If only pure-plays had stores

Hardly a week goes by without some news of a pure-play about to open a physical store or rumours circlulating that a big-gun of the online world is investigating joining the multi-channel fraternity through adding bricks and mortar.

This has been particularly prevalent in fashion and the reason is because the online-only guys have significantly lower operating margins compared with their multi-channel rivals. Consider that Next enjoys a 20.1% margin versus a mere 4.5% at Asos, with others coming in between this pairing include H&M at 16.9%, Primark 13.4%, Arcadia Group 11.7% and Boohoo.com 8.5%.

Despite not having to foot the myriad of costs associated with running a physical store estate the pure-plays are clearly hindered by their more expensive operating models. According to research by the Fung Business Intelligence Centre this is down to a number of factors.

There is clearly the inability to use stores as brand-building entities that can affect customers’ perceptions of the business and therefore make it tougher for them to trade on anything other than price. The premium end of the market is effectively closed off to them. Without stores, the necessary scale to bump-up the margins can also be difficult to achieve.

But the real kick in the teeth to their margins is fulfillment. Often they have to bear the brunt of offering free (or minimal cost) delivery whereas multi-channel retailers can look to push customers to collect goods in-store. Even here there is some cost as evidenced by John Lewis now charging for click & collect orders below £30 (see earlier Retail Insider story here).

And then there is the big issue of return rates. Pure-plays suffer from significantly higher rates of returned goods than their multi-channel counterparts. The typical figure is around 30% for the likes of Asos and can be as high as 50% for some companies like Zalando. Compare this with the 15%-20% typical for those retailers who have stores.

There is no escaping the fact that dealing with returns is a real costly headache. Not only is there an expectation that customers can return goods through the post free-of-charge but there is also the cost of processing these unwanted items. In contrast, multi-channel retailers can have shoppers return their goods to its stores thereby mitigating the costs to some extent.

It’s clear that a store estate would help boost pure-play’s margins but the cost of building an estate – if you don’t already own any outlets at all – would be insurmountable for almost all businesses. Even Amazon would have a tough time pulling off that one.

Hence we have pop-ups, joint-ventures, and lockers for collection. These are all options that pure-plays are using to gain some form of physical property without actually opening their own permanent outlets. It is inevitable that we will continue to see interesting innovations in this area.

Glynn Davis, editor, Retail Insider

K3 Retail deliver multi-channel solutions that enable retailers to create joined up shopping experiences for their customers whether they choose to buy on-line, direct, in-store or via mobile. It has over 20 years’ experience delivering award winning solutions, to more than 175 internationally recognised retail brands