Brick-and-mortar retailers, which are looking to make a foray into the lucrative online space to take on the competitive threat posed by e-commerce companies may now have to stop and think twice.
After all, selling online may not help realize the highest profit potential.
The findings were presented in a CNBC video report compiled based on a research by retail consultancy Alix Partners.
The Case Study
Alix Partners calculated the profits earned by a traditional store-based retailer by selling an outfit costing $100 through three avenues, namely:
- A combination of in-store and online.
Case 1: In-Store Sales
When sold in store, an outfit fetching a price of $100 is bound to net a profit of $32 or 32 percent, after deducting the cost of goods of $40 and operational cost of $28 for rent and labor.
Case 2: Online Sales
The same outfit when sold online will generate a profit of $30 or 30 percent, given that the cost of goods is the same $40 and the product is shipped free of cost from a fulfillment center.
In this case, distribution costs could be more than four times and overhead costs could be more than three times, as shipping and fulfilling individual orders could prove expensive compared to transporting truckloads of goods to physical stores.
Case 3: Combo Of In-Store And Online Sales
When a traditional store allows ordering online and buying from physical stores, two channels are involved. Operating cost rises to $37, reducing profits to $23 or 23 percent.
Thus, there is a 20-percentage point differential in the profit between a pure instore model and selling through a combination of online and instore purchase.
Alix Partners also discussed the scenario when three channels are involved — namely online, physical store and a distribution center. Operation cost escalates to 48 percent in this case and leaving profits at an anemic 12 percent. Consequently, this three-channel sales model is the least profit of all the four options.
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