What is drop-shipping?

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05 August, 2021

Drop-shipping is a form of supply chain management, whereby a secondary retailer (the "drop-shipper"), typically taking the form of an online e-commerce platform, accepts a customer's order and, rather than holding the necessary stock to fulfil such order, it relies upon the primary manufacturer or distributor to ship the goods directly to the customer. The drop-shipper makes its profit on the difference between the wholesale and retail price of the goods in question, less any fees accrued shipping the goods.

While the drop-shipper is responsible for marketing and selling the goods, it generally has no control over storage, inventory management, or shipping. By doing so the drop-shipper eliminates the costs involved with maintaining an inventory and essentially undercuts the manufacturer or distributor of the goods at a low cost to itself. This process is often frowned upon by manufacturers and distributors and we are commonly asked about what steps (if any) that they can take to minimise the drop-shipping of their goods.

What problems do drop-shipping present to a Manufacturer or Distributor?

On first appearance drop-shipping appears to be a relatively 'risk free' sales opportunity for entrepreneurs; however, the practice brings with it a number of potential issues for the manufacturers and distributors which are otherwise concerned with protecting the value in their brand.

Drop-shipping has in the past been synonymous with the sale of inferior goods. As such, consumer trust in such retail practices can be low. Moreover, drop-shippers operating in the retail sector tend to be small scale entrepreneurs seeking to exploit an opportunity for a short period of time. Resultantly they often lack such basics as terms and conditions of sale or a returns policy. This results in the consumers suffering from a poor customer experience and we often find that the consumer will present any complaints or grievances to the ultimate manufacturer or distributor (whom they commonly mistakenly believe that they have purchased the goods from). This can adversely affect the perception of the products being sold and their "brand".

In some instances, bulk purchasers of goods are offered preferable prices by a manufacturer or distributor which are considerably lower than those offered directly to consumers. Where a drop-shipper can access goods on these terms, due to their minimal overheads, they are often able to undercut the manufacturer or distributor and thus affecting the latter's margins.

What can manufacturers and distributors do to protect themselves against drop-shipping?

Ultimately, there is very little that a manufacture or distributor can do to prevent drop-shipping. When a business sells goods, title (or ownership) in said goods transfers to the purchaser. As the purchaser is then the 'owner' of the goods, it is typically free to do as it chooses with the goods, which includes re-selling them on a drop-shipping basis. It is very difficult for a manufacturer or distributor to prevent a purchaser from doing this.

However, it is sometimes possible for manufacturers and distributors to limit this practice by placing contractual restrictions on the purchaser's use of any intellectual property rights (IPRs) associated with the brand/goods. This can be achieved by the inclusion of contractual clauses (whether in standard sales terms or otherwise within a supply of goods agreement) which set out that all IPRs relating to the goods (including packaging materials), such as trade marks, rights under the tort of passing off, registered and unregistered design rights and copyright shall be retained by the manufacturer or distributor following the sale of the goods to the purchaser.

Clauses of this nature seek to prevent the drop-shipper from advertising any goods featuring the manufacture or distributor's branding, packaging, sales and promotional materials. Whilst this would not eradicate drop-shipping entirely, it may give rise to a cause of action for the manufacturer or distributor in the event of breach by the potential drop-shipper,

The manufacturer or distributor's position can be strengthened by protecting its brand via the registration of its trading names and logos with the Intellectual Property Office (or internationally with the World Intellectual Property Organization, via the Madrid Protocol). This may also give rise to a claim for trademark infringement in the event of misuse by the drop-shipper.

Forbes Comment

For manufacturers and distributors, drop-shipping is often seen to be problematic. For the reasons outlined above, it is difficult to effectively prevent the practice as once a buyer has purchased goods, it subsequently has control and ownership of those goods. It is possible to somewhat restrict such activities by including robust provisions relating to IPRs within applicable terms and conditions, with a view to ensuring that such IPRs are not infringed by the buyer (such as, for example, the buyer asserting a form of supplier-distributor relationship, which may give rise to a passing-off action).

Protecting your company's market position and its IPRs can be a delicate process. The Commercial Team at Forbes Solicitors are well-versed in all aspects of intellectual property law and can offer concise advice and assistance in relation to protecting and exploiting IPRs, in addition to ensuring that your commercial contracts are fit for purpose. Should you have any queries regarding your commercial contracts or protecting your IP domestically or internationally, please do not hesitate in contacting Daniel Fletcher via email at Daniel Fletcher or phone on 0333 207 1145.

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