Retail viewpoint: E-commerce doesn’t come cheap

March 30, 2017

Spring has officially sprung, bringing with it more mixed signals about retail sales. Some were positive—the Commerce Department revised the advance January month-over-month retail sales increase of 0.5% upward to 0.9%.1 February also showed some momentum, posting a 0.3% increase over January, which though smaller than January’s increase represented a 4.5% increase over the same month last year.2 Further muddying the water, only 4 of 13 retail categories tracked increased in February. Building material/gardening and non-store retail were the big winners for the month, jumping 1.8% and 1.2%, respectively. Department stores and clothing had the toughest month and were down -1.1% and -0.5%, respectively.

And as to non-store retail, much has been written—here and elsewhere—about the tremendous growth of e-commerce and the pressure it has placed on retailers to compete online. For 2016, e-commerce sales increased 15.1% and accounted for 8.1% of all 2016 retail sales.3 Many retailers have had some success in the arms race to capture online spending, but this success comes with a new set of challenges for profitability. In this month’s Retail Viewpoint, we examine some of the expense pressures that come with shifting focus online, and the impact they appear to be having on EBIT margins.

We analyzed five years of financial performance for 20 publicly traded retailers who break out online sales penetration. As a group, we see that while online sales grew from 10.5% in 2012 to 15.5% in 2016, EBIT margins have steadily declined by 150 basis points to 9.0%.

Looking just at department and specialty stores for a moment, and the picture gets even bleaker. While these segments have experienced significant online sales growth, they have also suffered the largest operating profit decline.Total revenue for these 20 retailers increased $53 billion from 2012 to 2016. Had they maintained EBIT at 10.5% of sales, total EBIT for the group would have been $32 billion higher. Said a different way, the $53 billion in incremental sales should have added over $5.5 billion in incremental EBIT; instead the sales only added less than $4.8 billion, wiping out almost $1 billion in EBIT just from these 20 retailers alone.

Although there are many factors outside of just online penetration afflicting margins, the shift online has several implications for operating profit. Some examples of online-related expenses that are putting pressure on profitability and should be closely managed to avoid profit erosion include:

  • Shipping and handling charges: free and/or fast shipping and packaging costs
  • Costs associated with increased returns and restocking, reverse logistics, and lost margin on SKUs returned to a channel that was not intended to sell it
  • Corporate headcount growth to support e-commerce divisions (including merchandising, planning, marketing, content creation, web development, and IT, to name a few)
  • Balancing additional online marketing expenses with traditional expenses
  • Incremental distribution and warehousing costs associated with piece picking
  • Deleveraged store base and diluted store labor
  • Incremental labor and technology expenses associated with omnichannel capabilities (ship from store, buy online pick up in store, order from store, etc.)
  • Complications associated with inventory management—deciding to share or not to share online and stores’ inventory and the costs associated with either decision

Put simply, e-commerce revenue doesn’t come cheap. Retailers should of course continue to adapt. But they should also be aware that the move online comes with many expense pressures that they will need to offset to keep profitability healthy. This puts even more pressure on retailers to seek out EBIT-driving opportunities such as dramatically rethinking the SG&A cost bar and enhancing margins through pricing, sourcing, inventory management, and assortment initiatives.


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1    US Census Bureau revised January seasonally adjusted retail sales exclude motor vehicles, parts dealers and dining

2    US Census Bureau Advance monthly sales for retail, February 2017 (seasonally adjusted retail sales exclude motor vehicles, parts dealers and dining)

3    US Census Bureau Quarterly Retail E-Commerce Sales 4th Quarter 2016

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