Study: E-commerce is eroding retail profitability

By Tom Ryan

MAY 10, 2016

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.

Photo: RetailWire

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."