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Digital Retail News

E-commerce chipping away at bricks & mortar profitability

On-line shopping girl

E-commerce is slowly chipping away at in-store sales, according to Antony Karabus of HRC Advisory (HRC), a leading strategic retail advisory firm. The finding was revealed today as part of Karabus’ latest retail industry study, which found that operating earnings as a percent of sales has declined by up to 25% due to a shift from in-store to online sales, combined with e-commerce and omni-channel investments and the high cost of fulfilling e-commerce transactions.

Retailers haven’t yet figured out how to grow and maintain brick and mortar profitability while trying to keep up with the likes of Amazon in today’s increasingly digital environment. Retailers need to recalibrate and fine-tune their economic business models to reflect today’s new variable cost-oriented online model. Those who can engage customers and meet their heightened expectations, while offering complete visibility of inventory availability, can be lucrative in reducing markdowns and improving inventory productivity.”

As part of the study, Karabus analyzed the financial data of department stores, luxury, specialty apparel, beauty, and off-price retailers and also interviewed 15 C-level retail executives to gain their perspectives. Karabus determined that investments made in supply chain upgrades, digital marketing and IT, variable logistics costs and managing a high level of online returns are generating incremental SG&A costs of 2 to 3 percentage points of sales. Further, the combination of this, together with real estate, wage inflation and the declining in-store sales are resulting in a 1-2 percentage point reduction in physical store profit contribution.

Additional key findings include:

  • Pace of online sales growth has decelerated – While online sales were robust in the early years of e-commerce, the growth rate has continued to decelerate as the channel reaches maturity. Of the retailers analyzed, the online sales growth rate for 11 public department store chains declined from 39.3 percent in 2012 to 18.6 percent in 2015, while the online sales growth rate for 22 public specialty stores declined from 17.5 percent in 2012 to 9 percent last year.
  • Online returns are expensive – While intended as a way to protect and even gain market share from traditional retailers and pure play e-commerce players, high returns as well as unwanted e-commerce orders returned late or in a condition where the product may not be re-saleable at full price, resulting in negative profitability.
  • E-commerce volumes not sufficiently high to justify store closures – Despite physical stores’ profitability decline, online sales volumes are not yet strong enough to justify store closures in most instances. In addition, as many stores have significant lease termination obligations, retailers may incur a substantial cost to close the weaker stores early.
  • Price-matching should not be a “one size fits all” approach - Many retailers have introduced broad-based price-matching policies comparable to other online or brick and mortar retailers. While helpful in avoiding a lost sale, this approach has resulted in additional margin leakage.

“There are a number of ways retailers can strategically mitigate and ultimately offset the negative impact of e-commerce on their operating earnings and return to their historically higher brick and mortar performance,” Karabus continued. “To start, retailers need to re-examine the cost structures of their physical stores and infrastructure, and become more efficient omni-channel operators to staunch the losses from extremely high online fulfillment costs.”

Survey Methodology

The study analyzed the financial data for retailers across three key sectors, including 11 department stores and luxury chains with aggregate sales of $126 billion, 22 specialty apparel and beauty stores with aggregate sales of $67 billion, and 4 off-price retailers with aggregate sales of $49 billion. The study, which was conducted by Antony Karabus, CEO of HRC Advisory, also included interviews with 15 CEOs and CFOs across these sectors to better understand the impact of e-commerce on operating earnings.


HRC Advisory is a leading strategic retail advisory firm based in Northbrook, IL that helps retailers unlock value across key operating functions: including helping retailers to develop cost-effective cost infrastructures to transform their businesses in this new economy, enhance merchandise strategy, margin and inventory optimization, merchandise planning and allocation, store operations including more effective labor management and more cost-efficient supply chains. For more information, visit


Berns Communications Group, LLC
Stacy Berns / Danielle Poggi /
(212) 994-4660

08 May 2016

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