Home Retailers: Who’s Winning or Moving in the Right Direction?

By Cristina Fernández

The evolution from brick-and-mortar to omnichannel retailing is in a state of constant change as consumers embrace new technologies that enhance the shopping experience and add convenience. Home retailers find themselves in varying stages of the transition, with some far along in the journey, while others are just beginning.

For most retailers, the launch of e-commerce pressures profitability in the early years, as investments are made in people and technology and shipping costs rise. However, sales are captured that would otherwise be lost. Over time, as online sales grow, scale can be achieved and incremental expenses absorbed, driving improved profitability.

Below is a list of home retailers at different stages of the omnichannel transition and how it has affected their profitability:

EARLY STAGE
Bed Bath & Beyond: The retailer generates approximately 5 percent of annual sales from e-commerce. The retailer has found itself in a challenging situation in recent years as many of the branded goods it sells are found at other retailers and consumers have become savvy in comparing prices. This, along with investments in technology and distribution centers to support e-commerce, has caused the company’s operating margin to contract to approximately 9 percent in 2016 from 16.5 percent in 2011. Positively, online sales over the past year have risen more than 20 percent fueled by buy-online-pick-up-in-store and a reduced free shipping threshold of $29.

Ethan Allen: The company derives less than 5 percent of sales from e-commerce and in recent years has upgraded its website, expanded digital marketing, and added online capabilities such as chat and a gift registry. Different from Bed Bath & Beyond, Ethan Allen had a history of delivering custom-made products directly to consumers, which has allowed it to grow online sales while preserving profitability.

MID-STAGE
Wayfair: The online-only retailer has gained a disproportionate share of the market and reached roughly $3 billion in sales in the United States in 2016. Its heavy investments, however, have led to profitability being just break-even. Wayfair surpasses the competition when it comes to the breadth of products offered online (over 7 million) and the ease of search. Some products also qualify for two-day free shipping, as the company is following in the footsteps of Amazon and housing third-party products in its warehouses.

Pier 1 Imports: Strong growth in e-commerce has helped to partially offset a decline in store traffic in recent years. Pier 1 can serve as a case study as it launched e-commerce in 2012. Since then, higher investments, together with some execution missteps, have resulted in operating margin compression to approximately 4 percent from 11.5 percent in 2012. Now that e-commerce has reached 20 percent of annual sales, or $360 million, Pier 1 is finding ways to be more efficient with its supply chain and lower inventory costs, which should drive better profitability going forward.

LATE STAGE
Williams-Sonoma: The company generated more than $2.6 billion, or approximately 51 percent, of sales online in 2016 as it was early to the game. The profit margins of its e-commerce segment is also more than twice that of its brick-and-mortar stores at 23 percent. Some of Williams-Sonoma’s competitive advantages include the ability to digitally market to 60 million-plus customers in its database and a large online-only merchandise assortment. In 2017, areas of investment in e-commerce include better search functionality, more videos and 3D visualization tools, and a test of buy-online-pick-up-in-store.

 

KEY TAKEAWAYS

  • An online presence allows retailers to capture sales that would otherwise be lost to competitors.
  • The launch of e-commerce tends to pressure profitability in the early years as investments are made.
  • As scale is achieved, profitability should improve.
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HFN Staff | News & Commentary

HFN provides detailed information on the key home classifications: Housewares, Tabletop, Floor Covering & Rugs, Furniture, Home Textiles, Lighting, Home Decor, Mattresses & Bedding, Gifts, Major Appliances and Consumer Electronics as well as Business, Finance and Retail.

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