Can drop shipping level the retail playing field?

This article is brought to you by Retail Technology Review: Can drop shipping level the retail playing field?.

Ken Chrisman, division President of Sealed Air, a global leader in packaging solutions and technology, discusses the risks of implementing drop shipping and how to mitigate those while remaining competitive and profitable in the marketplace.

As traditional brick-and-mortar retailers look to wage war on the dominance of e-commerce giants, delivery services are a key battleground. Breaking from traditional fulfilment strategies can offer a competitive advantage if leveraged and tailored appropriately.

There's a clear productivity division between frontier companies, where new technologies are implemented faster and productivity rates are higher, and the hinterland of laggards, which despite inefficiencies and a failure to modernise still manage to survive.

In addition, smaller, less agile retailers simply don't have the warehousing space or infrastructure to compete with the big brand behemoths, and most likely can't justify the outlays for such facilities because of tight margins. They know they have to level the retail playing field and catch up to frontier businesses, so they are seeking ways to streamline operations to meet the growing demands of consumers– drop shipping is one such option.

Drop shipping is a fulfilment method enabling small retailers to sell a product without stocking it. After items are ordered by consumers, retailers obtain those items directly from the manufacturer. The manufacturer then delivers directly to the consumer. According to the Journal of the Operational Research Society, the average profits of manufacturers that drop ship are 18.33 percent higher than manufacturers that stick with traditional fulfilment methods. If managed well, drop shipping is a win-win for retailers and manufacturers.

The U.S. is leading the way with drop shipping. Research from eCommerce Drop Shipping Standards shows 22 to 33 percent of U.S. internet retailers have already adopted drop shipping as the primary method of order fulfillment, a figure expected to grow in the next few years. Europe has been slower on the uptake but with a similar packaging market size to the U.S., drop shipping could see similar growth and success in Europe.

Here, Ken Chrisman, division President of Sealed Air, a global leader in packaging solutions and technology, discusses the risks of implementing drop shipping and how to mitigate those while remaining competitive and profitable in the marketplace.

With the retail landscape in great flux, it is becoming harder for businesses to meet the changing demands of consumers while remaining competitive and making a profit.

While online retail sales represent less than 10 percent of overall retail sales in Europe, predictions suggest that this figure will rise to nearly 15 percent by 2020 as consumers continue to embrace online shopping.

In a volatile, omnichannel retail environment, retailers must ensure the correct strategies are implemented to retain and obtain consumers, and remain profitable.

New fulfilment realities

For online retailers, selecting the most appropriate form of fulfilment is crucial. Streamlining the order process is key to improving productivity.

It has been widely reported that many retailers have struggled to cope with the fast growth of online sales. Here are some considerations for those companies: Do they move to an e-commerce business model? How can they afford to build the infrastructure necessary to do so? What additional overheads will need covering? Is a physical store presence still crucial? The concerns are endless, and the progress relentless.

As e-commerce continues to dominate, retailers of all creeds have sought out fulfilment strategies that enable them to meet consumer demand for quick and free deliveries in a cost-effective and resource light way.

Brick-and-mortar brands are starting to strengthen their online offerings and delivery functions. Online retailers are supplementing their dedicated e-commerce fulfilment operations with ad-hoc ship-from-store set ups that make use of in-store labour to respond to online orders. Others are making more fundamental and thorough changes to become full-scale omnichannel operators.

As a step in the omnichannel direction, drop shipping is becoming increasingly popular amongst retailers looking to react to the increase in online orders.

Top of the drop

Why drop shipping? First, it's scalable and cost effective.

For every order placed, retailers pay a prearranged fee to the manufacturer which packages the product and delivers it to the consumer. If no orders come through, there is no direct financial outlay. Simple.

Secondly, drop shipping negates the need for extra warehousing.

With warehouse prices predicted to rise sharply, every square foot of warehouse space has become more precious. Retailers and fulfilment operators don't have to consider these costs with the drop shipping solution.

Thirdly, removing packing and shipping from operations simply lessens the fulfilment complexity for retailers. In theory, all retailers would have to worry about is offering products that consumers want and entice them to shop at their store.

So if drop shipping is so good, why isn't everyone doing it?

Well, adopting drop shipping as a preferred method of fulfilment comes with its challenges.

Engaging another business to take on the packing and shipping aspects of the fulfilment process is by no means simple. While not as intense as other options, new workflows and procedures are needed. Communications and reporting will have to be open and transparent.

Tracking and traceability of packaged products will become an even greater necessity to ensure the customer's experience is positive. In addition, if negotiations aren't well managed, businesses will end up paying more for packaging and shipping than if they did it themselves.

Damaged products can also be a problem if the manufacturer's shipping methods are dubious. Not only will damaged products end up costing a company financially, they could also affect the company's reputation even though the seller doesn't actually deliver them. Clear contractual obligations, ongoing reviews, and quality control are crucial to prevent these issues.

According to Sealed Air's research, 38 percent of consumers say that receiving a damaged item makes them less likely to shop with that retailer in the future, and 32 percent say that wasteful packaging material is one of their top complaints about online shopping. It's important that if drop shipping is implemented, it is done so with the utmost care, control, and attention.

The future of fulfilment

Surviving and thriving in this bifurcated era of fulfilment is only going to get more complex as all parties strive to achieve a desired state of agility. Retailers have to go along for the ride, but also need to aim to be at the crest of the wave in order to out-do the competition.

Drop shipping may be the answer to many companies fulfilment needs. It can certainly be effective in the short term. But if retailers truly want to deliver a memorable customer experience, as well as ensuring commercial success, they must take control of their entire supply chain, and take a strategic view of their fulfilment and delivery functions.