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Study Says E-Commerce Corrodes Retail Earnings

Remember when e-commerce barely made a dent in brick-and-mortar’s business? Those days are gone—and omnichannel isn’t helping matters.

That’s according to a recent report from HRC Advisory, which discovered in its latest retail industry study that online sales have been slowly chipping away at in-store performance since 2011.

The Northbrook, Illinois-based advisory firm analyzed the financial data of 11 department and luxury stores, 22 specialty apparel and beauty chains and four off-price retailers and found that though they had invested to build e-commerce and omnichannel capabilities, online sales growth slowed significantly.

At the same time, operating earnings as a percentage of sales declined by up to 25 percent—a drop that HRC said was down to a disconnect between investments and the high cost of fulfilling online transactions.

Basically, retailers are spending more but to no avail.

“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,” Antony Karabus, CEO of HRC Advisory, explained. “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.”

Additionally, the study found that while brick-and-mortar stores’ profitability is falling, e-commerce volumes are not yet strong enough to justify store closures in most instances. Not to mention, as many units are tied to lease termination obligations, retailers could incur a substantial cost if they close weaker stores early.

Another problem: price-matching. While such a policy may help a retailer avoid losing a sale, it only hurts margins in the long run.

“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,” Karabus continued. “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.”