In recent years, the practice of drop-shipping has intensified by taking advantage of the boom in e-commerce. While this way of business is in principle not illegal per se, some sellers who use it are guilty of misleading or even fraudulent practices.
In this article we explain drop-shipping, how it can be misused, and then compare it with market places.
What is drop-shipping?
The principle of drop-shipping is quite simple: the customer places an order and pays on the seller's website, as happens with any traditional webshop. Then, the seller transmits the customer's order and information (name, address, etc.) to a third-party supplier that will send the order directly to the customer. The seller gains income from the margin difference between the sale price paid by the customer and the purchase price demanded by the supplier.
The advantage for the seller is that it does not have to manage stock and take care of logistics. This is therefore a flexible business model that does not require a lot of resources to get started, which makes it an attractive formula for some entrepreneurs.
Consumers can be ‘lured’ by potential good deals and usually do not check who the seller is. They do not realise that orders are often being shipped by third party suppliers established outside Europe.
What is the legal regime applying to the seller?
Drop-shipping is not yet subject to any specific regulations. So the seller must comply with the legislation applying to any company operating a webshop, in particular consumer protection legislation. For example, the seller must comply with the rules on mandatory information, warranty, and the right of withdrawal.
The seller is responsible towards the customers and should therefore carefully choose the suppliers it works with to avoid cases of counterfeiting or products that do not comply with European safety regulations and to obtain guarantees about the order’s proper execution.
In addition, the seller must obviously comply with the rules on personal data protection and cookies.
Drop-shipping in practice: what are the pitfalls?
While drop-shipping can be used fairly by entrepreneurs to offer their customers a trusted local access to good deals, in practice (as is often the case on the internet), drop-shipping is regularly used dishonestly.
First, sellers often do not have the capacity and are not in a position to provide after-sales services or manage product returns. It is therefore often provided that customers who would like to exercise their right of withdrawal must return the products at their own expense to the country of shipment, which can sometimes cost more than the product itself. In practice, given the value of the products, customers rarely assert their rights against the seller.
As described above, there is generally no transparency about the fact that the order will be fulfilled by a third party supplier. It is indeed not in the seller's interest to be transparent as suppliers may also have their own sales platform or sell on market places. Customers may be tempted to go directly to these platforms to pay even less.
There are various misleading practices used by some drop-shipping sellers and we list a few of them below:
The seller applies fake discounts or promotions, e.g. the seller sells the product for 40 EUR “instead of 100 EUR” when in reality the product will be ordered on a Chinese website for 5 EUR or the seller advertises a 1+1 free deal, but the customer receives only one product due to not fulfilling conditions that were not clearly indicated.
The webshop does not display the mandatory legal statements and does not provide contact details. This makes it difficult, if not impossible, for the customer to identify the seller and to make contact in the event of a problem.
The seller presents itself as Belgian but is in fact established in Asia and is therefore not subject to European law.
The seller advertises intensively on social networks, receives an influx of orders and then makes its website unavailable.
Some webshops integrate icons suggesting that: the payment is secure (when it is not), they offer an order tracking system (which is actually fake), they use a countdown or (fake) consultation figures for the product to put pressure on customers to order, they have reviews on the webshop (which are fake).
Some webshops are unclear about delivery times. As the products come from outside the EU, delivery times can be long. However, the webshop only indicates that the product will be "shipped today", leaving the impression that it will be received quickly by the customer.
Drop-shipping is not a market place
Even if some sellers use market places for drop-shipping, the drop-shipping mechanism should not be confused with that of market places. Below we offer an overview of the main differences between these two sales strategies:
The seller sells products to customers and has the order executed by a third-party supplier.
A marketplace operator puts third-party sellers and customers in direct contact with each other.
The seller manages its own website, sets its sales prices and manages the integration of the offer into its catalogue.
The operator of the marketplace manages its website but does not manage the content of the offers, nor their price, which are decided by the third-party sellers.
The seller makes a margin by selling the product to the customer at a higher price than the price paid to the third-party supplier.
The operator takes a commission on the sales of the third-party sellers.
The third-party supplier dispatches the order to the end-customer under the name of the seller. The seller does not intervene in the delivery.
The third-party seller itself dispatches the order to the end customer in its own name. The operator does not intervene in the delivery.
The seller issues the invoice and handles customer relations. Requests to withdraw from the contract are sent directly by the customer to the seller, who will be responsible for forwarding such requests to the third-party supplier.
There is no transfer of ownership of the goods to the operator. The third-party seller receives the returns and manages the after-sales service as well as any disputes.
The seller is subject to the common rules applying to webshops. The seller's general terms and conditions apply in the relationship with the customer.
The operator is subject to additional specific information requirements on its platform under the omnibus EU Directive 2019/2161, which has yet to be transposed into Belgian law. The third-party seller's general terms and conditions apply in the relationship with the customer.
In terms of business strategy, these two mechanisms offer different opportunities and each entrepreneur should analyse the respective advantages and disadvantages before getting started.
From a legal point of view, a drop-shipping seller and an online market place operator each have a different status and are subject to different obligations. Entrepreneurs who do not wish to assume the obligations of a seller should therefore consider setting-up a market place rather than a drop-shipping website.
In any case, it is advisable to obtain legal advice to find out the extent of the legal obligations and to verify that a webshop or a platform comply with the many regulations in force under Belgian law.