5 Ways Online Shopping Can Drag Down Retail Profits
Business + Economy

5 Ways Online Shopping Can Drag Down Retail Profits


For retailers to ignore the shift toward online is to concede defeat to their more tech-savvy competitors. But what many people don't realize is that for bricks-and-mortar firms, increasing their digital sales isn't the silver bullet it's often described to be. 

Though building out a sophisticated digital channel is a necessary investment for retailers, the move toward the Web brings with it a number of challenges, including shipping costs, high return rates and an often less-engaged shopper.

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Below are five ways that the growth in online shopping can be a drag on retailers' profits.

Free Shipping Isn’t Really Free
Online sales are already breaking records this holiday, including desktop revenue that topped $2 billion for the first time on Cyber Monday, according to ComScore. But as more people make purchases online, retailers are saddled with higher shipping costs, particularly as consumers have come to expect free shipping offers.

According to a study by Pitney Bowes, which advises retailers on shipping practices, 82 percent of U.S. shoppers consider free shipping most important; by comparison, only 17 percent prefer fast shipping. Additionally, one in three respondents said they've abandoned an online order sometime in the past year due to prohibitive shipping costs.

Many retailers over the past few months have either lowered their minimum order threshold, or offered free shipping. Wal-Mart, for example, offered free shipping for one day last week, while Target has offered free delivery for online orders for nearly two months. That offer ends Dec. 20.

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"Shipping offers are critical to customers and are especially important during the holiday season," said Forrester Research analyst Sucharita Mulpuru. "However, these offers are costly and eat into retailer margins."

These costs will become even more significant toward the end of 2014 and into next year, when carriers UPS and FedEx will begin charging by size, not just weight. One way retailers are combating these costs is by offering buy online, pick up in-store options.

Easier Said Than Done
Many of the initial headwinds related to online shopping are operational in nature, said Stephen Mader, director of retail insights at Kantar Retail. For one, shoppers expect retailers' websites to carry the same, if not more, products than they have in store. For another, it can be challenging for retailers to sync up their digital and in-store inventory networks, to ensure their products are in the right place at the right time.

Not only are these issues challenging, but they can also be costly. "To get this right and to organize it so that you really have that seamless experience is a really hard thing to do," said Christoph Stehmann, president of e-commerce and shipping solutions at Pitney Bowes.

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Other operational challenges include ensuring on-time delivery of online orders, particularly during the holidays, and making sure retailers' desktop and mobile sites are optimized to handle heavy volume. On Black Friday, for example, Best Buy experienced outages that it attributed to volume.

Less Engaged Shoppers
It's no coincidence that retailers litter the path to the cash register with low-ticket items, or put popular items in the back so shoppers have to weave their way through the store. But online buyers tend to be more targeted in their purchases, seeking the best deal on a particular item, and are less likely to spontaneously add extra items to their cart.

What's more, because online shoppers have typically invested less time and energy into their search than is required by visiting a store, they're more likely to shift their attention away from a particular retailer, Mader said. "Online you're always one click away from failure," he said.

More Unsatisfied Customers
According to Pitney Bowes, nearly half of U.S. shoppers have returned an online purchase through the mail. That means retailers are paying not only to send goods out to consumers, but they're often paying for the package to come back into their distribution network.

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Kantar's Mader said apparel orders are particularly susceptible to returns, as fit can vary by brand or by item. The problem is exacerbated by the fact that many shoppers order two sizes right off the bat, knowing that they'll return the one that doesn't fit. "That's a lot of inventory which exists out in the public's hands, which you need to account for," Mader said.

Pitney Bowes' Stehmann said retailers can significantly cut back on these costs by giving more detail about a product—for example, a size conversion chart. He said he recently spoke with a small e-commerce company in Germany that lowered its return rates from 50 percent to about 25 percent, just by better describing its items.

"Twenty-five percent less returns makes a major difference," he said.

They Can’t Hide Behind High Prices
The digital shift has made it easier for shoppers to price compare. While that's great news for consumers, it's not so great for retailers, particularly those who carry the same items as their competitors. This results in companies slashing their prices, in what pricing firm 360pi has called a race to the bottom. But this online transparency isn't only tied to price tags, Mader said. Shoppers can quickly skim companies' websites to see who offers same-day delivery, pick-up in store or other convenient fulfillment options, creating another arena in which retailers compete.

"Pricing is only one component of the shopper's value equation," Mader said.

This article originally appeared in CNBC.

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