E-Commerce: Sales Driver & Margin Killer?

 

While top line sales have greatly benefited from e-commerce, the bottom line may be paying the price.

Online sales have been the darlings of otherwise dreary to downright depressing financial reports lately, providing retail execs with a silver linings. For example, Target reported a 4.3% sales decline for Q4, ended Jan. 28, 2017. But comp digital sales increased by 34 percent. Similarly, Express reported a comp store sales decline for the quarter of 13 percent though e-commerce was up 9 percent. In the same period, J.C. Penney reported comp stores were off by 0.7%, while e-commerce improved by double digits.

And it’s true that e-commerce continues to soar. Overall online sales increased to $394.9 billion in 2016, up 15.1% over the previous year, according to the U.S. Census Bureau. The reality though is that online only represents a sliver of total sales, so it can’t compensate for all of those same store shortcomings.

And now, a new report from AlixPartners reveals another inconvenient truth about retailers’ race to catch up with online shoppers: it’s costing them more than they realize.

The consulting firm analyzed 20 publicly traded retailers that break out online sales in their reporting. It found that for the group online sales grew from 10.5% in 2012 to 15.5% in 2016, but EBIT margins declined from 10.5% to 9.0%—representing a $1 billion loss in EBIT.

Department and specialty stores fared even worse.

“Put simply, e-commerce revenue doesn’t come cheap,” report authors Shawn Ashworth and Alexa Driansky said. “Retailers should of course continue to adapt. But they should also be aware that the move online comes with many expense pressures that they will need to offset to keep profitability healthy.”

AlixPartners lists several ways e-commerce threatens to erode profits, including shipping and handling. While consumers have an affinity for online shopping, they often aren’t willing to pay for shipping, nor do they want to sacrifice instant gratification. And with competitors like Amazon touting better, faster delivery deals, retailers feel they have to do so as well. Take for instance Walmart, which recently began offering free shipping on more than 2 million items.

Reverse logisitcs also threatens to eat into profits. According to the NRF, returns increased up 52 percent from 2007 to 2015 to $260 million. In the face of this tidal wave, stores are challenged with accounting for shipping costs and the fulfillment expenses of getting products back and on shelves where they can be resold along with the missed revenue associated with lost or damaged goods.

Chains are also having to rethink the store layouts, staffing and technology related to their omnichannel strategies. For instance, many companies are bullish on buy online, pick up in store features, but for it to work smoothly, the infrastructure must be in place. Target recently previewed its next gen store plans, which include formats designed around making quick trips to the store for things like BOPIS easier. Meanwhile, Kohl’s, which says about a third of its online purchases are fulfilled in store, plans to equip sales associates with tools to facilitate this feature.

The report also identifies additional concerns include building out teams to grow and manage the e-commerce arm of their businesses; online marketing; costs associated with picking and packing; and inventory management between warehouses and stores.

Ultimately for retailers to chase online opportunities, the report says they’ll need to enhance margins through inventory management, assortment, pricing and sourcing while also rethinking their selling, general and administrative costs.

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