While web sales are growing rapidly for North America’s leading online retailers, ecommerce growth is trimming profit for some merchants in the Internet Retailer Top 1000. Optimizing fulfillment and promotions can help revive profits, experts say.

Booming online sales are boosting the top line for North America’s leading web retailers but having the opposite effect on the bottom line for at least some of them.

Global web sales increased 17.7% in 2018 for the retailers and brands in the Internet Retailer 2019 Top 1000 rankings of North America’s leading online retailers. And it wasn’t just Amazon.com Inc. that’s growing: Even when taking out Amazon, No. 1 in the Top 1000, the rest of the Top 1000 increased their web sales by 16.8% over the prior year.

But at the same time, such major chain-store retailers as Walmart Inc. (No. 3) and Target Corp. (No. 16) blamed ecommerce for depressing profits. Such publicly traded web-only merchants as Wayfair Inc. (No. 12), Overstock Inc. (No. 47) and Blue Apron Inc. (No. 97) are losing money, and consumer brand manufacturers like Levi Strauss & Co. (No. 236) are increasing their marketing spend as they increasingly sell directly to consumers.

When you look at the different opportunities consumers have to transact online, there are only so many purchases that are going to be made.

Even Amazon may not be making money in retail, at least when counting its heavy investments in international markets like India. Virtually all of Amazon’s record 2018 net income of $10.03 billion appears to have come from its Amazon Web Services cloud computing unit and from its growing business in selling ads on Amazon.com.

Heavy fulfillment costs for online orders

The cost of fulfilling online orders is a big part of the profit squeeze retailers are facing, says Farla Efros, president of consulting firm HRC Retail Advisory. “Having distribution centers readily available and in the right locations, having your stores set up for buy online, pick up in store and direct to consumer, all those components are extremely costly from a systems and execution standpoint,” she says.

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Retailers also must absorb the expense of returned online purchases, which consumers often bring to stores when they purchase online from a retailer with bricks-and-mortar locations. “By the time it goes to the store and then to the distribution center and back, you’ve taken a couple of markdowns, so you’re losing money on that product,” Efros says. “All of that impacts the ecommerce component of the P&L [profit and loss statement].”

At the same time, increased competition has driven up customer acquisition costs for U.S. retailers by 50% in five years, says John Squire, CEO of DynamicAction, which aggregates data from retail clients about shoppers’ online activity and profitability. “When you look at the different opportunities consumers have to transact online and the number of retailers and brands going direct to consumer, there are only so many purchases that are going to be made,” Squire says.

Retailers will have to get smarter about when they offer free shipping and other promotions and focus on cultivating their most profitable customers, Squire says, because competition isn’t easing. In fact, he points out, Amazon is putting more pressure on rivals by announcing early this year plans to move to one-day shipping on many items from its current two-day guarantee for members of its Prime loyalty program.

Amazon says it expects to spend $800 million in the second quarter of 2019 to enable its fulfillment network to meet that one-day promise. “The amount Amazon is going to spend to do that is out of the reach for lots of retailers and brands in the U.S.,” Squire says.

Amazon’s offer of even faster free shipping figures to further its already dominant position in online retail.

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Broad-based ecommerce growth

In 2018, by Internet Retailer’s estimate, Amazon accounted for 40.3% of U.S. online retail sales, double its 20.0% share in 2012, just six years earlier. That includes the value of goods Amazon sold itself as well as sales by other merchants on Amazon.com.

But many other Top 1000 retailers grew rapidly as well in 2018. In fact, 475 increased their web sales by more than 15%, well above the 14.2% increase in online retail sales in the United States as reported by the U.S. Department of Commerce and the 14.7% increase in Canada. That means the Top 1000 online retailers gained market share over their smaller online rivals.

 

But growth was widely distributed within the Top 1000, with 342 companies posting year-over-year ecommerce growth of more than 20% and another 133 of 15-20%. Only 28 Top 1000 retailers saw web sales decline in 2018, and for one e-retailer revenue was flat.

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How retailers can rebuild profit

Over the next three to five years, HRC’s Efros says, retailers that survive will address their profit issues with improved online fulfillment. And some already are.

Target, for example, says it lowered its average unit cost of fulfilling online orders by 20% in 2018 by promoting delivery options that cost the retailer less. That includes shipping three-quarters of its web orders from 1,400 of its 1,800 stores during the fourth quarter. Shipping an online order from a store is 40% cheaper for Target than shipping it from a distribution center, and in-store pickup is 90% cheaper, Target says.

Squire of DynamicAction encourages retailers to look more carefully at discounts, especially on fast-selling items likely to sell out without a price cut. Even cutting a day off of promotions for items that are selling well can increase profit, he says.

Retailers in the Top 1000 and beyond are going to have to come up with strategies like that to address their profit woes because there is no sign the growth in online shopping is slowing down.

The 2019 Top 1000 Analysis Report is based on an annual study by Internet Retailer’s research team, which collects more than 200 data points for each company in the rankings. This exclusive data on the largest online retailers in North America is offered in the all-new 2019 Internet Retailer Top 1000 Analysis Report and Online Databases.

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What’s in the 160-page 2019 Top 1000 Analysis Report:

  • More than 50 charts and tables that quantify the shifts in online retailing.
  • An analysis of ecommerce versus total retail growth over the past decade.
  • Data on which retailers and brands are growing the fastest and slowest, broken down by merchant type, merchandise category and size.
  • In-depth looks at the ecommerce performance of web-only retailers, retail chains, consumer brands manufacturers, and retailers with roots in print catalogs and TV shopping shows.
  • A report on Amazon’s recent initiatives and the response of competitors and government regulators.
  • Data from consumer surveys on how they shop online, their view of Amazon, how they view in-store pickup, their propensity to return online orders and more.
  • Benchmarks giving industry averages for such key metrics as conversion rate and average order value by merchant type and merchandise category, free shipping policies, loyalty programs, website activity and features, digital marketing programs, shopper demographics and more.
  • Summaries of recent developments in such areas as online marketplaces, mobile commerce, omnichannel strategies, holiday sales and online grocery sales.

The Top 1000 Online Database is available in three membership tiers: Basic, Basic Plus and a more inclusive Pro version for corporate clients wanting multiple user licenses, more extensive data and data download capabilities. Learn more about what’s included in each Top 1000 Online Database tier.

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