Analysis: Here’s why e-commerce profits remain elusive for some brands
Retail companies have been forced to accelerate the development of their digital capabilities at a rate previously unimagined.
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Retail companies have been forced to accelerate the development of their digital capabilities at a rate previously unimagined. Many now face the challenge of optimising and refining these capabilities, often in the face of investment shifting back to more traditional channels as shoppers return to pre-pandemic behaviours. The good news is that e-commerce is expected to continue to grow as a total share of retail sales. However, despite this, many face a challenge in making e-commerce profitable.
In a recent international study on e-commerce that Ipsos carried out across seven markets, including Australia, there was a near-consensus among retail decision-makers that the nature of retail has changed permanently. But while the majority anticipate higher e-commerce revenue over the next year, there’s less optimism about associated profits.
Pure e-commerce retailers are more than twice as likely as those with bricks-and-mortar to say they are not profitable (44 per cent to 20 per cent) and are nearly twice as likely to say they are struggling to make the investments necessary to improve profitability (69 per cent to 39 per cent).
What is driving these profitability challenges, and what changes do retailers need to make to increase e-commerce profitability?
The problem with ‘overnight digital’
One of the issues many retailers face is that the pandemic and related competitive pressures forced many to go online or expand their online offering overnight, meaning they did so in less-than-optimal ways. New services and technologies were not necessarily executed in the best way due to the fast-paced nature of the implementations and are now inefficient from a cost and resource perspective.
Among retail decision-makers, 70 per cent hold this view; the idea is even more prevalent among those in the specialty non-apparel space. And lower-revenue retailers are also more likely to agree that while they made changes quickly, they didn’t necessarily optimise them.
This need for rapid changes is now driving a wave of replatforming initiatives across retail companies. Systems implemented in the last couple of years are being replaced by more robust, efficient and cost-effective systems. However, such initiatives are often costly and put pressure on e-commerce profits, as investments in these programs need to be recouped.
Digital customer experience the top priority
When Ipsos asked which investment areas were most critical to increasing profitability, digital customer experience and omnichannel commerce took the top spots (50 per cent or higher). This was followed by supply-chain modernisation (43 per cent) and marketing technology/data monetisation (38 per cent).
This is somewhat unsurprising, as these areas represent the primary opportunities to drive customer acquisition and loyalty by offering more convenient and personalised services across all channels. In the case of supply chain, this is also where most retailers find significant waste and opportunity for cost savings, through increased levels of automation.
Surprisingly, improving customer service is a lower priority, cited by just 33 per cent of retailers. There is instead keen interest and investment in self-service online customer support and tools. While the shift from labour-intensive call-centres to automated chatbot-style customer service may represent low-hanging fruit for many retailers, it doesn’t necessarily solve the root cause of why customers need support – something that’s necessary to drive sustainable profitability.
Different priorities for grocery retail
With their well-publicised supply-chain challenges, higher than average levels of e-commerce penetration and high customer churn, grocery retailers face a number of challenges unique among retail sectors. As a result, they are among the least likely to expect improvement this year in e-commerce profitability.
Instead, grocery retailers are looking to impact profitability through more long-term cost reduction and efficiency initiatives. Most in the study ranked digitising the store as the top priority in terms of investments being made today, with robotics for in-store cleaning or inventory management leading the investments being made (36 per cent).
Struggling to deliver on improvements
Although retailers know what improvements are needed to boost their e-commerce business, they’re not always implementing them. Being able to identify necessary improvements and actually investing in them are two different things. More than four in 10 (44 per cent) reported that their companies struggle here. This is a particular issue for Australian retailers (67 per cent) and purely e-commerce businesses. Delivering successful business cases for digital investment is made more challenging by slowing growth in e-commerce as consumers return to pre-pandemic shopping behaviours.
Additionally, the deployment of more complex programs such as data-enabled tools and robotics requires a level of speed, flexibility, and investment far beyond what many retailers’ current IT operations support. Although organisations appear eager to adopt such technologies, their ability to do so effectively – and harness the applications’ long-term profitability benefits – is limited, given their hefty price tag and often multi-year timeframe for return on investment.
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