What’s the best way to solve falling profit margins at e-commerce companies like ASOS and Zalando? Traditional, brick-and-mortar stores—however unfashionable they might be, reports The Wall Street Journal.
Investors often pay over the odds for online-only retailers, presuming strong sales growth will boost profit margins once market share is higher and the benefits of scale kick in. However, the opposite is happening. Some of the biggest online retailers by market share are seeing declining profit margins while growing demand for ever-larger warehouses makes it harder to process orders efficiently.
Physical shops could help. Zara, for instance, uses its network of stores to offer a click-and-collect service, where one-third of its online orders are collected by customers in stores and two-thirds of all returns are also handed back in. That keeps delivery costs down and shores up an operating margin of around 18% at the brand’s parent.
Investors may not like the idea of taking on expensive leases, but the days of e-commerce avoiding the shopping mall altogether look numbered. Once old rent contracts roll off and poorly performing locations are closed, retailers’ store footprints will start looking more attractive.
