Author: Andrew Bowcher, Partner, RSM Australia and member of RSM’s Global Restructuring Group
A new report has predicted that e-commerce will make up 19% of global retail sales by the end of 2022, with further growth of 25% anticipated by 2027. During a period of losses, e-commerce was among the winners from the pandemic, yet some retailers still face challenges as they adapt to the new normal. What do they need to know?
Let’s look at how the larger economies fared. In the US, e-commerce revenues jumped a third (32%) in the second quarter of 2020, with the onset of the virus. That was up 45% on the previous year – and they continued strongly through the year. At the start of 2020, ecommerce sales accounted for 11.3% of retail sales. At its peak, they hit 16.1%.
The phenomenon was not just a US one and was not confined to 2020 either. A UNCTAD (United Nations Conference on Trade and Development) report from earlier this year shows the COVID-19 boost to e-commerce was widespread and persistent in 2021.
In fact, across 66 countries where statistics were available, the average share of internet users who made purchases online increased from 53% before the pandemic to 60% following its onset.
For seven countries accounting for around half of global GDP, including the US, UK, China, Korea and Australia, online retail sales increased from around $2 trillion in 2019 to $2.9 trillion in 2021. Growth is expected to continue, too.
The International Trade Administration in the US forecasts that online avenues’ share of retail sales globally, from 13.6% in 2019, will pass 20% this year and reach 21.8% by 2024.
Furthermore, it is predicted that the Japanese e-commerce market (already the fourth leading e-commerce market globally) will see growth of 6.9% and reach JPY22.4 trillion ($194.3 billion) in 2022, according to a new report from GlobalData.
The research reveals that e-commerce sales in Japan grew at a compound annual growth rate (CAGR) of 5.2% between 2018 and 2021 to reach JPY20.9 trillion ($181.7 billion) in 2021. Perhaps unsurprisingly, China came out as the top market with total sales of $2.1 trillion, followed by the US with $1.5 trillion, and the UK with $292.1 billion.
And in my home country, e-commerce continues to thrive. Australia’s e-commerce market is expected to grow by 8.4% - nearly double the headline inflation rate, with demand remaining resilient. In fact, retail sales in Australia could total A$602 billion ($390.2 billion) by 2027 with 19% of sales occurring via e-commerce channels. The pandemic and its disruptions have brought a “paradigm shift” to business, it states. For businesses, that creates significant opportunities – but also risks.
In some respects, the business drivers for e-commerce are as strong as ever. While few government restrictions remain in place (outside of Asia at least), COVID’s legacy and, in Europe, the invasion of Ukraine have created new drivers to move online.
The continued prevalence of homeworking, for instance, has resulted in lower footfall for many urban retailers. More widely, staff shortages have hit many retailers hard; in the UK, the sector trails only hospitality in its need for staff.
More recently, soaring energy bills have seen European retailers consider reducing opening hours. For some, the threat is existential. The potential to reduce their footprint (and consequently energy and staffing bills) while maintaining or increasing sales will appeal to many retailers.
Online operations are not without their own challenges, however. For a start, e-commerce businesses have also faced issues in the aftermath of the pandemic. Expanding the client base, potentially across borders, exposes businesses to potential disruptions to freight and international haulage.
More generally, transport is not immune to soaring fuel prices. Meeting customer expectations for timely – and cheap – delivery is critical for successful online sales and a key challenge for operators.
The move online also fundamentally transforms the threat landscape for retail. As databases replace doorways as the critical business assets, exposures to fire, theft and flood give way to cybersecurity in the hierarchy of risks.
In 2020, Trustwave’s Global Security Report found that almost a quarter of all cyber-attacks targeted retailers – more than any other sector. It’s rare for an event to hit more than one outlet, but a single ransomware attack can cripple an entire business.
Finally – and crucially – it remains unclear how long and to what extent the impacts of the pandemic, from homeworking to inflation, will last. Restructuring for the future is challenging when the new normal has yet to emerge fully.
While the precise balance between e-commerce and the high street is uncertain, (and this will depend on other macro influences, different habits in local markets, and changing consumer preferences), for most businesses, it is likely to be a mix. Just as hybrid working seems likely to be the preference for staff in many companies, most retailers can probably expect a combination of online and shop-based sales.
Retail strategies need to consider not just the balance between the two but also how they interact. Those most heavily reliant on online sales are still likely to retain some physical stores, but the nature of remaining retail spaces is likely to change.
From Apple to Tesla and other auto manufacturers, stores acting mainly as a showcase for products rather than a channel for sales (primarily done online) are already common, and integration with online channels continues.
In August 2022, for instance, Nike launched its latest “Live” concept store in Miami, combining digital and physical services through its app to allow consumers to “discover the best of Nike online or in-store”. To date has been a success for the brand.
Unfortunately, not all brands can successful ride the wave. In May 2022, Missguided, the e-commerce fashion group founded in the UK and now popular in the US, Australia, France and Germany, went into administration. Despite enjoying strong growth during the pandemic when bricks-and-mortar retailers were shut, the company went into distress when it failed to innovate and physical stores reopened after lockdowns ended.
This is evidence that retailers may also need to re-think the online side too. While many small businesses profited from the e-commerce boom, the UNCTAD report showed it was the online giants – such as Alibaba, Amazon and eBay – that benefited most. The 13 top consumer-focused e-commerce businesses made sales of $2.4 trillion in 2019; in 2021, it was $3.9 trillion.
Without the in-store experience and service as a differentiator, products can more easily become commoditised and loyalties weaken. Businesses then face competing purely on price against those with much larger economies of scale. As more customers log on to shop online, retailers may need to find new ways to engage customers and make a connection with them. They may find that this is the only connection that really counts.