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Drop shipping and the future of retail

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.

  • http://twitter.com/ldn_tech_exec ldn_tech_exec

    I know this isn’t dribbble, but I’d like to rebound with this excellent analysis of the types of drop shipping as well as the lesser known pitfalls, by… you guessed it, the king of Quora-commerce, Matthew Carroll: http://www.quora.com/Dropshipping/Zappos-started-with-drop-shipping-Is-this-the-best-way-to-bootstrap-an-E-commerce-company/answer/Matthew-Carroll

  • http://twitter.com/roselewis roselewis

    The leaders in this category will emerge from those companies that are, of course, brilliant at customer engagement across multiple platforms, multiple channels, multiple environments and communities but the real winners will come from the companies that are able to capture the value of customer referrals when the time comes that you don’t buy anything unless one of your mates has recommended it.

  • http://www.facebook.com/digijoe Joe Stepniewski

    Think you’ve hit the nail on a big growth area head Nic. We might need to evolve the term “retailer” though – publishers themselves are adopting more universal cart and plug-in drop shipping capabilities. Just as innovative merchants like Mr Porter are investing a lot more on the content front – the lines are blurring between the two.

    A few impacts of drop shipping/embedded shopping: Universal carts on publishers/social networks/aggregators will solve a lot of the headaches for mobile user experiences – bypassing merchant carts designed for the desktop web. Also means that owning the product discovery part of the funnel will become a lot more important given the fragmentation of where you can actually buy from. If anyone can deliver like Amazon Prime, I may not default my shopping start point to Amazon any more.

  • http://twitter.com/Paul__Walsh Paul Walsh

    Spot on. I was on the management team at eqos.com in 1999 – they had an awesome solution for b2b retail collaboration, but was only for the big players. So I can see where you are coming from. Very very interesting model. Great insight.

  • http://www.theequitykicker.com Nic Brisbourne

    Thanks Paul. Hope all is well.

  • http://www.theequitykicker.com Nic Brisbourne

    Great point Joe. The line between retailer and publisher has been blurring for a while, and under a true drop ship model the distinction may all but disappear.

  • http://www.theequitykicker.com Nic Brisbourne

    Thanks Rose. Social and mobile are definitely two big themes.

  • Pingback: The internet deployment phase « The Equity KickerThe Equity Kicker

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    In order to earn great profits out of your clothing business, you should get clothing items at affordable prices. It is also advisable to buy in bulk manner. This is because wholesale products that are purchased in bulk manner are cheaper than in per piece. We all know that the cheaper the price of the wholesale items is, the higher the income we are able to make. Where to shop wholesale clothing with affordable prices?

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  • Anna Louise Simpson

    Brilliant article!

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