Saturday, June 20, 2009

Promotion with Costco.ca

We participated in a special 3-weeks discount promotion with Costco.ca in the month of April to sell our HF-380 air purifier.  Heaven Fresh is a drop ship vendor for Costco.ca, which means that Costco.ca only takes orders online and Heaven Fresh ships directly to the customer on behalf of Costco.  Normally when  drop-ship vendors take part in a promotion, Costco requires the  vendors to have certain level of  inventory sitting in their warehouses to cover the orders from the promotion.

Our decision to join in the Costco promotion might sound like a no brainer but given the tight cash flow situation there was quite a bit of a risk involved for us to order large inventory  as the Costco buyer had given us an estimate of anywhere between 100  to 500 units. So we had to have three additional containers sitting in our warehouse above and beyond our regular stock. The catch is that Costco’s estimate of sales during the promotion is just an estimate, not a guarantee for sale. Vendors not only chip-in money to advertise in the promotional catalog but also assume 100% of the risk of stocking the inventory for the promotion. If the promotion is not successful for any reason, vendor’s cash gets stuck in the inventory. We were somewhat reluctant as we had been burned in a similar situation with The Shopping Channel before. To cut the long story short, we went ahead with the promotion as we really needed accelerated selling to balance our books before the start of slow summer months but knowing very well that a bad outcome would put us in a extremely precarious situation.   The promotion went well and was a massive help in easing the cash flow.

The interesting new phenomenon for me is that many of the American retailers are separating their e-commerce ventures from their brick and mortar operations. For example, the buyers for both sides of the business are different.  The products that consumers can buy online are not necessarily available in the stores or vice versa.  An independent e-commerce operation is allowing them to use their brand recognition just for selling while shifting the logistics to the vendors. Canadian retailers have not jumped on that bandwagon yet and the British retailers are partially on board. However, I believe that this trend will continue to grow creating opportunities for small vendors as well as fanning the growth of more micr0-multinational distribution companies.

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