’Sales is vanity, profit is sanity’ goes that old retail idiom. But why does that not apply to the world of online delivery?
Retailers are giving away all-important margin by offering cut price or even free delivery in order to land grab in the growing world of online.
However, that world is pretty big now – 15% of retail sales are now made online. Is it right to still prioritise sales over profits?
Some retailers are taking a stand. Last year, Tesco added a £3 surcharge on top of existing delivery charge on orders under £40 and John Lewis introduced a £2 charge for click-and-collect orders under £30.
Many retailers secretly applauded these retailing giants for making a sensible move. However, we’re yet to see a flood of retailers following suit.
Is free delivery sustainable?
It’s of course understandable. To introduce a charge for delivery when competitors give it away for free is a risky move and may cause some shoppers to abandon their basket and head to rival websites.
However, offering free delivery is unsustainable. Analyst Bernstein estimated last year that margins from Tesco’s online sales are 1%, compared with 2.5% for store based sales. That’s at Tesco; the UK’s second biggest online retailer with sales of £2.9bn in 2014/15, which will benefit from enormous economies of scale when it comes to fulfilment.
At a time when retailers are facing deflation and increased wage bills thanks to the introduction of the national living wage, can anyone afford this self-imposed margin hit?
It feels like we’re reaching a tipping point when retail needs to collectively take the tough, but necessary, decision to pass the cost of delivery on to consumers. All will be watching to see which is the next business to take the brave decision to follow Tesco and John Lewis’ lead.