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Retailers question profitability of online sales

The high cost of fulfilling online orders is eroding margins, retailers across the UK have warned.

It comes after research published this week found fewer than one in five retailers around the world is able to operate an omnichannel business model profitably.

Accountancy firm PwC surveyed 410 global retailers on behalf of US software firm JDA, 69 of which are based in the UK. Two-thirds of respondents said the cost incurred from selling across multiple channels was growing.

The biggest costs come from handling returns from online and store orders, according to 71% of respondents, followed by shipping directly to the customer (67%) and shipping to the store for customer pick-up (59%).

UK retailers told Drapers the costs of fulfilling online orders are often prohibitively high, particularly – but not exclusively – for small or new businesses.

JD Sports Fashion executive chairman Peter Cowgill said: “Companies have to be careful. A lot is made of massive sales online, but there is very little profitability in it and that’s what counts.”

Philip Day, chief executive of Edinburgh Woollen Mill Group, which owns the eponymous chain, the value retailer Peacocks and their transactional websites, said: “It is difficult to get the scale for it [online] to work commercially. One of the biggest challenges online is availability; people want to be able to get things and get them quickly.”

House of Fraser chief customer officer Andy Harding agreed: “Where you see profit is when you get scale, because the costs are outweighed.”

Dave Conaghan, co-owner of young fashion business Chocolate in Derry, a former Drapers Multichannel Independent of the Year Award winner with a transactional site accounting for about 35% of sales, said: “Competing to be profitable online is difficult for independents as they are up against so many bigger players that can offer discounts and free postage or returns.”

However, Giulio Cinque, owner of men’s and women’s wear designer indie Giulio in Cambridge, which operates online through Farfetch, said: “The customer wants that level of service so you have to find a way to achieve that.”

The fashion director of a department store agreed: “Online isn’t an option anymore; you have to do it, so you may have to make savings elsewhere.”

PwC’s head of retail consulting David Oliver said online is only expensive if looked at as a separate channel. He added: “Three or four years ago retailers thought of online and stores separately; now they are starting to recognise they are interconnected.

“A lot of customers that come into store will have been online first so it plays an important role in driving sales.”

PwC’s report, The Omni-Channel Fulfilment Imperative, was published on April 14.

Readers' comments (12)

  • This is one of the most interesting Drapers articles this year, as in the rush to get online many fashion indies have forgotten about profit , all the contacts in the trade I talk to say it's almost
    Impossible to turn a profit online as a small indie yet many of us continue to try , scared of missing out when people start turning a profit?
    Discounts is what's driving web sales in branded fashion , many of them under the radar voucher codes etc .
    Brands are also increasingly supplying people like Amazon directly , cutting out the indie.
    Take into consideration the cost of Seo,ppc,Amazon percentage,returns,shipping.packaging,photography,data input
    You need to operate on a large scale to operate on such low margin. Think supermarkets !

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  • Retailers need to look at themselves and ask why are they selling online so cheaply?

    The Amazon situation is a concern as it is possible to buy from the site cheaper than buying from your brand partner direct! That is unsustainable.

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  • Why is anyone surprised!
    It really is a true case of the Emperor's new clothes and the gullibility of the press who were brainwashed into believing it was the greatest thing and telling the retailers it was the only way to go; and hasn't it generated all that money for the software people at least they have profited from it.
    Perhaps Drapers may get back to basics now but then that's not exciting is it!!!

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  • Arrrrrrrrrrrrrrrrrrrrrrgh, I've lost count about the amount of comments i've made on here about this, really makes me laugh when i read articles in Drapers about the death of the high street due to on line. All on line backers want is growth they are not interested in profit so when they float the latest ponzi scheme they can scream potential then ride off into the sunset and leave the share holders to puzzle about how the growth was achieved and worry about how they actually try to turn it into a profit focused business. As for Amazon, have a look at the figs, very impressive, that is impressive to see how much money that actually do not make, yet still people buy the shares, 89 billion turnover, £241 million loss for 2014. Omni Channel , Omni Channel, does anyone have any idea how much money it takes to drive traffic onto a website to get a sale let alone any traction and make it pay, thousands and thousands and thousands, if you want visibility on line then FB or even a non transactional site, both cost very little, one comment above says Emperor's new clothes, i've said this countless times, it is obvious to the people who have hands on experience but to those who don't and keep preaching Omni Channel and the High street is dead, wake up and smell the coffee, or alternatively read the Amazon profit and loss accounts.

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  • Very good last post. The clothing trade is obsessed with turnover and not profit, whether it is online or traditional set-up. This goes to show how badly run our trade really is, yet these organisations keep being press darlings. For example, when was the last time HOF made a profit for example? Yet they get portrayed - like many others - that they actually know what they are doing!

    Online is useful, BUT all players should be wary of how much time and money they throw at it, because if the figures don't add up, it isn't working.

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  • Not sure about HoF but they have just announced good profits, give me Retail over E tail anytime, if on line was showing the same profits i could understand the hype, take a look at HoF and Primarks latest set of figs, when you get the offer right in retail the customers will flock, the same can't be said for e-tail in which when you get the marketing right the customers will then flock to view your offer. I note HoF biggest store is on line, i assume this is turnover and actually how much this is adding to profit verses the cost of it.

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  • HOF's figures misleading as always, as their liabilities are around 3.5 times than their assets/cash in the business - HOF is still hugely in the red and will continue to do so. Not a model you would show as a good example of business I'm afraid.

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  • Clothing retailers only have themselves to blame by offering free delivery and free returns. They have created an environment where 40% returns is a standard and raised expectations of consumers that free is the norm. It's hilarious to see them competing on next or even same day delivery, which only erodes margins more.

    Hilarious if it wasn't so damaging for the industry.

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  • it's the independents that I fear for ....they bang on about the integrity of the brands and their crafted goods, organic philosophy etc.. and then discount those same brands at the drop of a hat.Most of them couldn't have traded at a profit since November when they all went on sale (Black Friday) broke the internet blah, blah, quiet the next two weeks of December, on sale the third week (or giving themselves high fives by going on sale after Xmas ie Boxing day ) , clearing out the last of winter stock at 70% by the 2nd week of January , full of summer goods 4th week of jan . Freezing Feb must have been fun....and as for March , don't go there.
    No wonder they were all offering 15-30% off for Easter I guess they must have needed the money for the Vat bill from Nov Dec & Jan's sales Doh !!! and do you see all that exclusive camouflage Barbour co lab they are trying to punt double Doh !!!

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  • darren hoggett

    I've often argued that many brands and retailers fail their customers because they continue to push products that consumers do not want to buy. Brands are run buy marketing departments who have no idea how to function in the real world.

    Giving customers what they want almost seems like a swear word as the clothing trade does everything it possibly can to lose money. If theres no common sense, then there's no profit.

    Darren Hoggett
    J&B Menswear Limited/Norwich

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