If all retailers needed to worry about were sales levels, channels would not matter. But sales made with tiny margins leave less profit for the company than sales with higher margins, so the distinctions are important. The most recent evidence suggests that for omnichannel retailers, the different profit implications between online and in-store sales can be substantial.
For example, at Kohl’s, the profits earned from online sales are approximately half those earned for the same products sold in stores. Both Target and Best Buy announced that their predicted profits would continue to diminish as their online channels grew.
The reason has to do with the very nature of the sales channels. In brick-and-mortar stores, the costs to sell to 20 customers are approximately the same as those to sell to 50 customers. That is, the store is already open, staffed, and stocked, no matter how many people enter through its doors. Thus, each additional sale increases the profit that the retailer earns, after paying all its costs. In contrast, each product sold online induces new, unique costs to pick, pack, and ship the item. If 50 people buy pairs of jeans, the costs to the retailer shipping them are much higher than if 20 people buy those jeans.
Furthermore, because Internet shoppers cannot try on the clothing or get a clear sense of the color of the home decorating item before they buy, returns are far more frequent in online channels. Therefore, retailers also need to deal with the costs of returns, including additional shipping, labor to restock, and potential losses if the returned items cannot be resold.
The result is a substantial difference in profits. But the result also might not be avoidable. As Kohl’s Chief Executive Kevin Mansell explained, “I don’t care if customers buy online or in store. We’re focused on sales.” This focus is necessary, because customers demand the convenience of online ordering. Thus even if companies earn less, they need a web presence.
Not everyone agrees though. The European discount retailer Primark has pulled itself off the Internet, noting that despite a lot of demand, it could never earn a profit on its online sales.
Discussion Questions
- For most omnichannel retail operations, which side is more profitable, stores or Internet?
- Among the strategic profit model ratios, which one is driving this disparity? Why?
Source: Suzanne Kapner, The Wall Street Journal, December 1, 2014