Dropshipping And The COVID19 Coronavirus

This article was updated on June 16, 2020. Jump to t­­­­he updated section here. The World Health Organization (WHO) has declared the coronavirus disease 2019 (COVID-2019) an international public health emergency. By March 2, 2020, reports indicated that there were more than 88,000 cases confirmed in over 54 countries. Even though the coronavirus was first reported in the province of Hubei in China on December 31, 2019, over 9,000 infections have been reported outside China so far. Wuhan, in central Hubei, is the epicenter of the coronavirus (Source). As the virus spreads, it has been causing chaos on the international markets and businesses. For instance, CNBC Markets reports that Friday, February 27, 2020, represents the worst week since the financial crisis with the Dow and S&P 500 sliding by an average 1.1 percent (Source). For businesses that rely on China and the international transport system such as dropshipping, the repercussions are obvious. To understand what is happening on the ground, we look at the challenges that the coronavirus is presenting to dropshippers and how they can mitigate these challenges. We speak to the people on the ground in China who have firsthand experience of these challenges.

Dropshipping at Risk

By its nature, using ecommerce platforms for dropshipping is a business model that depends on the effective production, warehousing, and transportation of goods. The effect of coronavirus will likely be felt by people in this business segment because almost a third of the world's production occurs in China (Source). Dropshipping is, in a nutshell, ecommerce without inventory. Entrepreneurs in this type of business sell goods that are then shipped from the supplier’s warehouse directly to the customer’s shipping address. Dropshipping is a popular business model in the ecommerce industry and now accounts for a third of ecommerce (Source). One of the significant drawbacks of dropshipping is the fact that ecommerce store owners have little control over their inventory and the shipping process. They focus on sales and marketing, and the shipping process happens anywhere across the globe where the supplier’s warehouse is located. A dropshipper might use some type of CRM or retail operations platform behind the virtual storefront that gets their products in front of customers, but they don't manage much—if anything—in terms of fulfillment. International public health emergencies such as the outbreak of the coronavirus often highlight the pitfalls of the global interdependency of commerce.

What is it Like For a Manufacturer or Dropshipper on the Ground?

How does the virus affect business and dropshippers? As expected, the answer from Mike Michelini, a Director of Business Development at Alpha Rock Capital, is straightforward: “Basically, everything is at a standstill." He adds, "the strange part is it happened during Chinese New year - so the already long time off and standstill in China basically extended.” For Brian Miller, founder of Easy China Warehouse, the situation on the ground can be explained in three ways: “Labor shortages; new health and safety requirements; and subcomponent and raw material shortages.” Miller notes that the situation is made worse by the fact that the majority of employees in China are migrant workers who live in small villages. The quarantine measures have made it almost impossible for them to leave the villages and return to work in the cities even if they wanted to. Added to this, factories now have the extra burden of putting in place measures such as providing masks, gloves, and hand sanitizers. This has led to delays in factory openings because inspectors have first to make sure that protection measures are in place. The challenges met by factories result in less production and the shortage of raw materials and subcomponents.

How is the Coronavirus Impacting Manufacturing and Dropshipping?

As the disease spreads across the globe, governments are, of course, prioritizing public safety. Many countries have set up surveillance, prevention, and control measures to avert a potential epidemic. However, these measures disrupt the free movement of people and goods both within and between countries. Ecommerce stores that rely heavily on the dropshipping suppliers are already facing problems since the outbreak of the disease. Businesses are facing many changes due to the virus. China is an important manufacturing hub in global commerce, and Chinese manufacturers are facing production disruptions due to factory closures. Yet China itself cannot afford to have its factories shuttered or sitting idle and has announced plans to assist the affected manufacturers.

Inevitable Delays

AliExpress buyers on Reddit are relating a range of difficulties, from long delays on products shipped through AliExpress, to increases in shipping prices. On March 5, 2020, AliExpress confirmed the delays, announcing: “We are working hard to get your parcels delivered, but there may be some delays due to the coronavirus” (Source). In the first week of March (2020), some dropshippers posting on Reddit indicate that the situation is improving. One post says, "As of this week, it appears that 80% of suppliers I work with are back to a fairly normal dispatch time. However, there are still delays with regards to packages leaving China of up to a week added time compared to pre-corona” (Source). Some posts on Reddit also indicate that some countries (for example, New Zealand) are not allowing shipments from China. However, our investigation shows that the disruptions in parcel services between New Zealand and China were initially suspended because of the backlog resulting from the virus. An announcement on February 10, 2020, by the New Zealand Post Group, indicates that services had resumed. On its website, the New Zealand Post Group says, "COVID-19 (Coronavirus) does not survive long on objects. Therefore it is safe to receive mail and parcels from China without the risk of contracting the virus. The World Health Organization (WHO) has confirmed this” (Source).

Threatening Business Viability

Michelini anticipates that the virus is likely to threaten the viability of the businesses of many dropshippers. He mentions "a dropshipper who has 6,000 pending orders that can't ship, and he is starting to get customers escalating their orders to PayPal disputes." He says that there is a knock-on effect as manufacturers are collecting more and more orders which they are not able to fulfill. This is because factories are not operating at full capacity. Miller clarifies that the issue is not a shipping issue, but an inventory issue. While there are long inventory delays, he reports that so far, "we haven't seen any shipping delays out of China for dropshippers".

Mitigating the Challenges

An emergency like the coronavirus will affect dropshippers. But what needs to be done? Below are a few things that may help.

Cutting Costs and Managing Marketing Spend

Both Michelini and Miller agree that reducing costs and increasing revenues should become a big priority for dropshippers at a time like this. One way of saving money at this time is to analyze marketing activities and their results in order to strategically reduce marketing costs. For example, you could temporarily freeze ad campaigns to save money and reduce the number of potential orders. Miller advises that one way of dealing with the challenge of delays is to increase prices “to slow the sales velocity, keep items in stock, and improve their margin while (you) are waiting on the new stock from factories." Miller also adds that dropshippers can provide a safety net by having a small amount of their own stock, which they can use to generate revenue during a crisis.

Communication

Even though communication is always essential, in these kinds of situations, it becomes indispensable. Matt Ellis, a dropshipping expert, and writer for Ecomdash.com, recommends some strategies that could assist dropshippers in managing communication in general. Ellis says that customers appreciate some communication, even if it's somewhat unfavorable, as opposed to no communication at all. He advises that you should inform your customers that it would take unusually longer to process and fulfill their orders. Highlight the fact that this is a temporary situation, and you will keep them updated as the situation progresses. Contact your suppliers and establish the impact of the virus on their operations. You may also request for referrals to other suppliers of similar products, particularly the ones based outside China.

New Sourcing Opportunities outside China

As seen from the impact of the coronavirus outbreak, overreliance on one supplier may hurt your business. Find dropshipping companies that have not been severely affected by the current situation, or better yet, suppliers with warehouses outside China. However, given that COVID19 has officially crossed into an international pandemic, dropshippers may want to focus on finding suppliers in countries with strong hospital and health systems. These may be the manufacturers that are best positioned to guarantee business-as-usual -- or at least as close-to-usual as possible.

Should we Believe Factories When They Say Issues Will Be Resolved Fast?

For many dropshippers, the vital question is what to do next. Essentially, the question is whether we should believe factories when they say that all production is starting and is back to normal? Miller is not convinced. He says that "many factories are telling overly optimistic conditions about the state of the manufacturing environment." In his view, factories will ramp up capacity to between 50 and 60 percent towards the end of March 2020.

Update on June 16, 2020

This post was originally published on March 2, 2020. Since then, a lot has changed. For instance, by June 15, 2020, the World Health Organization was reporting that 7 823 289 cases of the virus had been reported across the world, with 431 541 deaths. We spoke with Michael Michelini and Brian Miller to find out how things have changed with regard to the effects that the coronavirus was having on dropshippers.

What Has Changed?

Asked about what has changed since we last spoke to him in March, Michelini laughs and says “What hasn’t changed!” He notes that while production lines are moving back to normal in China, it is now the tensions between China and the U.S. which are resulting in the US stopping Chinese owned carriers from flying in and out of the US. With regard to the effects on the coronavirus on manufacturing, Michelini says that the factories seem to be in a state of limbo. “After months of focus on ‘essential items’ such as medical supplies, and the spike of demand to shipping and reduced flights around the world - factories are just really wondering when things can get back to normal.” For him, the numbers of people who have lost their jobs are an indication that the factories are struggling. “Gone are the easy days of listing products on a B2B directory and getting customers banging on your door,” says Michelini. Asked about what it is like to run a warehouse in Shenzen today compared to the time when the coronavirus started wracking havoc across the world a few months ago, Brian Miller’s answer, just like Michelin’s is straightforward “Not much has changed.” Miller notes that the “logistics industry has in general seen very strong demand throughout the coronavirus outbreak.” The reason behind the spike in demand was because most of the world was at home and ordering online. However, dropshippers have had to contend with rising air freight prices as capacity decreased and demand increased.

What Should Drop Shoppers Do Now?

From Michelini and Miller’s observations, it is clear that the effects of the coronavirus are still being felt across the dropshipping industry. So, what suggestions do they have for dropshippers trying to keep their businesses going? “Work towards building a brand,” advises Michelini. He adds, “At the least, focus on a specific niche of products rather than a 1 stop shop for everything.” According to him, it is also important to reach out to suppliers to ensure that they are fine so that you know whether you will be able to continue selling their products. This is because the health of a supplier’s business affects the health of the dropshipper’s business. Miller advises dropshippers to find fulfillment partners with direct, dedicated shipping lines. “We run direct lines. For the US it works like this, all shipments get labeled with a USPS label in China, then we consolidate the freight ourselves with Airfreight and pass it through a US warehouse onto USPS. This guarantees the delivery time is relatively stable.” Stable delivery times reduce the risk that customers will request a refund. Miller believes that the backlogs in the cheaper postal routes are still backlogged, creating massive delays and poor customer experiences.