Enterprise Drop Shipping Part 1: Why Drop Shipping is a Key Solution For Out of Stock Inventory
By: Jeremy Hanks
“Customers that used to have to shop in stores must now want to shop” – IHL
In a recent benchmark study IHL takes a deep dive into the relationship between ecommerce, omnichannel, and out of stocks in brick and mortar stores. Their main conclusion is that out of stocks are a huge issue that retailers have yet to address, costing the industry $984B per year worldwide. And this situation is only getting worse. As more retailers implement omnichannel strategies such as SFS and BOPIS, store inventories and resources are growing more and more strained.
In the coming weeks we’ll be offering a series of blog posts detailing how drop shipping is an important solution to the out of stock and inventory visibility issues that ecommerce and omnichannel strategies are exacerbating. We’ll discuss what drop shipping is at scale, why it’s so important, and the technical details of how to implement and run a successful enterprise level program.
In this post I’ll discuss some of the insights and conclusions from IHL’s research study to frame why and how drop shipping is such an important strategy for modern retail.
There’s No Stopping Ecommerce
You may have heard it a million times but it’s important to keep top of mind: ecommerce is on an unstoppable growth trajectory. In 2017 there were $453B in ecommerce sales, representing a 16% growth over 2016. Overall, ecommerce currently makes up 13% of all retail in the United States.
Such statistics, however, don’t tell the whole story of ecommerce’s influence. Currently 55% of all American households are Amazon Prime members. Such members do much of their product research and spend larger portions of their income online. They’re also much more likely to simply buy something from Amazon when they can’t find a product they want in a store. In other words ecommerce doesn’t just represent a redirection of sales income, but an overall change in consumer behavior and thinking that is much wider than just sales statistics. This is born out by the fact that even with brick and mortar sales, 50% of all in-store purchases now start with some manner of online research.
Additionally, consumers no longer simply accept a product being out of stock at a store. 29% of Amazon Prime Members and 17% of nonmembers will simply buy a product online when they can’t find it on store shelves.
That’s why according to IHL the most important new reality on the ground is the fact that customers that used to have to shop in stores must now want to shop.
Ecommerce Giants Have More Inventory
The companies that are spurring–and taking advantage of–these changes are ecommerce giants such as Amazon and, more recently, Walmart. A large part of their ability to meet these new consumer behaviors and expectations is product availability.
Consumers know that online marketplaces are seldom out of stock; there will always be some seller with the product they are looking for. They also know that no brick and mortar store can compete with the breadth and depth of inventory on such marketplaces.
Ebay has over one billion products listed on its site, while Amazon has 564 million. Even Walmart’s much smaller online item count of 29 million is still much more than any brick or mortar store could ever hold. By comparison a physically massive Walmart Supercenter only has 150,000 items in stock, Target has 80,000, Kroger has 45,000, and Costco holds just 3,700 products. Add to this the difficulty of finding products, waiting in lines, and the travel time it takes to go to and from a store and it’s easy to see why consumer behaviors are shifting more and more toward online shopping.
So Why Shop in Stores at All?
That said, 87% of retail purchases still occur in brick and mortar stores. According to IHL, the five major reasons why people shop at stores include:
- Want/need the product immediately
- Desire to touch and feel the item (try it on)
- Don’t want to pay expedited delivery charges
- Support local retailers
- Convenience/easier than online
Four of the above reasons directly relate to products being in stock. This means that any major strategy for improving the customer experience and keeping them coming into stores will have to involve solving for the out of stock issues that plague retail. Consumers want the right product, at the right time, and at the right place, otherwise they’ll just open their phones and find it somewhere else.
If in-store SKU availability is such an important aspect of keeping consumers coming to brick and mortar stores, this begs the question: how are physical retailers doing at preventing out of stocks?
Simply put, terrible.
Let’s take a look.
The Massive In Store Out of Stock Issue
IHL defines out of stocks as any time a consumer enters a store with intent to buy an item and leaves for any reason other than the price was too high. According to IHL’s research, the number of times a consumer faced out of stock issues at a store was:
- 1 in 5 shopping trips for Food/Drug/Mass merchants
- 1 in 4 shopping trips for Department stores and Specialty stores
- 1 in 3 shopping trips for electronics
This isn’t surprising considering the fact that stores have the lowest inventory accuracy (50-65%) of any retail inventory asset. Omnichannel strategies are only making this problem worse.
The wider adoption of BOPIS and SFS is leading to two specific out-of-stock issues. First, more and more store inventory and staff resources are being used to fulfill online orders, leaving stores empty of stock and lacking available employees to help customers.
Second, in-store fulfillment of orders is uncovering previously unidentified out of stock issues. When a brick and mortar customer buys something on their own they are often willing to replace an item they wanted with another similar one. They are not, however, so forgiving with BOPIS and SFS orders. Customers generally want the exact item they bought online, not a substitution. This exacerbates out of stock issues for stores with omnichannel fulfillment strategies.
What all this means is that if the major reasons behind customers coming into a store are based on item availability, and potentially 1 out of 3 trips to the store ends in an out of stock experience, retailers have a big problem on their hands.
How Big of A Problem?
Out of stocks drive customers to shop at competitors or go online. According to IHL, when a consumer can’t find the item they want they only ask a store associate for help 17% of the time. That means that 83% of the time they leave unsatisfied.
That’s why Amazon Prime members will buy from a competitor or online 23% and 29% of the time respectively when not able to find the in store item they want. For non-Amazon Prime members the rates are 29% and 17%. This has such a huge positive effect on ecommerce that IHL estimates 24% of Amazon sales volume comes from customers who first attempted to buy a product in a store.
Overall, out of stocks cost US retailers over $169B per year, including $24B tied up in safety stocks.
Drop Shipping As a Solution to Out of Stocks
There are three parts to developing a strategy to deal with out of stocks. The first is making sure that inventory information is accurate and as close to real time as possible before the customer buys a product. This involves investing in things such as advanced distributed order management systems, RFID, computer vision, and better forecasting tools to make sure that a retailer’s supply chain and store inventory are as up to date and accurate as possible.
The second is increasing the amount of inventory available to be shipped to a store or customer.
The third involves “save the sale” situations, where a store might not have an item in stock but can direct a customer to another location or arrange to have the item shipped to them.
Drop shipping can have a huge positive impact with these last two.
Currently there are 660 million items ready to be drop shipped in the US. That means developing a drop ship program allows retailers to access inventory at levels comparable to online marketplaces. As a result, Drop shipping can provide a slew of options for helping to prevent out of stock situations with omnichannel strategies such as BOPIS or even SFS. If a customer searching online can’t find an item at a store they want, alternatives can be offered through drop shipping such as having the items sent directly to them or to the store location of their choice.
Save the Sale
As for “save the sale” situations, retailers need the ability to offer alternatives to customers by stitching together inventory data from other stores, fulfillment centers, warehouses, 3PLs, licensed manufacturers, and factories. They need a way to see and access all the inventory assets beyond the walls of a store.
A key part of such a vision is creating more integrated relationships with suppliers, so that all the inventory assets in a retailer’s ecosystem are able to be seen online, or by store employees, and then drop shipped to customers. It’s because of such advantages that retailers growing their sales at a pace of 5% or more are 80% more likely to drop ship.
Expanding inventory data to include suppliers is therefore essential to achieve success with consumers and could potentially save US brick and mortar retailers $21.7B per year.
If you want a quick overview of the stats and information in this post, take a look at our handy infographic!