Recently, there has been more and more talk in Polish e-commerce about cross border and expansion into foreign markets. Not surprising since, according to the Baselinker Index, stores operating in more than one market are growing on average 2-3x faster than their domestic competitors. Nevertheless, there is no rose without thorns. Entering a new market presents a number of challenges. Including logistics, which can seriously affect operating margins. So what to consider when planning international expansion in the e-commerce channel? How do you prepare your operations so that revenue growth is not offset by excess cost growth? Much depends on how we approach the project of entering new markets. As well as on our preparation in the areas of finance, transportation, and legal areas. In the article, I will share my observations from building a European distribution network for one e-commerce aggregator. If you don’t want to make the same mistakes in your business I invite you to read on.

Cross Border has not one name

Before we get to solutions, we need to define in which model sales to foreign markets will be implemented in our case. From the perspective of sales in Europe, consciously not going into the options of the so-called “European sales”. drop shipping, we actually have two options. Both have their pros and cons and their associated challenges.

Classic Cross Border

The first is to start selling to foreign markets directly from our existing warehouse and fulfilling orders for the so-called “foreign markets. last mile debt. This classic model has many advantages. First, it does not require significant changes to our existing operations. Both the deliveries to our logistics network and the processes inside the warehouse are essentially unchanged. We continue to receive and store goods at our premises. The only significant change will occur at the level of the organization of deliveries to the customer. If we decide to enter some of the markets in Southern Europe we will have to consider signing additional contracts with courier companies that have better coverage and shipping rates to these destinations. We can choose from operators such as Packeta, Olza Logististics, and others depending on the market. If you’re thinking of selling primarily to Western Europe then you can first explore the market using DHL, which is still the most economical form of delivery to all major European markets outside the UK.

However, such a classic cross border e-commerce model has two major drawbacks. First, the delivery time. No matter how well we organize operations inside the warehouse.

Whether our integration with marketplac or our own store will work on a regular basis. We must take into account that deliveries from Poland to most markets outside Germany will take 3-4 days.

Are our customers able to accept this? On the one hand, Post Nord research indicates that Europe does not necessarily need speed. On the other hand, however, it is a factor in conversion.

Those interested are encouraged to read that article. On the other hand, to summarize the dependencies in one sentence – time plays less of a role the more unique the product. With competition in our product category, and especially when we sell not through our own website but through a marketplace, delivery time is becoming increasingly important.

Second, the classic cross border model involves much higher delivery costs. Even the “most economical” form of delivery to Western markets I mentioned earlier will be 2-4x more expensive than domestic delivery.

Of course, it all depends on the number of shipments we will be sending per country. However, even with significant volumes, the relationship will always remain the same. International shipping will be more expensive than domestic shipping, and this must be factored into the price level upfront, or passed on to the customer, in our sales channels.

Otherwise, our operating margin, or second level margin (from Profit Contribution Lvl2, PC2), may come out below the operating margin in the domestic market. Even if the direct sales margin, or first level margin (from Profit Contribution Lvl1, PC1), is higher in foreign markets.

Unfortunately, this is also how it worked out in the first months of entering foreign markets of the aggregator I mentioned above. The commercial team aggressively approached price levels in a bid to grab market share. We had to deal with the effects at the operational level. However, this only became possible when we entered higher sales volumes and were able to take advantage of further courier pricing thresholds.

What do “higher” volumes mean? As I write this article in practice at least 30,000 packages per country per year. At this level, you can already either negotiate better terms or use an international broker such as Bringg or, until recently, Seven Senders.

Soft international expansion

However, what other options do we have? What if time is of the essence in our product category? After all, not everyone sells furniture, where the customer, as eCommerceDB’s more detailed research indicates, can wait up to 3 weeks?

What if we sell products in impulse categories, or on a marketplace that premiumizes delivery time and doesn’t show our offerings to customers if we don’t meet the sub-2-day delivery standard?

Note: The above summary should be read with some caution. On the one hand, it is more detailed because it shows the desired delivery times in different categories. On the other hand, these are averages from all countries included in the survey. So the results of Post Nord and eCommerceDB cannot be directly compared.

What can we do if we sell cosmetics, for example?

Then you can consider entering new markets with the cooperation of a logistics operator that has warehouses spread across Europe. Contrary to appearances, it does not have to be a very complicated solution from the organizational and technical side.

Today, it’s not just the largest operators that offer integration capabilities using Order Management System(OMS) type systems. Also, a number of smaller, local, operators integrate seamlessly with solutions like Baselinker, Channel Advisor, Open Bravo or others.

However, when deciding on this model, it is important to remember that at the beginning we will have to go through a number of administrative procedures. It is no longer enough to simply register for VAT OSS. You need to register as a VAT payer in each country where you will hold stock, that is, one from which you will make sales.

In addition, it is imperative that we register with the Waste Database and information collection systems appropriate to the country. In France it will be Adelphe, in Italy CONAI, in Spain SIG, and in Germany LUCID.

However, once we go through the registration procedures we gain the ability to fulfill our customers’ orders faster than in the case of classic Cross Border, and everything would be beautiful… if it were not for the issue of operating margin settlements, which unfortunately become more complicated in this model.

What is landed cost?

When deciding to sell from several different points, we need to start taking the detail to the next level in our financial and accounting system, or at least in the reporting built on it.

First and foremost, what will change in our cost model is the approach to determining the costs of products ( COGS, Costs of Goods Sold), which are normally included in the first level margin – the previously mentioned PC1.

In this model, we need to keep in mind the total cost of making the product available for sale, that is, the so-called landed cost, which also includes transportation costs. In the case where we have one warehouse it is simpler because we only have to consider freight costs to our main warehouse.

When working on multiple warehouses, transportation costs within our distribution network must also be considered. The table above shows a framework Profit and Loss Statement, where transportation between warehouses is in the red line and not below in operating expenses.

This is important because whatever we do in organizing our logistics, selling from further points lower in the distribution network will always be more expensive than selling directly from our first, main, warehouse.

If we don’t take this into account then we lose transparency about how our sales margins are distributed. This is also one of the problems we faced when I helped build the distribution network of the aforementioned aggregator. The ERP system used by the company was unable to allocate transportation costs to product costs. At the same time, he did not allocate them to operating expenses.

As a result, until the patch was uploaded, margin levels in some markets in Europe were hypocritical. Overall, we saw the result of the entire Business Unit. In contrast, we had a distorted perspective on the impact of individual markets.

Cross border or soft expansion? What model for entering new markets should I choose?

It is not possible to point to one specific model for entering new markets. Both classic Cross Border and expansion into new markets using logistics operators have their pros and cons.

The choice depends on the customer’s expectations of our product category, the logistics service standards already imposed by the competition, and the level of competence within the organization.

The classic Cross Border is simpler to implement. That’s why many companies choose this model in the first place, reckoning with the limitations on delivery time and the increase in logistics costs.

Deploying one’s inventory in other countries, entering into partnerships with logistics operators, is not technically difficult. It allows you to get closer to the customer. When it is well laid out, it also makes it possible to reduce logistics costs relative to the classic Cross Border.

Note: Comparing the prices of operators’ services in Western Europe with domestic ones, this will obviously be a more expensive solution at the level of warehouse operations themselves (receipt, storage, picking of the customer’s order). Nevertheless, through lower delivery costs in a given market, it can be an overall cheaper logistics option than an in-house operation in Poland plus the long last mile that takes place in a classic Cross Border.

So it all simply depends on the specific case and calculation of what pays off more for us, and it can pay off because more and more organizations are entering either model into other markets.

Not only significant eCommerce businesses such as MODIVO, which has decided to expand internationally and is opening a warehouse in Romania. Also, smaller organizations such as Deeze and Cossibella are selling Cross Boder into Ukraine, and ANSWEAR.com is selling into several more markets in Southern Europe.

Battery Empire, the Green Cell brand store, is available in 10+ languages and fulfills orders for Europe not from Poland but from warehouses in the west of the continent.

All this shows that entering new markets is not as scary as they paint them ?