The Supply Side: Retailers still trying to crack the code to e-commerce profitability

Retailers have been trying to crack the code on e-commerce profitability for the past several years. While Walmart and Amazon have sought alternative revenue streams to help finance the business, Dick’s Sporting Goods said it had found a way to boost online profitability.

Lee Belitsky, chief financial officer at Dick’s, recently told analysts that the specialty chain’s e-commerce segment achieved significantly higher profitability in the second quarter by offering fewer promotions. That better leveraged the company’s fixed costs and more substantial 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 [Gross earning] margin,” Belitsky said in a call with analysts.

Dick’s reported online sales rose from 12% of overall annual revenue to 18% of revenue. He said the company mitigated higher shipping and delivery costs by using its 800 stores as fulfillment centers, including 40% from store to home and 30% from in-store pickup. Lastly, he said the company uses data science to position inventory closer to customers to reduce transit times and transportation costs.

Walmart has also employed this strategy by using stores for fulfillment and expanding online pickup to more than 3,700 stores. Walmart does not break out the number of pickup sales versus delivery done with its Spark service and other third-party drivers. In the recent earnings call, Walmart president and CEO Doug McMillon said the retailer had brought down its costs in the e-commerce division and is moving closer to profitability, taking longer than anticipated.

One of Walmart’s biggest grocery competitors, Kroger recently found two critical drivers of long-term digital profitability for online orders. Kroger said it saw a continuation of several pandemic trends, including more digital engagement across demographics, more sales in key fresh areas like meat, produce, and natural foods, and trading up to more premium products. New trends are emerging as customers settle into new routines. In a recent survey of customers, Kroger found that 92% of the people say they enjoy cooking the same or more than they did pre-COVID.

“We continue to utilize our data to understand those behaviors that are more permanent in nature. Whether customer habits are returning, hardening, or emerging, we will continue to meet the customer where they are and use our data science expertise to be where they are going,” Kroger CEO Rodney McMullen said in the June earnings release.

In its second-quarter earnings call, beauty retailer Ulta, poised to do well with a return to workplace sales, said that it is testing buy online pick up in-store (BOPIS) promotions to boost sales, reduce shipping distance, and improve e-commerce margins.

SHIPPING COSTS
Ulta’s freight costs have risen 45% year over year, trending down from late 2020. Contract rates rose 8.3% in the first quarter, second-quarter rates increased 63.3% for spot loads, and contract rates rose 12.7% from the prior quarter.

Fuel rates, which comprise 30% of a carrier’s overall costs, can significantly impact profitability. Fuel prices have trended higher since May. Recent refinery shutdowns from Hurricane Ida threaten elevated prices for another month as power is restored and suppliers catch up, according to Coyote.com, a subsidiary of UPS.

Ben Ball, senior vice president at Dechert Hampe, a consulting firm for consumer packaged goods and product manufacturers, said the apparent answer is reducing shipping costs, which is not likely in the near term. The less obvious is online ad revenue which more retailers are now generating.

“The real sleeper is whether Ulta can effectively lure shoppers in-store with BOPIS only promotions,” Ball noted in a recent blog post. “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 it will take for shoppers to drop to the fact that this is what the ‘BOPIS only’ promotion is.”

Other retail consultants are betting on using technology and data science to help retailers rein in costs.

“Omnichannel fulfillment is where the future of retail is headed,” said Melissa Minkow, a retail strategist at CI&T. “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. Shopper insights across verticals can learn a lot more.”

PICKUP SITES, AVOIDING RETURNS
Annibal Sodero, professor of supply chain at Ohio State University, said he expects to see local retailers partnering with Amazon and other online sellers to serve as pickup locations over the next five years or more.

“I can see us picking up an online order at the local barbershop or corner coffee shop in the future, as they can serve as pickup nodes for retailers like Amazon and Apple who have limited retail locations,” he said.

Others say there is not a magic bullet to improve e-commerce profitability. Suppose there is a magic formula for e-commerce profitability. In that case, it is likely in improving inventory accuracy and reducing the cost to drive traffic online, said Ken Morris, partner with Cambridge Retailers Partners. He said e-commerce margins have more upside than brick-and-mortar because that’s where companies can apply artificial intelligence and machine learning 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,” he said. “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.”

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.