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New Study Confirms eRetailNews Opinion on eRetail Profitability. |
A recent study by McKinsey and Salomon Smith Barney has confirmed opinions voiced in eRetailNews and by many other industry observers: that the most viable online business model relies upon sales through multiple channels. This is of course no surprise, but the study legitimizes what many experts have believed and what appears to be common sense; a retailer selling online and through a catalog and/or stores will be in a stronger position and better able to keep customers coming back. According to a press announcement today, the study also points out another well publicized fact: that most eRetailers lose money every time they process an order for less than $50 of merchandise. McKinsey and Salomon Smith Barney suggest "retailers can profit on every sale if they drive up their average order size, hold the line on discounting and sell higher-margin products". [I hope they didn't spend too much money coming to that conclusion! Ed.] Joanna Barsh, a director at McKinsey & Company and a leader of the firm's e-tail practice offered this insight: ``To be successful, online retailers need to exploit other marketing channels simultaneously, such as in-store and catalog sales, as well as private labels. A number of apparel e-tailers are already doing this successfully. Our study shows that multi-channel players can increase their share of wallet, as many consumers are already browsing on the Web before buying in the store.'' The study found that first-quarter sales for orders taken by online retailers were below the cost of acquiring and distributing goods sold to customers. Resulting per-order losses before marketing, overhead and Web site development costs ranged from $2 to as much as $12. One of the aspects of eRetailing highlighted in the study relates to the high volumes needed to break even when selling low margin products. "even if an online pure play toy retailer could generate an $11 per-order contribution to gross income--which is extremely ambitious given high fulfillment costs--it would need more than $1.0 billion in revenues (approximately 5 percent of the total toy market) to support the $120 million to $140 million it would have in fixed warehouse, Web site, marketing and overhead costs." The study found that how often people shop at a site and how much they spend are much more important in determining profitability than large customer counts. "While the average online grocery order generates only $9 in gross income, the typical online customer will buy groceries on the Web up to 30 times a year. Thus, order frequency drives the net present value of an online grocery customer to $909 over a four-year time period, according to study data." Following groceries, online retail categories showing the highest customer net present values were: prescription drugs ($434--over a seven-year period), specialty apparel ($384), department store apparel ($283), direct mail apparel ($190), pure-play books ($50), off-price apparel ($39), pure-play toys ($9) and pure-play apparel ($9). ``Shrewd e-tailers need to drive up their average order size to at least $50, hold the line on discounting and move to products with margins over 35 percent,'' said Blair Crawford, a principal at McKinsey & Co. ``Together with maintaining high ticket sizes and decent gross margins, driving order frequency is the way to bypass today's costly market-share wars.'' ``The e-tail shakeout now underway doesn't mean the industry is economically unsound,'' Barsh added. ``Winners will be those who focus on making their current transactions profitable while stopping the suicidal race to acquire unprofitable customers at any cost.'' What this and many other recent research articles show is that eRetailing can be highly profitable when the economics are right. Now that online companies are having to work by the same profitability rules as every other company in the free market economies, we are seeing a transition to traditional management analysis. "How can we make a profit?" is the key question in many eRetail boardrooms. The answer lies somewhere in the classic retail challenge:
Naturally the companies that are managing through these issues the best are those that have been retailing for many years, either in traditional stores or through catalogs, or both. (See Profitable eRetailing). Very few companies can generate the economies of scale of Amazon.com and even they are struggling to establish themselves in many overseas markets where they were not the first movers in the market. Source: Company Announcement |
Updated: 17 Feb 2006 .
