eCommerce and brick-and-mortar stores continue to play important roles in the world of modern retail. While consumers are rapidly engaging in digital channels, survey data indicates that most of them still want to see products in person before they make a purchase. At the same time, eCommerce, which used to offer cost advantages such as lower overheads, has seen rising return rates and increasing customer expectations around free and faster shipping, which can take a bigger bite out of profits.
eCommerce Is Growing But Margins Are Still Low
Retailers need to balance and optimize their eCommerce and brick-and-mortar operations because, while physical stores still dominate retail, eCommerce is growing at a faster pace. According to the US Census Bureau, while eCommerce made up only 7.7 percent of all retail sales in the first quarter of 2016, eCommerce sales have been growing at a rate of about 15 percent year over year. In contrast, total retail sales in Q1 2016 only grew by 2.2 percent from the same quarter last year.
However, although eCommerce is growing at a steady pace, profit margins are not. Rising eCommerce costs are also forcing retailers to strive for a careful balance between eCommerce and brick-and-mortar stores. During a quarterly conference call in February 2016, John Idol, CEO of Michael Kors, said that the company's online sales profits were being weighed down by free delivery, free return, and packaging costs, resulting in a lower margin than physical stores. One growing problem Idol noted is that consumers are taking advantage of free delivery and free returns to see products in person, a challenge that's becoming a problem for retailers. "There's a new trend that people are buying multiple sizes of things to try them out at home and then return them. That all is a negative headwind for us," he said.
Even Amazon, the undisputed king of e-tail, has persistently low profit margins, according to the Harvard Business Review. The company opened its first physical store in Seattle in November 2015 and announced that a second store in San Diego would open sometime in the summer of 2016. Sucharita Mulpuru, senior Amazon analyst with Forrester Research, said in a USA Today article that, while this is not a transformational development, it is a notable move for a company known for experimentation.
"Over time, there may be some lessons for selling in a physical environment and that could be something that is a bigger portion of sales in the long term for some categories," said Mulpuru.
Brick-and-Mortar Stores Are Still Worth the Investment
As physical stores will likely dominate retail for years to come, dealing with the overhead and liabilities that are part and parcel of brick-and-mortar operations—such as rent, utilities, and staffing—can still be a worthwhile investment. Physical stores offer consumers the ability to see the products before they buy and provide shoppers with the instant gratification of being able to immediately take their items home with them after paying. Brick-and-mortar locations also give consumers the chance to actively engage with store associates, ask questions, and learn about other products that they might be interested in.
A 2015 TimeTrade survey revealed that 85 percent of consumers still prefer shopping in stores and seeing products before making a purchase decision. More than a third of respondents (36 percent) said that they don't like waiting for items to ship, and 90 percent said they are more likely to make a purchase when receiving assistance from a knowledgeable store associate.
In addition to Amazon, other big e-tailers, such as Google and eBay, are also testing the waters with physical stores and it's "more than just a passing fad," according to a Wells Fargo report. Retailers such as Birchbox, Blue Nile, and Casper have also opened small pop-up shops in recent years in an attempt to broaden their brand's reach. The report says that the retail space continues to be in flux, but the direction of this flux is different than many had previously projected, "with e-commerce outlets trying to penetrate the brick-and-mortar distribution channel rather than the other way around."