Study: E-commerce having negative impact on retailers’ operating earnings
Online sales and returns are taking toll on retailers’ bottom lines.
Operating earnings as a percent of sales has declined by up to 25% 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 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.”
Additional key findings include:
• 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% in 2012 to 18.6% in 2015, while the online sales growth rate for 22 public specialty stores declined from 17.5% in 2012 to 9% last year.
• 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 not sufficiently high to justify store closures: 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.
• Price-matching should not be a “one size fits all” approach: 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.
In addition, the study, which was conducted by Karabus, also included interviews with 15 CEOs and CFOs across these sectors to better understand the impact of e-commerce on operating earnings.
Sears hopes to lure store shoppers with Mom, online pickup
Sears Holdings has been having issues attracting shoppers to stores, as evidenced by the recent decision to close 78 brick-and-mortar locations.
However, the department store retailer is not giving up on efforts to drive store traffic. Sears is combining the eternal appeal of Mom and its strong history of omnichannel customer service to give shoppers a good reason to visit their local store.
Sears is launching a major sale on apparel, jewelry, home products and other popular Mother's Day gifts and announced that any Shop Your Way loyalty program member who shops online and uses in-vehicle pickup between May 3-7 will automatically be registered to win a $5,000 gift card from the retailer
The in-vehicle pickup service, supported by the Sears mobile app, lets customers digitally shop and complete transactions. They then receive an email when their purchase is ready at their local Sears store and will have an associate bring it to their car and verify payment within five minutes of arrival.
Sears has long been a leader in digital retail innovation. The company was an early provider of buy online pick up in store functionality back in 2001. Around 2005, Sears introduced its “Ready in Five” guarantee that ensures customers will not have to wait more than five minutes in-store to pick up an online purchase. In 2009, the retailer purchased Israeli social media engine Delver, which was the origin of its Shop Your Way social platform.
More recently, in 2014 Sears began offering the in-vehicle product pickup and return service, as well as an online “Reserve It” service that lets online shoppers select apparel products to be set aside at a local store for try-on.
Despite these numerous innovations, Sears still struggles with sales and profitability. According to the retailer, 60% of its online sales involve a store, so offering more omnichannel services that blend physical and digital channels makes sense. And Mothers’ Day is a great individual selling event.
But the industry should watch Sears closely to see just how effective seamless customer experience is in improving store traffic for a retailer that appears to be having problems in areas such as marketing and merchandising.
Study: Retailers’ payments programs across channels by no means seamless
Omnichannel may be a big industry buzzword, but retailers are still figuring out how to apply it to payments.
According to a new survey of nearly 100 global retailers by PCM Research and electronic payment and banking solution provider ACI Worldwide, “Omnichannel Payments for Merchants: Myth or Reality?” only 21% of respondents have competed an omnichannel payments program.
This figure includes primarily large grocery and department store operators. Forty-six percent of respondents have no plans for an omnichannel payments program within the next 12 months.
In addition, 50% of respondents said their organization is in the “early” or “innovator” stage omnichannel payments innovation, while the other 50% s categorized themselves as ‘technology followers.’ The top two reasons for not moving faster into an omnichannel retailing environment were finding the business case and business sponsorship for the necessary funding for implementation.
Asked whether they have a common set of fraud prevention capabilities across all channels, a slight majority of respondents (53%) said no, 39% yes and 8% were unsure. Forty-two percent of respondents said they have no common set of payment security capabilities across all channels today, 9% were unsure and 49% have these capabilities.
The survey also shows that the preferred implementation strategy for omnichannel payments has moved from an in-house (on-premise) model to a hosted SaaS model. Results show that increased payments complexity and PCI compliance are likely to be the biggest drivers for this move in delivery/consumption model. Other notable findings include that 53% of respondents are interested in mobile POS and wallet technologies.
“The path to omnichannel payments is complex and can seem daunting, and merchants are at a crossroads with the number of technology options,” said Andrew Quartermaine, head of merchant retail EMEA, ACI Worldwide. However, those that embrace these types of disruptive opportunities to serve today’s anytime, anywhere consumers will come out ahead. A frictionless payment experience for the consumer in any channel should be the goal of retailers and merchants.”