Deliverance

Jay Shen, co-founder of MyCustoms, a Menlo Park, Calif.-based business service provider, says the backend is the most difficult component of international e-commerce. And it’s the least visible. “Often these problems do not come to the retailer’s attention until after they’ve conducted business,” he says. “It’s very intuitive for retailers to address the problems of language and currency, but they don’t have the knowledge to deal with duty and tariff.”

“There is no cookie-cutter, five-step solution to selling internationally,” says Scott Fox, vice president of marketing with LogiSoft, a Fairport, N.Y.-based global solutions integrator. “Every case is different.” That difference largely has to do with the product and how deep the retailer wants to plunge into the foreign market. Kodak, a LogiSoft client, was able to begin international sales in eight weeks, Fox says. However, Kodak is a Fortune 500 company that knew what it wanted to do, who it was selling to and had ground distribution in place in its target countries. “They made life easy for us.” More typically, it takes about a month of planning and three months of execution to begin foreign sales, he says. It is important to take a crawl-walk-run approach to going global.

There are strong indications that global demand for e-retailing will outpace the U.S. in a few years. When looking to go global, e-retailers must understand the importance of their backend operation. And that involves considering how to choose their product offering, how much added cost there is to global e-commerce, how to calculate fees and comply with regulations, how much local presence to maintain, and how to handle returns.

Since the beginning of Internet sales, people’s hopes and dreams of what could be sold internationally have changed, says Tracy Wilk, vice president of product management with Mountain View, Calif.-based CyberSource. “Expanding internationally is a lot harder than people thought,” he says. “People expected to storm the U.S. then very quickly move abroad.”

Shen sees the global e-commerce as young and budding. By 2004, international e-retailing is expected to surpass that in the U.S., he says. “There are a lot of things people are still learning, but they have learned from—and are avoiding some of the mistakes made by—U.S. e-retailers.”

The law of supply-and-demand generally dictates which products will sell well in foreign lands, Fox says. Items that are readily available locally are not likely to do well. But often, the European and Asian markets do not have access to U.S. products. Typically though, the products that did well in the early days of U.S. e-retailing—books, music, apparel, and computer goods—are the ones doing well in foreign markets, he says.

It is difficult to put a finger on the exact added cost an e-retailer will realize when shifting from domestic to global distribution. There are so many variables that each company will have different costs associated with overseas business. Those variables include the value of the product, the country it is entering, the type of product and the shipping method.

But, as a rule of thumb, Fox says, the cost of the logistics for doing business overseas can be 3-15% greater than that for U.S. distribution. Companies selling larger ticket items or items where competition forces price down view shipping as a breakeven venture, he says. However, those shipping lower ticket items or those with a narrow distribution, often use international shipping as a profit center. When looking at the cost of doing business globally, Fox says, it is critical to closely monitor the return on investment. For most companies, it takes 180 days for international sales to become profitable.

“A retailer in the U.S. who wants to move a music CD into Europe, may spend more in duties and taxes than on the CD itself,” Huff says. It may be smarter for low-ticket item retailers to consider moving items in bulk or finding local supply capabilities.

Shen says that at least 27 parties, such as the fulfiller, the export agency, the import agency and the broker, are involved in one international transaction before the product reaches the customer. “When you have that many parties, it is easier to make mistakes or miscommunicate,” Shen says. Providing consistent and accurate documentation to all the parties is important to preventing delays in shipping. Huff agrees, saying one of the most common pieces of paper missing with an international shipment is an invoice. “In the States, you can pack up anything in a box and ship it, it doesn’t have to have an invoice.” International shipments won’t budge without an invoice, he says.

Shen says the typical way to conduct an international transaction is to make the customer responsible for paying duties and taxes. In fact, that is how Lands’ End conducts its international transactions. Lands’ End provides only an estimate—based on information provided by the governments of countries it ships to—of those costs to its customers.

But companies such as MySource, LogiSoft, FULLeCOM and CyberSource will calculate all or some of the fees associated with international commerce. These services are linked to the retailer’s web site and perform the calculations instantly. This allows e-retailers to tell customers exactly what the costs will be.

The cost of managing the regulations and calculating duties manually is very high, partly because of redundancies, Shen says. “Upwards of 10% of the cost of the goods are being spent basically on moving paperwork,” he says. Companies using MyCustoms can expect to spend at most 5%, he says, adding that the cost decrease as the volume and value of the sales increase.

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When conducting transactions in foreign markets, it is best to get the money up front, Fox says. It is much less cumbersome for the retailer to collect the money online before shipping the merchandise. “You don’t want to have the distributors collecting the tax,” he says. This means it takes longer for the money to be routed back to the retailer.

Wilk agrees. Letting the customer know up-front what the end cost will be is a challenge to selling in foreign markets. Many companies offer landed cost services, which calculate the full cost (taxes, tariffs, shipping costs and duties) the buyer will bear. These services have been available for about 15 years, but migrated to the web less than 18 months ago. When an order is placed, the retailer’s web site contacts the landed cost service provider and within seconds the total is displayed on the retail site for the shopper. The cost of the technology to calculate shipping costs is affordable, says Wilk. Retailers can expect to pay from 10 to 25 cents per transaction up to $1 or more; it all depends on the value of the item being moved. The setup fees for such systems can cost several thousand dollars, he says. “Can mom-and-pop afford that? It all depends on the product they are selling,” he says. “If they are trying to sell CDs, it’s just not going to work.” For those selling bigger ticket items, it is worth it.

Government regulations also pose a problem for those shipping overseas, especially where software and computer hardware are concerned. The U.S. Department of Commerce’s Bureau of Export Administration maintains a list of persons, such as known terrorists, that U.S. companies are prohibited from selling to. Wilk says CyberSource developed export-compliance technology that checks where a person is dialing in from and checks the name and address against the list of denied persons.

Necessity was the mother of this technology’s invention. When CyberSource was one with its parent company Beyond.com, it was selling software and hardware online to foreign markets. “The government told us to put a system in place or they were going to shut us down,” Wilk says. Although this was developed for computer-related items, it can be used for other products. This can also keep retailers from shipping to countries where U.S. policy (such as embargoes) or channel controls (some manufacturers have exclusive agreements to only sell through certain retailers in some countries) prohibits trade. MyCustoms offers a similar service.

However, some restrictions are beginning to relax, Wilk says. For example, regulations are becoming more consistent in countries that belong to the European Economic Union. But adopting uniform import rules is slow and not yet across the board.

One method for avoiding some of the exporting hassles is to establish a physical presence in the target country. But setting up shop in a foreign country could be little more than exchanging one set of problems for another. Shen says there is benefit to having a local presence, but says retailers must weight that against the cost of being there. In most cases, it is too expensive to have a local distribution center. One strategy is to set up regional operations after a company has established itself in that market, he says.

That is exactly what Sumner, Wash.-based outfitters REI did in Japan. In 1989 REI opened its catalog to the Japanese market. Ten years later it launched a web store in Japan, and this past summer it opened a brick-and-mortar store near Tokyo. In September, the company opened a Japanese distribution center. Shipping from within the country significantly reduced duties and shipping times. Although the company ships across the world, Japan is the only physical presence it maintains. The move to having an in-country presence was not one of cost but of customer service. “If you can run everything from the U.S., it’s probably more cost effective,” an REI spokeswoman says. “We needed to provide a higher level of service. The web wasn’t our only vehicle for moving product in Japan, so we’ve had an advantage there.”

Like REI, Lands’ End established a catalog presence before opening online sales. Lands’ End, which ships to 175 countries, is using its UK distribution center to process all its European orders. Lands’ End has been in the UK for eight years and in Germany for six. The company also has a call center and distribution center in Japan. Lands’ End reported $1.3 billion in total sales in 1999, about 8% coming from abroad. The company recently built a warehouse in the UK with a five-year plan to use it as a distribution center for Europe. “It positioned us well to go further and launch the European web sites,” says Lori Lease, senior outbound manager with Lands’ End, of the company’s UK presence.

FULLeCOM, an Ontario, Calif.-based end-to-end service provider, has warehouses in Germany, Austria and the United Kingdom. FULLeCOM customers can have their product shipped in bulk to these foreign distribution centers, then shipped locally to customers. The system also works in reverse to the U.S. That model, says FULLeCOM EVP of Global Sales and Marketing Dina Marie Schon, will reduce shipping time and shipping costs. An item can arrive at the customer’s door in a matter of days, as opposed to weeks when coming from the U.S., she says. “Without startup costs, for most merchants to support what we support for backend services, they are looking at 20-30% cost per order,” she says. Her company’s end-to-end care is about 15.5%, she says.

Returned items from foreign destinations are often a complete loss, Fox says. Of the items returned, 55% are destroyed on the ground because it is more expensive to put them back into inventory and attempt to resell them. “You damn well better control your returns,” Fox says. “If they are at 12-14%, you will never see the light of day or a profit.”

“Retailers face the exact costs and complexities in getting the product there in the first place, but in reverse,” Wilk says of foreign returns. “Not only do they have to pay the taxes, tariffs and shipping costs in return, but often there are government bureaucracies at play.” Those can take the shape of additional paper work or special shipping arrangements, he says. “It’s just far more complex than simply dropping it in the mail.”

Shen says, “Once you’ve paid a government, it is a big task to get that money back. A lot of times the cost of getting that money back is greater than the cost of the item.” Huff agrees that returns can be a problem if they are not classified as a return. “You have to treat it as a return and pass it through the same way, or it may end up getting counted as two independent shipments,” Huff says. That would mean double the duties and taxes. “There are cases where it will be more costly to return it.” But that is true also for low-cost items sold domestically.

With a physical presence, Lands’ End and REI find it easier to handle returns. Since it opened its catalog business in Japan, REI has maintained a service desk that accepts returns. REI ships some items back to the U.S., but others were sold online as discounted items.

Lands’ End customers send returns to the distribution center from where the item came. German customers can take or send items to the phone center in Metlach, which then ships them in bulk back to the UK distribution center. The cost per piece of returns for international sales is about the same as it is for domestic sales, Lease says. German returns cost more because of the return transit fees. Lands’ End does not provide free return shipping to customers.

FULLeCOM also handles returns from its foreign distribution centers. The company’s clients decide if the items are to be destroyed—almost always where food is involved—or refurbished for sale, Schon says.