Retailers sink $1-trillion into digital but few manage to make e-commerce profitable
The cost of serving customers at any time, anywhere, at any speed, does not bring in enough top-line growth to monetise existing investments in machinery and technology.
Consumer preference for online shopping is booming internationally. Digital commerce has grown retail for the past decade, but so far, very few retailers around the world have been able to make e-commerce profitable. This, despite retailers sinking over $1-trillion into digital over the past five years, says a new report by global consulting firm AlixPartners and the World Retail Congress, which looks at how the rise of online shopping is affecting retailers.
The report, “Digital-first retail: turning profit destruction into customer and shareholder value”, has found that as online penetration has grown, retailers’ profits have been shrinking. And while customer preference for digital shopping is booming, this trend is creating a major problem for retailers, due to higher costs brought on by digital investments and lower profits.
The report unpacks some of the reasons for this and how to take advantage of customer preference for online shopping, through a “digital-first retail” approach.
Founded in 2007, the World Retail Congress is a global platform that connects the retail sector’s leaders, stakeholders, advisers and influencers to create solutions and drive progress within the industry.
Its latest retail analysis shows that the cost of serving customers at any time, anywhere, at any speed, does not bring in enough top-line growth to monetise existing investments in machinery and technology.
Consumer preference for digital is booming, as about 86% of customers are now researching products online at least once in the purchase process. The 2022 AlixPartners Holiday Shopping Survey indicates that these trends are creating a major retail problem: decelerating digital growth, high digital costs, lower profits and rising customer expectations for digital services.
This, as retailers are pumping money into digital retail technology, but not doing so effectively. The report says that only 24% of retail executives think their company has above-average digital capabilities, and just 36% of executives think their digital teams are able to meet their companies’ digital strategy needs.
Retailers should ask themselves, what if they operate as an online business with stores, rather than as a store business with a website? Doing so, the researchers suggest, then moves KPS across the business from conventional metrics to digital-first benchmarks.
It’s time for companies to embrace digital-first retail (DFR) — a shift in mindset, operating model, capabilities, processes, tools and key performance indicators.
Less than half (48%) of retailers are measuring the true costs and benefits of an omnichannel approach, so many are making digital investments that are not necessarily effective.
This, despite spending massively — yet efficiently — on digital, so they fail to see the intended results. Globally, retailers spent $1.1-billion on retail technology and digital improvements in 2022, according to data from Gartner Research and Advisory.
In the 2023 AlixPartners Digital Transformation Survey, despite spending over a billion dollars on these enhancements, 50% of executives rank their companies’ digital capabilities as “average” and believe their organisation lacks the right skills and processes.
Despite this expenditure, AlixPartners’ research among 150 global retailers has revealed that only 24% of retail executives think their company has above-average digital capabilities and just 36% of executives think their digital teams have the capabilities to meet their companies’ digital strategy needs.
Retail executives believe online will deliver accretive value, but almost half (48%) are actually measuring the costs and benefits of an omnichannel approach, so they are making digital investments that prove ineffective.
Retailers expect to increase digital spending this year. While 75% of retail executives are confident that they will see a good return on their digital investments, 64% doubt their existing digital tools from past investments can support a DFR business.
In the analysis of 50 public US retailers (including apparel, department stores, hardlines and specialty retail), the report highlights that, while their average online penetration has shot up from 9.4% in 2012 to 25.6% in 2022, their profitability (as measured by average Ebitda percentage) has in that same period declined from 13.8% to just 8.3%.
David Bassuk, global leader of the retail practice at AlixPartners, said it’s clear that retailers cannot keep operating in the same way and expect different results. DFR is not a programme or initiative, he said, “it’s a change in mindset and in a retailer’s organisation that places digital at the heart of a retailer’s business model. And that’s exactly where digital needs to be today”.
AlixPartners said 63% of retailers expect to spend more on digital investments in 2023 compared with 2022. Given consumer preferences for digital, most don’t have a choice — without a strong online experience, they stand to lose customers and market share to competitors. But while 75% of retail execs are confident that they will see a good return on their digital investments, nearly two-thirds (64%) doubt that their existing digital tools from past investments can support a modern, DFR business.
Most retailers are data-rich but insight-poor, said AlixPartners’ Matt Clark. And most still have a product-centric mindset rather than a truly customer-centric one.
“Retailers must establish new KPIs with a [DFR] lens to match their new operating model and operate with a DFR mentality, truly placing the customer first to turn shrinking profits into customer and shareholder value.” BM/DM