The e-commerce landscape in the United States has witnessed a paradigm shift with the advent of drop shipping. This fulfillment model, where retailers do not hold inventory but instead rely on manufacturers or distributors to directly ship products to customers, has not only transformed the dynamics of retail but also revolutionized the supply chain. From a manufacturer or distributor perspective, drop shipping offers unique opportunities and challenges that have reshaped the way businesses operate in the competitive e-commerce environment.
Drop shipping is an e-commerce fulfillment method where online retailers don't keep inventory of the products they sell. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. This model eliminates the need for inventory, allowing businesses to focus on marketing, sales, and customer service.
The Drop shipping trend seems to be here to stay as Grandview Research recently stated; between 2023 and 2030, Dropship activity will undergo a Constant Annual Growth Rate (CAGR) of 23.4% to reach $1,254 billion total market by then.
Supply Chain Efficiency and Cost Reduction at all levels
For manufacturers and importers, drop shipping provides an increased margin perspective as it eliminates the need for intermediaries commissioned to resell the products locally. Manufacturers are directly connected with the retailers, big and small. This leaner supply chain model enables manufacturers to focus on production and making the products available in the US, thereby optimizing the overall operational efficiency. Optimizing costs often requires finding a US based logistics partner able to receive orders and fulfill them to the final customer.
There is also a substantial benefit for retailers engaging in drop shipping. According to a report by McKinsey & Company, companies leveraging drop shipping have reported up to a 50% reduction in carrying costs compared to traditional retail models. Retailers, whatever their size, don’t have to carry dead inventory anymore or struggle with minimum order quantities. This is especially true for products like clothing.
Even if some big box retailers like Macy’s or Target have closed and transformed some well-located physical stores around or inside big urban areas into warehouses, they always are inclined to reduce cost and let others manage shipping for them while they can offer a bigger assortment to their final customers.
Market Expansion and Increased Sales
Drop shipping opens new avenues for manufacturers and distributors to reach a broader audience. By partnering with multiple retailers, they can tap into diverse markets without the need for significant investments in establishing a physical presence. This not only expands the market reach but also drives increased sales volume as the same inventory of products becomes available through various online channels.
Research by Statista indicates that the total retail e-commerce sales in the United States are projected to reach $563.4 billion in 2023, underscoring the immense potential for manufacturers and distributors to capitalize on the growing e-commerce trend through strategic drop shipping partnerships.
Strategic Branding and Product Visibility
From a branding perspective, drop shipping offers manufacturers an opportunity to enhance their visibility and brand recognition. Collaborating with multiple retailers allows products to be featured on various platforms, exposing them to a wider audience. This exposure can lead to increased brand awareness and customer trust, ultimately contributing to higher sales and market share.
A study by Nielsen found that 59% of consumers prefer to buy new products from brands familiar to them. Leveraging drop shipping to expand the reach of a brand across different online retailers aligns with consumer preferences, reinforcing the strategic importance of this fulfillment model.
Challenges and Mitigation Strategies
While the benefits of drop shipping are evident, manufacturers and distributors must navigate challenges such as maintaining quality control, ensuring timely order fulfillment, and managing relationships with multiple retailers. These challenges can be mitigated through robust communication channels, performance metrics, and strategic partnerships.
Implementing quality control measures, establishing clear communication protocols with retailers, and leveraging technology for order tracking and fulfillment monitoring are crucial strategies to overcome potential pitfalls associated with drop shipping.
Also, if product manufacturers decide to outsource the orders fulfilment, they should prioritize shipping reliability and consistency when choosing a 3PL (Third Party Logistics). Failure to deliver on time can result in a negative customer experience. Retailers will always ensure that their drop shipping supplier has a local warehouse to avoid shipping delays. So, the smartest move for manufacturers or distributors that plan to successfully dropship in the U.S. is to target a logistics partner established in the country already tightly connected with big box and smaller retailers.
Retailers must be aware that in a drop shipping environment, they are sharing the stock of drop shipped products among several retailers and online marketplaces. This can lead to out-of-stock situations that can be damaging for both the manufacturer or distributor and the retailer. As an example, a study by IHL Group shows that for both Canada and the U.S., the cost of inventory distortion (overstock and out-of-stock) was of $349 billion in 2022*. These situations can be avoided by drop shipper and retailers through a good and recurrent communication over available inventory levels so backorders can be avoided, and an out-of-stock product can be made unavailable in time from the retailer’s online platform.
*Combining online and instore sales
In conclusion, drop shipping has become a cornerstone of the e-commerce industry in the United States, presenting manufacturers and distributors with unique opportunities for growth and efficiency. The strategic advantages, including supply chain optimization, market expansion, and enhanced branding, positions drop shipping as a winning force in the competitive e-commerce landscape. As the market continues to evolve, manufacturers and distributors embracing drop shipping are poised to thrive in a dynamic and rapidly expanding digital marketplace. As the industry continues to evolve, the role of drop shipping will expand, influencing how businesses approach inventory management and customer satisfaction in the ever-changing landscape of online commerce.
References:
Grand View Research. (2023). “Dropshipping Market Size Worth $1,253.79 Billion By 2030” Retrieved from https://www.grandviewresearch.com/press-release/global-dropshipping-market
IHL Group. (2022). “Consumers say 1 in 5 items they want to buy is out-of-stock at their local retailer” Retrieved from https://www.supermarketnews.com/issues-trends/consumers-say-1-5-items-they-want-buy-out-stock-their-local-retailer
McKinsey & Company. (2018). "The future of the fashion industry: Old model, new opportunities." Retrieved from https://www.mckinsey.com/industries/retail/our-insights/the-future-of-the-fashion-industry
Statista. (2023). "E-commerce sales in the United States from 2017 to 2023." Retrieved from https://www.statista.com/statistics/272391/us-retail-e-commerce-sales-forecast