Despite overwhelming industry hype, 2020 was not the year ecommerce took over retail. Instead, it was when brick-and-mortar clarified its vital role in making retail profitable.
Buried in the hype around the massive growth of ecommerce that year, the U.S. Department of Commerce’s data reveals that ecommerce only made up 21.3% of total retail sales in 2020. Sure, the adoption of online shopping was accelerated across all age groups by the pandemic, resulting in a 44% increase in online sales in 2020 compared with 15% growth in 2019. But earnings reports have revealed a disturbing truth: Ecommerce is popular but not profitable.
Although a retailer’s total sales in 2020 might have been reasonable, profits were hampered by lowered margins on those sales. Profitability for ecommerce is not just about sourcing cheaper shipping — the cost of operations is typically higher for an ecommerce business despite not having the burden of store rent, and customer loyalty and basket size are typically lower for online shoppers. If this sounds counterintuitive, just look at Nike, a company that’s easily five years ahead of the ecommerce adoption curve. The company’s digital sales soared an impressive 75% in 2020, but its profit margins shrank to 37.3%, down from 45.5% the year before.
The Pressures on Profit
So what are the chief sources of pressure on retail sales margins? Here are the biggest sources of margin stress and how a combined omnichannel retail strategy can help resolve these stressors:
1. Free shipping. Shipping plays a key role in ecommerce profitability, with the average cost to a retailer for last-mile fulfillment currently more than $10 per order. According to a National Retail Federation survey, however, three-quarters of all shoppers expect shipping to be free — even for orders of less than $50. Additionally, delivery adds risk overall: More than 36% of online shoppers have reported stolen packages, for instance, with 73% receiving refunds on those stolen items.
How brick-and-mortar helps: More than 70% of consumers chose to buy online, pick up in-store (or BOPIS) last year, with 50% deciding where to buy based on access to BOPIS solutions in 2019. And when picking up items, 85% percent will also make an additional purchase.
2. Higher return rates. Online shoppers have an average return rate of 30%, much higher than the 9% return rate for items purchased in stores. Restricting online returns is not an option considering only 60% of shoppers check the return policy before deciding whether to make a purchase. In fact, the high impact of returns on profits is even prompting many retailers to simply tell customers to “keep it” after refunding or replacing purchases; after all, the cost of processing an average return can account for as much as 59% of the original price of the item purchased.
How brick-and-mortar helps: Aside from the reduction in return rates, many shoppers think it’s just easier to return items in person; 62% said they’re more likely to buy online if they can return in a store. And as an added benefit, many shoppers make additional purchases when returning items in person.
3. New competition. One of the biggest challenges for online retail is the increasingly leveled playing field in the eyes of shoppers. When a world of choices is available at your fingertips and side-by-side comparisons can be instantly viewed via platforms like Google Store, price becomes a key purchase driver and can prompt a downward spiral of commodity pricing. Furthermore, cart abandonment is far easier when you are a faceless online shopper versus someone walking through a packed store.
How brick-and-mortar helps: Stores generate an average of 37% lift in web traffic from the halo effect a physical presence generates. And multichannel shoppers spend more: a study published in Harvard Business Review revealed that omnichannel retail shoppers spend 4% more when inside a store and 10% more when online. Additionally, more than 23% of multichannel merchants saw a higher frequency of returning shoppers over a six-month period.
Looking Beyond Retail Trends: Stores Still Matter
As ecommerce surged in 2020, our inability to access stores during lockdowns underscored the essential role that brick-and-mortar plays in sales profitability.
Case in point: In 2018, Target ramped up its ecommerce capabilities, resulting in a 49% boost in online sales. But that same year, profit margins decreased by more than 28%. This prompted changes to their operating structure, and since 2019:
- At least 75% of online orders are filled from store shelves.
- Online orders are shipped from stores instead of distribution centers, reducing total costs by up to 90%.
- In 2019, Target’s omnichannel retail strategy resulted in a 3.6% year-over-year revenue increase and an earnings boost of 17.4%.
Physical spaces help bolster profit margins, customer loyalty, brand experience and lifetime customer value, pointing to the enduring importance of brick-and-mortar stores. Although ecommerce earned the spotlight last year with its monumental growth, brick-and-mortar trends remain promising: Physical stores still reported an overall 2.1% sales increase for 2020 — even in a year fraught with store closures and social distancing.
As ecommerce moves closer to becoming the transactional core of the retail business model, it’s important to remember that brick-and-mortar is alive and well. Even during a pandemic year, 80% of all sales happened within brick-and-mortar despite the wide availability of delivery options. Moving forward, why should we leave out such an integral part of the shopping equation? The future of the retail industry demands a full-fledged approach.
Lou Thurmon is the VP of Marketing for Harbor Retail, a design + build firm serving retailers.