Why Drop Shipping is a Major Growth Opportunity

Occasionally we hear stories from suppliers about retailer partners who stop purchasing wholesale once they realize they can make piecemeal orders through drop shipping. Such shifts by retailers make it much more difficult for suppliers and brands to perform accurate demand/inventory forecasting and increases their exposure to inventory risk. This has made some brands so nervous about drop shipping that they prefer not to tell many of their retailers that they even have direct-to-consumer pick, pack, and ship capabilities.

In this post, I’d like to offer a bird’s eye view about drop shipping and ecommerce that might help in addressing these real concerns.

I have three specific points to make:

  • Drop shipping (and ecommerce) is a major growth opportunity
  • Direct-to-consumer operations demand a paradigm shift towards a retail framework
  • Choose your drop shipping retail partners carefully

Ecommerce and Drop Shipping Are Major Growth Opportunities

We’re reaching a tipping point in the economy where it’s no longer possible for suppliers and brands to ignore ecommerce or pass it onto their retail partners to deal with.

According NRF, ecommerce is expected to grow 8-12% compared to 2.8% for brick and mortar retail. In total, ecommerce sales will make up between $427B-443B this year and by 2020 they are projected to reach $632B.

This has led Business Insider to state:

“This [ecommerce growth] further illustrates the importance of digital and omnichannel offerings. The NRF’s predictions drive home the point that online is going to be the major driver of growth for retail moving forward. This means that while in-person sales are still important, finding ways to capitalize on rising e-commerce, like through the addition of new channels or hybrid omnichannel functionality, will be increasingly important.”

The growth of ecommerce presents two particular opportunities for expanding a brand or supplier’s sales channels:

  1. Direct-to-consumer offerings through online marketplaces or digital storefronts owned and operated by brands/suppliers
  2. Drop shipping operations that can piggyback on the growth of retail partner ecommerce sales

The good news is that both of these ecommerce growth opportunities require similar technology, logistics, and infrastructure investments. So if you’ve already invested in direct to consumer capabilities then you might as well drop ship (and vice versa).

And because in-store experiences are still important (as seen by Amazon’s recent acquisition of Whole Foods and their partnership with Kohl’s), opening these new channels should not reduce wholesale revenue but complement it.

Finally, since retailers are already putting money and overhead into their digital storefronts, advertising, and growing their customer base, brands with drop shipping programs are able to reap the benefits of their retail partners’ investments.

Suppliers Need to Think Like Retailers

Any consumer-driven program like drop shipping will come with a new set of challenges–such as increased inventory risk and much more complicated volume/inventory forecasting–that wholesale brands and suppliers might not have experience handling.

Fortunately, these are issues that retailers successfully tackle on a daily basis to great profit.

If retailers are able to do it then there’s no reason why suppliers or brands can’t.

Essentially, what is required is a paradigm shift from wholesale to retail thinking. Once that shift is made then the strategies and tactics required to be successful come into focus, and drop shipping and ecommerce can be viewed as opportunities for growth rather than threats to the current paradigm.

Putting on your “retail hat” also allows you to access the host of sophisticated solutions and procedures that have been developed to deal with the complexities of consumer-driven operations.

There is an entire support industry that has grown up around providing the technology, analytics, and logistics for tackling these challenges, and suppliers and brands should not hesitate to take advantage of them.

The Right Retail Partners

There is of course still the issue of some retailers attempting to profit from the growth of ecommerce generally, and drop shipping specifically, at the expense of brands and suppliers.

I laid out the characteristics of a good retail-partner for drop shipping in a previous post.

What it comes down to is that drop shipping requires a huge amount of communication, coordination, and integration that won’t function if a partnership is one-sided or dysfunctional.

Suppliers therefore need to work with retailers who are invested in the trading partnership.

First and foremost this means retailers that look at drop shipping as a complement for wholesale, not a replacement.

Retailers that attempt to completely replace wholesale purchases with a lower volume of drop shipping orders are essentially trying to put their suppliers out of business and should be avoided at all costs.

Drop Shipping For All!

As ecommerce continues to grow, omnichannel offerings will only become more important for brand revenue streams.

Instead of a threat, drop shipping should therefore be seen as a vital opportunity for brands to make the necessary pick, pack, and ship investments to take advantage of this growth.

This will require learning how to think and operate like a retailer for handling the challenges that come with drop shipping and direct-to-consumer retail.

It will also require being careful to develop strong retail partnerships based on solid coordination and the harnessing of ecommerce to the advantage of all parties involved.

Azad Sadr is Dsco’s head of industry research and content development.

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