There is a common feeling that we are now finally moving out of the pandemic.
While there are still cases, the infection rate has continued to remain at a low ebb and the lockdowns of 2020 and 2021 now seem like a distant memory. However, we can still see the echoes of that experience with working from home becoming a new normal and ecommerce becoming a staple part of the average consumer’s spending habit.
Ecommerce was the lifeboat to and lifeblood of key parts of our economy over the duration of the pandemic and particularly in the heavy lockdown periods.
From chippies to chandlers and from off-licences to outlets — every small business that could either made the leap to or doubled down on ecommerce during 2020 and 2021. This forced move to online saw the ecommerce sector move forward five years in the first six months of the pandemic, according to IBM.
The preference to move to online only shopping grew from 5-6% to up to 30% in key sectors like fashion, sports goods and home improvement, according to professional services firm Alvarez and Marsal.
Northern Irish online businesses saw colossal growth in this time. IRP trading data shows three sectors with over 300% growth in online sales in the first lockdown — beers, wine and spirits, which increased almost five-fold, hair and beauty, and health and wellbeing.
Ecommerce found itself growing at a rate never imagined, all while doing a civic and moral duty of keeping the economy going, keeping businesses open and keeping people in work during one of the most difficult times in a generation. For my industry, it was our time to shine, and we did.
For local businesses however, the pandemic has merely masked a problem that has been brewing for many years now. In fact, the increase in sales could well have exacerbated the core issue facing the online merchants of today. Profit.
Average online profits margins have been shrinking for over a decade now.
Alvarez and Marsal data shows that while the pandemic gave a small rise in profitability to online retailers, it was against the trend of a sharply declining average profit margin and that the rate of that decline for online only merchants has significantly increased post-pandemic.
While the pandemic produced a party for online sales, the looming hangover for the average online retailer was profit. As we hit a challenging time at the start of 2022, the hangover hit with a bang. IRP data shows that we had a -30% growth rate in the first quarter of 2022.
Rising costs of living, rising fuel costs, rising shipping costs played a part in the challenges e-commerce faced this year in a market still trying to correct and find its feet after two years of unprecedented growth and change.
The ecommerce ecosystem is vast and complex. From one online store, you can attach a host of businesses, jobs and livelihoods — the web build agency, the designer, the hosting company, the e-commerce platform, the payments gateway, the warehouse management software, the media agency — the list goes on. At the centre of all of this is the retailer, or merchant. The merchant is the one who must do the selling, who takes the risk and who now reaps very little of the reward. If the merchant is not profitable, they are under no obligation to continue using the channel and if they move away from e-commerce, many businesses will suffer as a consequence.
This is why IRP believes that Merchant Net Profit is the only KPI that the ecommerce industry should be focused on right now. We have accelerated the adoption of ecommerce through the chance opportunity provided to us by the pandemic. In order to ensure we don’t have a colossal and irreparable correction, we need, as an industry, to ensure our merchants are profitable.
At IRP, we have developed a tool for our merchants allowing them to see the net profit for every trade they make. We feel that visibility of costs and accountability of service providers to the overall profitability of their merchant are critical in driving up the merchant’s net profit margin.
While the pandemic hangover has been pronounced, IRP trading data is showing that it may well be a short lived one. Trading levels are returning to 2021 levels and the forecasts show that this will be maintained throughout 2022.
The hangover is subsiding, but to make it disappear, the whole industry of merchants and service providers must move quickly to solve the underlying challenge of merchant profitability to keep the party going.
Philip Macartney is chief commercial officer at IRP Commerce