Ecommerce is chipping away at retail earnings, and the pace of ecommerce growth has slowed considerably in the U.S., according to a new study by HRC Advisory, a retail advisory firm based in Northbrook, Ill.
The study, conducted by CEO Antony Karabus, analyzed the financial data for U.S. retailers across three key sectors including 11 department stores and luxury chains, 22 specialty apparel and beauty stores, and four off-price retailers.
One of the key findings was that while online sales were robust in the early years of ecommerce, the pace of growth has decelerated as the channel reaches maturity. Of the retailers analyzed, the online sales growth rate for 11 department store chains 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.
The stats may offer a glimpse of what’s to come for Canadian retailers. “The U.S. is much further along in the ecommerce journey [than Canada],” said Karabus. “They’re probably three years ahead of Canada… so Canada is what I would call 2012 in the U.S., where there is still going to be rapid growth. Then in about 2018, we’re going to see what the U.S. saw in 2015, which is that [online] will still grow much faster than store growth, but the rate of growth will decline.”
One exception to the rule is Amazon, which is growing its sales by more than twice the rate of the online retail industry. That’s because “Amazon is frankly the best,” said Karabus. “No one is as efficient, no one fulfills as well as they do, no one’s assortment is as wide and no one’s prices are as good. And even if Amazon’s prices aren’t as good, there’s a perception that they are. They’ve done a phenomenal job hammering that into all of our brains.”
Karabus’s recommendation to Canadian retailers is to recalibrate and fine-tune their economic model and forecasts by channel for the next three years. “Think about the U.S. experience as a proxy, i.e. don’t assume that those growth rates are going forever because they’re not.”
The study also found investments in ecommerce are contributing to a decline of up to 25% in operating earnings as a percentage of total sales.
“The ecommerce infrastructure investments have been enormous,” said Karabus. “It’s digital marketing, IT costs, all the technology you’ve got to put in place, as well as the cost of the all the digital people. It’s very expensive talent and it’s in short supply.”
The other factor is “one of those big, bad, dirty secrets [and that is] the cost of supply chain fulfillment is off the charts,” said Karabus. “Online companies think that returns and free shipping is not a huge deal. It’s a huge deal [for brick-and-mortar retailers].”
Distribution centres, he explained were purpose-built for ecommerce and one-at-a- time shipments, whereas retailers’ fulfillment centres were not for the most part. “They were built to ship big quantities to stores, not one-offs,” said Karabus. “So the extra cost for a retailer to handle the return of one little box is much greater than for an Amazon whose processes are set up specifically that way.”
Retailers also lose out when customers order multiples of items, knowing they’ll buy just one, and wait too long to return things.
“Let’s say you were to buy three pairs of shoes online you really only wanted one, but you bought three because you figured you’d look at the colours and styles when they got to your house,” said Karabus. “So you decide on one and then you forget to return the other two and a week goes by, two weeks goes by… Well, now [the retailer] has lost two or three more weeks of selling.
“Then you ship it back to the distribution centre, and that’s not where they wanted it in the first place. They could have sold it in a store. And even if it is the right place, someone’s got to open it, item by item, and inspect it. That’s a whole lot of labour.”
While returns are a fact of life for retailers, Karabus suggested they push customers to pick up items in store. Retailers will cut the return rate dramatically because customers can look at the items in store and decide if they want them. And for retailers that sell big items like furniture and barbecues, where shipping costs are significant, “good click-and-collect practices are going to be vital,” said Karabus.