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Drivers of the Decline of America's Brand of E-Commerce

Increased complications and costs associated with same- and next-day deliveries, and swift and no-questions-asked returns, are causing customers to rethink their online purchasing activities.

 

Last week we exposed the dark side of America’s version of e-commerce. The adverse impacts are amplified once society begins to expect same- and next-day deliveries, at nominal costs, and to be able to freely return those items with no questions asked. When those two requirements aren’t met, according to the research, customers are less excited to follow through with online transactions.


America’s retailers, often with the assistance of governments and investors, have been heavily subsidizing rapid and cheap deliveries. They do this because they understand that if they didn’t, they would lose online shoppers. The same principles apply to returns.


America’s version of e-commerce is a race to the bottom and a long overdue correction is presently underway. Shipping and return processing costs are rapidly increasing, and shareholders and investors are now demanding profits from online transactions. As more costs are passed on to online shopping addicts, these customers are starting to feel like victims in a classic bait-and-switch.

 
 
Cheap Same- and Next-Day Deliveries

An Oracle consumer research study found that 74% of online shoppers want their orders delivered in one to five days, and 80% become angry when orders don’t arrive when promised. Half of the respondents said fast delivery is an important factor in whether they place an online order in the first place.


It’s clear that when a country’s major retailer offers same- and next-day deliveries, e-commerce explodes. In 2010, Amazon announced same- and next-day shipping for its Amazon Prime members. Once the online customer in America expected rapid and cheap deliveries, other retailers either had to invest in their delivery and order fulfillment infrastructure, or risk losing sales.


Amazon’s Growth Since Prime Shipping Introduced
Amazon’s Growth Since Prime Shipping Introduced

In Europe, same- and next-day delivery emerged in 2014 when Amazon announced free 2-day cross-border delivery across Europe. In Asia, in 2014 when Alibaba launched same- or next-day delivery networks throughout China. In Latin America, in 2018 when Mercado Libre announced same- or next-day delivery. WIND Ventures, using Pitchbook data, created the following charts which show the relationship to e-commerce sales and rapid order fulfillment.





E-commerce companies are in a Catch-22. On one hand, they must deliver cheaply same- and next-day deliveries in order to be competitive. If the product takes too long to arrive, or if delivery costs are too great, the customer will choose another option. This is why retailers subsidize shipments. A study by the Capgemini Institution found that only 80% of the costs to deliver a package are passed on to online purchasers. Retail is a low margin business, and these subsidies are now untenable.


The inconvenient truth is that e-commerce transactions are rarely profitable for the retailer. Amazon loses money on most online orders, and in 2022 Amazon’s North American retail business had an operating margin of -0.5%. Amazon generates its profits from other ventures. AWS in 2022 was responsible for 213.98% of Amazon’s operating income, yet it only generated 16.2% of Amazon’s revenues. In 2021, the Amazon advertising business generated $31 billion with margins approaching 75%.



The online grocery delivery fad takes the prize for delivering the worst margins to retailers and investors.


Source: The Financial Times and Bain & Co.
 
Free and easy returns

A PowerReviews survey of 9,286 adults in America found that online shoppers would be less likely to shop online on a site that ended free returns. 93% said they would likely cut off a brand or retailer that began charging them to return items.


Experts estimate that online orders are returned at a rate 3x that of purchases made in a store. Online returns cost retailers about $218 billion annually and ties up around 20% of their inventory in the returns process. Estimates are that each online return costs the retailer $10 - $20, excluding freight charges. One study found that a return on average costs 66% of the price of the product itself.


To stop the bleeding, retailers are modifying their online return policies. Zara now charges $3.95 to return items through the mail. J-Crew charges more at $7.50, and Dillard’s even more at almost $10 per return.


Online returns are more costly to process, and as discussed last week, far more common than when purchases are made more sustainably and ethically in a store. Online orders are more likely to be damaged in the delivery process, and the customer isn’t able to make a physical inspection of the items prior to purchasing. Fashion fits vary across brands and some online purchasers will purchase three or more sizes, of each color, with the intent to only keep the one that fits the best.


 
The Happy Ending

Nobody would argue that e-commerce is going away. It’s a fantastic tool that serves a purpose, particularly to purchase difficult to find and specialty items. In these cases, paying shipping and return fees are tolerated.


A healthier balance is emerging between online and in-store purchases. Beneficiaries of the currently unsustainable system, such as Amazon, will one day appreciate that they no longer have to consistently and magically pull rabbits from a hat to keep their machine marching forward.


Until the system corrects itself, there are things you can do now to reduce the harmful impacts of the e-commerce purchases you make:

  • Purchase multiple items at once. Most online shoppers purchase few items at a time and make many orders. Conversely, brick and mortar shopping generally results in fuller grocery carts and shopping bags, resulting in a more efficient transactions.

  • Ease off unrealistic demands for same- and next-day delivery. More than half of the adverse consequences of e-commerce can be traced back to last-mile delivery logistics associated with same- and next-day deliveries. Five-day to two-week delivery expectations will result in a healthier e-commerce ecosystem for all stakeholders.

  • Support local online retailers of local products. E-commerce done in this way is a positive for all parties and may actually be preferable to eliminating e-commerce transactions all together.

  • Make fewer returns. High return rates for e-commerce transactions are a significant cause of the negative consequences borne by societies from e-commerce activities. Research the product, try to kick the tires prior to making the purchase, and resist the urge to return the product if it doesn’t meet your every expectation.

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