Throughout 2020 and 2021, national restrictions forced large swathes of physical retailing into hibernation, and consumers were left with little choice than to pick up their mobile phones and laptops in order to shop from home. It’s clear that these seismic events fundamentally changed the way that people shopped and how retailers operated, and the balance between physical and online shopping shifted dramatically.
There had already been a consistent trend of online shopping channels taking sales away from physical stores. However, at the latest KPMG/Ipsos Retail Think Tank meeting, members discussed: just how far the balance between online and physical retailing shifted since the COVID-19 pandemic, if this shift was permanent or temporary, what implications this has for UK retailers today and just how much it will require retailers to adapt in the future.
Methodology
The first topic to address though are the varying methodologies used to assess the size of the online market, as there is no standardised approach. A multitude of data sets, sample sizes, focus groups and consumer surveys are used to stack the data in many different ways.
Nick Bubb, retailing consultant, comments: “While the BRC-KPMG basket of major non-food retailers is comprehensive, it is not exhaustive, and it may understate the overall online sector growth – especially if all ‘pure play’ online retailers are included. On the other hand, while the Office of National Statistics (ONS) should have a bigger and better sample of large online retailers in its monthly figures for non-food sales – as it is compulsory to provide figures to the ONS – it also includes many small and independent retailers in its figures, who clearly have lower rates of online sales penetration and ultimately, whose total sales are inherently harder to track accurately. The proprietary KPMG consumer spending model attempts to adjust for the weaknesses in the ONS and the BRC online non-food sales figures.
“In terms of online food sales, the BRC-KPMG survey does not provide a measure, but the monthly consumer panel data produced by the rival research businesses, Kantar and NielsenIQ, do have reliable figures for online grocery sales penetration for the big supermarkets, although they would slightly over-state the online sales penetration of the whole food retail sector.”
While it’s important to consider elements from a number of reporting models, and although there is consensus in the data with regards to the direction of travel that online penetration in food and non-food retail is headed, there is a degree of disparity between the different figures.
KPMG’s proprietary modelling is based upon data from the ONS, BRC and Euromonitor – in addition to KPMG’s tracking of online and instore spending during the COVID-19 period. The forecast estimates are a combination of statistical forecasts combined with KPMG’s long-term economic projections and sector points of view.
RTT members are in agreement that ‘the truth lies somewhere in the middle of the data’ and are happy that the KPMG consumer spending model produces figures and forecasts that incorporate the strengths and accounts for the weaknesses of the other models – helping to produce an accurate and well-rounded data set.
Overall online penetration
RTT members agree that while online retailing has been growing at a steady and relatively consistent pace for a number of years, the COVID-19 pandemic, the resulting lockdowns and dramatic shifts in consumer behaviour have all intensified the trend. The past 18 months has seen demand for online shopping grow at an exponential rate, with the KPMG consumer spending model showing that across all categories, online penetration has increased from approximately 16% pre-COVID-19 to 25% in 2021.
This figure shows substantial growth in online, but there is disparity between different categories. Maureen Hinton, Group Retail Research Director, comments: “Electricals will continue to have the highest share online. It is a brand-led sector and products and technical specification are easy to compare online, but being so price-led, with low margins, it is going to be a challenge to be profitable considering the fulfilment costs. The pandemic has also converted shoppers into buying home products online out of necessity but having done so, the convenience will continue to make it acceptable.”
While the trend towards online sales is expected to continue, albeit at a slower pace, books are highlighted as an example of a category that may have reached a point of saturation, resulting in an equilibrium between online and physical sales. As one of the early ‘victims’ of online shopping, physical bookstores have undergone a resurgence as consumers have sought out the social and emotional experience of shopping for books. Until ‘online shopping 3.0’, when major advancements in technology fundamentally change the way people shop again, categories such as books and others at this point of equilibrium are not expected to change to any high degree in the coming years.
Since the start of the pandemic, the data shows that the shift to online has been felt most in the food sector, with penetration rising from 5% to 11% in 2021. Despite their doors remaining open as ‘essential retailers’ throughout the COVID-19 lockdowns, ‘first-time’ online consumers across all demographics have been introduced to online grocery shopping, and those that previously shopped online infrequently, have more regularly used home delivery and click and collect services throughout lockdown.
Paul Martin, UK Head of Retail at KPMG, said: “There are many figures referenced by the media from analysts with regards to online penetration. It’s clear that growth over the last 18 months has been substantial and lockdowns have acted as a catalyst to speed up existing trends – however, we don’t believe it’s as extreme as some commentators have claimed. As restrictions are rolled back, and people are granted more freedoms again, it’s expected that the growth rate similar to 2019 will decelerate, but not grind to a halt. The challenge now for retailers is to assess how their business and operating models can cope with an increasing number of online orders, and how they need to adapt to ensure they are successfully servicing their customers while still driving profitability.”
Implications of increased online penetration today
Since March last year, UK retailers have faced much change and have had to be more agile and flexible than ever before. The rapid uptake in online shopping fundamentally changed the retail sector, but as the UK economy continues to open up and people start to return to city centres and offices, it won’t be a case of ‘business as usual’ or a return to pre-COVID-19 trading. RTT members agree that online will continue to take sales from physical retailing, but the current growth level of online sales will begin to slow.
Nick Bubb went on to say: “Online shopping has boomed over the last year and half, but as the economy and society return to some sense of normality, it will be interesting to see the impact this has on retailers. Just how desirable home delivery services are when people are back working in offices, and how smooth fulfilment will be when the roads are busy again with traffic are two key issues. The ‘stickiness’ of COVID-19 spending trends is therefore very much up for debate in the short term, and the City agrees, as the share prices of those ‘big winners of 2020’, who took best advantage of the rise in online sales, currently paint a very subdued picture overall.”
As we emerge from the ‘stop-start’ of lockdowns, retailers will need to look closely at their own business and operating models with a view to improving profitability. The speed by which online penetration increased will have left many retailers scrambling to piece together supply chains, warehousing and delivery services, and as such, the cost of fulfilment will have had a detrimental impact on profitability. As the dust settles and a ‘new normal’ of consumer behaviour starts to emerge, retailers will need to look again at how they service online orders and utilise physical stores to ways of working that are sustainable well into the future.
The grocery sector in particular is expected to require a re-calibration of its business model due to online penetration more than doubling since March 2020. A whole new demographic of shoppers has been introduced to home delivery services, and older generations who may be at home more frequently have been able to take advantage of cheaper home delivery slots. Many of the new digital shoppers will have been surprised by the convenience and ease of use of home delivery, and it’s expected that these older consumers may not fully revert back to their previous habit of only physically shopping for food.
RTT members agree that in the short term at least, some consumer behaviours will return to a pre-pandemic norm. The provenance and freshness of food has been increasingly important to consumers, and many people – especially the millennial generation – like to choose what to eat on a daily basis. Post-COVID-19, the trend of shopping little and often is expected to pick up where it left off.
RTT members expect that physical stores will be best placed to take advantage of people shopping for food on a daily basis again. As the Government’s ‘work from home order’ is rescinded, it’s expected that many office workers will switch to a hybrid model of working, with their weeks split between the office and at home. This will result in more people heading back into city centres and a return to smaller food shops taking place as part of their daily commutes.
There are a number of new digital services which allow for the quick delivery of small shopping baskets, and an increasing range of companies are now offering home delivery meal kits that could challenge physical stores for a share of these smaller, daily baskets. However, whilst these have prospered during lockdown, they only represent a very small fraction of the market and questions remain as to whether they are economically viable in the longer term.
One area where RTT members believe that online shopping is expected to penetrate further is the fulfilment of fewer, but regular ‘big shops’. Many consumers now look to online delivery as their central source for the purchase of bulky, non-perishable items such as toilet paper, pet food, frozen goods and alcohol. RTT members also expect to see more seasonal variation in online grocery sales, with the colder, winter months resulting in yearly peaks of online orders and home deliveries.
The growth of online shopping will clearly have implications for the high street and physical retailing, but RTT members agree that this will be a ‘recalibration’ as opposed to the ‘decimation’ suggested by some commentators. Despite the demise of many legacy retail businesses over the past couple of years, physical stores still remain an integral part of the overall proposition. We are continuing to see the likes of Google, Alibaba, Amazon and other big tech companies open stores. These platform-based businesses know the importance of physical space and what it can add to their offering, with stores acting as a marketing tool, showroom for products, brand experience and even collection point for online orders.
The physical retail landscape is definitely facing change, and retailers will need to adjust the use, size and location of many of their stores to help form part of a multi-touchpoint retailing ecosystem – one which compliments the growth in online sales.
Outlook and implications for the future
The KPMG forecast predicts that in 2030, online penetration as an average across all retail categories will reach between 35% – with food retailing reaching 15% and non-food at 50%. This increase in demand clearly indicates a slowing of the growth rate, but the upward trajectory is not in doubt. RTT members agree that this widespread change in consumer behaviour will have major implications for UK retailers, and their business and operating models will need to be reviewed and adapted in order to drive profitability and service customers.
One major impact of the increased usage of online and home delivery has been the rising cost of doing business for retailers. These costs will need to be assessed, as currently, profitability for the sector is at a record low and RTT members suggest that cost savings of between 20-50% (of the pre-COVID-19 cost-base) will need to be found in the coming two years. The way that retailers allocate funds to their Capital Investment programmes will also need to change, with regular investment in technology and fulfilment taking an increasingly bigger share of the budget than store openings and refurbishment.
The line between online and physical sales has become increasingly blurred, and this is only set to intensify as new technology is introduced and consumer behaviour evolves. James Sawley, Head of Retail & Leisure, HSBC UK, explains how the way retailers measure success will need to change: “Over the next ten years, consumers will be utilising a mix of physical and digital touchpoints with the same retailer to make purchases. The experience of being a customer will be so intertwined between the digital and physical, that it will be impossible for many retailers to determine between the two. As such, the manner by which a retailer’s performance is measured and reported will need to change, retailers will need to be progressive with their thinking and this will include determining success in terms of ‘total sales’ as opposed to by any specific or single channel.”
As UK retailers’ operating models transition to meet consumer expectations, and current metrics such as sales and profitability by channel cease to deliver the required reporting information – the metrics and KPIs for measuring success will need to become far more customer-centric. Similar to many players originating from the digital space, metrics such as lifetime value of the customer, net acquisition cost, customer retention cost and loyalty will all become a focal point as retailers’ further transition to operating as consumer commerce businesses.
These changes will have sizeable implications for the high street, but RTT members agree that this is by no means the end of physical retailing. In both non-food and food, physical shopping is expected to remain the most dominant aspect of most retailers’ multi-touchpoint offering.
That’s not to say that the purpose and use of many stores won’t need to change, the sector will see more stores offering immersive experiences for customers – often acting as introducers to a brand or to build customer loyalty and retention. Jonathan De Mello, Equity Partner, CWM Retail Consulting, explains: “We know that opening stores has a positive impact on online sales in a local area, with catchment areas benefiting from a halo effect in terms of total sales. Retailers are quickly realising that utilising physical space in high footfall areas as a ‘showroom’ for their products and brands is a model that delivers sizable ‘benefit to brand’ across all channels.”
For the grocers, the increasing demand for online shopping will mean the type and scale of fulfilment options will need to expand. Mike Watkins, head of retailer and business insight, NielsenIQ, adds: “At mid-2021, nearly one in three households were still choosing to shop for food online at least once every four weeks – with many happy to use these services for smaller baskets, which are often less profitable for the grocers. Shopping for food online has become a regular part of grocery shopping, and for many this adjustment will be permanent. This rapid change has led to many grocers needing to look closely at their own operating models, and as online penetration is expected to grow further in the future, the additional cost of fulfilling orders and home delivery will need to be balanced against the ongoing costs of running stores.”
Grocers will likely need to increase the amount they charge for delivery services and the food sector is approaching a tipping point where automation and technology will need to be introduced to fulfil orders, as opposed to the currently efficient, but labour-intensive method of manual ‘pick and pack’. Investment into technology that can further personalise and automate the customer experience will also be required, as consumers will seek out more intelligent and intuitive ordering services – a trend that will only be intensified as technology becomes more connected around the home and in people’s lives with the advancement of the Internet of Things.
RTT members agree that the UK retail sector is on a set course for further online penetration, but as retailers adapt their models to service customers as consumer commerce businesses, the specific level of online penetration will have reduced importance to retailers. The challenges that the sector faces will be there regardless, and channel performance and the balance between online and physical will be less relevant as retailers service consumers through a myriad of intrinsically linked channels.
RTT members also discussed the potential negative impact that such a shift towards online would have on society. Martin Hayward, Founder, Hayward Strategy and Futures, shared a word of warning with regards to the current direction of travel: “In the never-ending search for efficiency, retailers must be mindful to remember who they serve in order to exist. Customers are not nearly thought about enough in this process, and it should be an obligation for the industry to consider how their drive to service online orders impacts on society. Following 18 months of restrictions, younger generations have been robbed of many of the social interactions that are so important early on in life. Investment into on the high street to make shopping a fun, social experience should remain a focal point for retailers – rather than contributing towards a vision of people being further isolated, with everyone shopping from home as our roads are bumper to bumper with delivery vans pumping Co2 into the environment.”
Conclusion
The UK retail sector had been on a set course of increased online penetration years before the COVID-19 pandemic, but as restrictions forced non-essential physical stores into hibernation, the balance shifted even further towards online sales. Existing trends were accelerated, and all areas of the retail sector saw exponential growth in online sales.
RTT members agree that retailers will need to adapt many aspects of their operating models at a much faster pace. The way that retailers charge for and fulfil orders, their supply chains, the amount of funding pivoted towards investment in technology, use and location of their physical stores, and their reporting models, will all need careful consideration and decisive change if they are going to flourish.
Ultimately however, over the next decade the question of channel-specific sales will be largely academic, as retail is on a pathway to becoming a ‘channel agnostic’ sector. In this future, the challenges that retailers face and the subsequent requirement for model change will need to happen no matter the level of online penetration, whether it’s 30, 40 or 50%.
Paul Martin concludes: “It’s fair to say that in the future, the answer to driving success will not be online vs physical, but rather a hybrid business which is hyper customer-centric and blends the digital and physical into a single multi-touchpoint offering. Customers will be accustomed to enjoying all the benefits and convenience of online, seamlessly intertwined with the joy and experience of physical shopping – where the sale is ultimately made will not matter in the slightest.”
