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Greasing the wheel of E-commerce growth

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Over the past decade and a half, E-commerce became a key differentiator for retailers, allowing sellers of all sizes to compete even without a physical presence. However, the paradigm is shifting, as an Internet presence paired with bricks and mortar locations is providing the most convenient buying environment for consumers. Director of retail and consumer products advisory services, former industry analyst Jeffrey B. Edelman, discusses the evolution of E-commerce and the importance of developing a multifaceted sales approach to meet customer needs. 

The mouse that roared: Fifteen years ago, many observers wrote off the prospects of most bricks and mortar retailers in favor of Internet sellers. Terry J. Lundgren, Macy's chairman and chief executive officer, recently said: "Our business is rapidly evolving in response to changes in the way customers are shopping across stores, desktops, tablets and smartphones. We must continue to invest in our business to focus on where the customer is headed—to prepare for what's next."

Macy's is expected to grow its online business to the point where it is expected to rank No. 7 in terms of overall volume this year; benefiting from early and aggressive investments that encompassed people, technology, infrastructure and fulfillment capability. The costs have been high in an effort to capture market share, which in some cases have been made to stay ahead of the competitive curve, rather than generate a targeted return on investment. These are the new rules of the game.

We estimate Macy's online business is one of the fastest growing among its peers, contributing an incremental 2 to 3 percent to total sales, while comparable store sales have probably been relatively flat. These figures are not broken out separately and difficult to account for. We assume there has been some erosion in profit contribution, largely offset by ongoing expense reduction programs.

Returns can produce incremental profit: It is estimated that nearly one-half of all online customers return merchandise. Apparel and footwear, about 85 percent of Macy's sales, are particularly susceptible to returns, as fit can vary by brand or by item. Many shoppers order two sizes, knowing that they'll return the one that doesn't fit. Ordering for store pickup partially negates that problem, but more importantly, a growing percentage of its returns are to the store rather than done via shipping. This is not only cost efficient but generally translates into a larger and more profitable transaction. There is still a large percentage of the population that wants to touch, feel and try on a product, which usually enhances the likelihood of purchase.

Free shipping is the new norm:  According to a study by Pitney Bowes, which advises retailers on shipping practices, 82 percent of U.S. shoppers consider free shipping most important; by comparison, only 17 percent prefer fast shipping. Additionally, one in three respondents said they've abandoned an online order some time in the past year due to prohibitive shipping costs.

Target moved proactively to provide free shipping to its Red Card holders, in addition to offering a 5 percent discount on all purchases. Additionally, Home Depot and a growing number of other retailers offer free shipping if the item is picked up at a store. This could be particularly meaningful, as many of their prices are competitive with online sellers that charge for shipping. Fear of lost market share could lead to free shipping throughout the industry.

The Marketplace Fairness Act will level the playing field further: The Internet leveled the playing field allowing the smallest companies to compete with the largest. Even though legislation has been delayed, more states are pushing to collect sales tax on merchandise shipped from out of state. Amazon is ahead of the curve in charging sales tax; we wonder how much business is being lost to smaller, price competitive sellers, those that do not charge tax.

Finding commonality between online selling and bricks and mortar:  Back to Retailing 101—it is all about the consumer; how and when they want to shop, receive delivery and the ease of return. Successful and proactive companies are developing strategies around what their customers are telling them they want. Online eyeglass retailer Warby Parker has had great response to their recently opened stores, with a much higher average ticket and multiple transactions. Zappos is another recent entry into the bricks and mortar arena. Bonobos began selling to Nordstrom on a wholesale basis about a year ago, and now has 11 locations where customers can find the appropriate size, place an order and have it delivered home. It recently announced the opening of its own store in Manhattan.

These are just three examples, but they potentially set a strategy into motion for more Internet sellers to expand into bricks and mortar. Right now, the goal is market share—worry about the costs, margins and returns on investment later. For the consumer, a seamless transaction is important. The ability to ship from a store or warehouse can potentially offer the fastest delivery. This will also enable store management to manage inventory imbalances better.

Just as some speculated 15 years ago that bricks and mortar would be dead, now one has to wonder if Internet-only sellers represent a viable and profitable growth venue down the road?

Jeffrey B. Edelman is director of retail and consumer products advisory services for RSM, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory, including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at jeff.edelman@rsmus.com.

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