A practical guide toward profitability
E-commerce businesses have allowed shoppers to have sky-high delivery expectations, but these companies have not given sufficient thought to logistics complexities and costs. As we assess retail today, many online operations have never made a profit. A smart, structured approach using a clear framework can start to reverse years of losses.
Online retail sales revenues have been a consistent success story since the advent of the Internet. In Europe, for example, e-commerce revenues rose by 15 percent to €530 billion (US$632 billion) from 2015 to 2016, according to Ecommerce Europe, a Brussels-based industry group. A survey this year by PwC showed that 60 percent of global shoppers prefer online to brick-and-mortar stores when purchasing books, music, movies, and video games; that portion is 40 percent for fashion and 23 percent for groceries.
However, this incredible top-line growth has rarely been matched on the bottom line. Among other factors, cost-effective online delivery has proved an incredibly difficult problem to solve.
Many companies rushed headlong into e-commerce in part because they thought they had to match competitors and in part because of the supposed promise of future profits. But in their haste to gain a slice of this growing online pie, they rarely properly assessed the complex and costly logistics of online retail. Shoppers were often promised very fast and free standard delivery, and this simply created high expectations that made little financial sense for the company. A recent survey by PwC Germany showed that 91 percent of German online shoppers expect free delivery.
Exhibit 1 illustrates this trade-off between shopper satisfaction along the whole ordering and delivery journey, and the underlying fulfillment costs.
Recent Strategy& benchmarking analysis across European retailers suggests an optimistic breakeven model of €3.50 (US$4.18) as a minimum cost-to-serve per shopper delivery for simple parcel fulfillment. Anything below this level indicates an average loss-making business model that will be unsustainable in the long term. (For the purpose of our analysis, cost-to-serve means the logistics costs that are incurred from the point at which goods are received at a warehouse until delivery to the shopper’s doorstep.)
A separate survey of Strategy& online experts shows that although more than 80 percent of luxury brands run online operations profitably, the percentage drops to less than half of those selling fashion goods and less than 10 percent for groceries (Exhibit 2).
This report, drawn from our experience working in retail markets worldwide, sets out pragmatic solutions to tackle this industry-wide pain point. A structured approach to online logistics can help companies satisfy a new norm in shopper expectations — free high-speed delivery — while maintaining acceptable levels of profitability.