Wednesday 16 October 2019

Threat to retailers as 'Amazon effect' delivers market share to online giants

The rise and rise of ecommerce boosts An Post profits, but lagging behind in the online revolution is bad news for State and firms here

'Eurostat, the EU's statistics agency, is currently working on devising methods that would allow it to estimate the level of online sales from one EU member country to another.' (stock photo)
'Eurostat, the EU's statistics agency, is currently working on devising methods that would allow it to estimate the level of online sales from one EU member country to another.' (stock photo)

Dan White

Irish retailing is suffering from the 'Amazon effect' as strong increases in the volume of sales translate into much lower increases in the value of sales. The volume of retail sales rose by 4.3pc in May compared to the same month last year. However, the value of retail sales increased by only 3.7pc over the same period. When one strips out the volatile motor trade, the volume of retail sales rose by 4.7pc in May - but the value of sales was up by only 3.5pc.

This relatively modest increase in the value of retail spending comes despite very strong growth in the domestic economy, with the ESRI predicting 5.3pc growth in GNP in 2018 following on from 5.2pc GNP growth in 2017 - GNP remains the best gauge of the performance of the domestic economic.

So why, with the domestic economy growing like the clappers, the number of people at work having surpassed its pre-crash peak and average earnings also growing strongly, has the increase in the value of retail sales been so tepid?

The arrival of the German discounters Aldi and Lidl has definitely contributed to the gap between the rate of growth in the volume of sales and rate of growth in the value of sales. In 2007, when it seemed as if the Celtic Tiger would roar forever, the discounter's combined grocery market share was only a little over 5pc.

The severe post-crash recession persuaded previously purse-proud consumers who would previously never have dreamt of darkening the door of an Aldi or Lidl store to give the discounters a chance. When they did there was no going back to shopping as usual. The most recent Kantar Worldpanel figures put the discounters combined market share at almost 23pc for the 12 weeks to May 20.

The rise and rise of the discounters is only part of the reason for the widening gap between sales volume and sales value growth.

"There has been a notable structural shift. The traditional correlation between economic growth and retail sales has broken down. While there has been some increase in volume, value remains a challenge," says Thomas Burke, director of Ibec's Retail Ireland offshoot.

"Years and years of deep discounting have led customers to expect and demand lower prices. Any price increases are strongly resisted by consumers. If consumers are not getting something for the price they want in the domestic market, then they are heading online."

Unfortunately, the CSO figures only cover sales, whether offline or online, processed by Irish companies. With an estimated 70pc or more of Irish online sales being processed by overseas firms such as Amazon, most online sales don't show up in the official statistics. This is almost certainly the main reason for the gap between economic growth and the growth in the value of retail sales.

"What is sold into Ireland from companies located outside of Ireland can only be accessed through household surveys [where a sample of households are surveyed about their spending habits]. Most people neither know nor care," explains one statistician.

Even if they did, they might not be able to give the correct answer. While most of us would automatically assume that, by ordering from a .ie website, we were purchasing from an Irish online retailer, that isn't necessarily the case.

Meanwhile, the CSO is seeking a statutory instrument that will give it the power to force retailers to break out their online sales separately, this will of course only apply to Irish-based companies who account for at most 30pc of total online sales. Better than nothing but we will still be in the dark about sales by the overseas online retailers.

Getting an accurate fix on the Irish online sales of overseas-based companies is almost certainly a problem that can be only fixed at a pan-European level. Eurostat, the EU's statistics agency, is currently working on devising methods that would allow it to estimate the level of online sales from one EU member country to another.

In the absence of reliable official figures we have to rely on other measurements. One possible straw in the wind is the consumer index compiled by credit card company Visa. Its latest index shows that while what it calls face-to-face expenditure grew by just 2pc in May, ecommerce spending jumped by 6.9pc.

While monthly spending figures can be very volatile, the full-year 2017 figures paint a very similar picture with face-to-face spending unchanged but ecommerce spending up by 7.4pc.

An Post's burgeoning parcel business provides another possible indicator. With its traditional letter business in freefall as more and more people shift to email, it has aggressively targeted the delivery of online orders, teaming up with Amazon in 2016. It is now handling 25 million parcels a year with volumes up 20pc year-to-date following a 20pc increase in 2017, says Gilles Ferrandez, An Post's commercial director for parcels.

In addition its Amazon tie-up, An Post also launched its AddressPal service, which allows customers to have orders delivered to a UK or US address by online retailers that don't ship to Ireland, in 2016. It now has 160,000 registered users and recently delivered its one millionth parcel.

Both the Visa and An Post figures point to continued strong growth in online sales.

While the number of Irish retailers whose demise can be directly attributed to the loss of business to online competitors has been relatively limited up to now, video rental company Xtra-vision which closed its doors in January 2016 springs to mind, that could change very quickly.

In the UK, Maplin collapsed in February, Debenhams recently issued its third profit warning this year, House of Fraser announced that it was closing over half of its stores while Marks & Spencer recently revealed that it plans to shut over 100 of stores by 2022. Will traditional Irish retailers be able to avoid the carnage now being experienced on the UK High Street?

It's not all bad news, however.

Although the gap between growth in the volume and the value of retail sales remains wide, there are some signs that it is at least narrowing. In 2015, non-motor retail sales volumes grew at an annual rate of 6.2pc while the value of retail sales grew by just 2.8pc, a gap of 3.4pc. In 2016, retail sales volumes increased by 3.2pc while the value increase was a mere 0.1pc, a gap of 3.1pc. Last year retail sales volumes rose by 4.3pc while the value of retail sales was up 2pc, a gap of 2.3pc.

By May of this year the gap had narrowed to just 1.2pc.

That's the good news. The bad news is that traditional Irish retailers are still competing at an enormous disadvantage to the foreign-based online retailers.

"Irish costs dwarf those of the online retailers," says Burke.

However, merely complaining about high Irish costs and doing nothing is not an option for Irish retailers. They have to find a way to co-exist with the big boys. Going head-to-head with the likes of Amazon is not an option for even the largest Irish retailers who are only a small fraction of the size of the online behemoth.

"I don't think that a business case can be made for competing on price with the likes of Amazon," says Burke. "What the Irish retailers can do is compete on the basis of provenance and authenticity."

There are encouraging signs that at least some Irish retailers are doing just that. One particularly innovative user of digital has been Primark/Penneys. However, instead of building an expensive transactional website, it uses its website to keep customers informed of the latest arrivals in its stores. They are then invited to visit their nearest store to purchase it there.

"There is a perception that digital involves only a transactional website. You don't need this [a transactional website] to have a really authentic conversation with your customers. You have to have a digital presence. People expect and demand it," says Burke.

Unfortunately, establishing an online presence isn't cheap. With their offline business being eroded, the Amazons of this world how can the traditional retailers afford to make the leap into digital brave new world?

The answer of course is that they can't afford not to. "They have to make the turn and invest heavily. It is the only way to survive. They have no choice", says An Post's Ferrandez.

Despite the ravages of online, retailing remains one of the most important sectors of the domestic economy. It employs an estimated 285,000 people and contributes €7bn in gross tax revenues to the exchequer.

"With 70pc-75pc of online orders processed overseas, the State and domestic retailers are losing out. We have a job of work to do," says Burke.

His preferred response to the online threat is what he calls "omnichannel", where the traditional retailers offer their customers a "seamless" service that combines both online and offline. This could include not just ordering online for delivery to the customer's home but also so-called 'click and collect' where the customer orders online but collects from his or her local store as well as traditional in-store shopping.

But, he cautions, seamless will not be cheap.

"It will be expensive to build out the infrastructure and acquire the necessary skills. We will require help from the Government. We will not be able to do it on our own," he says.

He is calling for the introduction of an R&D style tax credit for omnichannel investment by retailers.

"This is in the national interest. As an industry we are well behind and facing a huge threat."

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