E-commerce is slowly chipping away at in-store retail productivity, according to a study by market research and strategy firm HRC Advisory.
Operating earnings as a percent of sales generated by brick-and-mortar retailers have declined by up to 25% due to a shift from in-store to online revenues, as well as omnichannel investments and the cost of fulfilling e-commerce transactions, according to the study.
Among the points HRC emphasized from its analysis:
- The online sales growth rate for the 11 department store chains studied declined from 39.3% in 2012 to 18.6% in 2015, while the online sales growth rate for 22 specialty stores declined from 17.5% in 2012 to 9% last year.
- Product return rates continue to be a profitability burden as unwanted e-commerce orders returned late or in a condition where the product may not be resaleable at full price.
- Despite physical store profitability declines, online sales volumes are not yet strong enough to justify store closures in most instances.
- Price matching should not assume a one size fits all approach, as the result can be unacceptable 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 Antony Karabus, CEO of HRC Advisory. “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.”
He added, “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. To start, retailers need to re-examine the cost structures of their physical stores and infrastructure, and become more efficient omnichannel operators.”