How profitable is online selling?
“What online-only company is really profitable? Basically none of them. That’s this dirty secret.”
So said Everlane CEO Michael Preysman last week to CNBC’s Jim Cramer to explain why Everlane is opening stores.
The statement is a full reversal for Mr. Preysman, who told The New York Times in 2012 that he would rather “shut the company down” before opening a store.
Mr. Preysman told CNBC, “Everybody loves to say you don’t spend money online, but the way things work now with Facebook, Instagram, and how much it goes to acquire a customer, then you have to ship it all.”
The apparel retailer just opened its fourth store, in Brooklyn, adding to others in Manhattan, Los Angeles and San Francisco.
In another about face, Andy Dunn, the co-founder of Bonobos and now Walmart’s SVP of digital consumer brands, told attendees earlier this month at the Future of Home conference in New York City, “I don’t really like digitally native vertical brands. What gets me excited are brands that are really strong and direct-to-consumer, but also have got omni.”
According to Business Insider, he described e-commerce as a “tremendously challenging, frequently unprofitable business” and insisted that consumers want to interact with “brands and products and people” face-to-face. Bonobos’ “guide shops” inside Nordstrom are its most profitable business.
Despite digital first start-ups such as Casper, Glossier and Rent the Runway attaining $1 billion valuations this year, studies regularly find online selling continues to be price driven. Primary purchasing incentives include free shipping, free returns and coupons.
A recent Drapers article exploring the “true cost” of online selling found avoiding rent and associates’ pay is often offset by major investments in customer acquisition, fulfillment and the cost of returns. According to Drapers, one U.K. department store told suppliers any online order under £30 ($38) is unprofitable.
A less talked about challenge is the climbing costs of customer acquisition and online’s lackluster retention rates. Matt Alexander, CEO of Neighborhood Goods, the start-up specializing in bringing digital native brands to physical places, recently told Crunchbase News, “Customers acquired offline have five times more lifetime value than those acquired digitally.”
DISCUSSION QUESTIONS: Is online selling still facing near-term profitability challenges or is it inherently unprofitable in its current set-up? What are the biggest profitability hurdles for online retailers?