Online retailers betray limits of the internet

Online retailers are looking more like their passé predecessors. Websites including Amazon and furniture seller Made.com are opening physical showrooms so punters can look before they buy online. Being footloose remains better than having old retail’s cost base. But new entrants wouldn’t be hiking their own expenses unless they had to.

Tech giant Amazon is leading the charge. Founder Jeff Bezos is reportedly rolling out a fleet of up to 400 bricks and mortar stores to sell books, and launched the company’s first 1,800 square foot grocery shop in Seattle in December. Five online brands opened physical stores in the UK last year, according to property group Savills.

The new showrooms are appearing partly for branding purposes and partly because shoppers still like to lay their hands on certain products before buying. But the shift is also about online retailers’ costs: if a customer has road tested a product in store, they are less likely to send it back. Online shoppers typically return 30 percent of purchases, a big reason why web retailers like Asos run on thin operating margins of 4 percent.

Physical shops are also a necessary evil for any retailer offering click-and-collect orders, one of the fastest-growing and more lucrative sectors of online sales, where customers buy a product on the web but pick it up in a nearby store. That circumvents web retailers’ Achilles heel – the profit-sapping “last mile” of delivery from a local warehouse to a customer’s home that counts for 28 percent of total delivery costs, according to logistics group Bringg. 

The need to cut costs in turn stems from the fact that online sales are growing at a less breakneck pace. Annual online revenue growth will slow to 4.8 percent in 2022, against just over 14 percent a decade earlier, according to GlobalData forecasts. Websites will avoid the same fate as old-school predecessors, now saddled with too many stores and spiraling overheads. But if online sales are to progress beyond their current 15 percent market share, an overtly asset-light approach to retail may itself be an unsustainable fad.