Stores key part of online retail model: HBC boss
‘Amazon makes no money on sale of physical goods,’ Jerry Storch argues
“All channel” is the term Jerry Storch has coined for the future of retail, and the Hudson’s Bay Co. chief executive wants people to know why online retailers aren’t making much money: The business model is horrendously inefficient.
Storch, whose retail resume includes seven years as CEO of Toys R Us, 13 years as vice-chair at Target Corp. and more than a decade as a principal at management consultancy McKinsey & Co., said Tuesday it all comes down to simple economics: It’s much cheaper for consumers to serve as the end of the retail supply chain by buying a product at a bricks-and-mortar store rather than having a retailer shoulder the burden, even if that retailer does not have the overhead costs of a store.
That is because there is a “huge” cost penalty in home delivery, Storch told a full audience at the Retail Council of Canada’s Store 2015 conference, saying direct-tohome retail costs are three times higher than traditional classic retail costs.
The Internet “is a great place to sell something enormously expensive, because then the freight cost really isn’t a big deal,” he said. E-retail is not a great way to sell “inexpensive widgets” because logistics costs overwhelm margins.
So why are Internet retailers such as Amazon trying to charge consumers less than bricks-andmortar retailers for goods?
“It’s because they are not making any money,” Storch told the conference. “Quarter after quarter, Amazon makes no money on the sale of physical goods.”
That makes stores a critical part of the Internet era — evidenced by the fact that many online retailers are now opening stores.
“The classic Amazonian model is really hard to do and make any money at the end of the day. You are picking individual orders and separating inventory and you are shipping little tiny things to people’s homes.”
As a key force behind the launch of Target.com, Storch was hired to run HBC in December to help the retailer make an aggressive push into digital retailing.
But in an interview after his presentation, Storch said he believes the future of retail lies in the successful convergence of selling modes, hence the “all channel” designation — a moniker that illustrates individual arms including mobile, Internet and retail storefronts as distinct pieces of the retail matrix — rather than as parts of one whole “omnichannel.”
His remarks came on the same day as a report from the retail council and Forrester that predicts online retail will grow at a compound annual rate of 12.3 per cent during the next five years to reach $39.9 billion in sales by 2019. The number of Canadian Internet users who buy online is expected to grow to 63.6 per cent in 2019 from 59.7 per cent in 2014. Regardless, online spending in Canada currently accounts for just six per cent of retail sales, lagging the United States at nine per cent.
HBC’s digital advantage over a retailer such as Walmart Canada could be that the latter — which until March offered free shipping with no minimum in Canada — sells an abundance of lower-margin, lower-ticket goods than HBC.
“For Walmart, there is no doubt to me that it is margin-diminishing, if it is lower ticket,” Storch said. “I am sure over time as retailers get better I expect the margins to equalize across various channels, but they will never be identical, and it will be a constant process of managing each customer and each transaction and trying to optimize the margin rate.”
Several retailers attempting to navigate a consumer migration to online buying have shrunk their square footage and opened up smaller format stores, including music retailer HMV, electronics chain Best Buy and office supply retailer Staples. But Storch said HBC does not have an excess of square footage, nor is it contemplating opening up smaller or alternative store formats.
“I never rule out anything creative. I think that’s a fascinating idea, but it would be speculation,” he said.