The online retail revolution – all in the shopper’s mind

E-commerce is growing rapidly but it does not yet pose a threat to high street store takings. However, it could be changing the way we think about shopping

If you widen the statistics from Verdict’s focus on traditional retailing – physical products sold in traditional high street retailers – to total consumer spending, including things like travel and insurance, then e-commerce has exploded by 2600% over the past five years according to the Interactive Media in Retail Group (IMRG). That’s 9% of total consumer spending already. Some 24 million British consumers shopped online in 2005 and spent an average of &£816 each, says IMRG. The current growth rate is around 36% per year.

Yet arguably, even these eye-opening figures fail to illustrate e-commerce’s full impact. What the numbers don’t tell us is how online experiences are changing consumers’ attitudes, expectations and habits. As Nick Gladding, author of Verdict’s new report on e-retail comments, e-commerce is redefining how people select retailers, facilitating greater and more informed choice and empowering them to find the best prices. Because of this, “online retailers are far more formidable competitors to high street retailers than their current sales figures suggest”.

OK. But before we go any further, let’s remember the usual caveats. There are some things e-commerce will never be very good at. Wherever it’s difficult to separate information about a product from the product itself – where the direct sensual experience of look, feel, fit really matters – e-commerce falters, and there are many categories like clothing where that’s true.

Things are getting horribly complicated

E-commerce also falls down in terms of immediacy. If you want something now and buying online means it has to be delivered, then it doesn’t deliver value. Also shopping online is mainly an instrumental, lonely activity, not a social, leisure activity, so it’s never going to sweep the board. In fact, even by 2020 Verdict doesn’t believe online shopping will actually cause physical shopping to decline – it will simply steal a high proportion of traditional retailing’s growth.

Bearing those caveats in mind then, what does the burgeoning development of e-retailing mean for marketers? For one thing it means that things are getting horribly complicated. A few years ago, consumers had basically one mode of accessing products/ they had to go to a fixed location shop (apart from a small minority who indulged in a clearly understood and delineated activity of mail order). Today, we can flip between four different options. They are to research and buy in fixed location stores as we always did, do our research in physical shops but buy online (after searching for the lowest price, for example), research online and then buy in a shop, or research and buy online.

For most consumers, there is now a subtle dance between all four modes depending on circumstances, occasion, mood and category. Nail this slippery beast with one simple, neat formula and you will be an Einstein of marketing.

Even so, the accolade won’t last long because things are changing so fast. EBay has been surprised many times over by its success in categories such as clothing and motorcars, where everyone said e-commerce would never work. In the US, comparison shopping (via sites like Kelkoo, Shopping.com and Pricegrabber) is now the fastest growing form of e-commerce. In the UK comparison shopping is only beginning to gain momentum. In the UK, “home and garden” isn’t a big online category, but if the US experience is anything to go by, it’s about to take off. The profile of e-shoppers is also changing. The charge was led by the technology-familiar young, but now the over-55s are the fastest growing user group. Whether it’s shopping mode, category or shopper, it’s all still in the melting pot.

Horses for courses

Likewise for retailers and their suppliers. Take the crucial question of distribution costs. Is it cheaper to deliver direct to individuals or absorb the costs of prime retail sites, fixtures and fittings, self-stacking and cash handling? And what are the related benefits? The answer is that this really is horses for courses territory. For Tesco, e-commerce is an opportunity to move into new categories unconstrained by the requirements of physical display and shelf space. For John Lewis, it’s an opportunity to expand its geographic reach beyond its existing store catchment areas. For Ikea, it’s almost too big an opportunity. It fears that if it was to go online it would not be able to cope with the demand.

For Dell, it’s an opportunity to bypass margin-hungry retailers. Inside Sony, it’s seen as a threat: Sony marketers see their ability to influence distributor in-store merchandising as a source of competitive advantage. So, working out what’s right for your particular company, category and customer base requires hard, careful thinking.

Nevertheless there are two important general trends united by a single, common theme: the centre of the retail universe is changing, from the shop to the shopper. The first manifestation of this trend is the increasing importance of shopper, as well as seller, logistics costs. As a Londoner, if I want to buy a &£10 book from a physical shop, it will cost me the &£10 plus about &£4 in tube fares, plus about &£22.50 in time costs (one and a half hours travelling at current average wages). That’s a total of around &£36, when I can probably get the same book from Amazon for &£8.

Now, very few shoppers think through their costs in such a detailed manner, and the whole equation changes if you are already out shopping and passing a bookshop anyway. But with the rise of alternative channels, the general idea of factoring in time and travel costs is sinking in. It’s driving the growth of online food shopping (Verdict’s predicted star performer with nearly five-fold growth over the next five years) and it’s having an effect on shopper attitudes. As IMRG managing director Jo Tucker remarks: “Many shoppers just don’t have the time to trudge the streets hoping goods are in stock.” So ignore shopper logistics costs at your peril.

The second manifestation relates to the shopper’s first port of call, which is the epicentre of power in retailing. What is the shopper’s first, instinctive destination? Is it a physical shop or mall, well stocked and conveniently located? Or is it an internet site offering easy access to rich, relevant and useful shopping information? If the shopper’s first point of call changes, everything else changes.

Consider the issue of retailer power. Historically, this was based on retailers’ stranglehold on access: suppliers’ access to customers and customers’ access to products. Both had to pay homage to the middleman to access the value they sought.

This, in turn, was a by-product of the fixed location shop’s function as a physical availability point, a payment point and a source of information (by offering choice between competing products). Together these factors create an engine for increasing returns driven by the logic of “I might as well while I’m here”. That &£36 price tag for a &£10 book evaporates if I’ve already spent the time and money going shopping anyway.

But now, for the first time in two centuries, the tide has turned. E-commerce is offering shoppers the possibility that they can save time and money, and access better products or services by not going to a shop.

This means that even if they keep their sales volumes, shops risk losing the marketing initiative. Instead of setting shoppers’ value agenda, they may find themselves forced to respond to a value agenda (easy price comparison, for example) that’s being set elsewhere. They may have to work much harder to justify their costs and margins to suppliers. They will also have to persuade consumers that the personal logistics and search, or “shopping around”, costs are worth it. If I’m not already out there shopping – if my first port of call is a website – I won’t pop into that book store “while I’m at it”.

This “first port of call” effect on habits and expectations may be subtle but it is powerful: in the long term, probably much more powerful than sales trends alone.

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