A foreign affair

February 1, 2016 09:54 AM

Floyd Baker had no time to enjoy the success of his business selling photo backdrops online because of the paperwork and legal entanglements that resulted from the 10% of sales that came from consumers outside the United States.

“We spent most of our time doing accounting, bookkeeping and taxes,” says Baker, co-founder of Lemon Drop Stop, based in Monticello, Minn. “The administrative burden was overwhelming.”

To fulfill international orders, Lemon Drop Stop contracted with several warehouse and fulfillment vendors in Newcastle, U.K., and Toronto. But a tax audit by Canadian authorities for under-reported duties and taxes on orders shipped to Canadian consumers led to nearly four years of legal wrangling that is just now getting sorted out, resulting in the retailer having to pay Canada $50,000. The U.K. business added complexity, too, because the e-retailer reached a shipping volume level there that required monthly tax filings, Baker says.

Understanding that he was in over his head, Baker was “ecstatic” when his UPS shipping representative told him about i-parcel LLC, an international fulfillment vendor UPS had recently acquired. With it, the e-retailer was able to stop working with the overseas vendors and operate Lemon Drop Stop’s entire business domestically. With UPS i-parcel, orders from international customers are managed by the vendor, which actually buys the merchandise from Lemon Drop Stop. UPS i-parcel handles the currency conversion and payment, the customs paperwork, tax remittances and delivery to the customer overseas. The e-retailer pays UPS i-parcel a cut of each sale and a service fee; a service fee is also collected from the consumer. The companies decline to say what the cut or fees are.

Many more North American retailers are now able to sell globally by relying on services provided by such familiar vendors as delivery service FedEx Corp. and shipping technology provider Pitney Bowes Inc., both of which recently snapped up leading providers of cross-border e-commerce services—Bongo International and Borderfree, respectively—in the wake of UPS buying i-parcel in October 2014. Add in new cross-border services introduced by the e-retailer’s leading friend/enemy— Inc.—and U.S. and Canadian online retailers no longer need to hire translators or convert currency to get help in shipping orders to shoppers around the world. They just have to figure out which of these services will best serve those shoppers at the lowest cost.

The large number of global online shoppers prompted the sudden shopping frenzy for cross-border fulfillment services. U.S.-based retail sites are the top international destination for online shoppers outside the United States, with 26% of these shoppers making at least one purchase with a U.S. e-retailer in the 12 months ended in October, according to PayPal Inc.’s “2015 Cross-Border Research” report. (China, 19%, and the United Kingdom, 14%, are Nos. 2 and 3.) Further, global e-commerce sales were expected to grow 25% last year, per eMarketer Inc. figures, with much of that growth coming from online shoppers in markets outside of North America, such as Asia-Pacific, where sales were expected to climb 35.2% year over year, and Brazil, up 17.3%.

Looking forward, Forrester Research Inc. forecasts U.S. outbound cross-border e-commerce globally will expand at a 16% compound annual growth rate, to $44 billion in 2018 from $24 billion in 2014, while domestic e-commerce sales will grow at a compound rate of 10%, to $480 billion by 2019 from $334 billion in 2015.

Pitney Bowes sees the potential such figures present its business. “The global e-commerce market is a $1.5 trillion market,” said Lila Snyder, president of global e-commerce at Pitney Bowes speaking at the company’s analyst day in September, fewer than 100 days after it closed the Borderfree deal. “Over 1 billion consumers will buy products online this year alone, and it’s expected to grow at 15%. I can tell you from experience that finding a market that’s large and growing and underpenetrated is rare. Finding those market conditions where you have an established value proposition and track record with over 200 clients is unprecedented.”

UPS CEO David Abney also highlighted the global opportunity for UPS in a call with analysts four months after its i-parcel purchase, saying that while the global economy is expanding, “e-commerce is expected to outpace global GDP [gross domestic product] growth by fourfold, and cross-border e-commerce seven times [that pace].”

These vendors want to be the ones U.S. merchants use to service international customers by helping them fill the gaps in their service portfolios to ensure they are indispensable to merchants as their global sales rise.

For luggage and travel accessories e-retailer eBags Inc., a renewed international demand convinced it to give global e-retailing another try. EBags relied on its own personnel to service customer orders originating in Canada, France, Germany, Japan and the United Kingdom from 2002 to 2009, but exited the overseas business when the worldwide recession slowed sales, says Mike Frazzini, eBags chief technology officer.

In 2002 it took six full-time employees spanning information technology, merchants, designers, operations and marketing, a full year to launch in the five countries, Frazzini says. Last year, eBags decided to try again with a different approach. It spent 10 weeks reviewing vendors’ services, including UPS i-parcel, Bongo and Dublin, Ireland-based eShopWorld, before it selected Borderfree, shortly before Pitney Bowes bought it. EBags uses UPS and FedEx for shipping but says one of the reasons it favored Borderfree was because it was independent of those dominant carriers and thus would look for the best shipping deal, regardless of carrier. The company wasn’t concerned by Pitney Bowes’ takeover of Borderfree.

It took three months to implement the Borderfree service and eBags turned on sales to more than 200 countries, including fast-growing China, just in time for that country’s Singles’ Day shopping event Nov. 11. Frazzini says that since November, international sales have grown more than 25% month over month. EBags CEO Mike Edwards says Canada, Australia, the United Kingdom are driving the most sales. In Asia-Pacific, Hong Kong, Singapore, Japan and China are eBags’ leading markets.

“We are very pleased with the result in growth,” Frazzini says. “We have a significant road map planned for international e-commerce in 2016 that will include new products, enhancements of the international website and the rollout of localized marketing programs.” The company will use Pitney Bowes for those services.

Frazzini won’t say how much eBags pays Pitney Bowes/Borderfree to handle its international e-commerce checkout, logistics and fulfillment, but says the setup cost was much lower than when the retailer managed the process in-house. “We’re able to support many more countries with much less maintenance effort, particularly for localization and logistics integration,” he says. Localization includes currency conversion, language translation, regulatory compliance and the hand-off to local postal services and shipping carriers, Edwards says.

Pitney Bowes believes global e-commerce services will account for a greater share of its future revenue. Its experience over the last several years shows how. Its digital commerce solutions accounted for 17% of Pitney Bowes revenue in 2012, 22% in the first half of 2015, and is expected to grow eventually to 30-35% of revenue.

Analysts caution that global expansion won’t necessarily be a slam dunk for e-retailers or the vendors offering international services. The strengthening U.S. dollar in recent years makes U.S. goods more expensive overseas and therefore may limit the goods’ appeal to consumers and the near-term return-on-investment to vendors offering expanded service portfolios. And since most e-retailers already use UPS and FedEx domestically, the number of net new customers these vendors might gain through their acquisitions is limited, says Linda Bustos, cofounder and managing partner at e-commerce consultancy Edgacent.

Retailers say the acquisitions of the specialist cross-border companies haven’t led to an immediate increase in online sales, but that these services are saving staff time.

For example, Pure Auto Parts Inc.’s goal when it hired FedEx’s Bongo to handle international sales was to relieve the strain of trying to singlehandedly manage sales going to areas including Canada, South America, Russia and the Middle East—a task that could take up 75% of one staffer’s time, says Becky Shelton, general manager of the e-retailer of parts and accessories for the Toyota FJ Cruiser. Consumers now can check out using one of 22 payment methods, and Bongo can show costs in more than 120 currencies.

Pure Auto Parts, which generates about 20% of its revenue from international sales, says FedEx hasn’t offered any cuts on shipping rates or other sweeteners for signing on for the international fulfillment service, and Lemon Drop Stop says the same about UPS. Both merchants say they can ship with any service they prefer to get goods destined for overseas shoppers to the vendors’ fulfillment centers.

Shelton says Bongo has offered it a multisite discount if it elects to use Bongo for three other auto part sites it intends to launch this year.

Shelton says Bongo’s key benefit to Pure Auto Parts is that the retailer doesn’t have to manage the order itself. “Adding the fulfillment software put the ownership of the order, and all the changes, more into the customers’ hands than in ours,” Shelton says. None of the merchants in this story would say what they pay for the vendors’ services. UPS i-parcel, FedEx’s Bongo and Pitney Bowes’ Borderfree declined to share their pricing.

UPS, FedEx and Pitney Bowes aren’t the only vendors open to taking international responsibilities off retailers’ hands. Amazon is expanding the array of international services it offers merchants selling through its marketplace, and poses a potentially large challenge to existing parcel carriers. “We believe Amazon may be the only company with the fulfillment and distribution density and scale to compete effectively with global fulfillment providers,” says Colin Sebastian, a Robert W. Baird & Co. analyst. Amazon over the last two years has worked to diversify how it delivers packages, including reducing its reliance on UPS and FedEx. It has, for example, begun using independent contractors to deliver packages, and recently bought a fleet of semitrailers to transport products among its 76 U.S. distribution centers and 18 sortation centers, which are where Amazon hands off packages to the U.S. Postal Service for last-mile delivery. Internationally, it acquired a 25% stake in French package-delivery company Colis Privé in 2014. Unconfirmed reports as this story goes to press say Amazon will acquire the rest of the delivery company before the end of Q1.

Amazon marketplace merchants who hire Amazon to warehouse and fulfill their products through Fulfillment by Amazon (FBA) to Amazon shoppers see their goods delivered via these services as well. Further, merchants using FBA can also enable FBA Export, which lets international customers shopping on Amazon buy those goods, with Amazon handling all international fulfillment responsibilities at no additional cost to the merchant. Amazon in January said use of FBA Export grew more than 100% year over year in 2015.

Taken together, Sebastian puts it this way: “We expect Amazon to invest in more transportation and logistics to support not only its own retail sales growth, but potentially also as a service to other companies.”

A concession Amazon merchants must accept with FBA is that Amazon holds their inventory, unlike the other international services that receive merchandise from e-retailers once it is sold. “There are still plenty of retailers who want to maintain their own warehousing, or use fulfillment solutions other than Amazon, including those who want to have the flexibility to work with carriers they have good, existing relationships with,” Bustos says.

As e-retailers look to satisfy demand from international customers, vendors are working to develop a service mix that satisfies e-retailers.

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