Specialty stores better be careful about e-commerce.
That’s the view of Antony Karabus, chief executive officer of HRC Retail Advisory, whose latest report outlines the pitfalls for specialty retailers selling online. His analysis shows that fulfillment costs, free returns “and the challenging issues of refurbishing and getting returned product into a resalable state and to the location most likely to sell the returned product at the best margin” can add more than a whopping two percentage points to a retailer’s cost structure.
“And this is not sustainable,” Karabus told WWD.
His report on specialty stores and e-commerce follows a similar detailed analysis of about 20 major U.S.-based department and specialty stores, which revealed that efforts to boost online revenue had eroded both sales of physical stores and profitability.
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That was mainly due to the combination of the primary focus being on chasing online sales along with the impact of managing e-commerce fulfillment (that often includes free shipping), rather than on a more balanced focus on physical stores and online.
Karabus found the same financial trends in the latest, follow-up study, provided to WWD exclusively, which focused on 20 specialty apparel retailers. The specialty retailers had annual sales of $400 million to $16 billion. HRC focused on mature retail businesses and excluded chains “in the early- to midstage of their expansion,” the firm noted.
Some of the key findings of the report include that Amazon Inc. is an apparel juggernaut that is “continuing to increase market share and expand into new categories.” Karabus noted that Amazon’s merchandise sales rose 32 percent in the North American retail sector in the most recent quarter, which is on top of a 31 percent gain in the same period last year.
Amazon’s gains are clearly having an impact on the retail market. For the specialty apparel retailers in the HRC report, compound annual online sales as a group showed a 9 percent gain last year, which compares to 19 percent for department stores. Karabus said these gains represent a deceleration in the growth rate of online sales, which was previously 12 percent for specialty apparel and 29 percent for department stores for the previous four years.
Karabus said 60 percent of the specialty apparel retailers opened 14 percent more stores over this period “even as their online penetration rate of total sales reached a very high median rate of 19 percent in 2015…versus 9.1 percent in 2011.” But that is not necessarily all good news.
“The sharp increase in e-commerce penetration rates for brick-and-mortar retailers is coming at a very high cost, especially as most e-commerce sales are coming as a result of a channel shift, rather than being purely incremental,” Karabus said.
“The combination of so many physical store additions plus the shift to online resulted in these chains experiencing a median 6 percent decline in sales per store between 2011 and 2015, with 2015 itself reflecting a 4 percent decline in sales per store,” Karabus noted in the report.
Combined with the department store report, the results indicate that “e-commerce sales typically represent true incremental sales when additional market share is won from competitors, and when e-commerce customers are in geographical areas where the particular retailer does not have a physical presence. Few customers have the disposable income to increase their total size of wallet spending, so it is all about how they allocate their share of wallet between retailers and between channels,” Karabus said.
While the shift to online sales is driven by consumers it results in a “transformation of retailer costs from a largely fixed-cost structure for traditional physical stores to the new paradigm where retailer sales need to continue to support this fixed-cost structure plus a very costly variable-cost infrastructure to enable e-commerce,” he said.
Karabus reiterated that this “economic model” and the related profitability metrics are not sustainable and offered several recommendations, which include establishing “a methodology to better exploit data insights to drive customer-focused decisions” while exploring “how to re-think and enhance real estate decisions in the light of the channel sales productivity issues.”
The ceo also suggests that retailers “decide which omnichannel capabilities will be most valued by their specific customer, rather than investing in all capabilities” and to prioritize “important decisions such as price-matching, free shipping, free returns, fulfillment centers and full inventory visibility,” among other recommendations.