Retailers chase ecommerce growth, but can profitability match up?

Since the pandemic, consumers’ intent to purchase goods through e-commerce channels has increased significantly across categories - from everyday essentials and clothing to beauty products and accessories, as well as electronics. Forecasts suggest online sales could account for nearly half of all retail revenues within the next five years.

In informal chats with several key retailers, the general feedback is that those who initially viewed e-commerce as a lifeline now take a slightly more cautious view. While current online operations may look promising for quite a few, many have realized that skyrocketing sales have also been accompanied by costs that have risen just as fast. Fulfilment costs can now be as high as for 10-18 per cent of e-commerce revenues, depending on the category and industry segment.

Digital marketing and customer acquisition costs, which could be in the region of 6-8 per cent, sit at the top of these expenses. And frequent investments in software and anti-hacking processes, as well as in more user-friendly and AI-based websites will be recurring costs that will progressively squeeze margins and may end up making profitability a distant mirage.

Different shades to growth

Retailers will soon recognize that all growth is not the same, and that unprofitable growth could end up destroying value, while they would need also to ensure the brick-and-mortar model is still sustainable and profitable. Those who give too much of emphasis to investing in building up their e-commerce models and revenues could end up causing more harm to their organizations.

The thumb rule needs to be that digital growth is not enough; only profitable digital growth will create value. Since e-commerce is a significant contributor to growth for most retailers, they must ensure their strategy creates long-term value for the organization as a whole. It is a known fact that higher value items and basket size in categories such as electronics incur lower shipping costs as a percentage of sales.

Threshold on shipping costs

In comparison, a fast-fashion retailer with a low threshold on the free-shipping amount may need to absorb a large number of negative-margin sales. Such retailers can have better control on margins by introducing in-house brands. Retailers who offer a unique product or service via online are more likely to protect their margins.

Retailers in this region, whose traditional strength has been brick-and-mortar operations, are likely to have many employees who lack the necessary digital knowledge. Developing this knowledge will be critical to foster effective collaboration — not only in digital and e-commerce teams but also across the organization. A baseline of digital fluency will become an additional cost to be factored in, but will enable retailers to achieve true cross-channel coordination.

No distractions on costs

While investing in training for digital literacy, organizations will need to find ways to ensure greater retention of their tech-savvy staff. The massive increase in e-commerce over the past two years has led retailers to focus on capturing growth, but with not too much of focus on real online profitability. To win in the years ahead, retailers will have no choice but to scale their digital channels while maintaining a relentless focus on costs.

The increasingly complex matrix of customer engagement creates friction points that can cloud decision-making. While supply-chain issues have commanded the world’s attention, supply-chain shocks are becoming increasingly common. By investing in supply-chain resilience now, organizations have an opportunity to build critical speed and agility into their supply chains, which will help them withstand not only the current crisis but those to come.

Ultimately, ecommerce business is all about speed and the last-mile delivery experience for the consumer.

One thing is certain, the operating rhythm is only accelerating. Retailers are no longer in the world of monthly or fortnightly reviews. The model has shrunk to on-the-go review of operations and supply chain processes.