As traditional retailers struggle to compete with e-commerce platforms and accommodate the fashion industry’s embrace of see-now-buy-now, their need to reinvent is more important than ever. One way they can do so is by diversifying their typically less-expansive inventory.
According to Mona Bijoor, the founder and CEO of JOOR — an online platform that has digitized the wholesale process for over 200,000 of the world’s leading retailers and brands, including Net-A-Porter, Stella McCartney and Saks Fifth Avenue — drop-shipping is the key to providing retailers this opportunity.
The model is little known in the outside world, but responsible for the success of giants like Amazon and Nordstrom, and Bijoor predicts many retailers will soon follow. Here’s what the model actually entails and how it affects the purchasing process for all parties involved.
So, what exactly is drop-shipping?
Drop-shipping is a retail model in which larger retailers like department stores do not buy or keep all of their online inventory in stock. Instead, they act as platforms for selling brands’ products, leaving the actual shipping process to the brands themselves. For instance, if you order a Marc Jacobs bag on Nordstrom’s website that’s part of its drop-ship program (not all products are), Nordstrom will take a cut of the profit but rely on Marc Jacobs’s shipping infrastructure to get the product to you.
Bijoor compares it to the showroom sales model popularized by the automobile industry. “When you go to the Tesla showroom or something, they don’t keep all that inventory there — you just look at it and then place an order,” she said.
E-commerce platforms like Farfetch and Etsy have also helped popularize the model through successful integration.
Got it. And what’s the payoff here for retailers?
For starters, drop-shipping is thought to save retailers a lot of money that they would usually spend on product storage and shipping costs. That’s one reason why Nordstrom further invested in the model this past July, when it acquired a minority share in the drop-shipping platform Dsco. This came just months after Nordstrom’s chief financial officer Mike Koppel reported that e-commerce was actually eating into the company’s overall profits, citing the high variable costs involved in the process.
What’s more, it allows retailers to expand their inventory without actually, well, expanding their inventory. “Through collaborative relationships with suppliers, we give customers a wider selection with better value — including additional styles, sizes and colors,” reads Nordstrom’s explainer on the model.
This means that, rather than just feature a small selection of products from each brand, a retailer can theoretically sell their whole collection. “The network of suppliers gives retailers a wider virtual shelf of goods to sell to customers, which could drive a positive sales impact,” said Evan Bakker, a senior associate at L2. “It relieves the retailer of having to forecast inventory demand, one of their biggest pain points.”
Sounds great, but what do the brands get out of it?
Greater exposure, for one thing, says Bijoor, since companies like Nordstrom have large, lucrative followings that newer or niche brands may not have access to.
And since they’re handling the bulk of the transaction, “brands can probably can take a higher margin, [as well],” said Bijoor. They are also likely to receive more direct information about their consumer base. “Right now, the issue is they’re always begging retailers to find out who bought their products,” explained Bijoor.
OK, so what’s the catch?
Well, the drop-shipping model involves a lot of trust, which is not an easy commodity to come by in any situation. “It’s difficult to do because the retailer doesn’t own the entire experience,” explained Bijoor. “So they’re reliant on [a separate brand] to uphold their own brand promise.”
This can present problems like shipping delays or incorrect orders, which the larger retailers wind up receiving all the flack for. In fact, a reliance on drop-shipping almost sunk Zappos’s business model early on. CEO Tony Hseih elaborated on that experience in his book “Delivering Happiness”: “The inventory feeds that we were getting from our vendors for our drop-ship business were 95 percent accurate at best, meaning that we would not be able to actually fulfill 5 percent of all of our drop-ship orders. On top of that, the brands did not ship as quickly or accurately as our own warehouse, which meant we had plenty of unhappy and disappointed customers.”
In short, for all its benefits, it can be risky, too. New intermediary platforms like Dsco and RevCascade hope to streamline the process and work out its kinks by automating the process and creating clearer channels of communication between brands and retailers. Time will tell if their efforts will entice more fashion companies to hop on board.