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Continuing shift towards online further impacts retail profit margins

Full report: The True Cost of Online Retail

Continuing shift towards online further impacts retail profit margins

3 minute read

The impact of Covid-19 will accelerate the migration towards online well beyond the step-change European markets have already experienced. Our research has shown that the shift towards online is a significant contributing factor to dwindling profit margins, revealing an inverse correlation between a rise in the proportion of online sales and a fall in pre-tax profit margins over the last decade.

This is the fourth of five articles based on a wider piece of research on the true cost of the shift to online by Retail Economics and Alvarez and Marsal.

Indeed, pure online retailers typically operate on considerably lower margins than multi-channel and brick-and-mortar business models. Our analysis shows average pre-tax profit margins for pure online retailers across the key European markets analysed resided at 1.4%, compared with 5.4% for the total industry. This reflects the difference in cost structures, business models and the price sensitivity of consumers, where transparency in price, service and quality places further downward pressure on margins. As penetration rates rise across Europe, many retailers will undergo a period of transition where profit margins come under intense pressure as operating models and cost structures are put to the test.


Profit margins fall as penetration rates rise - Penetration Rate (%)

Retail profit margins fall as penetration rates rise - Retail Economics

Source: Company reports, Retail Economics and Alvarez & Marsal analysis (includes the U.K., Spain, Italy, France, Germany and Switzerland)


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This work forms part of a wider piece of research and is a downloadable in pdf format


Scenarios to 2025

There has been a step-change in the proportion of online sales with further growth to come. Across Europe, the impact of Covid-19 has caused step-changes in the proportion of online sales. By 2025, more than 20% of retail sales across key European markets are forecast to shift online. The UK is expected to be the most deeply penetrated market, with more than a third (33.5%) of sales expected to occur online by 2025. This will contribute to a reduction in pre-tax profit margins from 5.5% in 2019/20 to just 3.2% by 2024/25. However, all European markets are poised to see a significant rise in the penetration of online over the forecast period with Italy expecting to see the fastest growth – rising on average 13.5% each year.

"COVID-19 has accelerated the online shift and profit margin erosion. Our model forecasts that an acceleration in online growth will lead to profit margins falling to 3.2% by 2025 for the six European countries analysed, compared with 3.7% for a ‘no COVID-19 impact’ scenario".

But the shift to online is inevitable, and retailers will need to adapt and adjust to the changes it brings if they want to prevent further erosion of their profit margins. To find out how retailers can truly thrive in a digital-first environment, please click here to read the next article in the series.

Things to do now

Explore the next retail insight article in this series here.

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Found this short article interesting?

This short insight article forms part of a thought leadership report entitled “The True Cost of Online”. It was produced by Retail Economics in partnership with Alvarez & Marsal and looks at the impact of Covid-19 across Europe and the accelerating shift to the online retail channel.

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