Between growth and apocalypse: the impact of e-commerce in the retail sector

What is the impact of e-commerce in the retail sector?  The “retail apocalypse” that we’re hearing about refers to the flight of consumers from the big stars and stripes malls. In countries all over the world, there is talk of a “retail apocalypse” as consumers’ habits are taking them online and away from the shopping mall. Data suggests that businesses must change how they do business, perhaps taking advantage of digital retail, the only sector in the sector that continues to show double-digit growth.

Retail concerns all activities connected with the sale of goods and services by a company directly to the consumer for personal or family use are considered retail.

In other words, the term “retail” refers to commercial companies such as supermarkets, specialist shops, but also hotel chains, bars and restaurants, barbers, etc. whose core business is the sale of products or services to consumers, who benefit from them directly.

 

Not just physical shops

With digital transformation, the meaning of “retail” has gradually changed. It includes all those activities that sell goods and services to consumers without using classic physical shops. This is the case of e-commerce, the segment of the retail sector that is based on the transaction and exchange of goods and services carried out through the use of telecommunications and information technology.

Today, being a retailer doesn’t require a physical store; retail activities can be carried out even only in digital form.

Moreover, some of the most successful players in the sector, such as Amazon, operate primarily online, providing that a brick and mortar shop is not essential to create a successful retail business. In fact, many businesses—from big-box retailers to small boutiques— have a presence that is both physical and online. In this way, companies have the opportunity, via the internet, to reach a much larger number of consumers and thereby, greater profitability. 

Digitization has increased the ability of all retailers to grow their sales, and when the integration between online and offline is done correctly it is inevitable that this will trigger a real, virtuous circle.

However, this has not always happened, thus increasing the gap between traditional and digital retailers. This rift also manifests itself in the way retailers do business and how they react to changes and transformations in their market.

This is demonstrated by the fact that some retailers are showing signs of strong growth, while others are showing signs of greater fragility. Let’s look at some data to better understand these dynamics.

 

A litmus test

Let’s start by saying that the retail sector is considered by many as a thermometer to understand a country’s economic situation. In the expansive phases of an economy, in fact, the real or perceived consumer wealth increases and this leads to increased consumption. As a result, revenues for retailers in every sector increase.

Conversely, in times of stagnation or, worse, contraction, consumers tend to be more conservative and less inclined to spend: in such a case, the first to suffer are retailers, who see their revenues decline and inventories increase at the same time.

Retail sector is made up of many subcategories with specific characteristics that react differently to different situations, sometimes influencing each other. For convenience, therefore, we will limit ourselves to looking at three segments that are representative of the entire sector: large organized distribution (GDO), small retail businesses, and, finally, e-commerce.

 

GDO and retail: a near apocalypse

The first two categories are experiencing a similar trend, if only because they both move mainly in the “analog” world.

In order to understand what is happening, and what will happen, in Italy in the near future with regard to these two segments, it is always useful to look at the American market, which often and willingly anticipates the trends that then manifest themselves in Europe.

These fairly positive figures are, however, mitigated by others, which speaks to the volatility of smaller retailers. Between 2016 and 2017, about 90,000 small- and medium-sized shops closed; Italian retail is also experiencing (at least in some of its sectors) a delicate situation.

According to the latest Istat surveys, in January 2020, retail sales in Italy showed a zero change in value and a slight increase in volume (+0.1%).  In particular, food sales increased both in value and volume (+0.8%) while non-food sales fell by 0.4% in value and 0.3% in volume. Looking at the previous quarter (November 2019 – January 2020), the data is roughly the same, with a slight growth, below 1%.

Large retailers, on the other hand, are doing a little better, since the value of retail sales increased by 2.3% compared to January 2019. Large-scale retailing also comes from a four-year period (2013-2017) in which aggregate turnover grew to €83 billion in 2017, the best result since 2014, while there was a 5.5% decrease in net operating margin and a 5.9% decrease in net profit (repubblica.it).

What does all this mean?

It means that, while we are not necessarily facing a crisis, there are signs of stagnation, even in the face of partial market saturation. And if some compartments have shown themselves to be more lively, such as the discount channel, others are showing clear signs of suffering.

 

The remarkable growth of e-commerce

The picture changes, however, when we look at the growth rates of the third segment: e-commerce. This area has recorded the most remarkable economic results.

Starting from an international context, the value of the retail e-commerce market reached $2.875 billion in 2018, or 11% of the total value of retail sales, up 12% over the previous year. In Europe, the e-commerce segment is worth €313 billion, up 9% compared to 2017 (casaleggio.it). These numbers are just the tip of a trend.

In Italy, instead? Let’s see the impact of e-commerce in the retail sector in Italy.

 

E-commerce in Italy 

Also in Italy the digital sales sector is in a phase of net expansion, much stronger than in the other “analog” retail segments listed above.

This is confirmed once again by ISTAT, according to which e-commerce recorded +15.8% only in January 2020 compared to 2019, in line with a robust and steady growth that recorded +18% of turnover in 2018(istat.it).

Consider that, despite the growth, Italy lags behind many other European countries. The percentage of online buyers in other European countries is very high (93% in the United Kingdom, 91% Nordic countries and the Netherlands, 88% Germany, 84% Spain and France). In Italy, online consumers are “only” 38 million, or 62% of the population. 

This, however, has not prevented the e-commerce sector from generating a turnover of €41.5 billion in 2018, with double-digit future growth prospects.

 

Some final considerations

What can we learn from these numbers? What is the impact of e-commerce in the retail sector? 

First of all, the Italian retail sector is in a slightly different situation than the American sector, but this does not mean that there is an “Italian-style apocalypse” on the horizon.

More fragile at the moment is the traditional retail sector, which is showing more signs of stagnation than growth, but it is not necessarily the case that this condition is generated by the growth in online shopping. On the contrary, this could be the result of overall slowed growth in Italy, which is inevitably reflected in the retail sector.

In this sense, e-commerce and digital transformation could certainly have contributed to put some retailers in difficulty, especially smaller ones, just as happened years ago with the arrival of large shopping centers, which were said to have led to the demise of the city center “high street.” 

However, there is a substantial difference: the impact of e-commerce in the retail sector is important, but e-commerce, in addition to being a “threat”, can also be an incredible tool for all retail operators. Thanks to the internet, retailers can create a showcase to reach an infinitely higher number of people; it’s all about knowing how to do it right.

This does not mean that all stores must go digital, on the contrary. The best solution is more likely to be an integration: maintaining a physical space for contact with customers and implementing an e-commerce site or app dedicated to sales. Incidentally, the observation of digital retail could provide very interesting trends to follow and apply in the real world.