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Dropshipping is a widely used business model by online retailers. It is beneficial due to its low risk and startup cost. However, in light of the Ozdirect case, many people believe that dropshipping is illegal in Australia. This is not the case; dropshipping is legal as long as online retailers abide by the Competition and Consumer Act, the Australian Consumer Law and other relevant legislation. In this article, we first explain dropshipping and then set out the legal considerations in Australia.

What is Dropshipping?

Typically, the items on display on an e-commerce website are the items found in the retailer’s warehouse. When a customer places an order on the website, the items are posted from the retailer’s warehouse to the customer.

Dropshipping is a business model where the retailer never actually possesses the inventory. When a customer places an order on the website, the retailer forwards the request to a dropshipping partner. The dropshipping partner then prepares and ships the order straight to the customer.

See the following example of a customer buying an item from a business we’ve made up, called Fancy Bows:

Dropshipping Model Warehouse Model
Customer places an order on the Fancy Bows website. Customer places an order on the Fancy Bows website.
Fancy Bows forwards the order to a dropshipping partner. Fancy Bows has the product in its warehouse.
The dropshipping partner prepares, packages and ships the product using Fancy Bows’ branding. Fancy Bows prepares, packages and ships the product from its own warehouse.
The product arrives at the customer’s chosen address. The product arrives at the customer’s chosen address.

 

Advantages and Disadvantages of Dropshipping

Using a dropshipping model can have several advantages and disadvantages for a business.

Advantages Disadvantages
Low startup costs Difficult to find a reliable dropshipping partner
Easy to get started You don’t have direct control over quality
Low operating budget Lower profit margins
No overstock issues Extremely competitive market

 

Dropshipping allows you to sell items on your website without investing capital in inventory. It also prevents the risk of buying too much stock and being unable to sell it all. It can, therefore, be an attractive option for businesses that are just starting out and have limited capital.

However, as your business grows, you may wish to retain greater control over the delivery of your products. You will also have a better idea of which products are successful, reducing the risk of overstock issues. You can then consider buying your own inventory and using dropshipping as a supplementary alternative.

For example, Zappos is an online shoe retailer that began as a dropshipping company. As the business grew, Zappos wanted to acquire greater brand control and decided to manage its own inventory.

The Ozdirect Case: Is Dropshipping Legal?

There is nothing illegal about dropshipping alone. However, it can be done illegally. The case Ozdirect exemplifies how dropshipping can be executed illegally.

Facts

Ozdirect was an online retailer of electronic goods that operated using a dropshipping model. Customers paid for their orders before receiving the products. When a customer paid for an order, Ozdirect would pass it on to its suppliers. Ozdirect had an agreement with its suppliers that, if it exceeded its credit limit, suppliers were under no obligation to fulfil the orders.

Despite this, Ozdirect submitted several orders while it was on credit hold, resulting in customers not receiving their orders at all, or within a reasonable time frame after making payment.

Decision

At the time Ozdirect accepted the orders, it knew or ought to have known that it would not be able to deliver the orders within a reasonable time because it was on credit hold. Furthermore, Ozdirect made various misleading and deceptive statements about customers’ rights to refunds. Ozdirect’s conduct contravened the Competition and Consumer Act (which was then called the Trade Practices Act).

Therefore, as long as retailers can deliver the goods customers pay for, there is nothing illegal about dropshipping. What is illegal is accepting payments for products you do not reasonably intend to supply and making misleading and deceptive statements about customer rights and refunds.

Key Takeaways

Dropshipping is a popular business model among online retailers. It has the advantage of having low startup costs and permitting you to sell items without needing to manage inventory. However, as a business grows, it may want to acquire greater control over the delivery of inventory to consumers. In such cases, businesses may choose to manage their own stock.

The case of Ozdirect brought to light legal considerations of dropshipping. Although Ozdirect was liable for various legal infringements, dropshipping alone is not illegal. Accordingly, a dropshipping model can be successfully executed in compliance with the Competition and Consumer Act. Therefore, if you need advice on a dropshipping model for your business, get in touch with LegalVision’s competition lawyers on 1300 544 755 or fill out the form on this page.

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