Profitable In-Store Products Move Turn into Losers when Sold On-Line and Delivered to Homes

Pretty much everyone understands the cost impact of on-line order fulfillment and shipping, and its devastating impact on the bottom line for etailers. One only has to look at the history of Amazon.com's inability to make a profit to see the challenges, and even though Amazon managed some profits in Q2, its overall profit margins were still very low.

The Wall Street Journal published an interesting story this week on how those fulfillment and shipping cost turn money making product sales at the store into money losers when orders are received on-line and the goods are delivered to a consumer's home.

The article focused on a make-up product from Christian Dior and some Tide laundry detergent from Procter & Gamble, and delivery to the somewhat remote Oklahoma City and an even more remote city of Magnum, OK, based on shipping from a DC in Atlanta, GA.

The financial impact for a retailers on the full transactions is illustrated in the graphic below.

On-Line Fulfillment and Shipping Costs Can Wreak Havoc on a Retailer's Bottom Line

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Not a pretty picture, as presented, with basically no profit or heavy losses for the on-line sales.

Now, there are all kinds of questions and issues here. Many/most/all retailers would ship from far closer sourcing points to Oklahoma than from Atlanta. Walmart could ship from a local store, for example, and likely it has a DC not too far away as well - though its store and DC density are of course unrivalled among retailers (except for Amazon on the DC side).

It's also not clear if order picking costs are included in the analysis, and how those are calculated.

So, SCDigest believes these numbers are exaggerated - but are likely directionally correct. The WSJ article notes many consumers in more remote/rural areas are now ordering staple products on-line - and often cutting back store visits, putting a double whammy on retailers.

And the article notes that the delivery loop that must be driven to serve Magnum, OK is a whopping 187 miles for one carrier. Ouch. Either the retailer or the carrier is paying for that - but not yet the consumer.

At some point, something will have to give - the question is when.

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