Something’s got to give. That’s according to a study released Tuesday by retail advisory firm HRC which found that traditional retail profitability metrics are no longer economically sustainable.
“This is a challenging time for brick-and-mortar retailers as they work hard to profitably compete against digital pure-plays, while concurrently managing their brick-and-mortar profitability,” Antony Karabus, chief executive officer of HRC and author of the study, said in a press release.
Case in point: Online sales at specialty chains grew only 9 percent last year, compared with a compound annual growth rate (CAGR) of 12 percent in the previous four years. At the same time, 60 percent of those retailers continued to open additional stores. However, a bigger brick-and-mortar base combined with the shift to online resulted in a 6 percent median decline in sales per store between 2011 and 2015, with 2015 alone reflecting a 4 percent median decline in sales per store.
As though that weren’t bad enough, enabling and fulfilling e-commerce sales comes at a massive cost, which also chips away at profitability.
“Very high fulfillment costs, free shipping and returns and the challenging issues of refurbishing and getting returned product into a re-saleable state and location can add a substantial two percentage points or more to a retailer’s cost structure,” Karabus explained.
But while specialty retail struggled, Amazon soared, increasing its market share and expanding into new categories in the North American retail sector. The Seattle-based e-tailer’s top-line growth in merchandise sales has steadily increased, reaching 32 percent in the most recent quarter, up from 31 percent in the comparable period in the prior year. In fact, Amazon’s North American merchandise growth rate is currently about three times that of brick-and-mortar chains.
“The increase in e-commerce penetration rates for brick-and-mortar retailers is coming at a very high cost,” continued Karabus, “Especially in situations when most e-commerce sales are as a result of a channel shift.”
His advice: adapt or die.
But before investing in new omnichannel capabilities, brick-and-mortar retailers need to first know which ones are most valued by their customers. Once that information has been attained, important decisions such as price-matching, free shipping, free shipping, free returns, how product will be fulfilled and technology to provide full inventory visibility should be prioritized. Then, exploit data analytics to drive customer-focused strategies.
As online shopping becomes a near-everyday activity, retailers would be wise to rethink real estate, too, perhaps even close underperforming locations or alter in-store and online offerings to encourage consumers to shop across all channels. Another crucial point: ensuring store, supply chain and home office infrastructure cost is efficiently sized and structured to maintain profit performance and boost the bottom line.