Inflation Cuts Online Fashion Down to Size

Regardless of where they sell, all retailers are paying more to get their inventory from factory floors to distribution hubs. Take a pair of H&M sneakers: The sea shipping cost per pair of $23 shoes is now about 8% of the final sale price, compared with 1% three years ago, data from booking and payments platform Freightos shows. Airfreight rates have almost doubled since the pandemic began. Overall, costs associated with this leg of the supply chain are equivalent to around 5% of retailers’ sales, based on estimates by

Deutsche Bank

analyst Adam Cochrane.

But e-commerce companies are being hit hard by the expensive extra leg from warehouse to customers’ doors. This is becoming pricier because of fuel surcharges and wage inflation for couriers. According to Deutsche Bank, costs associated with home delivery are equivalent to 10% to 15% of an e-commerce brand’s sales, compared with 2% to 3% when a lorry delivers stock to a store.

Inditex and H&M do have last-mile delivery bills, but they are less exposed than pure online players that send every order directly to shoppers. Inditex makes about a quarter of its sales online and can also tap its network of stores to keep costs down. Zara has begun to charge €1.95, equivalent to $2, to have an online return collected in many markets, motivating shoppers to physically hand unwanted goods into a shop.

Any retailer that can get people to come to stores saves money on logistics. It may also stimulate extra sales as consumers see something else they might like: Inditex last week reported very strong numbers for the three months through April, when sales increased by more than one-third year over year. Meanwhile, online returns are a big challenge for fashion brands. Up to 40% of apparel can be sent back unwanted, compared with less than 10% for purchases made in stores. Zalando still offers free returns, though it recently introduced minimum order values.

E-commerce businesses also have less of a cushion to absorb extra costs. ASOS and Zalando are expected to have operating profit margins of 2% and 3% respectively in their current fiscal years, according to consensus estimates compiled by

FactSet.

Inditex has a margin forecast of 16%.

All fashion retailers face a demand crunch in the coming months as clothing budgets get squeezed. The average household in the European Union spends €1,418 a year on clothing and footwear, equivalent to $1,486 at current exchange rates, according to

Bank of America.

But higher energy prices mean utility bills could be €1,000 more expensive by 2023 than in 2020. In the U.K., the bank thinks low-income consumers will trim spending on fashion by a third, and wealthier shoppers by almost a fifth.

E-commerce operators may get earlier insights into how the macroeconomic environment impacts buying behavior. Better data will help them spot “how the consumer reacts to price changes online and to test the elasticity,” says Sonia Lapinsky of AlixPartners. They also still have a long-term advantage as more spending moves online. For now, though,

Credit Suisse

analyst Simon Irwin thinks slower sales, high freight rates and slow delivery times will make growth difficult.

In a tough market, bricks-and-mortar brands have a better shot at keeping costs under control, especially as retail rents are falling. For the first time in years, stores look fashionable.

Write to Carol Ryan at carol.ryan@wsj.com