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Channi Dorset’s online shop, Cr8tive Wallflower, is looking bare. Last year, shoppers could buy the 26-year-old’s artwork emblazoned on more than 170 different product lines, including clothes and mugs. Visit the site today and you’ll see just 15 items on sale. The reason? Brexit.
Dorset uses dropshipping, a method of fulfilling orders that means sellers don’t have to keep the products they list in stock. Instead, they rely on a third-party producer to manufacture the item on-demand and ship it directly to the customer. “It’s an easier way of not having to hold all that stock but being able to access a lot of different [customers worldwide],” Dorset says. “It wasn’t the most efficient way of getting the best profit, but it was working.” Or at least it was, until it stopped working altogether.
Since the end of the Brexit transition period, dropshippers have been hit by a series of changes that have materially affected their businesses – right at the time when the pandemic’s impact on employment makes secondary income more important than ever. There are at least 140,000 dropshippers in the UK, according to Shopify, one of the largest providers of dropshipping technology in the world. The UK makes up eight per cent of Shopify’s 1.75 million merchants, generating the company $3 billion in global revenue in 2020.
For the biggest dropshippers, there’s the opportunity to make huge sums without ever having to buy stock or inventory. Others use it as a supplementary income to top up their salaries. Sometimes, it goes further: one high-ranking dropshipper claims to have brought in £310,000 within his first six months of trading. Neither matches the $1.5 million Bali-based dropshippers have been able to make from their businesses.
“Because of Brexit, shipping prices from China to the UK are ten times higher [than before] and there are a lot of delays at customs,” says Zain Shah, who sells products on eBay, Amazon and Shopify. “It is not easy and smooth as it used to be when it comes to shipping items from the UK to the EU.” One UK-based fashion dropshipper, who earns around £70,000 a year, was more blunt. He said he would cease trading “because my profit margin will go to shit”.
“Dropshippers’ overheads are so high that for them to pay the VAT will kill their margins,” says Philip Karageorgis, who runs Honest FulPhilment, a logistics company that brokers arrangements with Chinese suppliers on behalf of dropshippers. “It will affect the average dropshipper a lot. If you increase your prices 20 per cent, for most there’ll be a big dropoff.”
In the aftermath of Brexit, Aliexpress, one of the main sites that connects dropshippers with China-based manufacturers, slapped a 20 per cent price hike on every product sold through its platform. The policy was introduced to cover a change to UK tax law that shifts the requirement for levying VAT on items brought into the UK from the customer at the point of receipt of the goods to the company selling them, at the point of sale. Previously, smaller items that were sent to the UK, costing under £15 each, weren’t checked and taxed because they were assumed to be gifts.
The change meant that overnight, the price of items increased by a fifth for dropshippers, who were forced to pass on those costs to their customers. “If their margin was under 20 per cent, they’re making a loss at the point of import,” says Ethar Alali of Axelisys, which provides APIs and frontend tech support to dropshippers. “Not only are they seeing their margins affected, but small volume-based businesses could be turned into loss-making businesses.”
That includes Dorset’s business. “The way the delivery services have changed and having to pay extra customs charges, it was turning out I was going to be at a loss rather than a profit,” she says. She’s investigating other options, including sourcing her items from closer to home, rather than China. “It’s opened my eyes to the impact of Brexit,” she says. “You wouldn’t think dropshipping is something that would be impacted. But for someone like me who’s an illustrator and creative, it’s a major thing.”
Changes started happening the summer of last year, Dorset says, when the fulfilment company she works with started to discontinue some of the products that were most popular with her customers. The prices for other products from outside the European Union started to increase. She says she “didn’t mind paying a couple of quid” if it was going to benefit her business to have a broader range of products. But prices increased further, and popular product lines disappeared. “I had to start withdrawing certain products because there was no way of obtaining things, and I didn’t want to disappoint customers.”
Christmas orders for some of her most popular lines, including bucket hats and baseball caps, had to be cancelled because the supply of the raw items to make the finished products dried up. That could be because the manufacturers didn’t want to take the risk of being charged to supply Dorset’s business under new tax and import rules post-Brexit.
The supply of stock for dropshippers disappeared overnight. Suppliers couldn’t be bothered to deal with the additional paperwork, tearing up supply chains and leaving once-economical businesses broken. “A lot of EU suppliers will have said no – and that will have left a lot of dropshipping clients with a lot of problems,” says Alali. Suddenly they can sell an item that won’t be manufactured, he says.
It’s also a worry for customers. Post-Brexit, the default rules have changed so that any European end customer who buys something from a UK shop and receives the finished item is responsible for paying any import VAT or orders at their door. UK-based dropshippers handling items like plastic car parts have reported packages being refused entry by customs, losing £25 on shipping and £160 in sales to refunds on a single shipment. Other dropshippers say they’ve had packages go missing – likely stuck in the system if a customer refuses to pay what can often be hefty additional import VAT fees.
“One option for them would be to bulk import,” says Karageorgis. “They could bulk ship from China to the UK, then distribute from there. But then that isn’t dropshipping anymore.” And it’s a gamble that few are willing to make.
“For some people this is fatal,” says Alali. “Fundamentally, dropshipping will have to change. The reality is the timelines involved means customers will start to find themselves ordering from Amazon or eBay. Unless dropshippers take on the burden of speculatively placing goods somewhere close to the UK or within the UK itself, which means they need to be sure they can sell it, that part of the industry is going to struggle.”
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