Mystery of the Missing Profits (Part 2)

Digital’s Promise and Reality – 2

McKinsey wrote in a recent story about the “retail reset”:

Consumers are increasingly shopping across channels, showing little loyalty, and expecting fast shipping and sustainable products. Meet today’s “zero consumers.”

Zero boundaries. Browsing in stores used to be one of the primary ways that shoppers came across new products. But the purchase journey is now more fragmented. Nearly half of consumers—and approximately 70 percent of millennials and Gen Zers—say they rely on social media, celebrities, and articles or blogs for purchase inspiration. And they’re shopping fluidly across channels.

Zero in the middle. Consumers are moving away from the middle of the market—they’re either scrimping or splurging. Total consumer share of wallet spent on mid-priced goods and services has declined almost 10 percent in the past five years.

Zero loyalty. About half of consumers reported switching brands in 2022, compared with only one-third in 2020. What’s more, about 90 percent said they’ll keep switching. Absent truly differentiated, exclusive offerings, the retailer will soon become a utility—just a means of distribution.

Zero patience. Consumers are much less willing to wait. Free standard shipping, once offered by only a few retailers, is fast becoming table stakes. Amazon’s delivery speed and the rise of “buy online, pick up in store” have raised consumers’ expectations: a plurality of customers today report that three-day shipping is the slowest they’ll tolerate before looking to other retailers.

The vision of an unbridled digital utopia has thus evolved. While the promises of global reach and direct customer interaction remain, they now come with the wisdom of experience. Brands must navigate a landscape that demands adaptability, strategic innovation, and an understanding that while the digital realm offers unparalleled opportunities, it also presents unique challenges. The dream of supernormal growth is still attainable, but it requires a more nuanced, multifaceted approach than initially envisioned.

The biggest challenge though has been the elusive nature of profits. Even as brands see revenue growth, true bottom-line sustainability is in question in not just native digital businesses but also in traditional brick-and-mortar brands venturing into the digital realm.

I asked ChatGPT to list out the top challenges faced by retail and ecommerce businesses which hurt profitability:

  1. High Customer Acquisition Cost (CAC): With increasing competition, the cost to acquire new customers, especially via online advertising platforms like Google and Facebook, has skyrocketed.
  2. Cart Abandonment: Many customers add products to their shopping carts but do not complete the purchase, leading to potential revenue loss.
  3. Thin Margins: Heavy discounts and promotions, often needed to attract customers, can erode profit margins.
  4. Inventory Management: Overstocking can lead to increased holding costs and potential obsolescence, while understocking can result in lost sales.
  5. Returns and Refunds: High return rates, especially in categories like fashion, can lead to logistical challenges and added costs.
  6. Shipping and Fulfilment Costs: As customers increasingly expect fast and free shipping, managing shipping costs while ensuring timely deliveries becomes challenging.
  7. Fraud: E-commerce businesses are susceptible to various types of fraud, including chargeback fraud and fake transactions.
  8. Platform Fees: Selling on third-party platforms or using certain payment gateways often comes with associated fees that can reduce profitability.
  9. Technology Investments: Continual investments in technology to improve user experience, backend operations, and cybersecurity can strain finances.
  10. Regulatory and Compliance Costs: Adhering to ever-evolving e-commerce regulations, data protection laws, and trade policies can add to operational costs.
  11. Competition: The ease of setting up e-commerce businesses means that niches can quickly become crowded, driving up costs and driving down prices.
  12. Customer Loyalty and Retention: With so many options available, retaining customers and fostering loyalty becomes difficult. Acquiring a new customer is often more expensive than retaining an existing one.
  13. Global Supply Chain Issues: Factors such as trade wars, pandemics, and geopolitical tensions can disrupt the supply chain, leading to delays and increased costs.
  14. Changing Consumer Behaviour: With trends evolving rapidly, staying relevant and catering to the changing needs of the consumer is a constant challenge.
  15. Physical Store Overheads: For omnichannel retailers, the overheads associated with maintaining physical stores, including rent, utilities, and staff salaries, can be significant.

Against this backdrop, how does a brand bridge the gap between the promise of the digital goldmine and the sobering reality of no or low profitability? In this series, we will discuss the mystery of the missing profits for digital consumer-facing businesses. More importantly, we’ll chart out a comprehensive roadmap for brands to harness the genuine potential of digital and eCommerce and build profipolies (profit monopolies) by driving exponential forever profitable growth.