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The Future of Online Retail

Sally Lai


With the technological advancements in the past few decades, the retail industry has transformed its business model to service the ever-evolving consumer demand. As firms compete alongside increasingly challenging times, many firms have chosen to tap into the world of e-commerce. The rewards for those who choose to venture into this market are endless. Firms soon realise that not only does their e-commerce platform serve as an alternative source of revenue, but the emergence of e-commerce has completely altered consumer behaviour. Never before have consumers been offered this many options, and been so tempted by an impulse purchase just a few clicks away.


To understand the prospects and future of the online retail industry, it may be helpful to examine the online retail landscape of three of the leading economies in the world, namely China, the UK and USA. There is little question to why online retailing has been more robust than ever, as all three of these countries prioritise their technological sectors. China has nurtured multiple new online retailers, most notably Alibaba and its subsidiaries Tmall and Taobao. E-commerce has transformed consumer behaviour and habits in the UK as well, with most supermarket brands developing their own online retailing service to keep up with changing consumer habits. The same trend of changing consumer behaviour could be found in the US, where the world’s biggest online retailer, Amazon, is headquartered. Examining the online retail landscape of these three countries may help extrapolate the future direction of this growing industry.


Market Share

Currently, the online share of total consumer retail sales in all 3 countries has yet to be significant enough to say that online retail dominates the retail market. In the UK, the online share of retail sales was at 21.5% in 2018, a 3.9% increase from 2017, with the value of online retail sales standing at £69.71 billion[1]. Online sales in the US occupied a lesser percentage of the country’s total retail sales, at 14.3% in 2018, up 1.3% from 2017, but with greater absolute value at $517 billion (£400 billion).[2] Nevertheless, China trumps both US and the UK with its volume of online retail sales at a staggering amount of 9 trillion yuan (£1 trillion) in 2018, which is an increase of 23.9% compared with 2017, and is 18.40% of the total retail sales, up 3.4% from 2017.[3]


The high amount of online sales in China can be attributed to its larger population as compared to the US and UK. Regardless, there is certainly room and potential for market expansion in all three markets, with more than two-thirds of the market still dominated by traditional brick and mortar stores. However, there is also evidence of the rate of increase in online sales slowing down, suggesting that there may eventually be a limit to the expansion of e-commerce. For example, the value of retail sales increased 11.5% from 2016 to 2017 in the UK, in comparison to merely 3.5% from 2017 to 2018, where similar trends are observed in both the US and China. This suggests that there are qualities inherent to brick and mortar stores that cannot be easily replaced, such as the visual, auditory and kinesthetic experience of shopping. More and more retail firms are also putting more focus on improving and revamping the experience of shopping for shoppers to various levels of success, such as by incorporating virtual reality, voice-controlled robots assistant, and in-store customisations, which further hints that e-commerce is unlikely to fully replace retail stores.


Technology

Nevertheless, this is unlikely to deter online retailers from continuing to expand and maximise their revenue, where many have chosen to employ technology that further enhances consumer convenience and reduce costs. By employing artificial intelligence to understand consumer preference, behaviour and patterns, further personalization of web pages and recommendation items gives online retailers an edge over traditional retailers - and is hence crucial to the success of an online retailer. Statistics show that 74% of customers feel frustrated when website content is not personalized.[4] Collecting such vast amounts of data could also aid in cost reduction for the company, as understanding how demand fluctuates could lead to better managing of labour, cost and inventory. World’s largest retailer Amazon, which occupies more than a third of the online retail market share of UK and 49% of that of the US[5], spends a much larger proportion of its revenue on information technology in its mission to get closer to customers as compared to traditional retailers, where on average over the next 5 years each of the top 10 largest traditional retailers will be spending $100 billion less into IT than Amazon. On the other side of the world, Alibaba has also invested heavily into artificial intelligence, with an example of the result of this investment being an AI-powered chatbox that can understand more than 90% of customer queries and serves more than 3.5 million users a day.[6] This means that these major online retail mammoths will not only continue to gain a larger and larger edge over traditional retailers, but also over their online competitors – who would find it increasingly difficult to compete.

Aside from personalisation, the great success of Amazon and Alibaba can also be attributed to the convenient and seamless consumer experience it provides. For Amazon, this is mainly provided by its prime loyalty program and quick 1-day free delivery for its prime users. With Alibaba, electronic payments and assigning each customer a single ID to use across its full platform further increases its consumer’s reliance on the company. This seamlessness is something that many other online retailers may find hard to achieve to the same scale, and is something that is near impossible for traditional retailers to imitate.


Singles Day/Black Friday

Another method online retailers use to boost sales is annual shopping events, where offers and discounts are offered to entice potential buyers. In the US and UK, a significant shopping event in the year is Black Friday, which extends to Cyber Monday, and has evolved into a weekend, week or month of shopping discounts and offers. 2018’s Black Friday on its own brought in $6.2 billion (£4.8 billion) in online sales for the US, while bringing in £1.49 billion in the UK, which is a 23.6% and 7% increase respectively. While these results are fairly impressive, not all firms were happy with their result during the shopping extravaganza, in particular UK firms. Clothing retail Asos’s chief executive Nick Beighton called its Black Friday performance in 2018 ‘disappointing’, and the company has admitted to ‘setting prices too high during the sale’. Similar failure to satisfy consumer’s appetite for worthy discounts may be why shoppers in the UK have become increasingly cynical about the deals available during Black Friday and Cyber Monday, where according to a consumer survey by PwC in 2019, 29% claim that the deals aren’t exciting and 20% believe that deals aren’t genuine.[7]

Perhaps on the contrary, during China’s annual Singles’ Day shopping blitz, Alibaba itself brought in 91.2 billion yuan (£10 billion) within the first hour, a 32% increase from last year’s 69 billion yuan, for a total of 268 billion yuan (£29.5 billion) across the whole 1-day event.[8] This is a significantly higher amount than the figures for Black Friday for both the US and the UK.


Why is it that e-commerce appears more vibrant in China?

A plausible reason behind the success of the Singles day is that it focuses more on the experience of shopping by incorporating games, events and entertainment in a fun and engaging manner, instead of solely focusing on pricing and endless discounts[9], where it is difficult to strike a balance between presenting an attractive price and making a profit. The slew of events around Singles Day also has the additional benefit of increasing attention and publicity to attract more consumers, achieving a level of anticipation for the event that Black Friday seems to be unable to match. On the contrary, Black Friday has more or less remained in its same form in recent years, especially in the UK since it was introduced in 2010 by Amazon[10] - as a weekend of mildly attractive discounts, and hence it may have gradually lost its appeal with some consumers, whom may be chalking off Black Friday as a purely marketing event that gives no true value to consumers.


Another key reason behind e-commerce’s rapid growth in China could be the country’s much higher and faster adaptability to technology, aided by the Chinese government’s bid to make China the world’s technology powerhouse. Across the entire country, in particular in more rural areas of China, the Chinese government has deliberately encouraged the population to shift to the use of digital transaction, such as Alipay and Wechat payment. Statistics reveal that 83% of transactions in China was conducted via mobile payment, which leapfrogged from 3.5% only 8 years ago in 2011[11]. As the Chinese become increasingly accustomed to the use of digital payment, they are less concerned about the possible security risk incurred by digital payment. Even if they do, the prevalence and convenience of digital payment simply outweigh the possible risk of digital payment, where today cash has almost been phased out by consumers. On the other hand, the transition to digitalization in the UK and US has become marred in increasing concerns regarding privacy and security, where consumers are becoming increasingly wary of the dangers that come with putting information online and are voicing out such concerns. These concerns dissuade people from being completely comfortable with shopping online, and may be another reason behind much slower e-commerce growth rates for the US and UK compared to China.


Conclusion

There will definitely be growth in the e-commerce industry for the foreseeable future in all three countries examined above, where firms that have made continuous investments into technology and artificial intelligence for further personalisation to consumers are likely to see fruitful results. However, waning growth rates in online sales, in particular in the UK, reveal that online retailers may need to further innovate, perhaps through marketing, to incite consumer spending. The US e-commerce industry is also a distance behind China’s, but with Amazon at its helm, there is likely still much room for the industry to expand. Amazon and Alibaba are likely to continue being key players within their respective regions, and other firms will have to employ appropriate scale of technology and understand how to target their consumer group in order to compete against them.

References

[1] https://www.statista.com/statistics/315520/online-share-of-retail-sales-in-the-uk/

[2] https://www.digitalcommerce360.com/article/e-commerce-sales-retail-sales-ten-year-review/

[3] https://www.digitalcommerce360.com/2019/01/24/chinas-online-sales-grew-almost-24-in-2018/

[4] https://www.loyalty360.org/loyalty-today/article/customers-frustrated-with-brands-that-fail-to-pers#sthash.3PDFp438.dpuf

[5] https://techcrunch.com/2018/07/13/amazons-share-of-the-us-e-commerce-market-is-now-49-or-5-of-all-retail-spend/

https://tamebay.com/2018/07/third-uk-ecommerce-comes-amazon-online-sales-11-across-europe-2017.html

[6] https://www.scmp.com/tech/innovation/article/2119359/alibaba-lets-ai-robots-and-drones-do-heavy-lifting-singles-day

[7] https://www.pwc.co.uk/industries/retail-consumer/insights/black-friday-cyber-monday.html

[8] https://www.businessinsider.com/alibaba-says-singles-day-sales-hit-912-billion-yuan-in-first-hour-2019-11?r=US&IR=T

[9] https://www.retail-insight-network.com/features/e-commerce-in-china/

[10] https://www.telegraph.co.uk/black-friday/2019/11/29/black-friday-name-meaning-history-sales-event/

[11] https://www.statista.com/statistics/1050151/china-market-share-of-mobile-payments/

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