to test things out on a drop-ship basis. We now get about $1 million in sales on those products per month." With nearly 400 products available on AllBrands.com, Jiffy Steamer is now the retailer's largest drop shipper, he adds.
AllBrands' strategy is not uncommon, says Jim Frome, executive vice president and chief strategy officer at SPS Commerce, whose supply chain services include helping retailers link order management systems with drop-ship suppliers. Because retailing overall has struggled since the recession hit in 2008, more merchants are seeking ways to boost their fast-growing online channels without putting up a lot of capital, he says. Drop shipping fills the bill. Three years ago, about 10% of SPS Commerce's deals linking vendors and retailers involved drop-shipping arrangements for e-commerce sites; now it's around 35%, he says.
By having suppliers ship directly to customers, merchants can experiment with new products, he says. They are branching into new merchandising categories in which they have no track record and trying out new styles, all the while avoiding taking up limited warehouse space and eliminating the risk of investing in inventory that may not sell.
Drop shipping is especially a boon for start-ups like health and beauty products retailer Stockn'Go. It currently drop ships about 15% of its products, but plans to increase that to 50% in five years. Last month, for example, the web-only retailer began expanding into the fragrance category, and by the end of the year it will add 1,500 SKUs to its e-commerce site, all of them drop shipped from 28 suppliers.
"When we started out, we mostly focused on health and beauty products, but with a new vendor or product, we want to make sure there is a demand for it before we house any inventory," says owner Adam Berkowitz. "We look at the opportunity and what are the costs and risks associated."
Stockn'Go looks for suppliers with reliable inventory availability and good reputations, and keeps an eye out for added perks. "Some shippers we deal with will pay for shipping," Berkowitz says.
Setting up contracts with each drop shipper can be complicated, and retailers need to take into account a vendor's payment terms and whether there is a set charge for warehousing and shipping costs or if the supplier charges a percentage of sales, says Paula Rosenblum, co-founder of Retail Systems Research LLC. "Will you need to pay a drop shipper to ensure that they are always in stock?" she asks. "You want to have guidelines in place that ensures they pack things to your specifications and make sure they know how important your customers are to you. You need to have a dedicated person on the other end that is handling your account and shares your values."
When it came to establishing drop-ship arrangements, AllBrands had the advantage of relationships with companies that had been supplying its retail stores since 1976. The retailer found other suppliers through referrals or housewares and appliance shows, Douthat says.
Depending on a retailer's sales, some suppliers will charge a drop-shipping fee on top of a shipping fee, while others will not. "If it's a new vendor, they might want to test you out with a drop-ship fee," Douthat says. "For small orders, they will usually charge anywhere from three to five dollars."
The margins can vary widely in each product category, but as a specialty vacuum cleaner and sewing machine retailer, AllBrands typically averages about 25% gross margins on items it drop ships and 30% on products it stocks in its warehouse, he says. "We've calculated that we have to sell at least 12 products per month to justify stocking that item."
AllBrands uses VendorNet Inc.'s Dropship Manager software to monitor orders from when the customer purchases an item, to when the item ships from the supplier's warehouse, to when the item is received. "Our suppliers get the VendorNet orders the same time we do," Douthat says. "They can process that order and get it out the next day or two. It's a paperless system that automatically gets an invoice and shipping confirmation to us."
No cash crunch
A well-established e-retailer that has honed its drop-shipping strategy over more than a decade is handbag and luggage retailer eBags Inc., which works with some 420 drop-ship suppliers and sold $132 million online last year, by Internet Retailer's estimate. Aside from its private-label product line and the closeout merchandise it purchases, the e-retailer warehouses virtually no inventory.
"We don't have to outlay any cash for the products we are selling," says eBags' vice president of operations Rob Cassidy. "We will get a payment from a customer 10 to 15 days before we pay the vendor, so we never get into cash crunch situations. That allows us to take more risks on our assortment. We can offer a really wide selection and get into a lot of different categories and our customers know that they will be able to get anything they need."
The biggest challenge is ensuring customer satisfaction, Cassidy says. EBags has procedures in place to ensure that new vendors are brought into its network quickly and deliver items fast.