What is the real story regarding E-Commerce and Bricks and Mortar Real Estate?
Globally, e-commerce is spoken about virtually everywhere. Anywhere that you can find an internet connection can link you to thousands of e-commerce sites. The press and statistics that one reads from China to Los Angeles and everywhere in between shout loudly about the massive growth of the e-commerce industry.
The US retail market in total is approximately a $5 trillion industry annually.
Today the online e-commerce retail industry in the US market accounts for less than $500 billion. Globally the e-commerce retail accounts for even less than the 10% market share of the retail market in the US.
Strangely, until recently not much discussion was about the profitability of this growing segment of the retail industry. Retail sales are generally a low margin business because of high overhead costs, competition, infrastructure, logistics, delivery costs and other factors. Reportedly according to statements by Amazon, their traditional online e-commerce business historically has a profit margin in the range of 3%.
We hear about the need for sheer scale of these e-commerce retailers to create the volumes of sales and the anticipated profits. To put the e-commerce profitability into context, a 2% to 3% profit is marginal, however in 2016 for Amazon the gross annual sales are estimated to be $100 billion. Amazon’s 2016 profit is expected to total approximately $2.7 billion from all sources.
For over 20 years since start up, Amazon has not making a regular profit as an organization. For example in 2012 and 2014 Amazon lost money which was due to reinvestment into many business related expenses including fulfillment centres which are warehouses where it processes customer orders, hardware, video streaming and cloud computing initiatives.
Amazingly Amazon has accumulated over 480 million products to sell in the US market. In the past sixteen months Amazon has added 485 thousand new products to the offering every day!
Amazon’s cloud computing business and web services division has recently become a significant profit centre for the company bolstering the overall profitability of the company. Although reportedly contributing only 7% of gross income to Amazon, the margins are very strong in the cloud computing business in the range of 25%. This new profit source for Amazon is now generating a substantial profit with operating income expected to be $2.88 billion in 2016 in this new division and profits of around $700 million.
Some other factors to consider in the e-commerce world are the costs for the ‘last mile’ delivery of the products from the warehouse to the customer. Online retailers typically lose money on the ‘last mile’ delivery costs to the final destination. Most online retailers also provide free pick up for returned goods that the customer changes his or her mind on. Returned goods will be an additional cost for the online retailers to bear.
Statistics indicate that an extraordinarily high number of goods ordered and delivered to the customers through e-commerce are returned. Some statistics indicate that up to 40% of all goods purchased on line are returned to the online retailer in the US. Online customers who become impulse buyers with a credit card may accumulate large volumes of unwanted purchases.
The future looks promising for online retailers who are able to achieve a large scale of operations even with a lower profit margin. Today in the e-commerce world large scale operations are the only way to prevail in this competitive retail marketplace.
By David Macadam