On-line shopping has obviously become more popular. First, this is perhaps a long-term trend, supported by technological change and changes in consumer habit. Second, there is a more recent factor: much fewer people would go to shopping malls in recent months due both to the inconvenient transport and uncertainty involved in demonstrations. The latest development is of course quarantine issue due to coronavirus.
But one thing is clear: On-line shopping is not as popular in Hong Kong as elsewhere. Taobao makes a big profit in mainland China while Amazon does so in America. However, in Hong Kong, famous on-line retailers are still struggling. Why? Some students of mine had indeed tried to investigate this in their general-education project. They had discussed with me and had done some initial researches. Certain factors were identified. First, logistics or goods-transporting is more expensive in Hong Kong than elsewhere. Second, physical distances between homes and shops are closer to each other than elsewhere. Taken together, people may not think on-line shopping is so attractive.
Yes, the recent events may change these factors somehow. Going out for shopping may no longer be so convenient as before. But it is unclear whether consumers' habit will be changed permanently. For this, we have to look at some fundamental factors and assess if there are some fundamental changes.
Recently, I have read a newspaper column that analyzes the financial positions of retailers. The major findings include: The profit rate, or profit-to-revenue ratio, of a famous on-line shop is actually much lower than a grocery shop, which mainly sells goods at physical stores. This is a little surprising as many people may believe that rents of physical stores are high in Hong Kong. Avoiding the high rents, on-line retail may be a lower-cost business. But it is not! Why? On one hand, logistics cost is high and indeed not lower than rental cost. On the other hand, on-line marketing requires more advertisements and promotional discounts to attract customers. I am not a business analyst and have no any expertise in the business models of on-line shopping. But I think this analysis is convincing. Nonetheless, this analyst report describes only the existing situation. The question is: will the problem be overcome in some days?
As an economist, I notice that logistics cost is a variable cost: it increases if more goods are sold and more delivery services are needed. Meanwhile, rents are a fixed cost: no matter how few goods are sold, the rents have to be paid. Of course, the fixed versus variable cost are only a relative distinction. For example, once a truck is bought, it can deliver few or many goods but the cost is the same. So, before its capacity is reached, it is a fixed cost. Beyond the capacity, if the business still expands, you need one more truck, and this is a variable cost to the firm. For another example, the rent of a store is a fixed cost to the store. But a company running many stores will consider renting more stores if its business expands. Then, from this company's viewpoint, rents are variable, at least over a longer period (where leases may be renewed or ended).
If the concept is relative, then can we tell which cost is (relatively) variable and which cost is (relatively) fixed? I think we can. In my view, logistics cost is more variable than rent. Let us consider the same time span and the same quantity of goods sold. With a physical store, one can sell (or store) more goods in a given time (e.g. a day) than a truck can deliver. Hence, a company does not need to rent another store for a substantial volume of sale but another truck is needed for some business expansion. Furthermore, the salary of the driver and delivery staff may be directly related to goods sold while the rent is often unrelated to sale.
If we accept that logistics cost is mainly variable while rent is mainly fixed, then there is another surprising point. This is because people often think that on-line shopping involves a high fixed-cost structure so that economies of scale is a key for its success. The point is: on-line shopping involves an expensive electronic system that handles orders, retrievals of goods in warehouses, and automatic assignments of packaging and delivery jobs. However, once the system is installed, it can handles many orders and jobs. Thus, it is mainly fixed cost. Selling more goods does not increase this cost, and so the average cost of sale is decreasing with sale. This is economy of scale. Furthermore, if the sale volume is high, the on-line retailers can bargain for a deeper discount for goods from suppliers, which promote sales. This is also economy of scale. Due to this belief, many on-line retailers are willing to invest and expand. Their hope is that if they can secure enough sale, scale economy will help them achieve low cost and profit eventually.
Now, there seems to be a fact inconsistent with this belief. If the dominating cost of an on-line shop is logistics cost, and logistics cost is mainly variable, then the overall cost structure of the company does not exhibit significant scale economy. If this is true (I don't know), these Hong Kong on-line shops cannot hope for a brighter future by expanding sale. Struggling for a longer time does not help!
Of course, these on-line shop owners are not stupid. Perhaps I miss something. Perhaps only at the moment logistics is the major cost component. Perhaps in future volume sale can bring about more discounts on goods, thus generating a bigger scale effect to outweigh the logistics cost. There may be some rationale for them to keep betting on it. Of course, as a consumer, I wish them every success in future.
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