Grabbing exports by e-tail
Online retailers turn to FiftyOne to eliminate trade hassles, open new markets.
Many U.S. companies have thrown up their hands when confronted with the complexities of international trade and simply avoided the export market. In the past 20 months, a third-party service provider called FiftyOne has developed a turnkey product that allows Internet retailers to essentially outsource the international component of sales without adding any sales, distribution or compliance infrastructure.
Available since January 2008, FiftyOne lists 30 electronic retailers as customers and is setting up 20 more for the holiday shopping season. The companies see FiftyOne as a way to expand their business to new overseas markets minus costly problems associated with international trade, such as returns from buyers surprised by undisclosed duties and taxes at time of delivery.
“In today’s economy top line revenue growth is an easy case to make right now, and the U.S. market is reaching the saturation point,” said Kris Green, FiftyOne’s chief marketing officer. Meanwhile, exports continue to be one of the stronger components of the U.S. economy due to the weak U.S. dollar versus other currencies.
Forrester Research estimates U.S. online retail sales will increase 11 percent this year to $156 billion, not including automobiles, travel and prescription drugs.
In the past many Web-based retailers simply screened out international hits to their sites because they did not have the processes in place to manage the international transactions. Some large “e-tailers,” such as Amazon.com and New York City-based B&H Photo, have built their own software applications to automate the international buying process and make exports cost effective. Other shippers also use global trade management (GTM) systems offered by software vendors and consulting firms, but some trade experts say these applications are not suited for the fast-changing online sales environment.
By acting as the international broker and exporter of record, FiftyOne simplifies the logistics process for e-commerce companies that don’t want to manage cross-border orders in-house. It buys the product from the retailer and handles shipping in collaboration with Pitney Bowes, a large mail services and document management company based in Stamford, Conn. The retailer simply puts the order in its domestic shipping network and its work is done.
FiftyOne is a 10-year-old, privately held company that started out providing electronic currency hedging for e-commerce transactions between U.S. retailers and international customers. E4X, as it was originally called, guaranteed the exchange rate in the respective currencies of the shopper so that the retailer and buyer were not exposed to the risk of currency fluctuations, or bank conversion charges, during the transaction. The New York firm takes positions on currencies through futures contracts that lock in currency prices and makes money on the difference saved. The retailer pays no fee.
Green said the currency product worked well for online transactions such as hotel reservations, concert and airline tickets, and downloadable software, but didn’t resonate as well with international shippers who were more concerned about managing total landed costs, fraud, customs compliance, payment processing, counterfeiting and service levels. The landed cost is the total delivered cost to land an imported item in a store. It goes beyond product cost to include vendor and broker fees, insurance, transportation, duties, taxes and other charges.
In response, the company developed a new application called FiftyOne that not only addresses currency changes but all the other needs of online exporters. The FiftyOne name, which the company adopted to reflect its new primary business model, is intended to denote 50 states operating in one world. Today, the company supports sales to 39 countries with 700 million consumers, including Canada, the United Kingdom, Australia, Hong Kong, Singapore and 32 in Europe. By the fourth quarter it plans to launch service to 59 more countries, Green said.
“We can help retailers turn the lights on all over the world without having to actually create any new assets. They have an existing U.S. Web site, distribution center, and call center and we can leverage those assets and extend them internationally,” he said.
The company charges a commission based on a percentage of the sale that is built into the price the customer sees. Start-up consulting charges for electronic retailers are $20,000 to $50,000 plus an 8 to 12 percent sales commission, according to a March report by the Patricia Seybold Group, a Boston-based customer relationship consulting firm.
Here’s how the process works. FiftyOne applies technology to Web sites of companies such as Overstock.com, drugstore.com, Saks Fifth Avenue and women’s apparel seller Anthropologie, to create the look and feel of a domestic shopping experience for the foreign customer. The system automatically recognizes which country potential shoppers are from based on their log in, reshapes the screen view to display the national flag, prices products in their local currency, and figures out extra fees up front.
Although the browsing, buying and shopping cart experiences are virtually identical to a U.S. customer, the retailer can restrict the products, promotions and content the foreign buyer sees.
The FiftyOne module plugs into the retailer’s e-commerce platform so customers can configure their orders and see a breakdown of guaranteed landed costs, including an itemized list of products, the import duty, shipping and handling fees, value-added taxes and any discounts that may apply, all without having to go to an outside Web site to complete the transaction.
“One of the nice things about this model is that the price the customer sees is what they pay,” said Ed White, director of international business for Overstock.com.
The system also screens the buyer for fraud risk to make sure the credit card used is valid, processes the payment, and remits the duties and taxes to the proper authorities.
When international customers enter their shipping and billing information they are really working with FiftyOne and Pitney Bowes without knowing it.
“That’s important for the retailer to have control of the customer experience at all times,” Green said.
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| ‘We can help retailers turn the lights on all over the world without having to actually create any new assets. They have an existing U.S. Web site, distribution center, and call center and we can leverage those assets and extend them internationally.’ | |
| Kris Green Chief marketing officer, FiftyOne |
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Consumers in the United Kingdom, for example, price their products in pounds sterling and pay duties and taxes in advance rather than as cash-on-delivery charges, as often happens now because most retailers can only estimate the customs and transport fees ahead of time.
One reason is that use of a typical freight forwarder or postal service requires two separate payments for an e-commerce shipment; one by the retailer at checkout and one by the forwarder for shipping and taxes to move the product to a foreign country.
“Most of our customers just weren’t shipping international because without being able to calculate and guarantee landed cost the customer experience was terrible,” Green said. Customers would either refuse the shipment, requiring the retailer to pay round-trip freight without the benefit of a sale, “or the customer would grudgingly pay, vow never to do it again, and tell 10 of his friends,” he added.
Some e-commerce executives say they have avoided selling smaller items overseas because the cost in fees and manpower hours for processing returns outweighs the resale value of the product, which they then have to declare as a loss.
Fraud is also more difficult to detect in most countries because they don’t have the public financial databases prevalent in the United States to verify shipping addresses and make smart credit worthiness decisions. Other difficulties include import restrictions for certain products in various countries, currency fluctuations, differences in payment methods, and limited delivery coverage in certain countries.
Given all the hassles and risks, many retailers simply opt not to ship internationally.
“I was always surprised that this is a market niche that nobody had figured out because it’s very cumbersome for an Internet retailer,” said Overstock.com Chief Executive Officer Patrick Byrne, pointing to the extensive software development and regulatory expertise required to manage cross-border shipments.
“We looked for a long time waiting for something like this to emerge,” he said. “Until it’s put in a nice single package, it’s too difficult” to export because a retailer has to integrate systems with too many different partners.
Overstock.com began using FiftyOne in August 2008. Exports now account for 1 percent of its sales and officials expect that figure to increase.
Upon acceptance of the consumer’s payment, FiftyOne places the order with the retailer. It also buffers the merchant from the currency exchange risk during the period from checkout until fulfillment is completed at the warehouse with an outbound shipment, and the buyer’s credit card is actually charged.
The customer then automatically receives a branded e-mail with order confirmation and online tracking information. The merchant charges the order to a credit card provided by FiftyOne for payment in U.S. dollars and ships the item to the Pitney Bowes hub in New Jersey by its preferred carrier as a loose parcel or in a master container. Companies using drop-ship networks to sell something from a supplier that directly ships it to the customer can also instruct their supplier to send orders directly to the Pitney Bowes facility.
Pitney Bowes receives the inbound domestic shipments and prepares them for cross-border transportation. It handles the labeling, packaging, customs paperwork, international transportation arrangements, delivery to the destination country address, and reverse logistics for returned goods. The company uses freight forwarders, but acts more like a third-party logistics provider that manages a network of carriers doing the underlying work.
Craig Reed, Pitney Bowes’ managing director for e-commerce solutions, said the company offers two types of service:
- Delivery duty paid in which it manages the customs clearance through its broker.
- A postal clearance option that goes through the postal customs clearance process with duty unpaid until delivery.
“When it’s in our network we manage it through customs so it’s not subject to postal delivery delays,” he said.
Pitney Bowes’ service is also available to companies that want to directly deal with foreign buyers and handle their own international payments. Reed said the company plans to wrap third-party insurance products around its service in the first quarter of 2010.
The mail consolidator has multiple distribution centers, but FiftyOne is routing everything through the New Jersey warehouse to generate economies of scale during the start-up phase. The two partners plan to soon introduce more dynamic operations in which shipments can be sent to various facilities, Green said.
FiftyOne has so far targeted large enterprises, but next year will work to make its services more accessible to small-and-medium size shippers, he added.
Automated screening of products that cannot be shipped to certain countries for customs or logistics reasons was one of the main draws for drugstore.com, said Corey Tower, the company’s director of logistics.
drugstore.com had revenue of $366.6 million in 2008 and is on pace for $400 million in sales this year, but has lost money in recent quarters.
The health, beauty, vision and pharmacy products it sells are heavily regulated in most countries and can be subject to import restrictions. The FiftyOne system automatically blocks certain products from view based on the customer’s home country Internet address.
“A company like E4X allowed us to expand internationally, and they take on the burden of determining what products are allowed to be shipped into various countries,” Tower said. “It’s allowed us to do something in this area and focus our efforts elsewhere.”
FiftyOne is a good way to quickly enter new markets at low cost and test whether there is demand for the retailer’s products, he said.
The downside is that shipping packages internationally is expensive, so customers must be motivated to make a purchase. Reed notes that parcel shipping prices are much higher with an integrated package company such as DHL, UPS or FedEx than Pitney Bowes’ cross-border service.
Over time, a retailer that generates enough volume may find it more economical to partner with local logistics providers to do fulfillment or set up its own distribution facilities in country, Tower said.
“I’m stunned how many people are paying that money to get what we sell. So it speaks to the fact that if we were to do local operations there’d be even more sales,” he added.
The company is shipping about 2,000 orders overseas per month, still a very small portion of its business, since it began using FiftyOne a year ago.
Landed Cost. Pitney Bowes also does the landed cost calculations through its global trade engine, which is pre-integrated with the FiftyOne software. It teams, in turn, with a small company called Global Data Mining that provides the classification codes and tariff information so its application can do the duties and taxes on the fly.
Global Data Mining maps the item number of every product the retailer sells to the harmonized tariff code in each country in which it does business, stores that internal matrix in a master file and keeps the classifications updated as customs authorities routinely change their product numbering systems. Its sister company, CustomsInfo, provides the tariffs. Global Data Mining then delivers a data package with the HTS code, product descriptions and tariffs in Pitney Bowes’ preferred format.
Pitney Bowes loads the data into its ClearPath trade management system, which then uses algorithms to associate the classification number to the tariff percentage for each product to calculate the amount of duties and taxes that are required in the destination country. It can automatically figure out that an importer in France, to take a hypothetical example, might have to pay a 7 percent duty for a pair of jeans plus 3.5 cents per pound of material. The trade engine also applies the weight and size of the shipment to determine the total landed cost.
ClearPath is part of an acquisition Pitney Bowes made four years ago that originally helped eBay sellers with their cross-border shipments. The physical shipment is done by Pitney Bowes International Mail Services.
GTM systems from companies such as SAP, Oracle, TradeBeam, Management Dynamics, and IntegrationPoint were designed for corporations moving containers between regular departure and destination points, according to Ron Lackey, president of Eden, Utah-based CustomsInfo. The systems determine the landed cost, create and electronically file the invoice and shipping documents, and carry out a host of other import, transportation, compliance and order management functions.
Many manufacturers and other shippers that utilize containers have a relatively stable product mix that they import and export. In the physical world, they may set up production and distribution operations in a few countries at a time. E-tailers such as Amazon.com or PCMall.com, by contrast, constantly add a huge amount of new products to their online catalogs and they can start business in multiple countries within months if they get past the duty and tax barrier, Lackey said.
The enterprise-type GTMs ‘were not designed for people to classify 50,000 products in 30 days,’ Lackey said.
The tools TradeBeam provides some Internet retailers involve moving inbound shipments to their warehouses rather than determining duties and taxes for final sale to the customer, acknowledged Alex Thomspon, vice president of product strategy.
In August, Amazon.com dropped Management Dynamics as its GTM provider for landed cost calculations at checkout, spokeswoman Annika Helmrich said. The online store has developed its own landed cost engine and is using another outside company to populate it with trade data.
The FiftyOne template and shell now allows retailers in the virtual world the ability to quickly expand into new markets.
“I think they were a first mover and got a great customer list,” Lackey said. “They really are a one-stop shop. They have the e-commerce application, the content, the classification and international mapping services if you need them, and the logistics part.”
FiftyOne does “a very good job” of marrying the physical movement of the goods with financial-type services, White said.
Byrne, his boss at Overstock.com, said the bundled export service could help U.S. merchants knock down the barriers to entry in many markets.
“In my view the retail industry in other countries is somewhat ossified and protected. There’s not a lot of discount shopping. American discounters haven’t been able to cut into the European market because of the logistics costs and hassle.
“This strips out so much of the customer-facing complexity that it may turn into extreme discount shopping that’s pretty well non-existent in Europe,” where the legal system tends to control competition and allows retailers to keep their margins high at the expense of consumers, he said.
“This is going to expose them to a new level of competition. It’s really like taking a gun to a knife fight to invade the European market.”