NEW YORK, United States – Online sales can be a saving grace for pandemic-battered retailers with fewer shoppers in their stores. But many retailers, from department store chain Macy’s Inc. to essential retailer Target Corp., struggling with higher costs associated with e-commerce.
Retailers often use the more lucrative in-store sales to subsidize hefty e-commerce costs, ranging from marketing to delivery and shipping. Companies usually don’t split those costs, which have been overshadowed recently by massive write-offs for unsold inventory and lower online profits.
According to credit rating agency S&P Global, margins for the hardest hit non-essential retailers – including clothing chains in shopping centers – are on average about half of what they were in 2019 this year. The shift to e-commerce has likely erased a few percentage points from the company’s margins, said Sarah Wyeth, senior director for retail and restaurants.
When it comes to online sales, “retailers have always given away too much margin,” said Neil Saunders, general manager of GlobalData Retail. “With more stores closed and online penetration increasing, losses have exploded.” Historically, in-store sales accounted for more than 80 percent of all retail sales in the United States, according to eMarketer. E-commerce as a percentage of retail sales, excluding gas and car, rose to 22.9 percent in the second quarter after the pandemic accelerated the shift to online shopping, said Andrew Lipsman, chief analyst at that research firm.
In mid-July, the peak of Covid-19 infections in the United States prompted states like California to close malls – further jeopardizing personal transactions, which are generally cheaper.
Nearly 18 percent of Macy’s stores are located in California.
On July 1, the retail operator, which also owns the Bloomingdale store, said gross margin fell to 17.1 percent, down more than 21 percentage points from a year earlier.
Jeff Gennette, CEO of Macy, said the chain saw “ a noticeably worse trend in brick-and-mortar stores ” in Texas, Florida and Arizona, where infections are setting new records.
“Conversely, in those specific states, the dotcom business is improving,” he said after a stunning $ 3.58 billion loss for the quarter ended May 2.
Fast forward, squeeze tighter
Paula Rosenblum, co-founder of RSR Research, estimated that typical online orders cost retailers about 10-15 percent more than in-store purchases, where customers do the work of selecting items and shipping them home. Her calculation doesn’t include returns, which are more common with e-commerce purchases because customers don’t see, touch, or fit products in advance.
While Amazon.com Inc., Walmart Inc. and other deep-pocket companies can spend a lot on projects like automation and inventory tracking to cut e-commerce costs “many companies are on the ropes and can’t afford them,” Hilding Anderson, senior director of strategy and consulting at Publicis Sapient.
Target remained open during the early stages of the pandemic, but gross margin declined 450 basis points in the first quarter as digital sales increased 141 percent. The retailer blamed the deterioration in the write-downs of apparel, a shift to lower profit sales of food and essential items, and rising digital fulfillment and supply chain costs.
“Our first quarter digital volumes were not expected in another three years … It was an extreme test of our model and team,” said John Mulligan, Target’s Chief Operating Officer, at a conference call on May 20 .
Meanwhile, FedEx Corp. and United Parcel Service Inc. blocked the delivery of e-commerce, but they lost a significant number of high margin cases when the offices were closed. Those carriers are raising their prices to offset the explosion of more expensive home deliveries of everything from food to furniture and electronics and fitness equipment.
“The margin squeeze may continue for a while,” said Gabriella Santaniello, founder of retail research firm A Line Partners. “It will be very difficult to put the ghost back in the bottle.”
By Lisa Baertlein, Melissa Fares and Nivedita Balu; editor: Aurora Ellis