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Rise in online sales further threatens retailers' margins

Retailers’ margins will come under further pressure from a forecast doubling in online delivery and click-and-collect sales in the UK over the next 10 years.

Research by OC&C Strategy Consultants predicts that by 2025 home delivery will be responsible for 30% (£69bn) of non-food sales and click-and-collect for 10% (£23bn). By contrast in-store purchases will decline to 60% (£138bn) – down from 78% last year.

The report also anticipates that by 2025 40% of non-food sales in Britain will be made online, up from 22% last year.

However, the increasing costs of home delivery and click-and-collect are expected to eat into retailers’ margins by a further 1.5%, hitting multichannel retailers the hardest. The cost to retailers of home delivery for small or large parcels can be between five and 23 times more than for in-store purchases. However, this is unlikely to be recouped from customers: the research found that 70% of consumers said £4 was the maximum they would pay for delivery.

OC&C Strategy Consultants said the changing retail environment had led to the average operating profit margins for the UK’s top 10 multichannel retailers more than halving since 2011, from 6% in 2011 to 2.5% in 2015. 

Anita Balchandani, partner and head of retail at OC&C Strategy Consultants, said: ”The last mile is fast becoming the ultimate battleground for retailers as shoppers demand more convenience. Being able to offer predictable delivery slots, free next-day delivery and an accessibly priced same-day service is becoming the norm. The challenge retailers face is how to meet these changing expectations while making the economics work for their business.”

She added: “Retailers need to tackle the last mile head on to make the economics stack up. First, retailers should start to rethink activities such as warehousing, picking and packing, and delivery to make them more cost effective. Delivery, for instance, can account for as much as 60% of last-mile spend.

”There are several ways retailers can do this – for example, shipping from stores that are closer to customers’ homes, improving the drop density of each driver in particular areas, or using more flexible labour models.

“Second, retailers should start to consider mutually beneficial partnerships that will help them fulfil the last mile, and do it in a way that is faster and less capital intensive.”

OC&C’s research involved 20 etailers and multichannel retailers that have publicly reported revenues of more than £500m, and an online survey of more than 1,000 consumers.

Readers' comments (1)

  • The bigger problem is the fact this 'last mile' is a two way street. With product being returned at levels (20-40%+) way above any other retail sector.

    Endeavour to create systems that manage this unwelcome feature is not a bad idea. However a better idea is to invest in systems that reduce returns to start with. Using data and technology to do so, by better understanding their shopper.

    Surely reducing complexity rather than seeking 'efficient' ways of managing a problem (the industry appears to take for granted) is a more attractive solution?

    I see store staff acting as 'warehouse operatives' for click an collect and managing the time consuming process of returns for online orders. This may appear great customer service but really it's an extended cost of online (and at the cost of customer service associated with store based sales).

    I do wonder if these true costs of online sales are accounted correctly. My impression is they are not. Am I the only one to think this way?

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