UPS Invests to Learn About Direct-to-Consumer Online Sales

Two-year-old Ally Commerce Inc., headed up by a former eBay Inc. executive, has launched websites and other e-commerce services for brands including D-Link, Bosch and Electrolux.

The startup has raised a total of $8.4 million in two rounds of funding, and UPS declined to disclose the amount of its minority-stake investment.

Direct-to-consumer online sales by manufacturers have become e-commerce’s final frontier, and it is fast-growing.

By next year, direct-to-consumer online sales are expected to become the largest source of sales for brand manufacturers at 34% of the total, according to a survey by Forrester.

Brand manufacturers reported in the survey that their online sales grew nearly 30% in 2013, compared with about 14% growth for all e-commerce, according to the U.S. Census Bureau.

At that time, Jason Rubottom, now CEO of Ally Commerce, was working at eBay and noticed a tipping point as more than a dozen major manufacturers expressed interest in getting into online sales.

At the time, he was in touch with the Atlanta-based founders of an online music-equipment retailer with experience and technology, who came up with the starting point for a new cloud-based software platform to bring the same logistical expertise to manufacturers.

Rimas Kapeskas, head of UPS’s strategic enterprise fund

“We want to understand how they’re operating. It’s a very cost-effective deployment of our capital”Rimas Kapeskas, head of UPS’s strategic enterprise fund

Ally Commerce’s technology allows manufacturers to tap the company for everything from creating and running a website to fulfillment of orders and returns. The company launched in January 2014 and did $10 million in sales its first year.

Shoppers already expect to be able to buy direct. The margins are typically twice as good for the manufacturers if they sell directly to consumers than through retailers and other channels, Mr. Rubottom said. “This is consumer-driven,” he added. “You want to go to one spot, and you know you’ll find it there.”

Ally Commerce is the latest in a string of startup investments by the strategic corporate venture arm of UPS, ranging from crowdsourced delivery app Roadie Inc. to 3-D printing manufacturer CloudDDM LLC.

Currently, the delivery giant has a portfolio of about 20 companies which have invented technologies that align with UPS’s interests - especially in areas that might affect UPS and its customers’ businesses in the next two to five years, said Rimas Kapeskas, head of UPS’s strategic enterprise fund.

When UPS invests in a startup like Ally Commerce, it is for research purposes. It is often cheaper than UPS carrying out its own research and development. “We want to understand how they’re operating. It’s a very cost-effective deployment of our capital,” Mr. Kapeskas added.

E-commerce is a special target for investments, he added, “because it’s transformed our business.”

Growth in online sales has caused growing pains for UPS in recent years, including back-to-back holiday seasons in which it disappointed investors with its performance as online orders surged.

The company warned earlier this year that costs to ramp up for its increasingly unpredictable holiday season will continue to be a drag on earnings. The business is also low margin, as delivery drivers often go farther to drop off cheaper packages at houses scattered throughout a neighborhood.

In response, UPS has sought more profitable e-commerce outlets, including expanding its ability to handle retailers’ returns. But it remains to be seen how much of a role UPS might take in the direct-to-consumer space. Mr. Kapeskas said that the company typically doesn’t purchase the startups in which it is invested.

Ally Commerce now has 30 customers, including D-Link Systems Inc. The computer networking-product manufacturer first started using Ally Commerce about a year ago to sell its products on marketplaces like eBay.

Previously, the company struggled with juggling filling single orders to consumers with its big shipments to retailers. Now it ships routers and other products to Ally Commerce, which fills the orders.

Source: The Wall Street Journal

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