Drop shipping and the future of retail

By September 5, 2012 16 Comments

Anyone reading this blog will have noticed that the internet has transformed retail. I think drop-shipping will usher in another revolution.

Here’s a definition of drop shipping from the Shopify blog:

Drop shipping is a retail method in which you don’t keep products in stock. Instead, you partner with a wholesale supplier that stocks its own inventory – you transfer customer orders and shipment details to them, and they ship the goods directly to the customer. The biggest benefit of drop shipping is you don’t have to worry about fulfillment or inventory issues.

Also, most customers don’t know you’re drop shipping, since "private label shipping" lets you ship from the wholesaler with a return address and invoice customized to your ecommerce store.

Now let’s chart the history of retail.

Phase 1 – Offline retail – golden period: before 2000

Retailers bought products from wholesalers and sold them via high street stores. Retailers managed customer acquisition, stock and logistics. The physical limits of high street stores resulted in limited range and costs were high due to the need to maintain expensive high street properties. Big department stores and chains like Selfridges and Marks and Spencers emerged as the winners.

Phase 2 – Online retail – golden period: 2000-201?

Without the cost and limits of physical stores online retailers were able to offer increased range and lower prices. They still managed customer acquisition, stock, and logistics. Winners included Amazon and Net-a-porter.

Phase 3 – Online retail with drop shipping – golden period: 201? onwards

Manufacturers and wholesalers upgrade their systems so their retail partners can access real time stock and price information, and so they can make next day deliveries to the customers of their retail partners – i.e. drop ship. Retail partners should be able to further increase the range and reduce the prices they offer to consumers. The capabilities of a successful retailer shift from managing stock and logistics to search, discovery, user experience and customer care. Customer acquisition remains the core competence. Current leader: Amazon with Amazon Market Place.

It seems to me that the benefits of reduced cost and greater range make the shift to drop shipping inevitable. However, wholesalers and manufacturers will need to invest in new systems and capabilities and have difficult conversations with their existing retail partners, so the transition won’t happen overnight. The other interesting question is whether existing retailers will adapt to be the winners in phase 3 or whether new winners will emerge. If the existing players are to win they will have to abandon capabilities in stock management and logistics that previously made them successful, accept the lower gross margins that come with managing less of the back end, and develop new capabilities in search and discovery. That is a lot to ask. I’m sure one or two will get there, most likely including Amazon, but my bet would be that this transition creates space for some new entrants to build significant businesses.