Shopping For Data: The Truth Behind Online Costs

The chatter around the diminishing future of brick and mortar retail got served up again in a misleading piece on the costs of doing business online.

This time, the narrative focuses on failing brick and mortar chains and their digital resurrection in The Wall Street Journal’s “Beyond Bankruptcy: How Failed Stores Come Back Online.” The article includes an infographic that slices up a pair of jeans to show the costs and profit for a pair sold in stores versus online. However, the math doesn’t add up, and the headline should actually read “Why Online Retailers Need Physical Spaces to be Profitable.”

Here’s why.

While the bankrupt labels cited in the Wall Street Journal may be contending with different costs compared to running physical stores, that doesn’t mean it’s cheaper to go online. A recent analysis by AlixPartners for CNBC showed that even when accounting for the legacy costs associated with online retailers, in-store purchases yielded higher profits  than those of online shopping purchases– shipping from distribution centers, picking up in stores, and shipping from stores.

The analysis of the marketing spend is also off. Brick and mortar stores already use their physical spaces for customer acquisition. Stores are billboards. As AlixPartners contends, the customer acquisition costs for buy-online, ship-from­-distribution-center models include overhead, IT and marketing costs that can make distribution costs four times higher than in-store methods.

The  infographic is short on other details, too. The itemized cost for the offline pair of jeans includes payroll, but for the online pair, “operating costs” are lumped together and account for $30 of the $150 price tag on the fictional pair of jeans. Can an online retailer cover payroll for warehouse staff, pay benefits, cover machinery acquisition and depreciation, meet capital expenses and still come out ahead with those numbers? That seems doubtful.

The questionable math shows up at the same time that a slew of online brands have realized they need physical spaces to drive profitability and increase relevance in the retail mix. Companies like Warby Parker, thredUP and UNTUCKit are among a growing number of primarily e-commerce brands that have realized they can’t do without brick and mortar. Even Amazon is opening physical storesas the lines between online and offline retail continue to converge.

These days, you can find just about anything online. Companies are smart to respond to the trend. But those who claim that clicking alone is cheaper than visiting stores haven’t read the fine print.

[“Source-forbes”]