Ecommerce boom is eating profits from non-food retailers

21 March 2016 4 min. read

Consumers seeking low prices and convenience are more and more often shopping online, with 20% of non-food consumer goods now being sold through online channels. The delivery of the goods to customers, as well as dealing with returns, is creating a serious headache for the industry – as well as its supply chain operators. Operating profit margins have fallen from 6% in 2011 to 2.5% in 2015, and may fall a further 1.5% if retailers don’t find a way of dealing with the spiralling costs as total online sales hit a projected 40% by 2025.

The benefits of digitalisation and the creation of omnichannel shopping experiences have been extolled in any number of reports in recent years. The convenience of buying online, as well as the proliferation of available digital shopping channels, means that the online market has grown steadily in the UK, and now accounts for around 20% of total non-food consumer goods sales. OC&C Strategy Consultants has provided new insight into the effect of the digitalisation of part of retailers’ supply chain on their bottom line. The research involved an online survey of more than 1,000 consumers, as well as the publically available reported revenues of 20 multichannel retailers with revenues of more than £500 million.

Online shopping

Many of the online purchased goods need to be ferried, by one means or another, to customers. The growth of the digital shopping environment, and with it the transportation of goods, is not expected to stop over the coming decade. The research by OC&C Strategy Consultants finds that by 2025 home delivery will be responsible for 30% or around £69 billion of non-food sales, while click-and-collect is set to account for a further 10% or £23 billion in sales. The number of in-store sales, the research highlights, will drop from 78% last year to around 60%, or £138 billion.

The extolled development, however, comes with considerable costs. According to OC&C Strategy Consultants’ figures, the cost of home delivery and click-and-collect are eating serious chunks out of the margins of retailers, as well as the delivery services used to ferry the goods to the customers’ door. The cost of home delivery can amount to between five and twenty three times the cost of in-store purchases for small to large products. Customer expectations, and wallets, are not making up for the costs – with a large percentage of consumers not portraying a high willingness, or even any, to pay for delivery.

The result of the increased in online purchases, and increasing logistics supply chain costs – for both delivery and processing returns – has resulted in operating profit margins, dropping off considerably for the UK’s top 10 multichannel retailers: falling to 2.5% in 2015 from 6% in 2011. By 2025 an additional 1.5% drop is expected as costs continue to spiral from among others the omnichannel revolution.

Parcel delivery - OC&C Strategy Consultants

“The last mile is fast becoming the ultimate battleground for retailers as shoppers demand more convenience. Being able to offer predictable delivery slots, free next-day delivery and an accessibly priced same-day service is becoming the norm”, says Anita Balchandani, partner and head of retail at OC&C Strategy Consultants. “The challenge retailers face is how to meet these changing expectations while making the economics work for their business.”

Retailers can seek to improve margins by making the delivery and returns part of the supply chain more cost effective, with ideas including shipping from stores that are closer to customers’ homes and improving the drop density of each driver in particular areas. Working together with other retailers within the supply chain may – given the ubiquitous nature of the problem – provide companies with a means of reducing each other's costs to supply what is ultimately, the same service. Balchandani adds: “Retailers need to tackle the last mile head on to make the economics stack up. First, retailers should start to rethink activities such as warehousing, picking and packing, and delivery to make them more cost effective. Delivery, for instance, can account for as much as 60% of last-mile spend.”