- The internet retailing market is not as large as many commentators would have us believe. Serious questions need to be raised about what is actually being measured and how a greater degree of consistency can be brought to bear in these measurements.
- While the size of internet retailing may be small, its influence is huge. It has revolutionised the way in which consumers interact with retail, particularly amongst the younger generations.
- Despite the acceptance of internet retailing as a mainstream retailing channel, the fundamentals of retailing remain unchanged, even for a pure-play online business. The technology aspect comes second in terms of importance behind getting the traditional retailing basics right.
- Returning to the opening question, the RTT’s conclusion is that the current scale of the internet retailing market has been over-exaggerated, as has its impact on mainstream traditional retailing.
The true size of internet retailing
When considering the true size of the internet retail market, it is clear to the RTT that a very real problem exists due to the large differences in the way various bodies interpret, and report upon, internet retail sales. This leads to discrepancies in how these numbers are reported in the media, leaving the sector – and the general public – with no real idea of just how big this retailing channel has become.
Combined with the media’s propensity for latching on to the largest reported numbers of them all, it is no surprise that there is an element of the Emperor’s clothes about internet retailing; with commentators talking enthusiastically about the state of the market while all the time a nagging suspicion exists that perhaps something isn’t quite right.
Consider the following figures from three of the UK’s leading authorities in retailing statistics.
Retail Think Tank member Richard Hyman’s company Verdict Research states that internet retailing was worth £8.2 billion in 2005. That accounted for 3.1% of the total UK retail market, although it claims as much as 15% of the music, video and DVD sectors. Verdict reports a growth rate of nearly 30% in internet retailing during 2005. By 2010, it believes that online retail will account for 6.8% of total UK retail spend.
The Office for National Statistics also points to a growth rate of 30% when considering internet sales to households. However, in their report, this takes total sales up to £21.4 billion in 2005. Considering that this only takes into account internet sales made by businesses with more than ten employees, the final figure could feasibly be higher once sales from smaller organisations or even individual artisans are taken into account.
Topping even these estimates is the Interactive Media in Retail Group (IMRG). The IMRG states that the first half of 2006 saw £13.5 billion of sales, representing a 40% increase on the corresponding period in 2005. The IMRG reckons that 20% of UK retail sales will go through the internet by 2010; a considerably more ebullient prediction than Verdict’s 6.8%. In addition, IMRG suggests that £80 billion of consumer spending is already either done via the internet or is affected by the internet.
So what is the true state of affairs? As ever with retail statistics, they are all correct in their own way but upon closer examination of the various groups’ statistical parameters, the members of the Retail Think Tank (RTT) felt more comfortable with an assessment of internet retailing at between 3% and 5% of the total UK retail market.
Although this assessment is at the more conservative end of the scale, the consensus was that the activities which constituted internet retailing could only correlate to those activities which counted towards the overall, mainstream retailing figures.
The RTT felt that an appropriate assessment of internet retailing should not include the sale of concert tickets, travel bookings, insurance sales or car hire for example, yet these transactions are counted in some of the calculations of internet retail sales.
These transactions rightly belong elsewhere – in aggregates of leisure and entertainment spending for example. Most assessments of the size of the UK retail market exclude them. Including them in an assessment of pure retail sales distorts the true comparative size and view of internet retailing.
In the context of its contribution to retail growth, the RTT acknowledges that the overall UK retail market growth rate is around 2.5%, of which it considers 2% is attributable to bricks-and-mortar retailing. With the remainder of growth coming from the internet, that would equate to just over 1/5th of UK retail’s growth being driven by a retail channel which accounts for – at most – 1/20th of total sales. At first glance, this seems disproportionately high but is understandable when taking into consideration the way in which internet retailing is able to grow quickly from a low starting point.
This is also consistent with the RTT feeling that internet retailing has helped to swell the overall pot of retail spending to a degree – but not to the spectacular extent that some of the industry commentators would have us believe.
“There is a point to be made here about the fluidity of spending”, stated RTT member Sian Davies of Henley Centre Headlight Vision. “A lot of growth in the internet channel will have come from purchases being transferred from other retail channels, not necessarily by generating new spending of its own.”
Fellow RTT member Mark Teale of CB Richard Ellis concurred, saying, “Catalogue retailing is the obvious loser in this equation. Internet and catalogue retailing are essentially branches of the same mail-based retailing tree yet the sales will now be registered as internet retailing, not catalogues, providing an artificial boost to the net-based sales figures.”
So where exactly is the real threat to mainstream retailing coming from? Perhaps the answer is that, if there is a concern about the threat from internet retailing, it relates to the fear of cannibalisation. Irrespective of how much one believes it to be worth in sales terms, internet retailing is seen by the RTT as simply taking sales from one part of the retail mix and transferring it to another, without necessarily adding huge amounts of extra sales to the overall pot.
It is also an inescapable fact that an online presence generates increased costs – both in terms of running costs and the upfront investment needed to establish the website.
“The question which then has to be asked is: if the internet continues to account for a disproportionate amount of the sector’s overall growth, will there come a point when traditional business models and cost structures no longer work?” Helen Dickinson of KPMG queried.
“Simple economics would tell you that this would eventually be the case if the internet grew to such an extent that it was no longer viable for mainstream retail to incur the costs of physical store locations and on-the-ground sales staff.”
The RTT considered whether we were beginning to see the effects of this given current lower levels of demand for non-prime site retail property.
The property market seems to have an interesting – and dismissive – take on the actual threat posed by the internet. “Ten to fifteen years ago, there was grave concern that an escalation in internet retailing would result in a dramatic weakening in property demand,” said retail property expert Mark Teale. “It never came. The proportion of total sales accounted for by the internet has proved far too small in absolute terms, and too narrowly-based in range of merchandise, to have a significant impact on property value growth trends.”
The consensus of the RTT is that there is no doubt that traditional retail is here to stay. After all, traditional retail still accounts for nearly 2% of the sector’s overall 2.5% growth, representing a large amount of new sales in actual terms; sales which will help them sustain their physical presence cost effectively (and hence their profitability) and providing they continue to find cost savings through IT and supply chain efficiencies within their businesses.
Size versus influence
While you may argue about the actual value of the internet retailing sector in pure monetary terms, there is no way in which its influence on the UK retail scene can be under-estimated.
Without a doubt, internet retailing has opened up many niches for smart retailers to exploit. It has allowed manufacturers and wholesalers to enter the market directly while consumers are now empowered as never before – via their new-found ability to research products and compare prices, delivery times and other competitive elements such as guarantee periods.
Consumers have been able to connect more directly with their passions and have been enthused as a result, while an increased number of outlets have increased consumer choice and opportunities to buy.
It is important to bear in mind that internet retailing has not revolutionised the sector, it has simply improved the ability of retailers to serve the consumer. With this in mind, the smartest retailers are those which incorporate stores, catalogues and the internet, creating more and more “touch points” for potential customer interactions.
Sian Davies suggested, “Perhaps a greater insight into the real merits of internet retailing would come from an understanding of just how much time consumers spend researching product purchases online. This is where internet retailing really needs to be understood – in how it affects people’s shopping habits behind closed doors, in the home, in front of the computer screen.”
Vicky Redwood of Capital Economics added, “Currently, all that we really understand is the final sales figure. Yet we all know that there must be a huge number of purchases made on the high street which are properly researched ahead of time on the internet – but this trend isn’t captured in the sales figures.”
This is where we start to appreciate the true nature of the enhanced competition which internet retailing has created. People regularly cross channels and their purchase may be influenced by any or all of these interactions. You realise just how great a risk a retailer runs in either not having an online presence or having a presence which is not as user-friendly as it could be.
It is not the missed online sales which are the greatest danger. The danger comes from being excluded from a potential purchaser’s advance thinking – which may explain why many retailers’ online activities may be perceived to be a defensive mechanism; simply filling a gap which they feel cannot be left exposed.
Returning to the assertion that internet retailing has not necessarily brought extra spending power into the UK retail sector and combining this with the feeling that some retailers have established an online presence purely as a defensive mechanism, then you are confronted with a situation whereby online activities are merely a way of keeping up with the Joneses, which may not necessarily drive extra sales, while all the time incurring extra costs.
However, as a channel for aiding research into possible future purchases or providing a mechanism to undertake the final purchase having assessed the look and feel through a physical store, the internet is second to none. This is where the opportunity for an individual retailer arises. Although the growth of the retail pot is not majorly attributable to the expansion in internet activity, an individual player who manages the customer interaction across all the potential ‘touch points’ will be able to take market share.
If there is an area which causes some concern to the mainstream retailers, it is the manner in which internet retailing may become ingrained in the psyche of future generations. The fear comes from the “cohort effect”- a theory which would suggest that people who start shopping online rarely go back.
“Amongst the younger generations, who are already much more comfortable with using the internet for so many facets of their daily lives, the implications of the cohort effect could be much more profound,” claimed Tim Denison of SPSL. The IGD already claims that 15% of teenagers shop exclusively for groceries online; a figure which could conceivably rise very rapidly.
It’s also worth bearing in mind that internet retailing is making the most of people’s changing lifestyle choices. For today’s time-poor consumer, being able to make the most of limited “quality” time is now a key goal.
Therefore, shopping time can often be relegated to times of the day not usually thought of as key shopping times, meaning that the internet is left as the only feasible option. Bricks and mortar only retailers are therefore often excluded – because of lifestyle decisions which the retailer has little or no chance to influence.
Reality bites; fundamentals remain the same
A key point as far as the RTT is concerned is that – at its heart – internet retailing is still about retailing, not about technology.
As Prof John Dawson of the Universities of Edinburgh and Stirling pointed out, “The fundamental desire to shift volumes of product still remains king. Internet retailing has made operating a retail business more challenging but the business fundamentals have still not changed.”
For example, the importance of getting the look and feel of the site right directly translates to the physical retailer’s fundamental need to get its store location(s) right.
Similarly, in bricks and mortar retailing, price is not the sole differentiator and internet retailers would be well served to remember this. It’s about a combination of factors – brand, product, after-sales service, delivery etc. – all of which need to somehow be conveyed in that single online interaction with the consumer.
The absolute challenge for the retailer is achieving consistency of the fundamental cornerstones of their retail proposition across all the channels in which they operate, allthe time.
On the plus side, this does at least create a level playing field for all retailers, opined Paul Clarke of Barclays Bank. “In the online world, every player is reduced to that single opening gambit of a consumer’s initial reaction to the company website. Scale, history, resource, geographic exposure – none of these factors will necessarily guarantee success in that first, important interaction.”
“A poor website will instantly exclude your business from both the research and purchase elements of the shopping process; no matter who you are.”
In this regard, John Lewis stands as a good example of the importance of getting retail fundamentals right. John Lewis stores are currently doing incredibly well in the electricals sector, despite this being one of the sectors most vulnerable to internet competition.
Electrical and high-tech purchases seem to have a natural home on the internet yet John Lewis has been able to repel the competition simply by getting the basics right in its bricks and mortar outlets and despite not seeking to compete purely on price terms with the internet players.
If there is one fundamental retailing issue whose importance was under-estimated by the early internet retailers, it is distribution.
To begin with, distribution appeared to simply be the closing of the deal. The hard work went into making the website attractive, managing the product offering and making the sale. The delivery of the product was almost an after-thought.
Only now is the true importance of that delivery becoming apparent, according to Richard Hyman of Verdict Research. “For starters, that delivery man or woman is now the sole point of human interaction for the internet purchaser. Therefore, that person must be a natural extension of the retailer’s brand and its associated values. It is no longer simply a case of getting the right products to the right people. It is now a case of applying the finishing touches to the customer’s brand experience,” said Hyman.
With this in mind, it should give rise to a lot of serious thinking as to how exactly that person can best represent the brand. For an internet retailer, investment in their delivery staff should mirror the investment which bricks and mortar retailers make in their sales staff; as they are both of similar importance to the business.
In addition, Nick Bubb of Evolution Securities felt that, “More attention needs to be paid to the problem of missed delivery slots as this one issue can have a disproportionately negative effect on the consumer’s overall online retail experience. In fact, nothing seems likely to alienate a customer more than a failed or missed delivery.”
The cost of missed deliveries also exposes the myth of internet retailing always being cheap. The cost of returned products – and subsequent repeat deliveries – goes straight on to the bottom line and eats into the narrow margins with which these businesses are working.
Helen Dickinson summarised the RTT’s stance on internet retailing, by saying, “The channel’s actual size may be small but its influence is all encompassing.”
Nick Bubb added, “However, the attention which the channel attracts is completely out of proportion to the size of the business and its importance in the overall retail mix.”
There is a feeling that the channel is over-hyped. It has changed the market in many ways – but its development needs to be seen in its proper and full context. As Tim Denison pointed out, “What it won’t do is affect retail in the way that the mobile phone affected the phone box for example.”
As well as connecting people to their passions, it has exposed all of us to new niches and products. We are all now connoisseurs, it would appear, in premium coffees, olive oils and fine wines etc.
It is important to not be too dismissive of internet retailing as it has been an oft-used comment within the RTT that small changes at the margins of retail can lead to major changes in the fabric of the sector.
However, a great website is less important than being able to properly understand good old-fashioned customer demand, for example. This is where pure play internet retailers struggle against the traditional retailers – who have been doing it for years.
The fact that Marks & Spencer, for example, took so long to enter the internet retailing world is indicative of the fact that they appreciate the need to get the bricks and mortar aspects of retailing right first.
There may also be a feeling amongst traditional retailers that they are still not completely sure of how an internet presence is anything more than a defensive measure. There is still a struggle to understand how to turn that internet presence into hard cash and add value to the overall brand.
On the other hand, can any retailer afford to go without an internet presence? Probably not – but if they do go down this route, all the basics must be right. The retailer has a huge responsibility to get their info right and to ensure their availability is spot on.
For sure, some internet retailers have generated an incredible level of brand loyalty in next to no time. It can be done. Additionally, it provides a great opening for new entrants and niche players, allowing small operations to thrive in a way that they could not have done in a bricks and mortar environment.
However, if there is one word which needs to be borne in mind above all others when considering internet retailing, it is perspective. Commentators needs to be realistic about what they are actually measuring, the impact it has had on the retail sector as a whole and what it’s sensible ambitions are.
Internet retailing is not all that it’s cracked up to be, mainly because it has been imbued with a scale and power above and beyond that which it truly deserves.
It is a major factor in the UK retail sector and it is forcing companies to reassess the very way they do business. At its current level of 3-5% market share however, and with much of the early growth from catalogue substitution now absorbed, it is hardly about to become the mainstream channel of UK retail.
Anyone writing on the topic would be well advised to look beyond the hype.
Date Published: 12/1/2006 5:45 PM
Note to Editors:
The RTT panellists rely on their depth of personal experience, sector knowledge and review an exhaustive bank of industry and government datasets including the following:
Members of the RTT are:
- Nick Bubb – Independent Retail Analyst
- Dr. Tim Denison – Ipsos Retail Performance
- Jonathan De Mello – Harper Dennis Hobbs
- Martin Hayward – Hayward Strategy and Futures
- Maureen Hinton – Conlumino
- James Knightley – ING
- Richard Lowe – Barclays Retail & Wholesale Sectors
- David McCorquodale – KPMG
- Martin Newman – Practicology
- Mike Watkins – Nielsen
First mentions of the Retail Think Tank should be as follows: the KPMG/Ipsos Retail Think Tank. The abbreviations Retail Think Tank and RTT are acceptable thereafter.
The RTT was founded in February 2006. It now meets quarterly to provide authoritative ‘thought leadership’ on matters affecting the retail industry. All outputs are consensual and arrived at by simple majority vote and moderated discussion. Quotes are individually credited. The Retail Think Tank has been created because it is widely accepted that there are so many mixed messages from different data sources that it is difficult to establish with any certainty the true health and status of the sector. The aim of the RTT is to provide the authoritative, credible and most trusted window on what is really happening in retail and to develop thought leadership on the key areas influencing the future of retailing in the UK. Its executive members have been rigorously selected from non-aligned disciplines to highlight issues, propose solutions, learn from the past, signpost the road ahead and put retail into its rightful context within the British social/economic matrix.
Definitions: The RTT assesses the state of health of the UK retail sector by considering the factors which influence its three key drivers.
1. Demand – Demand for retail goods and services. From a retro-perspective, retail sales, volumes and prices are the primary indicators. When considering future prospects, economic factors such as interest rates, employment levels and house prices as well as others such as consumer confidence, footfall and preferences are used
2. Margin (Gross) – Sales less cost of sales; the buying margin less markdowns and shrinkage. Cost of sales include product purchase costs, associated costs of indirect taxes and duty and discounts
3. Costs – All other costs associated with the retail operations, including freight and logistics, marketing, property and people
The Retail Health Index – how is it assessed?
Every quarter each member of the RTT makes quantitative assessments of the impact on retail health of demand, margins and costs for the quarter just completed and a forecast of the quarter ahead. These scores are submitted individually, collated and aggregated in time for the RTT’s quarterly meeting. The individual judgements on what to score are ultimately a combination of objective and subjective ones, drawing upon a wide range of hard datasets and softer qualitative material available to each member. The framework follows the example of The Bank of England Agents’ scoring system on economic intelligence provided to the Monetary Policy Committee.
The aggregate scores are combined to form the Retail Health Index (‘RHI’) which is reviewed at that meeting and occasionally revised after debate if members feel it appropriate. The RHI tracks quarter on quarter changes in the health of the UK retail sector and as such provides a useful and unique measured indicator of retail health. The index ‘base’ of 100 was set on 1 April 2006. Each quarter, it assesses whether the state of health has improved or deteriorated since the previous quarter. An improvement will lead to a higher RHI score than that recorded in the previous quarter, and with a deterioration leading to a lower score. The larger the index movement, the more marked the shift in the state of health.
The RHI has two main benefits. Firstly, it aims to quantify the knowledge of the RTT members in a systematic way. Secondly, it assesses the overall state of health of the UK retail sector for which there is no official data.
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