- KPMG analysis shows that UK online penetration increased from 16% pre-COVID-19 to an expected median of 25% in 2021.
- The rate of online sales growth is expected to slow in the coming years, but the upward trajectory is clear and here to stay.
- Across all categories, online retailing is expected to reach 35% by 2030.
- Retailers will need to adapt their operating and reporting models to improve profitability as online penetration increases.
Throughout 2020 and 2021, national restrictions forced large swathes of physical retailing into hibernation, and consumers were left with little choice than to pick up their mobile phones and laptops in order to shop from home. It’s clear that these seismic events fundamentally changed the way that people shopped and how retailers operated, and the balance between physical and online shopping shifted dramatically.
There had already been a consistent trend of online shopping channels taking sales away from physical stores. However, at the latest KPMG/Ipsos Retail Think Tank meeting, members discussed: just how far the balance between online and physical retailing shifted since the COVID-19 pandemic, if this shift was permanent or temporary, what implications this has for UK retailers today and just how much it will require retailers to adapt in the future.
The first topic to address though are the varying methodologies used to assess the size of the online market, as there is no standardised approach. A multitude of data sets, sample sizes, focus groups and consumer surveys are used to stack the data in many different ways.
Nick Bubb, retailing consultant, comments: “While the BRC-KPMG basket of major non-food retailers is comprehensive, it is not exhaustive, and it may understate the overall online sector growth – especially if all ‘pure play’ online retailers are included. On the other hand, while the Office of National Statistics (ONS) should have a bigger and better sample of large online retailers in its monthly figures for non-food sales – as it is compulsory to provide figures to the ONS – it also includes many small and independent retailers in its figures, who clearly have lower rates of online sales penetration and ultimately, whose total sales are inherently harder to track accurately. The proprietary KPMG consumer spending model attempts to adjust for the weaknesses in the ONS and the BRC online non-food sales figures.
“In terms of online food sales, the BRC-KPMG survey does not provide a measure, but the monthly consumer panel data produced by the rival research businesses, Kantar and NielsenIQ, do have reliable figures for online grocery sales penetration for the big supermarkets, although they would slightly over-state the online sales penetration of the whole food retail sector.”
While it’s important to consider elements from a number reporting models, and although there is consensus in the data with regards to the direction of travel that online penetration in food and non-food retail is headed, there is a degree of disparity between the different figures.
KPMG’s proprietary modelling is based upon data from the ONS, BRC and Euromonitor – in addition to KPMG’s tracking of online and instore spending during the COVID-19 period. The forecast estimates are a combination of statistical forecasts combined with KPMG’s long-term economic projections and sector points of view.
RTT members are in agreement that ‘the truth lies somewhere in the middle of the data’ and are happy that the KPMG consumer spending model produces figures and forecasts that incorporate the strengths and accounts for the weaknesses of the other models – helping to produce an accurate and well-rounded data set.
Overall online penetration
RTT members agree that while online retailing has been growing at a steady and relatively consistent pace for a number of years, the COVID-19 pandemic, the resulting lockdowns and dramatic shifts in consumer behaviour have all intensified the trend. The past 18 months has seen demand for online shopping grow at an exponential rate, with the KPMG consumer spending model showing that across all categories, online penetration has increased from approximately 16% pre-COVID-19 to 25% in 2021.
This figure shows substantial growth in online, but there is disparity between different categories. Maureen Hinton, Group Retail Research Director, comments: “Electricals will continue to have the highest share online. It is a brand-led sector and products and technical specification are easy to compare online, but being so price-led, with low margins, it is going to be a challenge to be profitable considering the fulfilment costs. The pandemic has also converted shoppers into buying home products online out of necessity but having done so, the convenience will continue to make it acceptable.”
While the trend towards online sales is expected to continue, albeit at a slower pace, books are highlighted as an example of a category which may have reached a point of saturation, resulting in an equilibrium between online and physical sales. As one of the early ‘victims’ of online shopping, physical bookstores have undergone a resurgence as consumers have sought out the social and emotional experience of shopping for books. Until ‘online shopping 3.0’, when major advancements in technology fundamentally change the way people shop again, categories such as books and others at this point of equilibrium are not expected to change to any high degree in the coming years.
Since the start of the pandemic, the data shows that the shift to online has been felt most in the food sector, with penetration rising from 5% to 11% in 2021. Despite their doors remaining open as ‘essential retailers’ throughout the COVID-19 lockdowns, ‘first-time’ online consumers across all demographics have been introduced to online grocery shopping, and those that previously shopped online infrequently, have more regularly used home delivery and click and collect services throughout lockdown.
Paul Martin, UK Head of Retail at KPMG, said: “There are many figures referenced by the media from analysts with regards to online penetration. It’s clear that growth over the last 18 months has been substantial and lockdowns have acted as a catalyst to speed up existing trends – however, we don’t believe it’s as extreme as some commentators have claimed. As restrictions are rolled back, and people are granted more freedoms again, it’s expected that the growth rate similar to 2019 will decelerate, but not grind to a halt. The challenge now for retailers is to assess how their business and operating models can cope with an increasing number of online orders, and how they need to adapt to ensure they are successfully servicing their customers while still driving profitability.”
Implications of increased online penetration today
Since March last year, UK retailers have faced much change and have had to be more agile and flexible than ever before. The rapid uptake in online shopping fundamentally changed the retail sector, but as the UK economy continues to open up and people start to return to city centres and offices, it won’t be a case of ‘business as usual’ or a return to pre-COVID-19 trading. RTT members agree that online will continue to take sales from physical retailing, but the current growth level of online sales will begin to slow.
Nick Bubb went on to say: “Online shopping has boomed over the last year and half, but as the economy and society return to some sense of normality, it will be interesting to see the impact this has on retailers. Just how desirable home delivery services are when people are back working in offices, and how smooth fulfilment will be when the roads are busy again with traffic are two key issues. The ‘stickiness’ of COVID-19 spending trends is therefore very much up for debate in the short term, and the City agrees, as the share prices of those ‘big winners of 2020’, who took best advantage of the rise in online sales, currently paint a very subdued picture overall.”
As we emerge from the ‘stop-start’ of lockdowns, retailers will need to look closely at their own business and operating models with a view to improve profitability. The speed by which online penetration increased will have left many retailers scrambling to piece together supply chains, warehousing and delivery services, and as such the cost of fulfilment will have had a detrimental impact on profitability. As the dust settles and a ‘new normal’ of consumer behaviour starts to emerge, retailers will need to look again at how they service online orders and utilise physical stores to ways of working that are sustainable well into the future.
The grocery sector in particular is expected to require a re-calibration of its business model due to online penetration more than doubling since March 2020. A whole new demographic of shoppers has been introduced to home delivery services, and older generations who may be at home more frequently have been able to take advantage of cheaper home delivery slots. Many of the new digital shoppers will have been surprised by the convenience and ease of use of home delivery, and it’s expected that these older consumers may not fully revert back to their previous habit of only physically shopping for food.
RTT members agree that in the short term at least, some consumer behaviours will return to a pre-pandemic norm. The provenance and freshness of food has been increasingly important to consumers, and many people – especially the millennial generation – like to choose what to eat on a daily basis. Post-COVID-19, the trend of shopping little and often is expected to pick up where it left off.
RTT members expect that physical stores will be best placed to take advantage of people shopping for food on a daily basis again. As the Government’s ‘work from home order’ is rescinded, it’s expected that many office workers will switch to a hybrid model of working, with their weeks split between the office and at home. This will result in more people heading back into city centres and a return to smaller food shops taking place as part of their daily commutes.
There are a number of new digital services which allow for the quick delivery of small shopping baskets, and an increasing range of companies are now offering home delivery meal kits which could challenge physical stores for a share of these smaller, daily baskets. However, whilst these have prospered during lockdown, they only represent a very small fraction of the market and questions remain as to whether they are economically viable in the longer term.
One area where RTT members believe that online shopping is expected to penetrate further is the fulfilment of fewer, but regular ‘big shops’. Many consumers now look to online delivery as their central source for the purchase of bulky, non-perishable items such as toilet paper, pet food, frozen goods and alcohol. RTT members also expect to see more seasonal variation in online grocery sales, with the colder, winter months resulting in yearly peaks of online orders and home deliveries.
The growth of online shopping will clearly have implications for the high street and physical retailing, but RTT members agree that this will be a ‘recalibration’ as opposed to the ‘decimation’ suggested by some commentators. Despite the demise of many legacy retail businesses over the past couple of years, physical stores still remain an integral part of the overall proposition. We are continuing to see the likes of Google, Alibaba, Amazon and other big tech companies open stores. These platform-based businesses know the importance of physical space and what it can add to their offering, with stores acting as a marketing tool, showroom for products, brand experience and even collection point for online orders.
The physical retail landscape is definitely facing change, and retailers will need to adjust the use, size and location of many of their stores to help form part of a multi-touchpoint retailing ecosystem – one which compliments the growth in online sales.
Outlook and implications for the future
The KPMG forecast predicts that in 2030, online penetration as an average across all retail categories will reach between 35% – with food retailing reaching 15% and non-food at 50%. This increase in demand clearly indicates a slowing of the growth rate, but the upward trajectory is not in doubt. RTT members agree that this widespread change in consumer behaviour will have major implications for UK retailers, and their business and operating models will need to be reviewed and adapted in order to drive profitability and service customers.
One major impact of the increased usage of online and home delivery has been the rising cost of doing business for retailers. These costs will need to be assessed, as currently, profitability for the sector is at a record low and RTT members suggest that cost savings of between 20-50% (of the pre-COVID-19 cost-base) will need to be found in the coming two years. The way that retailers allocate funds to their Capital Investment programmes will also need to change, with regular investment in technology and fulfilment taking an increasingly bigger share of budget than store openings and refurbishment.
The line between online and physical sales has become increasingly blurred, and this is only set to intensify as new technology is introduced and consumer behaviour evolves. James Sawley, Head of Retail & Leisure, HSBC UK, explains how the way retailers measure success will need to change: “Over the next ten years, consumers will be utilising a mix of physical and digital touchpoints with the same retailer to make purchases. The experience of being a customer will be so intertwined between the digital and physical, that it will be impossible for many retailers to determine between the two. As such, the manner by which a retailer’s performance is measured and reported will need to change, retailers will need to be progressive with their thinking and this will include determining success in terms of ‘total sales’ as opposed to by any specific or single channel.”
As UK retailers’ operating models transition to meet consumer expectations, and current metrics such as sales and profitability by channel cease to deliver the required reporting information – the metrics and KPIs for measuring success will need to become far more customer centric. Similar to many players originating from the digital space, metrics such as lifetime value of the customer, net acquisition cost, customer retention cost and loyalty will all become a focal point as retailers’ further transition to operating as consumer commerce businesses.
These changes will have sizeable implications for the high street, but RTT members agree that this is by no means the end of physical retailing. In both non-food and food, physical shopping is expected to remain the most dominant aspect of most retailers’ multi-touchpoint offering.
That’s not to say that the purpose and use of many stores won’t need to change, the sector will see more stores offering immersive experiences for customers – often acting as introducers to a brand or to build customer loyalty and retention. Jonathan De Mello, Equity Partner, CWM Retail Consulting, explains: “We know that opening stores has a positive impact on online sales in a local area, with catchment areas benefiting from a halo effect in terms of total sales. Retailers are quickly realising that utilising physical space in high footfall areas as a ‘showroom’ for their products and brands is a model that delivers sizable ‘benefit to brand’ across all channels.”
For the grocers, the increasing demand of online shopping will mean the type and scale of fulfilment options will need to expand. Mike Watkins, head of retailer and business insight, NielsenIQ, adds: “At mid-2021, nearly one in three households were still choosing to shop for food online at least once every four weeks – with many happy to use these services for smaller baskets, which are often less profitable for the grocers. Shopping for food online has become a regular part of grocery shopping, and for many this adjustment will be permanent. This rapid change has led to many grocers needing to look closely at their own operating models, and as online penetration is expected to grow further in the future, the additional cost of fulfilling orders and home delivery will need to be balanced against the ongoing costs of running stores.”
Grocers will likely need to increase the amount they charge for delivery services and the food sector is approaching a tipping point where automation and technology will need to be introduced to fulfil orders, as opposed to the currently efficient, but labour-intensive method of manual ‘pick and pack’. Investment into technology that can further personalise and automate the customer experience will also be required, as consumers will seek out more intelligent and intuitive ordering services – a trend that will only be intensified as technology becomes more connected around the home and in people’s lives with the advancement of the Internet of Things.
RTT members agree that the UK retail sector is on a set course for further online penetration, but as retailers adapt their models to service customers as consumer commerce businesses, the specific level of online penetration will have reduced importance to retailers. The challenges that the sector faces will be there regardless, and channel performance and the balance between online and physical will be less relevant as retailers service consumers through a myriad of intrinsically linked channels.
RTT members also discussed the potential negative impact that such a shift towards online would have on society. Martin Hayward, Founder, Hayward Strategy and Futures, shared a word of warning with regards to the current direction of travel: “In the never-ending search for efficiency, retailers must be mindful to remember who they serve in order to exist. Customers are not nearly thought about enough in this process, and it should be an obligation for the industry to consider how their drive to service online orders impacts on society. Following 18 months of restrictions, younger generations have been robbed of many of the social interactions that are so important early on in life. Investment into on the high street to make shopping a fun, social experience should remain a focal point for retailers – rather than contributing towards a vision of people being further isolated, with everyone shopping from home as our roads are bumper to bumper with delivery vans pumping Co2 into the environment.”
The UK retail sector had been on a set course of increased online penetration years before the COVID-19 pandemic, but as restrictions forced non-essential physical stores into hibernation, the balance shifted even further towards online sales. Existing trends were accelerated, and all areas of the retail sector saw exponential growth in online sales.
RTT members agree that retailers will need to adapt many aspects of their operating models at a much faster pace. The way that retailers charge for and fulfil orders, their supply chains, the amount of funding pivoted towards investment in technology, use and location of their physical stores and their reporting models will all need careful consideration and decisive change if they are going to flourish.
Ultimately however, over the next decade the question of channel specific sales will be largely academic, as retail is on a pathway to becoming a ‘channel agnostic’ sector. In this future, the challenges that retailers face and the subsequent requirement for model change will need to happen no matter the level of online penetration, whether it’s 30, 40 or 50%.
Paul Martin concludes: “It’s fair to say that in the future, the answer to driving success will not be online vs physical, but rather a hybrid business which is hyper customer-centric and blends the digital and physical into a single multi-touchpoint offering. Customers will be accustomed to enjoying all the benefits and convenience of online, seamlessly intertwined with the joy and experience of physical shopping – where the sale is ultimately made will not matter in the slightest.”
PART II In detail – individual views of the KPMG/IPSOS Retail Performance Think Tank members
Paul Martin, UK Head of Retail – KPMG
Over the last 15 months we have heard many different superlatives both from a positive and negative perspective relating to the UK retail sector. One topic that has received significant airtime is the growth of online retailing, to the detriment of physical shopping. Some commentators have highlighted that we have experienced 5-10 years of online growth within the period of 9 months. Whereas some of this sentiment may be correct only time will tell and the million pound question remains which of the consumer behavioural changes we have experienced during the pandemic are here to stay.
There is no doubt that the online channel has grown exponentially since March 2020. In that context multiple sources, in many cases using different methodologies and definitions of the retail sector, provide their views on the penetration of the online channel which all tell the same macro-growth story although there is some divergence in the detail. The KPMG model shows approximately 16% online penetration pre-Covid which has accelerated to 25% in 2021. These numbers are annual averages and cover all retail categories. 16% in 2019 to 25% in 2021 is of course a significant growth curve. It is important to emphasize that pre-Covid significant variations between different categories already existed Although when looking at food vs non-food there is a more important distinction to be made with non-food growing from 21% to 39% and food showing the highest growth trajectory from 5% to 11% in 2021. When reviewing our longer-term forecast to 2030 we believe overall penetration will be 35-37% of the total retail market which is definitely lower than some analysts 50% prediction. We do expect online sales to fluctuate seasonally with peaks in the months of colder weather and shorter daylight and troughs in sunnier periods when consumers will spend more time visiting physical locations. The convenience of using the online channel is here to stay with a section of consumers experiencing this for the first time on a regular occurrence over the last 15 months.
This means physical retailing will remain the largest channel for the foreseeable future although the developments of the last 15 months have 3 key implications. We articulate these in detail in our recent publication “Future of Retail” (Transitioning from ‘retail’ to ‘consumer commerce’)
- Business model. The retail business model has been built on the physical channel being the dominant route to market. This works if online penetration ratios are below 10% (as an average). Irrelevant if the overall number is 35% or 50% online penetration, many of the current models are no longer fit for purpose and therefore re-engineering your business model towards a “true” customer centric and channel agnostic approach is a “must” do.
- Connected with the above point of evolving business models, the growth of online has fundamentally increased the cost of doing business. Therefore retail profitability in the UK as a median figure is at historic lows. I believe 20-50% of pre-Covid costs will need to be reduced over the next 12-24 months. Optimising existing cost bases will become even more important as retailers will need to balance their investments away from physical store openings and refurbishments towards technology to cater for the growing importance of the online channel. This means in many cases multi-year investment plans need to be revisited.
- Historically, product and channel related performance metrics have been at the forefront of retailers reporting measures. I would argue going forward customer related metrics such as life time value of the customer, net acquisition and retention costs will need to be become the base layer with product related criteria remaining important and channel KPI’s becoming less important. This is already common practice with many players originating in the online space and will define how businesses operating in the consumer commerce ecosystem will be measured in the future.
In conclusion it is fair to say that the answer is not online vs physical as hybrid business models are the answer with all the implications described above irrelevant of the actual online penetration levels.
Nick Bubb, Retailing Consultant, Bubb Retail Consultancy Ltd
Online retailers were certainly seen as big winners in 2020 by the stockmarket, given the impact of the closure of non-essential stores, but yesterday’s winners can easily turn into today’s losers and the performance of Online stocks has generally been more subdued so far in 2021, reflecting the uncertainty in the City about whether they can hold on last year’s fortuitous gains post-lockdown.
For example, AO.com, which was a massive winner in 2020 (with the shares rising more than three and half times) has been a very poor performer in 2021 to date, down 44% as of the close of business on July 9th. Despite its excellent trading performance, the Boohoo share price has barely moved over the last 18 months, reflecting its perceived governance and ethical weaknesses, but even its rival ASOS has only managed to edge its share price up by 1% so far this year (albeit on top of a healthy 44% gain last year).
In the Online Food sector, the Ocado share price is down by 17% in the year to date, after rising by as much as 79% last year. But the Naked Wines share price is up by 21%, despite nearly trebling in 2020, reflecting its success in the key US market.
The share price of The Hut (THG) is down 21% so far in 2021, but its successful IPO last September has spurred many other flotations of Online retailers, eager to cash in on last year’s trading success before City sentiment turns against them…Following the IPO of Moonpig in February, the flotations of Virgin Wines, In the Style, Deliveroo, Music Magpie, Made and Victorian Plumbing have quickly followed, with varying degrees of success.
The City may be suspicious that many of the sales gains made by Online retailers last year were one-off and temporary, but the evidence is that Online retailers have generally continued to trade well of late, despite the reopening of non-essential stores.
The latest BRC-KPMG Retail Sales survey shows that Online Non-Food sales fell by nearly 6% last month on last year’s levels, but on a 2 year view they were still up as much as 31%, driving Online Non-Food sales penetration up to 39% in June. That level of penetration may drop back in the second half of 2021, given the tougher comps post-lockdown, but the BRC-KPMG basket of major Non-Food retailers is not perfect and may understate the overall Online sector growth, whilst according to the Kantar and Nielsen surveys Online Grocery sales penetration is holding at over 13%.
One issue helping the success of Online retailers during the lockdown was the ease of finding people working at home to make timely deliveries…and it will be interesting to see how that metric holds up if and when things get back to normal, but life is not going to be “normal” for some time…Many people are having to quarantine at home because of rising cases of the Covid Delta variant, which will drive them to shop Online instead of going to the shops, whilst the closure of many department stores and fashion stores has made many High Streets and shopping centres less attractive places to shop in. So, on top of the sheer convenience and the attractiveness of the even quicker delivery options the Online retail industry has been able to offer over the last year, there are many factors likely to drive up Online sales penetration even further in the next 12 months.
Martin Hayward, Founder – Hayward Strategy and Futures
Trying to unpick the longer-term consequences of a year and a half of extraordinary restrictions on consumer behaviour will ultimately challenge even the greatest forecaster, but we can at least try to assess the available evidence to signpost the likely direction of travel for the retail industry.
British consumers have shown themselves to be generally resilient creatures through previous shocks to the system, but there are some worrying signs that the scale and longevity of Covid’s dominance of everyday life has wrought some serious damage on consumer confidence and freedoms.
For instance, The British Psychological Society have reported (July 2nd 2021) that “One-third of UK children could need mental health support due to the pandemic”. This probably isn’t surprising due to the constant upheaval to schooling and leisure, but is a worrying generational constraint.
Perhaps more concerning is the impact that the constant media and SAGE doom-mongering and government messaging has had upon consumer confidence and ability to assess risk. An IPSOS MORI survey (8th July 2021) astonishingly found that 19% of UK adults are in favour of a 10pm curfew forever, and 26% saying that nightclubs should never reopen.
There is clearly a legacy of fear amongst a sizeable proportion of consumers that will take time to diminish, if at all. Some will say that this is not a worry for the industry, as these more cautious consumers will simply buy what they would have bought in the high street online, so it’s a zero-sum game. This is probably wishful thinking, as those who are worried about interacting socially will inevitably spend less with fewer social occasions to invest in. We must also remember that online sales are less profitable for many retailers.
The Bank of England governor, Andrew Bailey, has recently professed to expecting changes in financial and commercial behaviour brought on by the pandemic to persist. He said “My best guess, for what it’s worth, is that I think that to some considerable degree they will (persist), because we are essentially all adaptive creatures”.
The reluctance of many to return to their workplaces will potentially add further headwinds for the retail industry. City and town centres will retain low footfall, and the need for expenditure on clothing, accessories and casual purchases will remain suppressed.
Rather than consoling itself with platitudes about “a new normal” emerging, the retail industry needs to do all that it can to support a rapid return to “normal”.
Nobody in the UK needs to spend more time sitting at home staring at a laptop. No young person needs more home deliveries at the expense of social shopping and leisure. Few great careers or personalities will be built sitting alone in a darkened room with Zoom and a lukewarm takeaway pizza.
In a digital world, successful consumers will remain resolutely analogue in their need for social interaction and tangible experiences. Having removed these opportunities during the last year and a half, the serious consequences are already apparent.
We owe it to the next generation to not hide behind our websites, invest in our stores and young people, and make life human again.
Maureen Hinton, Group Retail Research Director, GlobalData Plc
2020 was a catalyst for online retail, as physical store lockdowns attracted new converts to the channel and turned many previously agnostic online shoppers into devotees. From an 18% share of total retail, online jumped to 27%. However, the level of penetration varies across the sectors, with some non-food categories reaching very high levels as our lives and lifestyles changed considerably from the ‘norm’ of 2019.
The chart above shows the levels of penetration pre-pandemic in 2019 and, what we hope will be a post pandemic world in 2023, when we would expect life to have settled back into one of no restrictions on movement, socialising, and travel, and consumers’ fears about the virus will have subsided.
We have already seen that consumers are keen to get out, socialise, and spend, and as stores have opened again, we have seen online growth slowing back down. That said, it will still be stronger growth than physical retail which results in a rising share across all sectors.
Electricals will continue to have the highest share online. It is a brand-led sector and products and technical specification are easy to compare online, but being so price-led, with low margins, it is going to be a challenge to be profitable considering the fulfilment costs. The pandemic has also converted shoppers into buying home products online out of necessity but having done so, the convenience will continue to make it acceptable. While clothing & footwear has become established online it too is going to be a struggle to be profitable with its high return rates.
Online has also given the consumer more power to bypass retail and sell ‘pre-loved’ products direct to each other. What this circularity trend is doing is taking sales from the retailer – which could develop into a major problem, biting into the spending in traditional retail.
Despite the shift online and the demise of so many legacy retail businesses over the past couple of years, there is still a place for stores. Even the big tech companies realise their importance – Google was the latest to open a physical store a couple of weeks ago and Amazon and Alibaba both have stores. The new retail model is platform based with stores forming an integral part of the overall proposition – a marketing tool, showroom, brand experience, stock hub, collection point. Warby Parker the online specialist optician, is now planning to open hundreds of stores.
But location has become even more critical. Now, with the working from home trend, the relevance of store locations is in question. City centres have been hit hard from lack of commuters and tourists, while retail parks and local stores are benefitting from the new working and living patterns. The so called new normal in physical retail is likely to be a hybrid of local and central, but city and town centres must re-appraise their purpose.
Martin Newman, The Consumer Champion
As it stands today, 27% of all retail sales are online (ONS). This represents a 50% growth in the online share of retail sales from pre-pandemic levels of around 18%.
Ecommerce sales are likely to end the year at around 28% of total retail sales. In general terms, and outside of the pandemic peaks and troughs, ecommerce sales grow at around 10% to 15% per annum. At this rate, it would take another decade before ecommerce took 40% market share. If indeed it gets there.
Grocery has enjoyed similar uplift from around 6% to 7% of grocery sales online pre-pandemic to 16% today (Nielsen). Grocery online is predicted to account for 21.5% of retail grocery by 2025 (Mercatus), however, it may well end up higher at around 25%. Particularly as consumers who are relatively new to online grocery shopping, who bought online during the pandemic have realised how easy, convenient and safe it is to do so.
Statistics of course don’t tell the full story. As the picture in general merchandise very much varies category by category.
In fashion, multichannel retailers already see anywhere from 25% to 55% of their sales online. Next the bell-weather of the High street has around 55% of all its sales online. Let’s not forget they’ve been distance selling for rather a long time through their catalogues!
However, other categories such as DIY, pharmacy and furniture have a far lower percentage of sales online.
We also have to keep in mind that we live in a multichannel world. Many sales journeys, around 70%, start online but are completed offline. And the reverse is true where some products need to be seen in the store before customers complete their purchase online.
Rentals and leases are becoming more realistic and accessible. When you layer this on top of retail becoming more experiential offline allied to a gradually improving High Street proposition and a big population shift over-time of consumers migrating back to town centres to live, physical retail has a bright future.
Allied to this, we’ll see the continued move from pureplays such as Boohoo and Gymshark to open up a physical presence.
Local and independent retailers will see a sustained uptick in performance as a result of the hybrid work from home model with the subsequent increase in footfall and sales that this will bring.
Let’s not forget that even Amazon has become a multichannel retailer. With Amazon Fresh/wholefoods, Amazon Go, 4 star curated stores and more set to grow their physical presence over the next few years. That is because they recognise the requirement to ‘be where your customers are’ and that the value of customers who shop through multiple channels is exponentially higher than single channel customers.
My prediction is that ecommerce will not become greater than 40% of all retail sales in the foreseeable future and that it will take some time to get there.
Mike Watkins, Head of Retailer and Business Insight – NielsenIQ
As the UK reopens and lockdown restrictions are finally eased, it is evident that online grocery shopping is one of the changed behaviours that will remain in a post lockdown world. It`s now part of regular grocery shopping and a permanent addition for many households. At mid-2021, almost 1 in 3 households are still choosing to shop online every 4 weeks and online has a 13.5% share of all fmcg sales, up from 7% in 2019, albeit down a little from the 16% peak at the start of 2021. (NielsenIQ Homescan FMCG).
And with new entrants, new platforms and the incumbent retailers continuing to invest in more click and collect, as well as their own or a partner rapid delivery service, this share is expected to increase again to 15% by 2023. For the `big5` supermarkets this share will be even higher.
Whilst the type and scale of fulfillment options will continue to expand, it is the demand of shoppers that will drive this growth of online. NielsenIQ research suggests that there are two significant reasons for this. Firstly, shoppers no longer see online only as an option for one large shop and usage is now evolving to meet a wider range of shopper needs and meal occasions, no matter the basket size. Many of the new shoppers are interested in spending £50 or less rather than the £75 or more which was the norm during the pandemic. Whilst it can be expensive for retailers to offer smaller online baskets, provided that the cost can be passed on to shoppers (who are already prepared to pay for added value in other parts of their consumer spend), it’s an attractive new business model. Secondly, there will be a convergence of the monthly online grocery shop, the twice a month dining in at home `treat` using food delivery and the weekly convenience store shopping trip.
Channel boundaries are now flexible and supermarkets will need to diversify and expand their online customer proposition to maintain business growth as fmcg spend at traditional (large) stores will continue to fall as more and more food purchasing is switched to digital. Looking ahead to 2025, perhaps a natural ceiling for online will be reached when 20% of grocery sales are online and 40% of shoppers are regular users. NielsenIQ see a world where food and drink spend will be more about occasion rather than location, with bricks and mortar having an important but different role to play in shaping the digital experience aswell as meeting the lifestyle needs of Gen Z grocery shoppers.
Jonathan De Mello, Equity Partner, CWM Retail Consulting LLP
According to the ONS, online spend increased from 18% pre-COVID to 35% penetration across retail as a whole at the height of the various lockdowns we have experienced. Given that Food represents c.50% of all retail spend, this masks significant variances at an individual retail category level, with some categories such as Household Goods, Electrical Goods and even Clothing & Footwear moving to nearly 50% plus online penetration in lockdown. In general, spend in comparison goods was down overall – with shoppers focusing more on convenience (ie: grocery). This has led to significant pent up demand in certain categories – catalysed by a combination of home working, and the closure of evening dining and entertainment venues; ie: with few people leaving their home/immediate area, fashion and beauty spend in particular dropped significantly – only starting to grow again now physical stores have reopened. According to Barclaycard data, spend on home improvement/DIY, pets, digital subscriptions and electrical goods (laptops etc..) all rose significantly during various lockdowns. Predicting future levels of online spend penetration depends largely on COVID, and whether we enter further lockdowns in the medium term. Whilst further lockdowns are unlikely given the impressive pace of the UK’s COVID vaccination programme, home working to some extent is likely here to stay regardless, with many companies offering a combination of home working and office working to employees when COVID restrictions start to ease. Given this, online spend is likely to settle at a higher level than the 18% pre-COVID level, with circa 25% penetration likely to be the ‘new normal’ going forwards.
Much of this increase will be driven by Food, with online penetration rising from 5% to 10% in Food during lockdown. Many people across a range of age groups have engaged with online grocery shopping for the first time during lockdown and – particularly in city centres such as London where car ownership is lower – online grocery penetration has increased substantially as a result. Whilst this rate will clearly drop once restrictions are fully lifted, even if it settles at say 7% penetration on average, this creates a major shift in logistics property requirements for the major grocers. The Food sector is not isolated in having to pivot toward online home delivery – with many restaurant occupiers having to invest in this capability also; either themselves, or via Deliveroo, Uber Eats or Just Eat. This has led to huge demand for dark kitchen space.
Due to this increase in online demand, many businesses have realised that their current logistics networks are sub-optimal, and are losing out to competitors with better networks – given they cannot fulfil orders in a timely fashion. A large proportion of businesses – especially in the grocery sector – lose money on online deliveries, due to the need to remain competitive and therefore not passing on the full cost involved in online fulfilment – derived from a mix of low quality facilities and poor warehouse location strategy. The solution for these businesses is to invest in more and better quality logistics/warehousing, and to do so as a matter of urgency, given the potential to lose not only sales – but also suffer defection to competitors that can deliver in a timely fashion. As a result of this, many property investors are seeking to invest in either acquiring or developing logistics facilities in order to meet occupier demand – in some instances buying retail parks in order to achieve partial/full conversion of these into warehousing.
The other trend impacting property as a result of increased online penetration is the trend towards physical stores as ‘showrooms’ in high footfall areas. Occupiers are increasingly looking to model overall ‘benefit to brand’ from a site across all channels – as opposed to the pure EBITDA that site generates. For property owners, quantifying this is increasingly important given turnover based rents are on the rise. If a landlord can determine the true value of a store to an occupier they are looking to target, they are better placed to negotiate an appropriate level of rent for that space.
James Sawley, Head of Retail & Leisure, HSBC UK
I still firmly believe that consumer behaviour will normalise closer to pre-pandemic patterns, when compared to habits that consumers were forced into during lockdowns. We were already experiencing a slowing of online sales growth across the whole sector pre-COVID, with some categories growing faster than others. For books, for instance, the first category to be ‘Amazon’d’, we had already reached the point of natural equilibrium long before 2020, now, roughly half of books are purchased online. Non-food shopping up until Covid remained a past time in many cultures – especially the British, an enjoyable outing, an opportunity to socialise and perhaps most alluring of all, a chance to touch and feel products and have our senses stimulated by the environments created by the best retailers. This primeval need for social and physical stimulation is ingrained in us following millions of years of evolution, something a blip in human history will not change. If one in every three non-food pounds was spent online pre-pandemic, I believe that in the next 2-3 years this will reach one in two at peak (Black Friday and Early December). If COVID had never have happened this would have taken 5-7 years.
Apart from the visceral need for the physical, my belief in this balance is underpinned by 2 key factors. Firstly, the physical world is fighting back! Lower rents, more flexible deals, tax reform, looser planning control, all these factors will drive innovation and creativity on the high street, compelling consumers back with the allure of seeing something new and exciting and having a great experience, be it retail, hospitality, leisure or something cultural. Secondly, purchasing goods sustainably is a growing trend and if public perception shifts to a belief that that online shopping is more carbon intensive (I’ve heard both arguments), then this will be a long term drag on penetration rates.
Food shopping is slightly different. It’s not as fun or as social but people naturally prefer to hand pick what they put in their bodies (you are what you eat!), plus the consumer has become accustomed to so many convenience food retail options, be it a Waitrose in a train station or an M&S in a petrol station, people have got used to the luxury of deciding what to have for dinner that evening there and then. For these reasons, as well as the fact online remains less economical for the retailers themselves and delivery costs will undoubtedly go up once we return to offices, food penetration will stabilise around 12.5% in 2-3 years.
But in the long run, all this conjecture will be superfluous. We’ll stop talking about physical and online sales in about 7-10 years as the 2 channels will be so fluid and perfectly intertwined. The vast majority of sales will involve a physical and a digital touch point and a sale, will just be a sale (and in practice transacted ‘online’). In this new world, automation, data, auto replenishment and artificial intelligence will drive a hyper personalised and curated digital shopping experience, and the physical environment will be all about discovery, experience and convenience. Retailers need to be thinking their business models and how they measure success in this new world.
Ruth Gregory, Senior UK Economist, Capital Economics
Some of the leap in the share of retail sales that took place online has already been reversed. But although online sales have been a lockdown-easing loser, they were in May still 46% above the pre-pandemic peak in February 2020. Non-food in-store sales were 8% above. And while online sales accounted for 27% of sales in May, down from 36% in January, they were still up from a fifth before the COVID-19 crisis hit.
Over the next year, online share trends will likely be noisy as economies pull out of their COVID-19 slump. In our Future of Property research series, we have looked at where this trend may finally settle.
There is a strong argument for the pandemic giving a nudge towards greater use in the future, particularly in areas where adoption had previously lagged. Within those online categories for which sales rose the fastest during the spring 2020 COVID-19 lockdown, including food, household and other goods including pharmacy, newspapers and books, the online share had previously been lower than average. This supports the case for more of this spending to stay online in a post-lockdown world. And while these categories include essential items, such as food and medicine, where purchases can be less easily delayed, this is balanced by the fact that the stores selling these items were also less likely to be forced to shut during the lockdowns.
An interesting candidate for behaviour change is groceries. Historically, online food sales lagged other categories and the share of total spending has been low at around 5%. Of course, lockdown removed some issues with delivering perishables with more workers at home. But given that online sales remain strong and that food accounts for over 40% of total retail sales, the shift here seems significant. Meanwhile, many supermarkets seem now to recognise online demand as a key source of future growth.
Admittedly, for online penetration to reach a higher level, this requires a broader behaviour change. But there is the potential for demand shifts in the office sector over the next decade, as companies and employees adapt to an increase in remote working. At the very least, this will affect where people spend. As workers travel less to city centres, they will become more reliant on neighbourhood stores, and also critically on online purchases. And as workers will be at home more often, delivery becomes more convenient, removing obstacles to higher online penetration.
A move away from city living to rural and suburban locations, where more space makes remote working more palatable makes a higher level of online demand in a post-lockdown world more likely. Admittedly, a big rethink on housing hadn’t seemed likely given relative price movements and affordability constraints. And recent house price data show only limited evidence that COVID-19 has substantially changed where people want to live. While central London has underperformed, central Manchester and Birmingham appear unaffected. But the full impact of remote working on housing demand will take longer to unfold, so we wouldn’t rule out greater variation in house prices emerging in the future. And even a small migration will bring more online spending, as new locations will likely be less accessible.
There is of course the potential for the evolution of ecommerce to be shaped by new technologies and new behaviours. But the changing balance between home and work makes a higher level of online demand more viable in the longer term.