The strategic drivers of drop-shipping and retail store sales for seasonal products

Abstract

Retailers that sell seasonal products face significant challenges when planning inventory assortment. The incorporation of drop-shipping into their operations, wherein suppliers own and ship products directly to consumers at retailers’ requests, has only complicated these challenges. This study investigates multichannel assortment planning of retailers that sell seasonal products. We first capture structural properties of multichannel retailing of seasonal products through a simple and parsimonious analytical model. The analytical model uncovers key seasonal product attributes that make it more attractive for retailers to allocate a product for sale in the drop-shipping channel than in the store channel. We then empirically assess the findings of the analytical model. Using a rich and unique dataset from the fashion retail industry, we test relationships between product attributes and retailers’ channel choice. The application of a generalized linear latent and mixed model controls for selection bias by jointly estimating retailers’ likelihood of allocating a product’s inventory to the drop-shipping channel and the allocated volume in each channel according to the product’s characteristics. The empirical findings suggest that retailers are less likely to drop-ship products that are colored, irregularly sized, and offered in more style variants. They also unveil cross-channel effects in terms of inventory amounts allocated for sale in each channel according to those characteristics. Our analytical and empirical assessments jointly demonstrate the complementary roles played by drop-shipping and store channels for seasonal products and offer important academic and practical implications.