E-commerce — an expansive term describing the buying orselling of goods online—has emerged as a paradigm-shifter for retailers, distributors, manufacturers and the service industries worldwide. Since 2010, global retail e-commerce sales have maintained double-digit growth rates, and this trend is expected to accelerate as technology advances improve the security and convenience of the online shopping experience, enticing more consumers around the world to make the switch from physicalto digital stores. According to Emarketer, a leading digital research firm, in 2016 global retail e-commerce sales grew year-on-yearby more than 20% to reach USD 1.9 trillion, representing around 9% of total global retail transactions. In 2017, annual growth is projected to increase by more than 23%, with retail e-commerce sales of USD 2.29 trillion—which would make 2017 the first year that e-commerce sales account for more than 10% of all retail transactions. In comparison, since the 2008 financial crisis, traditional retail sales have managed only single-digit growth, whilee-commerce sales are currently growing at four times therate of brick-and-mortar transactions.
CLICK TO GROW, OR…
While it’s safe to say that brick-and-mortar stores aren’t indanger of disappearing anytime soon, it is becoming increasingly clear that e-commerce has become a major disrupter of traditional retail models. This is particularly the case in the US, where iconic retail stalwarts like Sears, Macy’s and JC Penney are being forced to shutter stores across the country as they scramble to find ways to get on the digital bandwagon before it's too late.
The struggle of Sears is an illustrative example. Founded in 1886, the company’s evolution has mirrored (and helped to shape) the pre-Internet American retail landscape. Somewhat ironically, Sears got its start as a pioneerin the pre-e-commerce world of longdistance mail-order catalogue shopping, and for decades was a staple anchor tenant of the American shopping mall concept. But the dual onslaught of low-cost retailer Walmart and e-retailing behemoth Amazo nis taking its toll. In recent years, Sears has been forced to offset losses from its core retail business by selling its financial services unit and power tool division. Earlier this year, in a sign of the changing times, Sears signed a deal with none other than the ubiquitous Amazon to distribute its line of Kenmore-branded home appliances—the first time in the company’s 131-year history that it sells products outside of its own distribution channels.
Unsurprisingly, Amazon—the e-commerce pioneer and disrupter par excellence—is the source of an even more profound seismic shift currently underway in the American retail landscape, following its purchase of the US grocery chain WholeFoods for an eye-watering USD 13.7 billion. The news sent shockwaves through the industry and is being described by many commentators as the proverbial “shot across the bow” for traditional brick and mortar businesses.The deal, approved by US regulators in late August, could truly be the beginning of the end of retail shopping as we know it—not replacing brick and mortar stores, but transforming them into part a seamless omni-channel shopping experience driven by online applications, automation technologies and big data, as personified by the Amazon Go concept, which Amazon launched as a prototype in Seattle in 2016 as the harbinger of the shopping future. For companies that can make the transition, e-commerce promises to be a lifeline in an industry otherwise hampered by limited growth. Those that can’t will likely disappear for good.
THE AMAZON OF THINGS
Amazon.com has become a global household word. The world’s largest e-commerce retailer by sales and market capitalisation, Amazon is currently the fourth-most valuable company in the world (behind Microsoft, Alphabet, and Apple).
In 2016, Amazon captured 43% of all online sales in the US, up from 33% in 2015. Most analysts are confidently predicting that in 2017 the company will cross the magic 50% threshold and could account for as much as 53% of online retail transactions in the US. Some predict that by 2021, Amazon will achieve USD 1 trillion in annual sales.
Amazon, the erstwhile bookseller and current “seller of everything” has big plans to change the future. They do so from a position of dominance few other companies enjoy in their sector.
Much more than just an online store, Amazon, through its subsidiary Amazon Web Services (AWS), is also the largest provider of cloud computing services in the US. The rapidly growing company ended 2016 with USD 10 billion in sales, a staggering 28% year-on-year increase. In line with Amazon’s supersized ambitions, the company is targeting annual revenue of USD 100 billion within eight years, which would make it the fastest to reach this milestone in corporate history.
And then there is the surprise brick-and-mortar investment into Whole Foods. While the deal is read by analysts as Amazon’s direct challenge to its arch rival, Walmart, its implications are far wider. The goal, it appears, is to create the perfect omni-channel retail universe, with a seamless array of mobile platforms and apps, desktop shopping, and hyper-modern brick-and-mortar automated smart stores operated by artificial intelligence and integrated with the Internet of Things.
To some, this utopian vision may seem a bit far-fetched, but Amazon is actively building this 21st-century retail universe. Amazon Go, the company’s first major investment in brick-and-mortar retail, is a ground-breaking retail smart store concept with the self-described “world’s most advanced shopping technology” that eliminates the need for check-out cashiers and the standing in line that goes with it. The system runs on artificial intelligence (AI) technologies that are similar to how the promised Internet of Things will operate (where the system automatically senses what items in a household need to be purchased and makes the purchase via an online transaction charged to the customer's account). At Amazon Go, the system knows what you put in your shopping cart and charges your account as you leave the store.
While it remains to be seen what Amazon will do with it, the prediction is that Amazon will transform Whole Foods into the Amazon Go concept.
And then there is the fixation of Amazon founder and visionary leader Jeff Bezos with the idea of home delivery by aerial drone. Once the butt of jokes, Amazon’s futuristic plans for reshaping not only the stores US consumers shop in, but also the cities they live in, created a buzz of their own in June when the US Patent Office published details (complete with visualisations) of patent applications submitted by Amazon back in 2015. The world now knows that Amazon envisions massive “beehive towers” for its dreamed of flock of drones, to be located in downtown urban areas across the US. If the company’s plans for what it describes as “multi-level fulfilment centres” comes true, they will forever alter the cityscapes where such “beehive towers” would be located, as there would be literally thousands of unmanned drones buzzing the skies above the major US metropolises. It can be expected that Amazon will face many obstacles in its quest to take retail shopping literally to the next level—and the company’s utopian vision may seem a bit farfetched to some. But if there is one thing that major disruptors like Amazon have shown–they are good at inventing the future.
ENTER THE DRAGON
The US may be the birthplace of e-commerce, but its most fertile soil is the Asia Pacific region, dominated by China, which in 2015 overtook the US to become the world’s largest e-commerce market by leaps and bounds.
Chinese consumers are the undisputed global champions of online shopping, and their appetite for it shows no signs of abating anytime soon. In 2016, online retail sales in China reached USD 752 billion, a 26% annual increase and representing over 15% of all retail sales in the country. This figure towers over the world’s next largest e-commerce markets—the US, with sales of over USD 450 billion, the UK (USD 110 billion) and Japan (USD 95 billion).
Analysts are projecting that in 2017 Chinese e-commerce sales will exceed USD 1 trillion and that by 2021 will account for up to 40% of all retail transactions in the country. This rapid growth is the result of many factors and mirrors the on-going growth of the retail business in the country in general, which is the main driver of growth for the industry worldwide.
Within China, growth is driven increasingly not by big-city shoppers but by residents of the country’s third- and fourth-tier cities, which are often far from China’s cosmopolitan shopping districts. With the spread of online connectivity and mobile technologies, Chinese consumers in rural areas and lower-tier cities have embraced online shopping with an unmatched fervour.
And like in the US, where e-commerce is dominated by Amazon, Chinese e-commerce is largely a product of Alibaba — the brain-child of Chinese entrepreneur Jack Ma.
With a model different from Amazon (it operates different portals for B2C and B2B transactions and allows for more thirdparty sales), and till now largely limiting itself to mainland China and select Asia Pacific markets, Alibaba is China’s long-term e-commerce champion, with over 50% of all of China’s enormous volume of online sales flowing through the company. In recent years, local upstart JD.com has penetrated Alibaba’s market
dominance, but from the global perspective, Alibaba remains king.
Earlier this year, the company signed a major strategic partnership with US toy and game producer Mattel. Under the deal, Mattel will sell its iconic brands like Barbie, Hot Wheels, and Fisher-Price via Alibaba’s B2C portal, TMall, which has over 443 million active registered shoppers. Mattel and Alibaba will also work together to develop toys and games specific for the Chinese market, which is estimated to be worth some USD 7 billion annually.
E-COMMERCE IN EUROPE
Although lagging behind the explosive growth markets in North America and Asia, European e-commerce retail sales are gathering pace, in line with global trends, and Europe remains the world’s number-three e-commerce market. According to data published by E-commerce Europe, the largest e-commerce trade association in Europe, turnover from European e-commerce transactions in 2016 increased 15% year-on-year
to reach EUR 530 billion. The estimate for 2017 is annual growth of 14%, with turnover from European e-commerce reaching over
EUR 600 billion.
Double-digit growth of e-commerce sales are forecast in Europe over the next five years, supported by data from the EU indicating that consumers are placing greater trust in online purchases, including cross-border purchases. According to the EU Consumer Conditions Scorecard, the percentage of EU residents making online purchases has nearly doubled in a decade, from 29.7% in 2007 to 55% in 2017. While within Europe, the UK accounts for around one-third of all online sales and the volume of online transactions remains larger in more mature markets, the real growth is in the CEE region. In 2016, turnover from e-commerce sales grew, year on year, by over 30% in Romania, Slovakia, Estonia and Ukraine; and by
25% in Poland and Bulgaria.
The Czech Republic remains the leader in e-commerce sales among CEE countries and ranks among the top-five e-commerce markets across the EU. Nearly 30% of Czech companies are engaged in online transactions. In 2016, e-commerce sales reached nearly USD 4 billion, a 23% year-on- year increase and representing just over 9% of retail sales in the country, continuing the double-digit growth trend of the last several years. Local champions include Alza.cz, Mall.cz and Heureka.cz.
In Romania, a relative latecomer to the e-commerce game, the growth of online sales is increasing rapidly. Last year, e-commerce sales topped EUR 1.8 billion, representing growth of over 30%. Part of the increase is the rapid expansion of smartphone penetration in the country, which shot up from 50% of all handsets in 2015 to 70% at the end of last year. While Amazon’s march to global domination began in Europe and the company still dominates Europe’s largest and most lucrative e-commerce markets — the UK, Germany and France — the currently fragmented nature of the European e-commerce landscape gives local competitors certain advantages.
DIGITAL SINGLE MARKET: EUROPE OF THE FUTURE
The main obstacle to further e-commerce growth in Europe is, paradoxically, the lack of a truly single online market. Only around 7% of SMEs in Europe make cross-border online sales. The European Commission wants to change that and to further integrate the single market in the digital space.
As part of these new changes, mobile roaming charges have been abolished from 15 June 2017. In early 2018, the crossborder portability of online content services will guarantee that European consumers will be able to access online subscriptions when travelling to other EU countries.
The third pillar to level the playing field for consumers will come when the EU moves to prevent the unjustified geoblocking of cross-border sales.
Underlying all of this is the EU’s plan to roll out uninterrupted 700 MHz broadband 5G internet connectivity by 2025 , which would support new technologies and services such as smart cars, online healthcare, e-government and highresolution video streaming.
Boosting cross-border e-commerce is one of the cornerstones of the EU strategy, hand in hand with strengthening consumer rights and data protection. Among plans are the introduction of harmonised digital contract rules—thus removing one of the main reasons why companies
will geo-block sales to consumers in other member states. The European Commission also calls for the development of more affordable cross-border parcel delivery systems and simplified VAT procedures for cross-border sales.
THE LOGISTICS REVOLUTION
The worldwide movement of consumers to digital shopping platforms is, unsurprisingly, having a profound impact on the distribution and logistics sector. Worldwide, the sharp spike in online sales has spurred demand not only for new warehousing, but for new logistics models that employ high-tech solutions to meet the constant flow of goods ordered online.
According to a report compiled by CBRE, online retail operations require up to three times’ more warehousing space than brick-and-mortar shops. According to CBRE’s findings, for each USD 1 billion in online sales, an additional 1 million m2 of warehousing is required.
Another change to traditional logistics wrought by e-commerce is the surge in reverse logistics—the massive flow of returns that appears to be the new-normal in terms of online consumer habits. Unable to touch and feel products in-store, online shoppers will typically order several items with
the intention of returning at least some of them. The numbers tell the story: traditional retailers tend to see returns of no more than 8%, but in the online world, return rates from 15% to as high as 30% are normal. In 2016, an estimated USD 29 billion of goods were returned in the US alone.
Most distribution centres are set up to distribute goods to market, not receive returns. This massive increase in the reverse flow of goods is forcing online retailers and their 3PL partners to invest in custom-built warehousing and distribution centres, with the technology backbone to track orders and centralise data.
While some of the major retailers with established distribution channels will choose to invest in upgrades to their own networks, the CBRE report finds that outsourcing is becoming the preferred solution for most companies that do not already have large-scale distribution networks in place. Under this arrangement, the retailer handles the inventory, while the 3PL handles the flow of goods and returns.
Regardless of a company’s strategy, the need for an e-commerce solution is becoming increasingly acute for a growing number of businesses. Technological and market forces are combing to bring about a sea change to global supply chains and is expected to act as a catalyst of growth for the sector over the coming years.
Changes to the warehouses of the future include an array of high-tech solutions, including artificial intelligence (Amazon is close to launching robot warehouse workers that can pick and pack faster and with more accuracy than human beings) and drone technology, which could see distribution centres built vertically, with smart drones doing the picking and packing.
It remains to be seen to what extent the utopian visions harboured by the likes of Amazon and other e-commerce giants will materialise. Will drones be flying your next pair of hiking boots, together with your weekly groceries, directly to your door? Will shopping become a seamless (and cashless) mix of appdriven and data-mined online and in-store experiences?
Will Amazon really be the only store in the world? Amidst the speed of change, one thing is certain: change is going to come.