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If I am a producer, manufacture or a reseller which is the more profitable way for me to sell my goods? Online through a platform such as Amazon or Boxed, or through a traditional retail store such as a supermarket or a fashion store. To obtain the answer the analysis will need to include the cost of logistics and fulfilment, online selling fees and physical store rent.
Hello! Thanks for your follow-up question about whether an online-only or mixed (online plus brick-and-mortar) strategy is the best way to sell goods. The short version is that the case for a mixed strategy is so compelling that even Amazon is opening physical stores. Below you will find a deep dive of my findings.
METHODOLOGY
Since you specifically asked about Amazon, we looked into that company's current strategy, profit margin, public financial statements, and so forth. We then looked at retail industry reports and articles regarding the forces driving online-only businesses vs. those pursuing a mixed strategy. We could not find any examples of a major retailer without the ability to either order or pre-order goods online. As a result, all of our comparisons are of online-only (with Amazon being our chief example) vs. retailers using both online and physical stores to sell their goods.
RESULTS
Amazon does not publish its logistical expenses such as shipping costs, return costs, etc. in its public financial statements. As a result, we cannot give exact dollar amounts on these costs. We can, on the other hand, look at Amazon's gross profits in comparison to retailers who still maintain brick-and-mortar stores. Interestingly, despite theoretically having less overhead due to not having to maintain storefronts, Amazon's gross profit margin for 2016 was in fourth place at 35.09%, behind Kohl's (36.07%), JC Penny (36.06%) and Nordstrom (36.02%).
Perhaps more tellingly, Amazon has recently opened brick-and-mortar stores of its own. Studies have shown that while 85% of shoppers will conduct online research before making a purchase, 70% prefer to shop in a physical store even among Millennials. In fact, Target reports that while 75% of its customers start shopping on mobile devices, their physical stores still account for over 90% of their sales. This coincides with retail sales in the US in general.
It turns out that there are other benefits to having a physical store instead of a merely online one. While e-commerce is growing, physical stores are still more profitable and have higher conversion rates; in fact, the profit margin for online sales is actually shrinking. This is due in part to an increasing demand for free shipping, concerns about the difficulty of the return process, and the desire to do research in a physical store. Amazon's 2nd quarter profits were sharply down in 2017 despite a 25% increase in sales. This was due to a 36% increase in shipping costs and a 41% increase in fulfillment costs.
In addition, it is extraordinarily difficult and expensive to stand out in the current market of over 800,000 online retailers. For example, Macy's spent $6.4 million for paid keyword search listings in just the first quarter of 2015. Finally, there are small but measurable revenue boosters in a physical store: About 27% of customers will make an impulse buy at the register, accounting for 7% of a store's revenue.
Between the loss of visibility, the hidden logistical costs, and the loss of impulse purchases all eating into the profits of an online-only business, it is small wonder that even Amazon is starting to open up physical locations.
CONCLUSION
To wrap it up, having both an online store and a physical store seems to be the best strategy for pursuing retail profits. Despite the apparent reduced overhead of operating only online, the cost of advertising, loss of revenue, and increased logistical costs have led most retailers--Amazon included--to continue to maintain their physical retail spaces alongside their web stores.
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