Is omnichannel a retail margin crusher?
Through a special arrangement, presented here for discussion is a summary of a current article from the IMS Results Count blog.
On the surface, omnichannel sounds like a panacea to bolster sales. But an analysis by AlixPartners provided to CNBC suggests some channels are far costlier than stores.
Analyzing the costs involved in the sale of $100 of goods by an apparel retailer under different distribution scenarios, in-store scored the highest margin: 32 percent. The “bricks and mortar” model’s economies of scale involves shipping truckloads to fixed points (stores) and customers managing their own delivery in terms of cash and carry from the stores.
Coming in second in margin was selling online, at 30 percent. Much of the cost in pure e-tail revolve around warehousing, infrastructure and personal home delivery. If the retailer can manage inventory turns, grow the long tail opportunities and manage price elasticity/discounting, it is not so bad selling online, even with direct shipping to homes.
More troublesome is click and collect, which earned a margin of 23 percent under the analysis. While convenient for the customer, BOPIS creates incremental labor and operational costs to ensure that the specific item is in stock, plus requiring staff for the collection point in-store. If the retailer can upsell something while the customer is at the store, it might be possible to offset part of the loss in profit.
Much worse under the AlixPartners analysis was ship from store, with a margin of only 12 percent. Not only are items shipped from stores to homes shipped twice, incremental systems and people are required to pick, pack and ship individual items from stores and maintain accurate shelf inventory. Very few, if any bricks and mortar retailers can survive the burdens and low margins of ship-from-store sales.
AlixPartner’s analysis also noticed how the need to add more SKUs to support omnichannel increases investments in stock, warehouses, systems and logistics. The higher rates of returns seen online likewise results in incremental processing, non-saleable inventory and, ultimately, markdowns.
There is one sure thing in an omnichannel world — the CFO’s role and retail financials just got a whole lot more complex!
- Which is more expensive – Omnichannel or retail stores? – IMS Results Count
- Think running retail stores is more expensive than selling online? Think again. – CNBC
DISCUSSION QUESTIONS: Do you agree that some iterations of omnichannel such as ship from store may just be too expensive for retailers? Which aspects of omnichannel retailing do you see challenging merchants most when it comes to absorbing incremental costs?