A recent study by OC&C in the UK has shown the impact of the growth on on-line sales on category margins. For those retailers whose sales are dominated by these categories, profits (EBIT) are considerably weaker.
The categories which have seen margins most affected by the high proportion of on-line sales are:
- Music, video and gaming (30% of sales are on-line, 2% profit margin)
- Electricals (15%, 2%)
- Books and stationery (14%, 2.4%)
Grocery is perhaps the exception (4%, 3%), affected more by intense concentration than by the proportion of on-line sales.
At the other end of the spectrum are categories which include:
- Clothing, footwear and accessories (4% on-line, 8.8% margin)
- Opticians, pharmacies, health & beauty (2%, 7.1%)
Both of these categories are notable for their connection to fashions, and thus the importance of browsing, touch and feel, trial, which can be experienced only in traditional store formats.
What should be of concern to retailers in the “high on-line” categories is that these margins were pre-recession,. The study was based on published financial accounts and these will be anything up to 18 months old. It is quite surprising just how low these operating margins are – which effectively means how close to breakeven the majority of retailers are.
The recession is showing up as a significant fall in sales. Year on year comparisons are around minus 8% in the critical pre Christmas/Holidays trading season. This will have pushed many retailers into losses immediately, and of a scale that cannot be met with trimming of overheads. Structural changes and consolidation will take place amongst retailers focused on the “high on-line” categories. Already Circuit City (Electricals) has filed for bankruptcy and Woolworths (Mixed goods) and MFI (DIY, home & gardening) have been put into receivership.
Retailers operating in the “high on-line” categories have been forced to embrace the on-line selling motion applying the same prices across all their channels and actively encouraging customers to flit between on-line and off-line (PCWorld, John Lewis, Tesco). Better to cannibalise your own sales than be cannibalised by others. They may find they need to reduce the floor & shelf space allocated to these categories, and provide on-line kiosks or catalogues in store to offer the full range and selection customers look for. They will also need to sharpen their customer service skills and extend their array of services that on-line propositions cannot match.
Bad news for suppliers who rely on retailers
Vendors with multiple routes to market have long found that retail was an expensive channel, but now must worry that it is also a highly vulnerable one as well. The irony is that in many categories, the vendors have been accelerating the growth of direct on-line sales that puts their retail partners in jeopardy.
The worry of potential demise will cause many vendors to limit their exposure to retailers, cutting credit limits and strangling allocations. This in itself will weaken the retail proposition to consumers, who are becoming increasingly used to finding the best array of range and assortment on-line rather than in-store.
Account managers or account teams looking after retailers need to ensure they are close to the trading numbers of the categories they operate in and ensure they are balancing sales and marketing activities with risk assessment and exposure control. Marketing managers need to look at all their programs and ensure that they are not exacerbating the situation by distorting business models or loading up accounts with excessive inventories.
The Retail channel is far more vulnerable to the recession than many seasoned commentators thought – and those categories with a high proportion of on-line sales are under real threat.
If you want to know more about how the retailer business model works, then check out Part 4 of the book Distribution Channels by Julian Dent, published by Kogan Page, ISBN 978-0-7494-5256-8