E-commerce, consumer tastes and the true retail apocalypse
E-commerce is shifting at a pace many thought previously impossible but how will we all keep up with this and what will the longer-term effects be for both consumers and businesses?
Pre-COVID-19 we thought we were seeing a transformation of shopping habits and supporting supply chains, but the pandemic has shown us that we were, if anything, too cautious. Massive lockdowns, consumer concerns around physical spaces and long queues at the few remaining shops that stayed open have turned a whole new segment of consumers onto shopping digitally, as well as spurring already-online consumers to higher rates of consumption.
The pandemic has thrown an accelerant onto a burning fire, leading to a surge in already present trends in the e-commerce environment.
Online retail is now growing at a pace where forecasts are being smashed years ahead of schedule. Businesses are scrambling to build or revamp their online offering. Companies are searching for new warehouse space to help fulfil orders and every organisation that is going deeper online is looking at how they can make the process profitable as costs rise, particularly in the last mile.
This means there will be a radical reshaping of the post-pandemic environment, particularly when it comes to the physical retail space. Even before this crisis began, the reduction in demand for in-store purchases was hitting high streets across the globe, with store closures an all-too familiar sight.
Now, with the cessation of in-store shopping for a quarter or more in many economies, alongside consumer fears about returning to public spaces, many businesses have been pushed to the edge and it is increasingly clear that some form of digital presence is going to be a necessity to survive.
Growth in e-commerce right now is explosive, beating estimates handily and catching many by surprise, even in these abnormal times. eMarketer estimates that e-commerce sales in the US will push over the $700 billion mark, which would bump it up to a share of 14.5% of total retail sales.
In the UK, the e-commerce market is expected to grow at an annualised rate of 19% in 2020.
At the peak of the crisis in May, Adobe estimated that online spending jumped by 77% compared to the same month in 2019. Many retailers have been comparing this sudden spurt to the peak periods that fall towards the end of the year in the West, operating at the same levels of demand they would normally see on Black Friday or in the run-up to Christmas.
In particular, there have been major boosts for essential goods, alongside electronics and a variety of items associated to working from home.
Crucially, low penetration segments are also now seeing a surge as a result of social distancing and store closures, most noticeably groceries. In the US, it is estimated that that the online share of the typical grocery shop is going to head towards 10%, up from 5% to 6% in pre-COVID estimates and four years ahead of projections.
Adobe similarly noted that the online spending splurge had accelerated their forecasts forward by about four to six years.
Almost all major supermarket chains have been caught short and scrambling for the capacity to handle the sudden turn towards online sales, although this has been a dramatic jump in requirements, with an estimated 20% of calories that were consumed outside the home in the US and around 25%in the UK, for example, suddenly needing to be filled by grocery stores.
However, “It's easy to say that this is all COVID,” argues Hunter Gorham, Founder and CEO of online car dealer Joydrive, “I would challenge that a little bit. I think COVID has been certainly an accelerant, but I think it's an accelerant to a foundation that's already been laid.”
For them, they “Were fortunate to be growing quickly before COVID. Then COVID was just a lightning rod accelerator.”
A whole new set of customers, a whole new set of behaviours
One place that the pandemic is acting as an accelerant is amongst consumers who were reticent to join the digital revolution pre-crisis.
“The pandemic and lockdown measures prompted a lot of consumers who hadn’t previously used online services to have no option but to shop there,” says Lena Roland, Managing Editor for WARC Knowledge. “There has been an increased uptake, for example, among older consumers who may have not shopped online and have been forced to adopt it.”
Surveys of US consumers have found rising e-commerce rates across the board, including 59% reporting that they had increased their online shopping since the start of the outbreak, 73% saying they had tried a new online retailer and 49% of over 50s who did not shop online prior to the COVID-19 pandemic moving over to now saying say that they’re likely to subscribe to a delivery service.
“We've had a variety of conversations with customers that have said stuff to us, ‘Look, we never did online groceries, we never did GrubHub, and now that's all we're doing. COVID forced us to try it. It worked. We like it. And now we value our safety and our time, so much more now,’” says Gorham. “We've sort of crossed the tipping point that we're not coming back from. And so, while I think that this was not just for millennials before COVID, I do think certainly that people that were not considering online before, they've now been forced to try it, love it, and like the time [savings] and the safety. That's now a top priority for them. And they're not turning back.”
The issue of safety is a further sticking point for consumers that will help entrench increased online shopping behaviours. Evidence points to most consumers sticking with stay at homes orders voluntarily rather than through coercion, and even as economies open up, there is reticence to return for many, with a report from GlobalData suggesting many will continue to avoid shopping in-person. This is also without the possibility of second waves further denting consumer confidence.
Even “If the kind of best-case scenario occurs, still the priority [will be] on people's safety and their time is paramount” believes Gorham.
“In the short- to medium-term there is still going to be a fear factor when it comes to safety,” agrees Roland.
This is creating a drive for convenience that many are going to continue with post-pandemic. Gorham notes that “Our average delivery distance was around 150 miles before COVID. We're actually seeing our delivery distance shrink a little bit. We're seeing people that are two miles away, being like ‘Wait a minute, normally I would have gone to the dealership when it was easier, but now I don't care if you're across the street, this is the way I'd like to buy.”
The challenge of performance and profitability
The speed and scale of the crisis has created a scramble to jump deeper into e-commerce, catching even giant brands out.
“The pandemic has forced a lot of legacy companies to accelerate their digital transformation plans,” says Roland. “Where big brands might have been planning to develop a direct-to-consumer offer, COVID-19 has forced companies to be really agile and fast-track these plans. PepsiCo for example reportedly developed its snacks.com and pantryshop.com offer within 30 days. And Kraft Heinz launched Heinz to Home, an online service delivering Heinz essentials to meet lockdown consumer needs.”
While “Companies that didn’t have a direct-to-consumer offer pre-pandemic will be looking to build this so they can serve their consumers in the online space too,” believes Roland, the challenge is in making the margins work, especially right now, where there are many distressed supply chains trying to cope with disruption.
A study of 200 brands by Kantar and Profitero in March of this year found that only 17% of executives in the survey think that they are at the forefront of e-commerce and half noted that pricing and profitability are their greatest barriers to success in e-commerce, with 40% also noting that they are struggling to adapt their supply chains to work in an e-commerce environment.
The transfer of the cost of sorting and picking goods from consumers doing it for themselves in shops to behind-the-scenes operations or in-store pickers places the cost burden back on the organisation. Furthermore, e-commerce operations frequently need dedicated facilities with plenty of operation space, and work best when scaled up.
Even the winners in this crisis have had to eat hundreds of millions of dollars in added costs, with Target reporting that digital sales had risen by 141% in the first quarter of the year but they had struggled to turn that into strong profitability.
There is then a strategic imperative for retailers to consider carefully how they are going to achieve success in the online world. Those with numerous pieces of commercial real estate should be looking at how they can use these stores more effectively and driving customers towards curbside delivery as more profitable option than home delivery. They will also need to think carefully about product to minimise the massive added costs of return logistics.
“In terms of logistics, if more people are shopping online then companies need to ensure they can meet demand and that they can deliver a customer experience that will keep consumers coming back for more. Companies need to consider how the five P’s work in the online world: Product, proposition, place, packaging and price,” advises Roland.
Hovering over all of this will be the need to adopt new business models and embrace automation. It is becoming increasingly clear that the shift to e-commerce can only be truly achieved with large-scale automation. Stay tuned with Reuters Events: Supply Chain for our upcoming feature on automation by signing up to our newsletter here.