Digital downsides - the cost of online channel growth in retail

As consumers become even more reliant on online shopping as a result of Covid-19, retailers must address the inherent inefficiencies in the channel in order to retain a degree of profitability. The crisis has seen a 3-5 year acceleration in online channel adoption in as many months; very few retailers are equipped to deal with that level of structural change in cost structure in such a short timeframe.

Returns are one of the biggest issues. Especially in apparel where return rates are often above 40% and when that is factored in, the channel economics rarely stack up. You need a hefty margin to begin with if you can absorb the cost of return, sorting, repackaging and still turn a decent profit on that item. Retailers must do everything they can to a) avoid customers wanting to return goods in the first place and b) make the processing of returns as efficient as possible. With accelerated digital adoption, use of avatars and ability to preview fit of garments will become more and more important, as will restricting choice for serial 'returners' and penalising poor customer behaviour.

But there is much more to it than just returns. Most retailers' e-commerce distribution networks are much less mature than those that serve stores. Significant increases in online volume are matched or exceeded by costs because the productivity associated with re-engineering operations over time has just not been done. All this at a time when bricks and mortar productivity for non-essential retail is likely to be poor for many months to come; leading to a profitability hit 'double whammy' of huge proportions.

Radical cost reduction and productivity improvement is required. Don't waste a good crisis! Now is the time to accelerate digital transformation, store network optimisation and distribution productivity programmes.