Study: E-commerce is eroding retail profitability

Discussion
May 10, 2016
Tom Ryan

A study from HRC Advisory finds that operating earnings as a percent of sales has declined by up to 25 percent for retailers due in part to a shift from in-store to online sales. The high cost of fulfilling e-commerce and omnichannel transactions also took its toll.

As part of the study, HRC analyzed the financial data of department stores, luxury, specialty apparel, beauty and off-price retailers as well as interviewing 15 c-level retail executives to gain their perspectives.

The study found that investments made in supply chain upgrades, digital marketing, IT, variable logistics costs and managing a high level of online returns generated incremental SG&A costs of two to three percentage points of sales. At the same time, real estate and wage inflation as well as declining in-store sales are resulting in a one to two percentage point reduction in physical store profit contributions.

Additional findings include:

Online growth decelerating: The online sales growth rate for 11 public department store chains declined from 39.3 percent in 2012 to 18.6 percent in 2015, while the online growth rate for 22 public specialty stores declined from 17.5 percent in 2012 to 9 percent last year.

Online returns are expensive: High returns as well as unwanted e-commerce orders returned late or in unsaleable condition is resulting in negative profitability.

Store closings not justified: While e-commerce volumes may not in themselves be high enough to justify store closures, retailers looking to close weaker performing stores may face significant lease termination obligations.

Price-matching not working as “one size fits all” approach: Broad-based price-matching policies are causing additional margin leakage.

“Retailers need to recalibrate and fine-tune their economic business models to reflect today’s new variable cost-oriented online model,” said Antony Karabus of HRC Advisory (HRC). “Those who can engage customers and meet their heightened expectations, while offering complete visibility of inventory availability, can be lucrative in reducing markdowns and improving inventory productivity.”

DISCUSSION QUESTIONS:
Do you believe e-commerce and omnichannel are chipping away at overall profitability for retailers? Do you see this as a temporary or long-term issue facing retail margins?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"With many retailers struggling to implement successful e-commerce and omnichannel strategies, it’s no wonder that their profitability is suffering."
"E-commerce and omnichannel are not options for most retailers but rather they are forcing investments that retailers have to make in order to catch up with other categories."
"As I argued here, these painful truths only underscore the importance of operating efficiently and with excellence."

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18 Comments on "Study: E-commerce is eroding retail profitability"


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Max Goldberg
Guest
3 years 5 months ago

With many retailers struggling to implement successful e-commerce and omnichannel strategies, it’s no wonder that their profitability is suffering. Learning how to manage these programs should result in long-term growth, but the learning curve will be steep and investors need to be schooled in realistic expectations.

Phil Rubin
Guest
3 years 5 months ago

E-commerce and omnichannel are not options for most retailers but rather they are forcing investments that retailers have to make in order to catch up with other categories. The incremental value of a multi-channel vs. a single-channel customer supports the investment strategy but it’s myopic to only look at the retailer itself. The elephant in the industry is Amazon and obviously they dominate e-commerce and will continue to do so for the foreseeable future.

Beyond Amazon and the need to invest, retailers have lost discipline in terms of pricing, merchandising and promotion at the expense of brand and customer-relationship building.

While overall retail profitability is on the decline, if you break out those who have invested in a customer-centric strategy — like Amazon, Sephora and Starbucks for example — they significantly outperform the rest of the industry.

Keith Anderson
Guest
3 years 5 months ago

For many retailers and brands, e-commerce and omnichannel will pressure margins and profitability. They require new technology and capabilities (capex), and many retailers aren’t as efficient as they eventually will be (opex).

As I argued here, these painful truths only underscore the importance of operating efficiently and with excellence. There will be a huge premium on supply chain and logistics talent over the next five to ten years.

Bob Amster
Guest
3 years 5 months ago

Intuitively, one would have thought that letting the consumers sell product to themselves online would be cheaper than paying store associates to do so in expensive real estate. When you throw in liberal return policies with same-day shipping, the costs go up and net margin goes down. As long as retailers continue to maintain the same store count while cannibalizing their own stores with e-commerce (I do believe that omnichannel is a zero-sum game), e-commerce will chip away at a retailer’s overall profitability.

E-commerce sales will continue to grow, albeit at declining (stabilized) rates. Those sales have to come from somewhere. If they are not coming from eating a competitor’s lunch, then they are coming from your own store count. Reducing the store count by closing the least profitable stores over time is the way to counteract the effects that a thriving e-commerce business has on profit margins.

And the cure will not take effect overnight.

Adrian Weidmann
Guest
3 years 5 months ago
There is no doubt that unless retailers create a brick-and-mortar experience that is rewarding, and as frictionless as an online experience, their relevancy will continue to erode and be marginalized. Everyday experiences always point to reality. Just this last week, I went online to look for a tool chest for my son’s birthday: Google’s zero moment of truth. I found our choice on Home Depot’s website. According to the website there were four units in stock in aisle RT, Bay 001 at my local store. I took a picture of the webpage with all of the details on my mobile phone. Upon arrival at the store, I asked where I would find find RT. Crickets! Three sales associates milling around the empty cash wraps and not one had the faintest idea where aisle RT was located. Is anyone surprised? Fortunately, after several long minutes I found the last unit sitting in the main runway. With all this talk about omnichannel, retailers are still struggling with the basics. At the very least, your online inventory should… Read more »
Cathy Hotka
Guest
3 years 5 months ago

It’s time to wise up and realize that starving the corporate IT budget to subsidize the far larger e-commerce IT budget is a mistake, and has been. Let’s invest some money in the store to make it easier to find items, get rid of checkout lines and engage with customers.

Kenneth Leung
Guest
3 years 5 months ago

The survey is focused on brick-and-mortar retailers who are playing catch-up investments to compete against Amazon.com and other native online retailers. I wonder: if you do the same survey to e-commerce pure plays’ c-level executives, will the data show the same downward trend? I expect traditional retailers to have downward pressure until they are caught up on e-commerce initiatives.

Ralph Jacobson
Guest
3 years 5 months ago

I think competition has now set the bar so high that it will be difficult at best for online merchants to pull back and offer less in order to try to make more profit. This is the age of the empowered consumer and everyone knows that. There are smart things to do to help manage realized gross margins, however this becomes a much more complex challenge than in the past. Online retailers need to leverage tools to see what costs are going up throughout the supply chain and address elements of those tasks that are invisible to the shopper. Also, look at assortment planning. Based upon promotional lift of online and offline items, which items could be dropped to improve margins? There are a lot of tricks that can be done to grow profitable revenue. You just have to see which tools will help the best.

Patricia Vekich Waldron
Guest
Patricia Vekich Waldron
3 years 5 months ago

Online is one (BIG) new business model that is chipping away at retailers’ profits … sharing, auction and home delivery are all impacting the industry. With consumers investing more in experiences than products, retailers need to find a way to differentiate themselves (in stores, with assortments) and radically optimize non-selling functions to remain financially viable.

Karen McNeely
Guest
3 years 5 months ago

I believe that e-commerce is chipping away at topline sales as well as profitability for retailers, although I’m not sure it’s for the reasons cited.

Yes, fulfilling orders is expensive, but so is the cost of infrastructure of the website. “Merchandising” a website is more technical and faster-changing than merchandising a sales floor and many major retailers have a separate buying team for their online presence.

It’s a catch-22. The sales volume doesn’t warrant the additional expense, but if you don’t have a strong web presence you might as well hang it up.

Add to this that today’s consumer has so many options of where to buy and easy price comparisons, it’s no wonder that individual retailers get a smaller piece of the sales pie and at lower margins to boot. It’s not an easy time out there.

Brian Kelly
Guest
3 years 5 months ago

Profitability starts and ends with selling more goods at higher margins than not, regardless of the channel. The rising chorus of in-store shopping experiences reminds me of Peter Glen. “You never see Snow White smoking a cigarette! Protect your brand!”

Retail Darwinism is culling the herd, and look-a-like lousy/undisciplined stores are returning to dust. Glen’s call to arms and legs for all to improve the shopping experience is even more relevant as sharpening differentiation and relevance becomes as necessary as ever to avoid the proverbial glue factory.

Overall business budgets will adjust continuously, its retail. So this is a short, mid and long issue. Sorting out brand promise across channels for an empowered shopper is just the latest challenge for retail success.

All hands on deck, no one can claim, “It’s not my department!”

Or as Peter might say, “retail ain’t for sissies!”

Ken Cassar
Guest
Ken Cassar
3 years 5 months ago

There is little doubt that the incremental costs of running e-commerce operations undermine overall profitability for brick and mortar-based merchants. Very few large B&M merchants have opted out of e-commerce, but many have taken conservative paths to mitigate that expense. Whole Foods, for example, has essentially outsourced e-commerce operations to Instacart. While it is easy to dismiss such choices as short sighted, I believe that not every retailer has to have a world class e-commerce capability to survive.

Retailers in the Dollar channel, for example, would be ill advised to invest in e-commerce. There is no obligation for retailers in the Convenience channel to invest in e-commerce. My local hardware store does not need to sell online.

With that said, there are an awful lot of large brick and mortar retailers that are underinvested in e-commerce, simply checking the “I have an e-commerce web site” box.

Doug Garnett
Guest
Doug Garnett
3 years 5 months ago

Elsewhere I’ve seen studies showing that the customers who shift to digital are usually (a) already loyal customers who (b) already spend significantly. In other words, the e-commerce channel isn’t generally ADDING to retailer revenue merely shifting revenue they already get.

That doesn’t mean any retailer can afford to ignore it — they could easily lose that revenue if they don’t offer decent e-commerce. BUT, our business has been lost in the idea that there was a big revenue and profit strategic advantage in omnichannel. It’s not true.

This also suggests retailers biggest strategic advantage remains stores — which have been neglected in the rush to pursue the digital phantom. Retailers need to return to the basics: Merchandise the store so that people want to come to it and communicate (advertise) reasons that bring people in. That’s the way to build the biggest strategic advantage.

Peter Charness
Guest
3 years 5 months ago

The store needs a reinvention. Current physical designs, inventory investment practices and assortments in particular don’t support today’s omni channel shopper. Retailers believe in low cost high scale processes, which are not conducive to flexibility. Just look at the challenges Retailers have adopting BOPIS and ship from store. E-commerce may have been the change agent, but the real issue is a need for retailers to adopt new and flexible business processes, and a sensible cost model. It’s a long-term issue; the world isn’t changing back to the way it was.

Shep Hyken
Guest
3 years 5 months ago

There are some retailers that are flourishing in the multi-channel (includes in-store) economy. They have found balance between online and in-store. They have a system that works. Unfortunately, there are some retailers that haven’t yet figured out how to straddle both. For those, there is most likely negative economic impact. Bottom line is that you can’t fight the online channels. They are there, so figure out how to make them work — and embrace them!

Gordon Arnold
Guest
3 years 5 months ago

It may not be too long before we see some interesting exposés showing how both new and returned goods are handled by e-commerce only companies. The shock value will arrive in the form of handling and shipping repetitiveness. Even with lower fuel prices and fixed part time labor costs, the handling and shipping along with repackaging margins are eroding.

Just as brick & mortar has turned to outlet stores to relieve the inventory excesses e-commerce might consider brick & mortar “blow-outlets” with lower prices and free pick-up for final sale returned goods. We all know something has to be done to save the e-free-bees.

Matt Talbot
Guest
3 years 5 months ago

For retailers that have just recently invested in e-commerce in an effort to enhance their omnichannel offerings, there is no question that they’re eating into profitability. However, this could be contained to a temporary issue IF these same retailers take a few necessary steps. The most important of these steps is to ensure that the brick-and-mortar experience is stellar. By eliminating stock outs, offering added value to the in-store experience and delighting every customer that walks through their doors, retailers can keep consumers coming back and eliminate shrinking margins.

Karl Haller
Guest

It’s most definitely impacting profitability, and is compounded by the slowdown in stores. See my post — https://www.linkedin.com/pulse/cost-being-omni-karl-haller

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Braintrust
"With many retailers struggling to implement successful e-commerce and omnichannel strategies, it’s no wonder that their profitability is suffering."
"E-commerce and omnichannel are not options for most retailers but rather they are forcing investments that retailers have to make in order to catch up with other categories."
"As I argued here, these painful truths only underscore the importance of operating efficiently and with excellence."

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