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E-commerce eating into retailers' operating earnings
12
May '16
Operating earnings as a percent of sales has declined by up to 25 per cent due to a shift from in-store to online sales, combined with e-commerce and omnichannel investments and the high cost of fulfilling e-commerce transactions, according to a study by American strategic retail advisory firm HRC Advisory.

The study found that investments in supply chain upgrades, digital marketing and IT, variable logistics costs and managing a high level of online returns are generating incremental SG&A costs of 2 to 3 percentage points of sales. The combination of this together with real estate, wage inflation and the declining in-store sales is resulting in a 1-2 percentage point reduction in physical store profit contribution.

“There are a number of ways retailers can strategically mitigate and ultimately offset the negative impact of e-commerce on their operating earnings and return to their historically higher brick-and-mortar performance,” said Antony Karabus, CEO, HRC. “To start, retailers need to re-examine the cost structures of their physical stores and infrastructure, and become more efficient omnichannel operators to staunch the losses from extremely high online fulfillment costs.”

The study also found that the pace of online sales growth has decelerated. While online sales were robust in the early years of e-commerce, the growth rate has continued to decelerate as the channel reaches maturity.

Of the retailers analyzed, the online sales growth rate for 11 public department store chains declined from 39.3 per cent in 2012 to 18.6 per cent in 2015, while the online sales growth rate for 22 public specialty stores declined from 17.5 per cent in 2012 to 9 per cent last year.

According to the study, online returns are expensive. While intended as a way to protect and even gain market share from traditional retailers and pure play e-commerce players, high returns as well as unwanted e-commerce orders returned late or in a condition where the product may not be re-saleable at full price, resulting in negative profitability.

E-commerce volumes are not sufficiently high to justify store closures, the study found. Despite physical stores' profitability decline, online sales volumes are not yet strong enough to justify store closures in most instances. In addition, as many stores have significant lease termination obligations, retailers may incur a substantial cost to close the weaker stores early.

The study also maintained that price-matching should not be a “one size fits all” approach. It said many retailers have introduced broad-based price-matching policies comparable to other online or brick and mortar retailers. While helpful in avoiding a lost sale, this approach has resulted in additional margin leakage.

“Retailers haven't yet figured out how to grow and maintain brick and mortar profitability while trying to keep up with the likes of Amazon in today's increasingly digital environment,” said Karabus. “Retailers need to recalibrate and fine-tune their economic business models to reflect today's new variable cost-oriented online model. 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.”

The study analyzed the financial data for retailers across three key sectors, including 11 department stores and luxury chains with aggregate sales of $126 billion, 22 specialty apparel and beauty stores with aggregate sales of $67 billion, and four off-price retailers with aggregate sales of $49 billion. (SH)

Fibre2Fashion News Desk – India

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