The imminent demise of traditional retail has been predicted many times over the past decade, with online shopping and e-commerce giants the prime suspects. Since 2017 the number of these predictions have dramatically increased, with a plethora of published articles all declaring that e-commerce has reached its ‘tipping point’. However, despite this doom-mongering, many traditional retailers remain and have been – until recently – reporting healthy sales figures, albeit with reduced levels of profitability. But could the black swan of the COVID19 pandemic be the final nail in the coffin for physical retail?
To understand this let’s first evaluate what is meant by a ‘tipping point’? A quick Google brings up the following definition: the point at which a series of small changes or incidents becomes significant enough to cause a larger, more important change.” So a tipping point from a retail perspective means the point when enough people swap their shopping habits from physical to online. But how many people is enough to represent this ‘more important change’? I would suggest that this would mean when online shopping becomes the default norm for the mass market. When it ‘crosses the chasm’ from niche to mainstream and becomes the way people buy ‘most things’, and not just ‘some things’. The ‘cross the chasm’ statement comes from the famous 1991 marketing book by Geoffrey Moore where he describes the diffusion of innovations into society and how a ‘chasm’ exists between those consumers who embrace and take risks with new innovations (‘Innovators’ and ‘Early Adopters’) and the Majority who are more cautious and pragmatic.
Geoffrey Moore’s Diffusion of Innovation Bell Curve.
New innovations may initially have a slow and deceptive introduction to the market, but once they cross the chasm and the Early Majority adopts the new innovation it quickly becomes more disruptive, drawing consumers away from the existing technologies. Moore estimates that around 2.5% of the market are innovators and 13.5% are Early Adopters, so for a product to ‘cross the chasm’ it has to have market penetration and acceptance beyond 16%. Those innovations that fail to cross the chasm into the mainstream either remain niche, or, more likely, disappear.
A GLOBAL TREND
If we take the chasm crossing as the tipping point, and 16% is the magic number, then 2020 is predicted to be the year when ecommerce ‘crosses the chasm’ globally, reaching 16.1% of total retail sales, up from 14.1% in 2019. This 16.1% represents $4.206 trillion of the $26.074 trillion value of the retail market in 2020.[i]
Source: Statista. E-commerce share of total retail sales worldwide 2015-2023.
One would assume that the US is responsible for most of this transition. In 2019, ecommerce market share growth in the US marked two impressive milestones: firstly, it increased by double digits for the tenth year running and secondly, it now makes up more than ten percent of the country’s total retail sales for the very first time. This means that if the US has only now reached the 10% mark, the global 16.1% of global ecommerce sales is not propped up by a much larger percentage from the US, but actually from elsewhere. In fact, the United States’ share of the global ecommerce market is declining as more of the globe embraces this new way of shopping, especially Asia. China is now the clear leader in ecommerce, responsible for $667 billion of ecommerce sales. A shift in purchasing power from the U.S. and Europe to China and Southeast Asia has begun, fuelled by the growing number of Asian consumers gaining access to eCommerce due to growing purchasing power and internet penetration, especially on mobile devices.
THE END OF THE BEGINNING OF THE END FOR TRADITIONAL RETAIL
This transition has caused what has been named a ‘retail apocalypse’ in the US and other markets that have followed that trend. In just over three months, fourteen retail chains announced they would require court protection, and many chains have closed hundreds of stores to try and return to profitability. 2017 was a record year for shop closures in the UK and US, and 2018 and 2019 broke these records again, with 9,300 stores going out of business that year in the US alone.[ii] As retailers have struggled, many have become targets for private equity firms, whose focus on profitability has led to lay-offs, shrinking pay-checks and reduced benefits for retail workers. In the US over 80 major retail organisations have become acquired by private equity firms and hedge funds, and in the last decade it has been estimated that over 1.3 million retail workers have lost their jobs in these organisations.[iii] When the retail stores die off, naturally the malls that house them die also. According to a 2017 report by Credit Suisse, between 20% to 25% of shopping malls will close by 2022, many of which repurposed by e-commerce giants to be giant fulfilment centres for the architect of much of this transformation – Amazon.
THE RISE OF THE ONLINE EVERYTHING STORE
While traditional retailers struggled, the new wave of ecommerce retailers, especially the behemoth that is Amazon, have thrived. In the countries where it operates, Amazon has gone beyond being just another retailer to the primary online marketplace, becoming the Everything Store where people can buy whatever they want, all from one location, and get it delivered to their house next day. This growth shows little sign of slowing down, with Amazon reporting net revenue of $280.52 billion in 2019, and $75.42 billion in the first quarter of 2020, a year-on-year increase in worldwide sales of more than 26%.[iv] Outside of the US, Germany is Amazon’s largest market with net sales of $22billion, with the UK third with 17.53 billion.
But can the growth of Amazon be taken to represent the rise of ecommerce as a trend across Europe, and what impact has the COVID-19 pandemic had this transition?
EUROPE CATCHES UP
The answer is yes, but it’s complicated. Amazon’s astonishing growth is absolutely symptomatic of a wider transition to ecommerce, as the convenience of being able to buy nearly everything you need from one store, without leaving your home, becomes more and more attractive to a time-crunched population. Europe’s ecommerce adoption is also growing at an incredibly fast rate, with an increase of 13.6% in 2019. Amazon’s direct presence in the UK and Germany has no doubt driven a lot of this ecommerce growth, as these represent the largest markets in the continent. The UK is by far the largest B2C ecommerce market in Europe, with ecommerce sales expected to reach 222.5 billion euros this year.[v] This is due to its high population density combined with a very digitized society, with 96 percent of the population expected to be online in 2020. The Nordic countries are also especially large users of ecommerce, being affluent and digitally savvy, with 62% of the Nordic natives shopping online every month.[vi] Northern Europe also has the highest spending per online shopper: 2.046 euros per year (2018), against an average online shopper spending for the whole of Europe of 1,346 euros.[vii] Central Europe is fast embracing ecommerce, with the Czech Republic the fastest-growing e-commerce market in Europe. In 2019 Its e-commerce market was worth 4.4 billion euros and was projected to expand at a compound annual growth rate of 16 per cent to 2021.
Eastern Europe has the lowest level of ecommerce adoption, with less than 26% of shoppers using that channel in 2018 compared to over 85% in the UK, but it is catching up fast as online retail sales in the countries of Eastern Europe continue to grow at double-digit rates annually. The leading B2C E-Commerce market in the region is Russia, with a projection that online shopping revenues could double between 2019 and 2023.
Internet penetration and usage is obviously one of the major factors that drives ecommerce, and Northern Europe has the highest adoption rates, and Eastern Europe the lowest. Yet across Europe this adoption has been steadily rising, with the predicted average internet penetration across Europe rising from 75.77% to 82.49% in the last 5 years. Daily internet usage has increased in nearly every country in the EU28, with the largest rises in the last three years occurring in Croatia, Ireland, Slovakia, North Macedonia and Romania (although Romania and Bulgaria still have the lowest daily internet usage at 57% and 60% respectively).[viii]
However, all of these figures and forecasts occurred before the COVID-19 pandemic swept across the world.
COVID-19 – ECOMMERCE ROCKET FUEL?
The current coronavirus pandemic is set to change many of our existing paradigms, both socially, economically and technologically, having a major impact on our working and shopping habits. It will accelerate both the scope and the pace of ecommerce adoption across Europe in three major ways:
- Accelerates internet adoption
The pandemic has forced a population to live in isolation and avoid crowded places; and in doing so also forced them to learn how to order everything online, work remotely, and embrace non-group activities. Children and students are being taught via Zoom, gyms are setting up remote and virtual offerings, restaurants and cafes are offering only delivery and take-out options, movies are being released online via streaming services – basically every company has had to either rethink their business model or their ways of working, accelerating the digital and online revolution. For those who do not use the internet, these new options are of little use, and as a result many of the internet Laggards, especially those in their later years, will have found themselves struggling. Any remaining resistance to internet adoption is likely to be forgone out of sheer necessity; the need to acquire goods, connect with friends and family and work remotely overriding any nervousness or reticence to move from physical activities to digital. State enforced isolation during this period is bad; without internet connectivity it must be awful. Expect to see figures demonstrating a large spike in internet adoption and broadband installations and upgrades; a trend that only goes one way.
- Accelerates the Transition From Physical Shopping to Ecommerce
The state-enforced closure of most retail businesses and restaurants has probably shaved five years off the time it would have taken eCommerce to move from the Early to Late majority. Rather than wait for ecommerce to diffuse and naturally ‘cross the chasm’ into the mainstream in the Laggard internet markets such as Central, Southern and Eastern Europe, instead the population in these areas has been forced to use eCommerce. This is not just a short-term spike, for in a world where people are told to stay at home, many – especially senior people who would have made up the Late Majority and Laggards – are forced to use online shopping due to being deemed an ‘at-risk’ category and instructed to not leave the house or have visitors. As a result, many of these late adopters are experiencing the convenience of e-commerce for the first time – and it won’t be their last. Many will come to see their old weekly shopping habits as fifth-wave drudge work, a remnant of a past life of inconvenience and manual labour, the equivalent of beating carpets or hand-washing clothes. Even after the pandemic’s peak is over, people will have been trained to avoid large gatherings, not travel unless absolutely necessary, entertain themselves at home, use online shopping and order takeout to be delivered rather than get it themselves, etc. Public nervousness around large groups of people will probably represent the final death blow for many of the physical retailers who lack a compelling online presence, or who are unable to distinguish what value they provide to consumers above what online commodity sellers such as Amazon can offer. As these retailers fail so will many of the remaining shopping malls, becoming a ghostly remnant of the 20th century retail revolution, awaiting demolition or the chance to be repurposed as an ecommerce fulfilment centre.
- Accelerates the automation and cashless revolutions
One of the inhibitors of eCommerce is the fact that many people – especially those who would naturally fall into the Laggard category – have grown up in a world of cash and physical currency and have a distrust of digital payment methods. Europe has an aging population and this demographic constitutes the majority of these digital payment laggards. Central and Eastern European countries are especially affected by this; for example, 45% of all transactions in the Czech Republic are still settled via cash.[ix] This obviously affects eCommerce, for the whole process is digital and cashless. Now, physical currency is seen as a biological nightmare – the handling of paper and coins that have been touched by many hands. Even card payments are seen as a no-no, with buttons to press that again have been touched by many other potentially infected consumers. The social distancing rules also mean that the simple act of handing over money is problematic, for you have to be next to someone to do that. People are therefore having to overcome any natural resistance they may have felt towards contactless and digital payments methods, creating a preference for these methods in even the slowest of adopters of new methods. Also, as more people get exposed to the convenience of ordering from home, combined with the desire to avoid themselves or their goods coming contact with other people, then the request for on-demand, automated delivery of goods will skyrocket. Europe also has a number of unique challenges from an infrastructure perspective, as unlike the US and China, most of its road network – especially in the inner cities – was laid down in a time before automobiles, restricting accessibility. Many areas in Central and Eastern Europe are also rural, making them unprofitable for ecommerce using traditional delivery methods. Satisfying this increased demand for omnichannel logistics will therefore accelerate the experimentation and adoption of robotic and drone based last-mile solutions in order to deliver goods in a fast, non-biological and cost-effective way.
We should therefore expect to see a significant spike in adoption of eCommerce over the coming months, allowing it to cross the chasm into the mainstream in a greatly reduced timeframe than even the most optimistic of 2019 forecasts predicted. 2020 will not only be known as the year of the pandemic; but also the year that consumer paradigms shifted, the ecommerce tipping point was reached and the chasm crossed. The mass market adoption curve will be heightened and shorted, leaving only the most die-hard of laggards.
It is therefore imperative that in order to stay relevant, retailers accept that eCommerce is likely to become the premium channel for many of their consumers, and that their supply chain and logistics operation is geared towards fast, reliable and consumer-centric delivery methods. Any planned eCommerce timeframes that existed post-pandemic should be re-evaluated, and the planned implementation accelerated. Finally, it is paramount that each B2C business, from retailers to restaurateurs, creates business models that focus on creating a unique value proposition for their both their physical and digital channels in order to ward off the challenge from the Amazons of the world.
Sean Cunley on behalf of P3 Logistic Parks