What’s the formula for e-commerce profitability?

Photo: RetailWire
Sep 01, 2021

Dick’s Sporting Goods says it achieved significantly higher profitability in the second quarter in its e-commerce channel through fewer and more targeted promotions, better leverage of fixed costs and strong customer adoption of curbside and in-store pickup.

“Because of these factors and other efficiencies, the profitability of our online business is now in line with total company EBIT margin,” said Lee Belitsky, EVP and CFO, on a call with analysts.

Asked to elaborate on the improvement, Mr. Belitsky said the retailer mitigates shipping and delivery costs by leveraging its approximately 800 stores. Seventy percent of online fulfillment came from stores, including 40 percent from ship-from-store and 30 percent from in-store pickup.

Online has grown from 12 percent of overall sales at Dick’s in the 2019 second quarter to 18 percent in the current quarter. Finally, Mr. Belitsky said the company utilizes data science to fine tune promotions via personalization as well to position inventory closer to customers “so we can accelerate our transit times and reduce costs there.”

On Kroger’s first-quarter call in early June, Gary Millerchip, CFO, stated that the two key drivers of long-term digital profitability for the grocer are the cost to fill a digital order and the retail media revenue generated from a digital transaction.

Ulta officials recently told analysts on its second-quarter call that they are testing BOPIS-only promotions to encourage in-store pickup — in addition to optimizing promotional cadence and reducing shipping distance — to improve e-commerce margins.

At a panel discussion at the recent Data + AI Summit, Colleen Qiu, VP and head of data science for Albertsons Cos., said she sees online profitability improving as data science and AI elevates forecasting, automation and fulfillment.

As quoted by Winsight Grocery Business, Ms. Qiu said, “E-commerce in grocery is still single-digit as a total of the omnichannel experience. As we grow and have more volume, AI can create more efficiency in end-to-end operations for e-commerce. When e-commerce is to scale, there is the possibility it can be less costly than running a traditional brick-and-mortar store.”

DISCUSSION QUESTIONS: What are the obvious and less obvious levers that drive e-commerce profitability for retailers? Do you see below average online margins being a short-term or long-term challenge for retailers?

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20 Comments on "What’s the formula for e-commerce profitability?"

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Neil Saunders

A current driver of profitability, both online and offline, is the reduction in promotions and discounts – especially in apparel. That will persist for some time, but will likely not last forever. As such, retailers need to look to other mechanisms such as increasing the volume of online orders collected from a store. From our work, in apparel the average margin on an an online purchase collected in store is 31.3 percent versus 27.8 percent on goods delivered to home. The results are even more dramatic in grocery where delivery to home has a negative margin on average. This shows the importance of omnichannel to retail profitability. Another important aspect is to reduce online returns, particularly in clothing, as these push up costs. Using fit technology such as Drapr (which Gap just acquired) is important here. Ultimately, a sale is a sale regardless of channel, but retailers need to look to optimize the profitability of all sales.

Ben Ball

The obvious answer is reducing shipping costs. The less obvious is online ad revenue. The real sleeper is whether Ulta can effectively lure shoppers in-store with BOPIS only promotions. In effect this is simply an advertised sale price where the consumer commits to the purchase in advance online. Brilliant in capitalizing on impulse buying in combination with requiring the shopper to eliminate shipping costs, with a bonus of potentially generating an incremental store visit. The question is, how long will it take for shoppers to drop to the fact that this is what the “BOPIS only” promotion really is?

Melissa Minkow

These are all great examples of how data, AI, and physical stores should be used. Promotions should become more targeted and personalized now that sophisticated data sets are abundant and table stakes. And omnichannel fulfillment is where the future of retail is headed. In addition to these efforts, I’d like to see non-competing retailers sharing data and cross-promoting to drive further convenience for shoppers and to expand the accessibility to out-of-category consumer knowledge. A lot more can be learned by shopper insights across verticals.

Steve Dennis
For quite some time “traditional” e-commerce profitability has largely been driven by gross profit dollars per order, since pick, pack and ship (through the mail) costs don’t vary as much as merchandise value. With a few exceptions (digital downloading of entertainment, big-ticket consumer durables) virtually all product flowed from large regional e-commerce DCs to the customers home or office. But a lot is changing. First there is way more product diversity that doesn’t conform to the traditional model (fresh, frozen, refrigerated grocery). Second a lot more orders that we call “online” involve a store, because the product is fulfilled from store stock with the customer picking it up and taking it home, or a runner picks it up to home deliver or the store associate sends it through the mail. Moreover, the growth of e-commerce is generally pushing up return rates, which drive a lot of extra cost. So the siloed approach to channels is becoming far more hybrid, and the profit dynamics can vary widely. Generally speaking higher gross profit/order will carry the day… Read more »
DeAnn Campbell

It can’t be overstated — the secret to e-commerce profitability is brick-and-mortar. Target went from margin loss to a 17 percent margin increase in 2019 by repositioning their online sales around in-store fulfillment, ship-from-store and BOPIS. Additionally, their product return rate dropped with more online orders being picked up in-store. Direct-to-consumer brands like Casper and Allbirds, while experiencing strong sales volume, showed they lack an adequate profit margin on those sales when they opened their books pre-IPO, hence their current efforts to increase their physical footprint. Leveraging stores, pop-ups or shop-in-shop partnerships is the best way to improve online profit margins and customer lifetime value, with the added benefit of reducing marketing costs and increasing basket size and cross category purchases.

Joel Rubinson

In addition to supply chain efficiencies, e-commerce also allows you to build a first party database of those interested in your brand, and what their underlying interests are. If used properly this should results in a 50 percent improvement in ROAS based on my white paper research.

Bob Amster

“E-commerce profitability” is only two words but the phenomenon is impacted by many factors. Profitability will come from tweaking the costs of each of those many factors individually. And these cost will have to be monitored regularly and forever.

David Naumann

The obvious profit drain on e-commerce is the cost of fulfillment and more specifically the last mile of delivery. Target, Walmart and many other retailers are leveraging local store inventory for online fulfillment to reduce costs. Encouraging customers to pick up online orders in the store (BOPIS) is another profit maximizer. As online shopping continues to accelerate, retailers need to optimize the fulfillment process to ensure all transactions are profitable.

Jeff Sward

It’s great to see an article that can legitimately talk about e-commerce and profitability. It’s unfortunate that apparel and returns can’t be mentioned in the same article.

Gary Sankary

Driving costs out of e-commerce is all about efficiency. Target had these same challenges early in the pandemic. Their costs were really high. They solved this by employing some of the same process they use for picking product in warehouses to the store aisles. They aggregated orders, used store location tools to route pickers efficiently, and created temperature controlled staging areas for orders.
I don’t believe the margin for curbside will be the same as traditional shopping, but I think it can be close. Like Target they already know how to pick and deliver product efficiently from their logistics. Now they need to employee those same capabilities for curbside and delivery.

David Spear

Many companies shy away from plunking down significant investments in advanced data and analytics platforms and services. But Dick’s Sporting Goods (DSG) serves as a primary example of a company who is getting HUGE profitability benefits as a result of weaving mature data and analytic practices into the fabric of their company. And this includes the use of advanced AI/ML algorithms and data science techniques. Kudos to them!

How are they doing it? They’re looking at all levers of profitability. The obvious levers are the highly visible transactional elements such as price, promo, markdown, item cost, surcharges, marketplace commissions. Some of the less obvious levers are the non-transactional elements such as labor, building, inbound logistics. Transactional + non-transactional = a lot of data! This requires analytics platforms that can handle massive data sets and return insights rapidly so decisioning can be made in near real-time.

Gene Detroyer

Yes, retailers seem to only count the transactional costs for their in-store operations while they compare it to online and apply full costing.

Ken Morris

If there is a magic formula for e-commerce profitability, it has to be improving inventory accuracy and reducing the cost to drive traffic online. E-commerce margins have more upside than brick-and-mortar, because that’s where AI and ML can be applied more universally. We keep discovering new ways to utilize RFID technology in stores and online, and it can be a key to gaining inventory accuracy — probably the most important driver of profitability across multiple channels. We also need to do something about returns, the killer of profitability. The pandemic in soft goods has driven people to order multiple sizes, keep one and return the rest. We need to address fit to be truly profitable in that segment.

Andrew Blatherwick

Retailers can use their figures to prove whatever they wish and can try to fool investors into believing that the online business is as profitable as traditional retail. If you use marginal costing and do not amortize the cost of stores across all channels then, yes, online, BOPIS and curbside can be profitable parts of the business. In reality, they are a necessary evil but not as profitable as traditional retail. The statement that online retail can, with the use of AI, be more profitable than traditional retail is promising more than even AI could deliver. It may be a huge help in running a retailer efficiently but it is not black magic.

Matthew Pavich
DSG has done a really great job of transitioning from a primarily brick-and-mortar retailer into a successful e-commerce player in a short period of time, while still investing in a top notch store experience (climbing walls, batting cages, etc.). Having worked with DSG, I can attest that they have made a lot of investments to improve their pricing capabilities and this has paid off throughout the product lifecycle across all channels. On a larger retail note, the vast majority of retailers could benefit from a robust, analytical analysis of promotional effectiveness. In my role, we’ve helped numerous retailers on this front and it is alarming how many promotions are ineffective – sometimes that number can be north of 50 percent and drive massive profit losses. In addition to promotions, the time is now for retailers to start really investing in their online strategy – do they follow the right competitors? Are they being competitive on the right items? Are they treating online consumers the same as their brick-and-mortar shoppers or are they actually looking at… Read more »
Peter Charness

All the obvious formularies are mentioned, but only Jeff mentioned returns. If those retailers who experience 20+% return ratios could cut that in half ,it would make a huge difference to their bottom lines.

Craig Sundstrom

Maybe not having “free”… everything?

W. Frank Dell II

Some years ago, when working with FMI, we established an industry standard costing methodology for the Supermarket industry called Direct Product Profit. This same method was used working with manufacturer costing from raw material to retail checkout. Manufacturers used this to change product packaging to increase both the retailer’s and their own profitability.

A key cost factor is number of touches. Every time you touch a product it increases the cost and reduces the profit. This same methodology should be used to determine how every item should move through the supply chain. Clearly, the most expensive is to select off the retail shelf and the cheapest is warehouse pick-to-light. Now difference handling and transportation options must be evaluated. Too often I see one system for a channel when it should be item or category.

Mark Price

Below average online margins have been an issue for e-commerce historically. The levers that can influence that include management of shipping costs (e.g. the BOPIS only test), targeting promotions to increase the percent of volume purchased incrementally and leveraging existing labor in-store to process orders. One piece that the article does not mention is management of returns. Some retailers are experimenting with funneling returns directly to stores, to reduce processing time and cost and to decrease the amount of time until that product can be resold.

Kenneth Leung

There is no one size fit all answer. It really comes down to managing distribution costs against customer expectations (shoppers want it now but not to pay for it) and using anything other than discounts to drive increases in basket size and repeat purchases. All of the tactics above are valid for their respective categories. They can’t be lifted and shifted to different businesses with different shipping costs and customer experience expectations.

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