Study Cautions Retailers To Find the Right Balance in Allocating Capital Spending between E-commerce and Stores

Retail industry news delivered directly to you. Subscribe to Retail-Insider.

A new study by HRC Advisory cautions North American retailers against investing too high a percentage of their capital spending on e-commerce, at the expense of not updating/ modernising aging store fleets. The study noted that for most Canadian retailers, brick and mortar operations comprise 85-95% of their total company sales and virtually all of their operating earnings. HRC Advisory examined detailed data for more than 40 national chains and found that online sales are less profitable than store sales, with online sales adding as much as three percentage points to a retailer’s cost structure when factoring in fulfillment costs, free returns, the high cost of digital marketing and IT costs, and associated costs of re-selling/refurbishing product from online returns.

The new study, led by HRC Advisory CEO Antony Karabus, suggests that Canadian retailers should consider how much and how they invest in online versus brick-and-mortar, particularly in light of four key factors:

  • The rapid growth of pure play online retailers such as Amazon and Wayfair, which are taking significant market share from traditional retailers, 
  • The high variable cost of enabling and fulfilling online orders,
  • Declining productivity at suburban and other non-prime brick-and-mortar retail locations for many retail chains, and
  • The increased occupancy rates at the leading malls as the competition for prime space grows in those locations from international and US entrants.  

Mr. Karabus’ report on specialty retailers and e-commerce follows a related study in April of 2016, where HRC Advisory examined department stores and specialty retailers, revealing that online sales had eroded both sales of physical stores and company profitability — and how Canadian retailers might learn from missteps made in the US.  

Costs to successfully operate Canadian e-commerce can be substantial, particularly given this country’s vast geography and limited economical shipping options. Costs to ship product, not to mention fulfillment time/costs and costs to refurbish returned product into a resalable state and at regular margins, are creating a potentially unsustainable situation for many retailers in Canada — particularly smaller businesses, according to Mr. Karabus. He noted that some Canadian retailers have recently been “playing catch up with the US” by investing heavily to enable e-commerce capabilities, while under-investing in their more profitable brick and mortar stores. At first glance, this is understandable according to Mr. Karabus, given:

  • The demands of consumers wishing to interact with retailers “at any time and any way they want to”, 
  • The rapid growth of the e-commerce channel, and
  • Amazon’s continued aggressive investment in its distribution infrastructure in Canada in the same fashion as it is investing globally, thus raising the bar for traditional retailers.

The study notes that Amazon continues to increase its market share and expand into new categories, with Mr. Karabus noting that Amazon’s merchandise sales rose 32% in North America in the most recent quarter, on top of a 31% gain in the same period last year. This contrasts with other retailers examined, with specialty retailers posting a 9% gain from their online channel last year, and department stores achieving a 19% increase from their online operations during the same year. Although these gains are significant, these growth rates have declined from prior years, indicating that the online channel may be beginning to trend towards maturity — a potential risk for retailers putting all of their eggs into the e-commerce basket. 

At the same time, some specialty retailers continue to add new physical stores, which in certain situations could prove to be less productive when considering that there’s only so much retail sales to go around. The study notes that the “combination of so many physical store additions plus the shift to online resulted in these chains experiencing a median 6% decline in sales per store between 2011 and 2015, with 2015 itself reflecting a 4% decline in sales per store”. While adding store capacity into new geographical areas is a positive, over-investment into both physical stores and the online channel could further erode a retailer’s bottom line, noted Mr. Karabus.  

Other retailers continue to close unprofitable stores in order to right-size their infrastructure in the light of the above factors. The HRC study notes that about 40% of North American retailers have “fine-tuned the size of their store fleets to better cope with the sales shift from physical stores to the online channel, with recent announcements of store closures coming from Le ChateauKenneth ColeAbercrombie & FitchGapAeropostaleSears and numerous others. 

There’s hope for Canadian retailers looking to effectively and profitably allocate capital and operating expenditures, with HRC Advisory’s Mr. Karabus recommending the following five factors to ensure that retailers have the right economic model to profitability, given the rapidly changing retail environment: 

  1. Decide which omni-channel capabilities will be most valued by their specific customer, rather than investing in all capabilities,
  2. Design and prioritize important decisions such as price-matching, free shipping, free returns, dedicated fulfillment centers and inventory visibility,
  3. Establish a methodology to better exploit data insights to drive customer-focused decisions,
  4. Determine how to re-think and enhance their real estate decisions in the light of the channel sales productivity issues, and
  5. Ensure store, supply chain and home office infrastructure cost is properly sized and structured to profitably serve customers and drive shareholder returns. 

In summary, Mr. Karabus advises retailers to find the right balance between investing in their various growth strategies and in protecting their base of older profitable stores to mitigate the inevitable decline in productivity as existing stores age and become less attractive in the face of increased competition. Nordstrom and Saks Fifth Avenue‘s arrival in Canada have raised the bar for the better and luxury sector, he noted, with  Hudson’s BayHarry Rosen and Holt Renfrew having upgraded many of their stores in the prime Canadian shopping locations. 

HRC Advisory has assisted numerous retail chains to adapt their business operations to operate more profitably in this complex retail environment. For more information on HRC Advisory’s study, visit: Adapting the Traditional Retail Economic Model to Profitably Compete

*Custom content. For more information, contact



Please enter your comment!
Please enter your name here