5 Financial Impacts of E-commerce Every Retail CFO Should be Aware of
Before COVID-19, most brands weren’t shouldering the real cost of fulfillment. Products went primarily from the brand, to the retailer, to the customer. DTC and marketplace sales were seen as more of an afterthought, but that was okay because brick and mortar still moved the majority of sales volume.Post-COVID retail looks very different. Consumer behavior has shifted to favor a more e-commerce dominant shopping experience, and now a larger share of products are going from the brand directly to the customer — or from the brand, to marketplaces like Amazon, to the customer.In both cases, brands are feeling the true cost of fulfillment. These costs hit several areas of a brand’s finances hardest.
Shipping
Shipping is one of the greatest costs associated with post-COVID retail. Whereas before products could be loaded onto pallets and sent to stores, e-commerce requires products to be shipped directly to the customer (DTC) — or to a fulfillment center and then to the customer (Amazon, Walmart, and similar marketplaces).
DTC is the more costly of the two. When fulfilling through DTC, brands have to ship hundreds of products separately instead of in one bulk shipment. As DTC volume increases, so does the cost of shipping.
Injecting inventory into marketplaces can also become costly. Amazon, for example, has strict receiving guidelines for inventory being injected into FBA. If inventory shipments aren’t prepped accordingly, brands face preparation fees or even worse: refusals, returns, or repackaging at their expense.
Packaging
E-commerce has different packaging needs than brick and mortar. Each product needs to be individually packaged for shipment, which comes at a cost of both materials and labor. Packaging also needs to be more durable than in brick-and-mortar retail.
The standard process for brick and mortar involves the product going from a manufacturer, to a packing line, then shipped to a store. The product essentially has only four to five touchpoints.
On the other hand, fulfillment via DTC and Amazon can put a product through 25+ touchpoints on its journey to the customer, so e-commerce packaging needs to be both durable and efficient.
Brand protection (gross margin)
The online world of retail is the wild west in a lot of ways. There aren’t any rules or regulations that obligate online sellers to follow things like brand guidelines or MAP policies. Unless brands have made efforts towards brand protection, there’s a good chance that their products can be found online below MAP.
Before COVID, MAP compliance issues mostly hurt brands through the erosion of brick-and-mortar relationships. Retailers would get undercut by online sellers, and if it happened enough, they might stop ordering inventory from the brand. Post COVID, MAP compliance issues have a more direct effect on brands. Brands now have to compete with problematic sellers underpricing their products, which can cause gross margin to shrink until some sort of brand protection strategy goes into place.
Marketplace expenses
Marketplaces like Amazon give brands access to millions of consumers, but that access comes at a cost. Fees, commission, storage — each of these expenses are part of doing business on Amazon. Storage can end up being one of the more costly expenses for brands. Amazon charges storage rates according to the size of the product, so the larger the product, the more expensive the storage rate.
Slippage can be another issue brands face when sending inventory to Amazon or other marketplaces. Here’s an anecdotal scenario: Ruffwear — a brand that sells premium dog harnesses — sends 1000 dog harnesses to Amazon. Amazon only receives 900 dog harnesses. What happened to the missing 100 dog harnesses?
Good question, and it’s up to the brand to find the answer. Slippage like this happens from time to time, making it necessary for brands to closely track their inventory to ensure everything gets received correctly. Depending on the volume a brand is sending to Amazon, tracking inventory and resolving discrepancies could be one-to-several peoples’ full-time jobs.
Advertising
Advertising isn’t a new expense for brands, but it’s becoming a much larger one. Online advertising is getting more competitive as more brands fight for consumer attention. Depending on the platform (Google Ads, Amazon Advertising, Facebook, Instagram, Taboola, etc) costs of advertising are notorious for overshooting budgets and underperforming expectations, which is why it’s so important to have a team with a high level of expertise. Managed correctly, brands will watch their ad expense evolve into a profit driver.
For brands handling advertising in-house, there’s also the learning curve to consider. Brands that are new to certain platforms have a steep and expensive climb to catch up to their competitors. Advertising doesn’t become efficient overnight, especially if in-house teams are trying to learn as they go.
The solution to rising costs: economies of scale
Consider the banana. Bananas only grow in certain climates but are available in almost every US grocery store at a low price. Economies of scale makes this possible. One region focuses on growing bananas while another focuses on producing something else. At the end of the day, there should be enough of everything to go around.
The same principle applies to e-commerce and fulfillment. In many cases, brands aren’t best-suited to take on the cost of online business. Instead, these costs can be more efficiently outsourced to a retail partner that solely focuses on e-commerce and fulfillment.
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