HRC report finds retail economic metrics are not sustainable

Amid continued market share growth by Amazon and a rapidly changing digital environment, traditional retail profitability metrics are under siege and not sustainable.



That is the conclusion of a new report by HRC Retail Advisory, a leading strategic retail advisory firm. The study, which focused on mature retail businesses and excluded retail chains in the early- to mid-stage of their expansion phase, is a follow-up to HRC’s May 2016 study, which revealed 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.”



The key findings of the study 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 three times 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. Sixty percent 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,” Karabus said, “especially in situations when most e-commerce sales are as a result of a channel shift.”



Karabus recommends that retailers consider the following five points to ensure the right economic model to most profitably operate in today’s rapidly-evolving environment:



1. Decide which omnichannel 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.



The study, focused on 20 major U.S.-based specialty apparel, footwear, home and beauty chains, 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. 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.