Business

Dropshipping: Why those online deals are usually too good to be true

The rise of online shopping has polluted the market with bogus products, murky return policies and consumers who feel duped when they get less than they bargained for.

Many consumers lured by low prices on social media ads

Sean Virsunen was disappointed when the deal he got on an aquarium heater online turned out to be unsuitable for use in Canada - despite being sold on a Canadian website. (Supplied photo)

When Sean Virsunen of Collingwood, Ont., was looking for an aquarium heater recently, he did what a lot of Canadians do: He shopped around online to find the best price.

He eventually found the item he thought would suit his needs on Walmart.ca for a great price — $15.97 Cdn. "I knew it was going to be something really cheap," he says, "but I thought it could be worth it."

A few weeks later, the item had yet to arrive, so Virsunen sent off an email to Walmart.ca to inquire about the delay. 

"Their response, in a nutshell, was that it was sold by a third party, we have nothing to do with this, you need to contact them," Virsunen recalls.

That was surprising to him, since he had ordered the item on Walmart.ca and didn't notice anything about the product not actually coming from them. But sure enough, when a package arrived some time later, it was from a company called Zest Mall Inc.

Dropshipping started as a way for retailers to supplement their own offerings online, but has devolved into online businesses with no products of their own selling straight from manufacturers. (Aleksey Novikov/Shutterstock)

It looked vaguely like the product he had ordered, but it came with foreign writing on the box. It also had European-style electric plugs, so it was wired to work on a 220-volt system — not the 120-volt system used throughout North America.

Virsunen contacted the company to complain, and after receiving numerous emails offering him a discount on his next purchase, he grew frustrated and insisted on a full refund. The company said it would do that if he could ship the item to an address in California — something that would have cost more than twice what he paid for it in the first place.

He complained to Walmart again, and they eventually said they would refund his money if he returned the item to a store. 

"We expect our sellers to honour their return policies," Walmart Canada told CBC in an email. "However if a customer is not able to receive a refund that is allowed under the policy, they can escalate their refund request to Walmart."

While Virsunen thinks he will eventually get his money back, the experience was an eye-opening one for him, and his first foray into the murky world of something called "dropshipping."

Representatives of Zest Mall Inc. did not respond to multiple CBC requests for comment. But their business has the hallmarks of a practice where third-party companies known as dropshippers sell products to consumers directly from the manufacturer, without the need for a physical store of their own.

A murky world of retail

Traditional retailers sell products to domestic consumers that are often made by foreign manufacturers. Retailers make money by marking up the price to cover their costs — rent for the store, salary for employees, warehouses to store the stuff and the technology to process payments.

In dropshipping arrangements, goods go directly from the manufacturer to the consumer without the added costs of the retail side. (CBC)

Dropshipping cuts all of those costs down drastically, because it circumvents or outsources most of those tasks. The dropshipper sets up a web store that's often little more than a photo catalogue of available items, and ships the item directly to the customer from the factory.

In some cases, dropshippers don't even have their own web store, selling their wares on the web portals of established retailers like Walmart, Amazon or Home Depot.

Payment processing is usually handled by an outside party, too. Canadian tech company Shopify is a big booster of the practice, via its app called Oberlo. Shopify says 85 million products have been sold through Oberlo. 

It didn't used to be that way.

"In the past, retailers would engage in a dropshipping arrangement for purely logistical purposes," says Mark Cohen, the former head of Sears Canada, who now teaches business at Columbia University in New York.

In Cohen's day, a brick-and-mortar retailer like Sears would partner with a foreign supplier to dropship "large bulky products it didn't want to stock on its own shelves that it could more efficiently simply arrange to have shipped directly from point of origin." It worked well for big-ticket items like appliances, many of which are made outside North America to begin with.

But the rise of online shopping has turned dropshipping into something quite different, as consumers demand better deals and expanding selection.

"Consumers don't care where the goods are coming from," Cohen says. "They see it, they want it, they buy it, they expect to get it."

More and more, that suspiciously cheap item online is coming to a consumer from a dropshipper "without the retailer they engaged having anything to do with the handling of it," Cohen says. "And they don't really care as long as everything is as promised."

'Selling really cheap stuff'

Problems arise when it isn't.

A worker assembles ornaments at factory Xitanon village in the outskirts of Wenzhou, China. Dropshipping allows online stores to sell imported products at deeply discounted prices because they ship directly from foreign manufacturers. (Qilai Shen/Bloomberg)

Andrew Youderian runs an ecommerce consultancy and community called eCommerceFuel, but between 2008 and 2016, he ran several dropshipping businesses that collectively netted more than $1 million in annual sales.

Back in his day, he says dropshipping was a viable business plan for real-world entrepreneurs who wanted to offer more products without having to take on the risk of adding expensive inventory that has to be stored, and may not sell quickly.

"Six or seven years ago," he says, dropshippers like him "worked with reputable suppliers and legitimate businesses."

Now, he says a lot of the industry has just devolved to mean "people selling really cheap stuff directly from the factory to consumers."

Amazon's journey to becoming an online colossus played a big part in the evolution of dropshipping, first by making it harder for their real-world competitors to sell stuff themselves online, and now by working closely with third-party sellers. Some of them are legitimate retailers, but many are just dropshippers with no products or stores of their own.

As Virsunen puts it, "[Amazon] used to compete with them, but now they're letting them on their platform."

"If your whole strategy is trying to resell someone else's products ... it's really hard to out-hustle Amazon," Youderian says, which is part of why he got out of the business entirely.

But not everyone thinks the same way. One of the ways that dropshippers now get noticed is by advertising on social media feeds to try and nab bargain-hungry browsers. Once you click buy, you're bombarded by even more ads for products, since dropshippers know you're open to buying them.

Consumer-focused chat forums are replete with countless stories of consumers angry about being sold shoddy merchandise based on ads targeting them in their social media feeds.

"A bogus manufacturer creates a picture and body copy describing this wonderful product they're going to make available for an incredibly low price, and the consumer opts to buy it," is how Cohen describes the process. "Then, when they get [the item], they get a package full of sawdust."

"They complain and discover the retailer that sold them the box of rocks is gone," he says, "doing business under a different name." 

In the past, consumers trusted that retailers were screening the items they were selling, Cohen says. "If they viewed the product as shoddy or substandard or not living up to its claims, they would typically reject it." 

Prices that are too good to be true are a hallmark of the dropshipping process, as items often take a long time to arrive, are of suspect quality and are very hard to return. (Pete Evans/CBC)

That's not happening as much any more, which is why Virsunen says he feels duped. 

"It's kind of false advertising," Virsunen says of his experience. He says he's unlikely to buy on Walmart's Canadian website again, despite the fact that Walmart said they will give him his money back.

"I ordered something off a Canadian website, I was expecting something that would at least work in Canada," he says. "Who are these people [and] how are they allowed to just willy-nilly sell stuff?"

In an email to CBC News, Walmart said all third-party sellers it works with are "carefully vetted and reviewed before being invited to join Walmart's marketplace community to ensure our customers receive the quality and service they deserve."

But Zest Mall's page on Walmart's official marketplace sellers list is littered with poor reviews that are reminiscent of Virsunen's experience.

Walmart says it makes it very clear on its website if any available product is being sold by a third party, as such items will have a "sold and shipped by" line next to their products. Walmart adds that customers can return any item from a third party to a Walmart store, "subject to the return policy of the marketplace seller."

Virsunen says that's not good enough.

Cohen says bad experiences with suspicious-looking deals online are a good reminder of the age-old retail advice: buyer beware.

"It's like caveat emptor on steroids," he says. "You took your chances, it seemed too good to be true and it was too good to be true."

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