Page 38 - February 2022

RLI TECHNOLOGY INSIGHT

The Hidden

Costs of

E-Commerce

In this month’s Technology Insight, Andrew Gorecki, Co-Founder and Managing Director
at Retail Directions takes some time out to explain how retailers of today are being
blindsided by the hidden costs of e-commerce and how it’s time to take a second look at
the numbers.
any retailers have experienced online sales booms during the With over a year of experience in this new, strange environment, some
pandemic as customers flocked online after being denied the retailers are finally beginning to properly examine their omni-channel
Mability to shop in stores during lockdowns. processes and numbers. For others that full cost/benefit and process
Brands and retailers for whom e-commerce was either just a minor analysis has still to come.
side-line or a strategy still in the planning, had to move fast to transform
their business into a true omni-channel Connected Retail enterprise. Identifying hidden costs through analysis
Driven by the pandemic, the changes in consumer buying behaviours Once such analysis starts, several patterns emerge. The most obvious
meant that orders flooded in, and retailers could congratulate themselves one relates to the visibility of real cost. When operating brick-and-mortar
on their online success. Some now believe that the upsurge might be stores, retailers know quite precisely what they are doing. They are
permanent. dealing with a clean-cut cost structure, years of understanding around
But will it? Retailers must now ask themselves two key questions: Is the margins and net profit and how best to optimise business operations.
change in customer behaviour and the sales mix structural or cyclical? In For e-commerce, true costs need in-depth analysis and retailers newer
other words, when retail begins to normalise, will customers re-engage to the channel don’t always have a clear-cut model to assess the real, net
with brick-and-mortar stores? profitability. If the customer behaviour changes we have witnessed do
Irrespective of whether the online sales volume will stay high or revert turn out to be structural – i.e., permanent – then it’s even more important
to pre-pandemic levels, how much net profit does the business really that retailers have a full understanding of the true cost of doing business
make from online sales? in all channels. If not, they won’t be able to make informed decisions and
Achieving a clear understanding of the above isn’t easy. The speed with could put their futures at risk.
which retailers had to accelerate their online strategies - as they sought to There can be many hidden costs related to online business that retailers
make up for lost sales and capture the extended e-commerce audience - must be aware of. For instance, when physical stores get replenished,
meant there was little time for planning and analysis. the warehouse costs are usually included in the cost of goods (applied
Online turnover and gross profit were the most common measures as an oncost for the retail outlet), but when picked individually to fulfil
of success, and these looked good, encouraging further expansion a customer order, the warehousing cost of an item goes up substantially
online. Retailers have also been dealing with a literally captive audience, and often is not attributed directly to the orders.
which both distorted consumer behaviour and their buying patterns. Similarly, online returns - which can be as high as 40 per cent of online
sales - can also pose further challenges for the retailer. Meanwhile, unlike
brick-and-mortar stores, where staff can engage directly with customers,
online requires a separate customer care team - yet another cost to
consider.
And of course, there are the external costs of delivery too, where
retailers have seen delays and increasing costs due to the pressure that
transport and delivery providers have faced during the pandemic.

Why it’s time to check the numbers
While speed of response and agility have been heralded over the last
18 months, the pandemic denied retailers the opportunity for careful
planning, which meant that some retailers went into e-commerce without
really thinking it through. This means that as long as they operate this
part of their business with limited understanding, the hidden costs will
continue to surface and bite, driving down margins and profits as a result.
Given that by now most retailers have settled into a new ‘normal’, it’s
essential that they take the time to look more closely at their businesses,
fully examine their real costs across all channels and ensure everything is
accounted for – particularly online.
Only once they have done that can they pat themselves on the back
and say that they made e-commerce a success, both during the pandemic
and after.

38 RETAIL & LEISURE INTERNATIONAL FEBRUARY 2022