The door has opened. Let's run some numbers based on the 30 June 2010 accounts. Assuming that SFH was a pure online retailer it would only be necessary to have a distribution facility(say $20m). Approx annual depreciation saving $14m.
Next invest the cash released from the carrying value PP&E of bricks and mortar stores (assume a discount of 50% on carrying value) that provides cash of approx $30m. At a bank interest rate of 5% that equates to $1.5m in interest income per annum.
No longer need staff at the stores as it will only be necessary to have warehouse staff (which they already have). Let's assume staff of 3 FTE per store on $20k per annum (with 837 stores). Annual saving $50.2m (noting that it must be more than this considering total employee benefits expense in the group is $132m).
No longer need to pay rent for the stores, again because we only have a distribution warehouse. Annual saving $97.4m.
Assume that we can cut the inventory in the stores by 2/3 of the current levels. That is, rather than carrying three of each line/size at the store, you reduce your inventory, and invest that cash in a bank account. That is (2/3 x 46m x 5%) equates to 1.5m per annum.
So far I come to annual savings of $164.6m. On the basis of $572.228m in sales this equates to 29% in annual savings to use to pay for delivery costs. This is without considering efficiencies in receivables/settlement of accounts before the goods are shipped.
Using your average item sales price of $15, this equates to a delivery charge of $4.50 per item. I agree that this is not comparable to your $7-$13 distribution cost, but remember I have already factored in that SFH retains its distribution facilities. So this $4.50 is only going to pay for postage/courier, which is very easily achievable.
The issue is that as you would see from the accounts that margin on sales is approx 132% to cover overheads. Now Manufactures want a piece of that profit by selling direct to the public. So when you consider that a manufacturer only has to establish a distribution center they can claw that margin back and that difference can be used to pay for delivery. So on an article that retails for $15 in SFH costs $6.50 from a manufacturer. SFH only can afford $4.50 on delivery costs to have a net nil impact on operations. But the manufacturer has the ability to incur $13 of delivery costs and then SFH will have to cut prices to compete.
Simply, the reason why you are paying the $13 that you indicated is not because it costs that much to actually deliver it, but instead a customer is willing to pay it because they still pay less online than in the shops.
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