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L2 Study Says Online-Only Retail Not Sustainable

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Major retailers might be unloading loss-making stores left, right and center, but having a brick-and-mortar presence is a crucial component of retail success, according to the latest intelligence report from research group L2.

Titled “Death of PurePlay Retail” and sponsored by Simon Property Group, the study said that online-only sellers are suffering from “unsustainable customer acquisition, shipping costs and a discount-driven environment that erodes already razor-thin margins.”

By comparison, digital darlings such as Athleta and Bonobos that built up their businesses online first before then making the leap into brick-and-mortar retail are reaping the rewards.

“E-tailers with a terrestrial presence enjoy greater organic site traffic and lower customer acquisition costs via paid search and e-mail,” the report said, noting that since Bonobos started opening “Guideshops” in major cities, it has cut its digital marketing spend from 25 percent of net sales to 4 percent and maintained online conversion rates of 5 percent.

Meanwhile, once-mighty pure-play retailers are falling out of favor and opening physical locations appears to be their only hope for survival. Gilt, recently sold to Hudson’s Bay Company for a quarter of the $1.1 billion that investors placed on it in 2011, will soon appear as shop-in-shops inside Saks Off 5th stores.

“If you want to increase the traffic to your website, open stores,” L2 founder Scott Galloway stated. “High-end malls continue to experience growth in sales per square foot, making them an attractive option for evolved retailers looking for brick-and-mortar spaces.”

“Online retailers are increasingly recognizing the advantage of opening stores in improving the underlying economics of their business and accelerating their growth and we’re seeing this trend reflected in our leasing activity,” echoed Mikael Thygesen, chief marketing officer at Simon.

The report also pointed out that retailers that offer in-store pickup and returns for online orders have a competitive advantage, whereby shoppers walk out of the store with 107 percent of their original basket size after exchanging merchandise and making incremental purchases.

Pure-play e-tailer orders, meanwhile, usually net 77 cents on the dollar due to costly returns that average 23 percent of order value.

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