Rising costs cut e-tailer profit

UK online retail start-ups are running with operating losses at between 35 and 45 per cent of Internet sales, with the haemorrhaging of cash likely to continue this year, according to a report by London-based e-commerce consultancy E-Insight.

The estimated &£200m online spend by UK consumers over Christmas is well up on last year, but may have resulted in losses worth as much as &£75m, E-Insight suggests.

A “mystery shopping” survey by the consultancy in the run-up to Christmas revealed only two-thirds of online orders were fulfilled, creating potential disillusionment for UK consumers with the concept of Web-based shopping.

Escalating marketing and distribution costs – prompted by the UK online retailing “land-grab” – are crippling short-term prospects, despite healthy gross margins on sales in many product categories, according to chief executive Alan Taylor. “It will get worse before it gets better, despite the quadrupling of e-commerce spend in 2000.

“We still can’t see many retailers in the UK or Europe getting anywhere near break-even from their e-commerce activities. The mature earnings model for UK and European e-commerce will take considerable investor patience. Strategies to drive scale and efficiency will be essential.”

In online retailing categories such as CDs, software and clothing, E-Insight estimates retailers are generating average gross margins of 30 per cent. But high overheads associated with stock loss, mark-downs, distribution, marketing, database development and customer service are absorbing up to 75 per cent of sales, says Taylor.

“Entirely new earnings models have to emerge for e-business in 2000, involving new methods of attracting site users, generating customer orders, delivering goods and working jointly with suppliers on e-procurement.”

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