Maureen Hinton, Lead Retail Analyst from Verdict, reflects on whether the large investments that retailers are making in online technology are worth it.
The only growth that retailers can depend on these days appears to be online. Without this channel UK retail sales would be dropping by over £3.5bn in 2009 rather than the £1.7bn decline Verdict is currently forecasting. Furthermore, with online sales still producing double-digit growth for the majority of sectors and retailers, this is where businesses are focusing their attention. Indeed about the only bright spot in Marks & Spencer’s results last week was the 34% increase in sales from its website and one of the main aims of its latest initiative is to become a fully functioning multichannel retailer.
However, even though this channel is outperforming significantly, it will still only account for 10% of total retail expenditure by 2013 (£30.9bn) and nearly half of this will be via two sectors: food and grocery; and electricals. Marks & Spencer is hoping for a £500m online business by 2011 – but this would still only account for around 5% of its business; not a significant amount.
Though websites can increase footfall to physical stores as shoppers first search online, then buy or collect from stores, providing retailers with the opportunity to cross sell, there is evidence that they are detracting from store-based sales. When space is still a major cost for retailers can they afford to cannibalise their own sales? Primark has existed very well without a transactional website and as a low-price, high-volume retailer cannot afford to dilute the sales of its stores with an online channel.
When retailers look at the performance of the likes of N Brown or ASOS they must wonder if the future is all online. So what is the answer? Invest heavily in your website or not? Go completely online and shut all stores? Or shut some stores and by doing so cut operating costs? Perhaps e-commerce is not the Holy Grail it seemed for retailers after all.
I suppose the answer lies with what your direct competitors are doing. I know that sounds glib but please bear with me for a minute.
If your and your competitors sales are £250m and you start a website and that site takes 10% of your sales out of your shops, then you are still selling £250m. If your competitor DOESN’T have a website then you may also take 10% of THEIR sales, ergo you are now £275m and they are £225m.
But if you both have a website or neither of you do, then the status quo (or whatever you want, sorry, little muso joke there for you!) remains and normal market conditions will dictate consumer preference.
The question is does online grow sales in your sector or move sales out of shop and online. I believe the latter to be true. But I am willing to hear other thoughts on the subject …