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The economics of eComm

26 October 2020

How has the pandemic affected the economics of e-commerce? Dave Berridge, secretary of the Automated Material Handling Systems Association (AMHSA), looks at the evolving retail landscape and the role of warehouse automation.

The pandemic has clearly accelerated trends that were underway before Covid-19 reared its ugly head. What might have been years of gradual change have been telescoped into a matter of months. With physical stores closed for all but essential goods, retail sales had to shift online and, once lockdown was eased and shops reopened, consumers remained cautious about visiting the High Street. 

According to figures from the Office for National Statistics, online spending as a proportion of all retail sales rose from 20% in February to a record 33% in May and remained just above 28% in August. The 'Amazon effect' – the rise of e-commerce over recent years – has now been underpinned by the global health crisis, with many consumers converted by the convenience and safety of online shopping being unlikely to shift back to bricks-and-mortar retail, even when a vaccine is in distribution. Digital market research specialist, eMarketer, predicts that online sales will account for 27.5% of total UK retail sales this year and will rise to almost a third by 2024. Within these figures, social shopping – purchases made via social media platforms – is on the rise, particularly among Gen Z consumers.

Winners and losers

There have clearly been winners and losers in retail. Companies selling food and pharmaceuticals were able to keep their stores open, but even these markets faced severe disruption and firms were forced to innovate. Grocery retailers had to ration their online delivery slots and expand their fulfilment and distribution capacity at breakneck speed, while some food wholesalers shifted to B2C sales. The fashion sector was probably worst hit, with those retailers without an eComm platform suffering very badly. Management consulting firm, McKinsey, estimates that revenues for the fashion industry globally in 2020 will fall by between 27 and 30 per cent year-on-year. 

The costs of online

The surge in online orders during the pandemic meant both pure plays and multichannel retailers had difficulty in meeting demand, forcing them to compromise on customer service levels and restructure their operations. Of course, as e-commerce volume rises, so does the volume of returns and it is clear that returns have serious cost implications for retailers – especially in the fashion sector, where the return rate averages 25% and can be as high as 45%.

Perhaps less well recognised, however, are the other costs of e-com for retailers. Before an order is even received, there is the cost of customer acquisition. The CFO of fashion brand, Quiz, was reported last year to have revealed that the cost to the firm of acquiring a new customer was around £7. This level of cost means that customer retention – and hence service levels – is paramount for success in retail.

Then there are the costs of warehousing, fulfilment (picking and packing) and delivery. With e-com's requirement for single-piece picking, these costs can be significant, even for established pure plays. ASOS, for example, spends 15.2% of its sales revenue on distribution, according to its 2019 annual report. Consequently, a retailer's choice of network model and distribution methods – including the degree of warehouse automation – can have a huge impact on the bottom line.

With the trend towards later order cut-off times and an increasing proportion of orders being for next day delivery, the pressure on distribution centres continues to rise. Automation can help retailers to increase efficiency, reduce costs and enhance customer service in their fulfilment operations. In particular, warehouse automation can help with consolidation of items into a single parcel, and ensuring that returns are available for resale as quickly as possible. At any point in time, it is estimated that as much as 10% of inventory is within the returns process and not available for sale.

Of course, automation can also help to reduce the level of returns in the first place, through increasing the accuracy of order picking. And it helps to mitigate the ongoing problem of labour shortages in the logistics sector that result from an ageing workforce, the relative unattractiveness of warehouse work and labour migration due to Brexit. This mitigation is important, given that e-commerce distribution is more labour-intensive than operations for store replenishment.

Partnerships and marketplaces 

With higher costs for eComm orders, retailers may turn to alternative models to achieve success. The development of partnerships is already a trend in retail – such as the tie-up between Ocado and M&S for food retail – and may well increase in popularity. Marketplaces are also in vogue and the success of major players in this field during the pandemic may entice others to switch to this model. For example, German pure play fashion retailer, Zalando, reported growth in net profit and revenue in the second quarter of 2020, as its partners stepped up activities on the Zalando platform. Another example is Next, which sells brands besides its own on its website and also fared better than most of its peers, helped by the fact that half its revenue came from online sales before Covid-19 hit.


A trend that may help multichannel retailers to compete with pure plays is micro-fulfilment. Also known as hyper-local distribution, this solution places inventory close to the consumer for speed and convenience of sales and returns. Retailers could section off parts of their High Street stores for use as micro-fulfilment centres (MFCs), with customers able to choose between home delivery and click-and-collect. 

Micro-fulfilment helps to mitigate the fixed costs that result from having a store network – such as rent and business rates – for multichannel retailers. Real estate costs (including staff and leases) typically account for some 30% of costs in multichannel retail.

The MFC model may be particularly attractive in grocery retail, where e-com is definitely the least profitable sales channel. Although grocers redeployed resources to meet online orders during the pandemic through in-store picking, this was a costly solution that helped to keep profitability flat despite the rise in sales. The MFC solution would enable the big supermarkets to capitalise on their nationwide real estate for click-and-collect services, overcoming the last-mile issue.

Survival of the fittest

It is clear that in these challenging times, retailers must adapt and innovate to survive. If not, the danger is that they will hit short-term profit targets simply by closing stores and cutting costs but they will not ensure their long-term survival. The retailers that accelerate their implementation of automation and digitalisation to maximise supply chain visibility and flexibility are the ones most likely to succeed.

For more information, visit www.amhsa.co.uk

Want to join AMHSA?

The Automated Material Handling Systems Association (AMHSA) represents over 60 of the automated logistics sector’s leading companies, which between them supply the overwhelming majority of the automated material handling equipment purchased in the UK. AMHSA is committed to promoting excellence in material handling automation in terms of solutions, after sales support, reliability and safety. Each year, AMHSA attends a number of key industry exhibitions and hosts a series of training workshops and networking events. The association also promotes its four-year apprenticeship programme – in association with car manufacturer, Toyota – to help recruit talent into the logistics sector. For information on the benefits of membership, please call Matthew Jones on 07517 610514 or visit www.amhsa.co.uk