Given the supposed downward pressure the online space has been exerting on mall rents throughout the developed world, what appears puzzling is why eCommerce companies for the most part continue to lose money.

And it isn’t only boutique websites, even the very large marketplaces have not been able to make money on a sustained basis. This apparent tautology once examined not only gives an insight into the differing pressures that traditional and online retailers face, but also offers clues as to how companies need to adapt to changing consume preferences.

A recent study by a US based consultancy found that traditional retailers in tier-1 malls enjoy a 30 per cent margin. When a similar study was conducted for online marketplaces, the median margin fell to 18 per cent. And for retailers that were integrating their traditional stores with their online offerings, the margin fell further to 11 per cent.

Why is this? Upon closer examination, the two biggest differences were the cost of fulfilling the order (delivering to the customer), as well as the higher number of returns that online marketplaces face (30 per cent) compared with traditional retailers (12 per cent).

This is because the customer experience is still much better in the offline spectrum, whereby the sales manager can interact more effectively with the customer than is the case in the online space. It therefore appears that the lower barriers to entry for e-commerce agents is mostly illusory, given the higher costs that need to be absorbed.

And it is because of this that we see a much higher closure rate with online stores than is the case with the traditional retail space. Despite the enthusiasm surrounding the former, there have been very few success stories that can be examined.

It is perhaps for this reason that we have seen e-tailers moving into the brick-and-mortar world by opening physical stores recently, in an attempt to enhance the customer experience and therefore reduce the percentage of returned orders.

In Dubai, the experience has been similar to that of the US, with one additional variable: given the fact that most of the online retailing is done on the basis of cash-on-delivery (COD), the returns in some cases are actually higher, adding to the margin pressure that eCommerce marketplaces face.

The comparison mutates further considering that the COD practice allows for a significantly greater percentage of “impulse buys” that the customer can then reverse by refusing delivery for whatever reason. For retailers that have attempted to integrate both platforms via an omnichannel interface (online ordering and the store delivering the product subsequently), the experience thus far has been the worst of both worlds.

Further margin pressure is being exerted on account of bearing the costs of both the channels, and not being able to reduce the percentage of returned orders.

While there are a number of ways to tackle the problem, there appears no doubt that the online content needs to be curated to enrich customer experience on account of ethnicity, language and ease of placing the order. Social media platforms have helped in overcoming this problem to some extent, as have “chatbots” that allow for customer interaction.

The fundamental problem remains one of etailers utilising the treasure trove of data that they have towards satisfying the customer in a myriad of ways. The use of online discount coupons and customer loyalty programs have proliferated, though they have not yet made enough headway.

Recent experimentation in curating the customer profile to include social media preferences have been more successful, and it is apparent that these platforms offer a glimpse of the future of eCommerce. They allow for the interaction that customers crave and desire, which ultimately leads to lower returns orders.

Retailers are by definition intermediaries. As retail evolved, the challenge always has been to justify the role by satisfying the customer. The online space offers both the latest challenge and an opportunity for evolving to target the customer in increasingly effective ways.

How e-tailers respond will shape the way of the industry in the coming years. But it is likely that, similar to traditional retail, success will be determined not only by a lower cost paradigm, but more critically one where the experience of the consumer is continually enhanced.

— The writer heads the digital online operations at GCP.