Markets, markets everywhere – but which are right for your business? Emma Herrod looks at the global growth of ecommerce.
THE WORLDWIDE recession produced a harder home market for UK retailers but it also delivered opportunities for expansion into international ones through ecommerce. Most countries are seeing a growth in online retail sales and UK e-retailers have been swift to expand their offering through international delivery or by moving into new markets, launching country-specific sites and setting up local customer service and fulfilment operations. Online sales by British retailers overseas are predicted to increase seven-fold to £28bn by 2020 as their share of online sales from abroad rises to 40% of retailers’ total online sales. Overseas shoppers’ interest in UK brands online is growing by 46% a year.
Retailers such as ASOS , Farfetch, Book Depository and Burberry now receive more than half of their traffic from other countries and have won themselves a place in the list of the top 20 ‘internationalisers’ in a study by strategy consultants OC&C and Google . But how is the retail sector faring in other economies and which countries hold the biggest potential for UK e-retailers?
The world economy is going through the longest recovery in living memory, and while it is slowly recovering there is still a strong headwind, explains D&B Senior Economist Warwick Knowles. “There are patches of growth,” he says, particularly in countries with strong oil revenues. The eurozone emerged from recession in the second quarter of 2013 and he believes that Germany is the best place in Europe for retailers to take advantage of this revival. There is more optimism in the US than in other parts of the world, and while this is tempered by uncertainty on a number of fronts, including anticipated federal policy challenges, Knowles says its private sector is poised for growth.
Many developing markets still have to contend with major structural issues such as business regulations, high inflation and current account deficits. Knowles advises that when considering new markets, retailers should look particularly at whether these are opening up, liberalising and adopting international norms for business – as is happening in Mexico – or private sector businesses still face political interference.
Amongst the developing markets, China holds the biggest potential for international expansion online, according to AT Kearney, with the country’s vast online retail market driving it to the top of the company’s Retail E-Commerce Index. At $23bn (£14.27bn), China’s annual online retail market is second only in size to the US’s. It is predicted that it will expand rapidly over the next five years, growing at an annual rate of 29% as the country’s infrastructure and online purchasing behaviours evolve. Consumer electronics and clothes are the two categories which are most popular with the nation’s online shoppers.
“China’s infrastructure challenges hinder realisation of the country’s full ecommerce potential,” says Mike Moriarty, Partner and Study Co-Leader at AT Kearney. “Delivery infrastructure varies outside of metropolitan hubs and inhibits the efficiency and effectiveness of the ‘last mile’ of online retail product delivery.”
The online market potential of another of the developing nations, Brazil, is a key factor in its number two spot in the AT Kearney listing. The country’s online shoppers are the biggest spenders in Latin America, buying retails goods worth a total of $10.6bn (£6.57bn) annually. Its online market is predicted to expand by 12% a year over the next five years as online shopping becomes more mainstream in most retail categories.
Case study: Next
Next, which delivers online orders to 60 countries outside of the UK, is maintaining a net profit on international sales of around 20% of sales. The company recently revised its estimates for international online sales for the financial year to January 2014 upwards from £75m to…
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Not only is it one of the fastest growing of the developing markets, but Brazil’s retail market is also set to receive a boost when the nation plays host to the FIFA World Cup in 2014 and the Olympics in 2016. Russia is number three in the AT Kearney index, its ranking driven by its large online user base and significant online retail market. The country has 60 million internet users – the largest online population in Europe – of whom 15 million shop online. Russians also own 1.8 mobile phones per person and browse the internet regularly on their handsets. These market dynamics translate into an online retail market worth $9.1bn (£5.64bn) which is projected to grow by 12% a year over the next five years.
When investigating ecommerce expansion there are the obvious macroeconomic conditions and consumer market size to take into account. But factors such as consumer payment behaviour, courier infrastructure and disposable income also need to be considered. So, while those countries with the fast-growing ecommerce markets may look attractive to UK retailers, they do not necessarily offer the easiest pickings. Taking all factors into account to gain a 360-degree view of regions’ online retail readiness, the Forrester Readiness Index reports that Central European countries are strong contenders for ecommerce expansion. For example, according to Forrester analyst Sue Huynh, Poland “has a larger retail opportunity than Brazil, with 35% online buyer penetration compared to just 14% in Brazil”.
What’s more, Polish consumers are showing a growing appetite for online activity, with a 31% year-on-year growth in the number of Facebook users and 9% of businesses now selling online. “Consumers, though, are visiting the same retailers so there may be a need for more competition in the market,” Huynh points out. There are also a number of markets which represent longer-term opportunities. India, which ranked 24 out of the 55 countries analysed by Forrester, has a population nearly as large as China’s, so even a small percentage increase in the nation’s internet penetration could translate into big sales figures, explains Huynh. It is also investing the most in telecoms as a percentage of GDP.
Unsurprisingly, the US takes the top spot in Forrester’s Index, followed by China, Japan, South Korea and the UK. Interestingly, the UK actually has a higher online buyer penetration than the US, at 63% compared with 55%.
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When OC&C looked at the markets in terms of strategic and operational readiness, the US, along with France and Germany, were found to offer the biggest opportunities for UK retailers by 2020. The US alone is expected to be worth £2.7bn to UK e-retailers by the end of the second decade of the 21st century. Western Europe will be worth £9.8bn by then with total European online retail sales reaching €191bn (£160.55bn) by 2017, up from €112bn (£94.14bn) in 2012. This reflects an 11% compound annual growth rate (CAGR) over the next five years.
Johan Berglund, Director and Senior Analyst at The Masterclass Network, agrees. He says in his Quarterly Internet & Mail Order Growth report: “There seems to be an enormous online retailing growth momentum in a lot of European countries right now, and we are probably just seeing the beginning. That the e-driven distance-selling sector is currently carrying overall European retail growth can be further validated through the study of the B2C parcel volumes of the major postal operators in Europe.”
Case Study: ASOS
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InternetRetailing’s recent study on internationalisation shows that the priority region for UK retail expansion is the EU. Some 93% of our survey respondents put it in their top three regions with 70% citing it as their prime target. Research and Special Projects Editor Liz Morrell comments: “This, of course, is of little surprise. Its proximity and ease of a common currency between countries makes it an easy next choice for retailers even though other factors – such as tax obligations – can vary widely between countries.”
Germany is already a particularly strong market for many eretailers. “No surprise given that the country has the second largest ecommerce market in Europe after the UK,” says Morrell. D&B economist Knowles also thinks it is the best place in the eurozone for retailers to take advantage of post-recession ecommerce. Expanding online presents retailers with attractive growth prospects, either by adding ecommerce to their existing store networks or as a vehicle for market entry. It allows them to build their brands and learn about consumers without having to invest in store openings, giving them fl exibility and the ability to react quickly to growth areas.
Yet the risks for the global economy remain substantial, particularly with concerns about the transition in US monetary policy, structural imbalance in China, the still substantial challenges of the eurozone, and continued political upheaval throughout the Middle East. In the UK, D&B predicts that GDP will grow by 1.2% in 2013 increasing to 1.5% in 2014. But quantitative easing will end at some point and, says Knowles, “interest rates cannot continue at the same low rate”. Rising interest rates will hit anyone struggling with mortgage repayments and as he points out “there are a lot of ‘zombie’ companies out there” which will start to struggle with cash fl ow and spark another wave of redundancies.
So, while the UK is not on a clear path to growth yet, ecommerce and m-commerce at least offer an easier and lower-cost way of reaching customers. Ultimately, retailers need to put themselves where their customers are, and the potential market for them and their products. Once that decision has been made, it’s time to test the market, build it up and start acting like a local.