NORTHBROOK, Ill.--(BUSINESS WIRE)--The traditional retail profitability metrics are under siege, according to Antony Karabus of HRC Retail Advisory (HRC), a leading strategic retail advisory firm, which today unveiled its latest findings of a report that involved 20 specialty retailers with annual sales of $400 million to $16 billion. The new study, which focused on mature retail businesses and excluded retail chains in the early- to mid-stage of their expansion phase, was a follow-up to HRC’s May 2016 study revealing that efforts to increase online sales had not only eaten away at physical store sales, but were also eroding profitability performance.
“This is a challenging time for brick and mortar retailers as they work hard to profitably compete against digital pure-plays, while concurrently managing their brick and mortar profitability,” said Antony Karabus, CEO of HRC Retail Advisory and author of the study. “Very high fulfillment costs, free shipping and returns, and the challenging issues of refurbishing and getting returned product into a re-saleable state and location can add a substantial two percentage points or more to a retailer’s cost structure. Retailers must take action now to address these issues, which are not economically sustainable.”
Key Study Findings Include:
- Amazon continues to gain market share from retailers. Amazon.com is continuing to increase its market share and expand into new categories in the North American retail sector. It recently announced a 32% top line growth rate in Merchandise Sales, which followed a 31% top line growth rate in the comparable period in the prior year.
- Online sales growth for traditional retailers has slowed. While online sales increased 9% for specialty chains and 19% for department stores in 2015, it represented a significant de-celeration in the most recent five-year CAGR growth of 12% and 29% respectively. It is notable that Amazon’s North American Merchandise growth rate is about 3X that of the brick and mortar chains’ online growth rate, indicating a continued loss of market share to Amazon.
- Continued increases in store fleets are pressuring sales per store. 60% of specialty chains continued to open additional stores between 2011 and 2015. In fact, even as these stores’ online penetration rate of total sales reached a high median rate of 19%, (versus 9.1% in 2011), these chains opened a median rate of 14% more stores over this period. The combination of so many store additions, plus the shift to online, resulted in a 6% median decline in sales per store between 2011 and 2015, with 2015 alone reflecting a 4% median decline in sales per store.
- Enabling and fulfilling e-commerce sales comes at a massive cost. According to Karabus, e-commerce represents true incremental sales for a retailer when additional market share is won from competitors or when e-commerce customers are in geographical areas where the particular retailer does not have a physical presence. When e-commerce is not incremental, the retailer’s cost structure is sharply increased due to high costs associated with e-commerce including the cost of free shipping and returns, price matching, maintaining e-commerce technology capabilities, the high cost of digital marketing and getting returns into saleable condition.
“The increase in e-commerce penetration rates for brick and mortar retailers is coming at a very high cost,” continued Karabus, “especially in situations when most e-commerce sales are as a result of a channel shift.”
Karabus recommends that retailers consider the following five factors to ensure the right economic model to most profitably operate in this rapidly-evolving environment:
| 1. | Decide which omni-channel capabilities will be most valued by the retailer’s particular customer segment, rather than investing in all capabilities; | |||||
| 2. | Prioritize important decisions such as price-matching, free shipping, free returns, how product will be fulfilled and technology to provide full inventory visibility; | |||||
| 3. | Establish a methodology to better exploit data insights to drive customer- focused decisions; | |||||
| 4. | Determine how to re-think and enhance real estate decisions in light of channel sales productivity issues; | |||||
| 5. | Ensure store, supply chain and home office infrastructure cost is effectively sized and structured to profitably serve customers across channels and to maintain profit performance. | |||||
Survey Methodology
Building on the research study completed in May 2016 by Antony Karabus (CEO, HRC Retail Advisory) surrounding the impact of e-commerce on retailer profitability, Karabus completed an additional research study in October 2016 on 20 major US-headquartered Specialty Apparel, Footwear, Home and Beauty chains. The study was conducted to determine the impact on top line sales and profitability resulting from retail chains’ decisions to open additional brick and mortar stores at a time of an escalated shift from physical stores to the online channel. Among the companies studied, 17 are public, and 3 are private. Annual sales ranged from $400 million to $16 billion, with a median of $2.5 billion. All 20 chains represent mature businesses, with established store networks.
About HRC RETAIL ADVISORY
HRC Retail Advisory is a leading strategic retail advisory firm based in Northbrook, IL, that helps retailers unlock value across key operating functions: including helping retailers to develop cost-effective cost infrastructures, enhance merchandise strategy, margin and inventory optimization, merchandise planning and allocation, store operations including more effective labor management and more cost-efficient supply chains. For more information, visit www.HRCadvisory.com.
