e-Retail storms ahead through recession

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With internet shopper numbers at an all time high and online spending growing by 2.4 billion in 2009, e-Retail is proving to be a star performer in the recession, says Verdict Research in its latest report, UK e-Retail 2009*.

In 2009, online spending by consumers on retail purchases will rise by a substantial 13.3% to 20.9 billion: a rate of growth in severe contrast to the historical decline being suffered by the total UK retail market. Although the internet is undoubtedly starting to slow and become a much more competitive environment, online retail is still set to reach 31.2 billion by 2013, accounting for 10.0% of total retail spending.

The key for individual retailers is to formulate two clear strategies, one for succeeding through the recession and one targeting growth beyond this, as the online channel begins to approach maturity, says Malcolm Pinkerton, Senior Retail Analyst at Verdict Research and author of the report.

Online shopping is the golden opportunity in UK retail; resilient to the recession and with continuing growth prospects.

In 2009, total retail growth will contract by 0.6% as consumer spending is ravaged by the effects of the recession. However, the online market will expand by a substantial 13.3% over the course of the year, driven by the continued increases in the number of internet shoppers and higher expenditure per head. This follows on from the trend of 2008 when there was a 1.0% increase in internet usersto 34.4mand an 18.1% increase in online shoppersto 26.7mwith each of these individuals spending an average of 5.8% more in comparison to 2007.

The major factor behind this outperformance of wider retail is the online channels possession of a number of counter-recessionary characteristics. Internet prices are frequently cheaper than they are in physical stores and shoppers are able to more easily search out bargains, including second-hand goods. Moreover, as a method of shopping, it is disproportionately popular with the more affluent, and therefore more resilient, AB shopping class. For this increasingly time-pressed group, making effective use of their limited leisure time is of the utmost importance. Indeed, Verdicts report revealed that the AB group is now responsible for a massive 56.8% of all online spending.

Those with less money to spend are turning to the internet to search out bargains on branded items like electricals,says Pinkerton. Additionally, the more affluent groups, who do still have money to spend, continue to appreciate the internet for its convenience, making the channel doubly resilient to the downturn.

There is some evidence that the most financially squeezed shoppers are abandoning the internet in favor of cheaper high street shopping at the likes of Primark, Matalan, Poundland and the grocers, particularly in sectors which retail smaller, lower priced items, such as homewares, DIY and clothing, adds Pinkerton.But overall this is being more than outweighed by increases in bargain hunters looking for larger, branded items and the loyalty of those most financially comfortable consumers who continue to value convenience over price.

Retailers forced to work harder and smarter than ever before to achieve growth online

Although online growth in 2008 represented a substantial outperformance of wider retail, it was also the smallest rise in the channels sales since the dotcom bubble burst in 2002. There are a growing number of signs that the internet is beginning to mature and enter a new, more subdued phase of growth, says Pinkerton. Growth in the number of online shoppers in 2008 was strong, but considerably less than the growth seen in 2007. We predict that these growth rates will continue to fall over the next five years, as penetration of the population begins to level out.

With the expansion in market capacity slowing, retailers are inevitably going to find themselves having to compete much harder against their rivals in order to achieve the same levels of growth that they have previously become accustomed to, Pinkerton says. Success will depend on a companys ability to create retail theater and a consistent shopping experience across all channels, with highly differentiated, targeted, propositions heightening the consumer experience. In addition, retailers will need to become more adept at using technology and unfailing at implementing innovations on their websites.

Retailers need to adapt to how consumers are behaving in the recession and prepare for how they will evolve after it

As well as targeting AB shoppers looking for convenience, retailers have to begin planning to exploit the areas which will propel growth after the downturn. The penetration rates of C2, DE and 55+ shoppers are currently so low as to make them relatively inconsequential, but looking to the future it is these same lower maturity levels which mean that these groups have such potential for growth.

We will eventually see online spending soaring among the less affluent C2 and DE shoppers as a result of two particular factors: higher broadband access rates and the growth of free delivery, says Matthew Piner, Retail Analyst at Verdict and co-author of the report. Traditionally the price of broadband accounts has restricted C2DE growth and this has become even more of an issue during the recession. However, we believe that once the economy begins to recover, the offer of cheaper connections, as well as free laptops and other goods as incentives, will see the take-up rates among C2 and DE consumers achieving notable growth. Consumers will also be attracted by the rise of free delivery: with the likes of Play, Waitrose and Amazon offering gratis services, it is only a matter of time before the majority of retailers are forced to follow suit, attracting many more shoppers from the highly price-conscious C2 and DE groups.

The significance of older shoppers will also continue to grow as they develop a greater appreciation of the channel. As it stands the penetration of the 55+ age group in particular is limited by a lack of understanding of the benefits of online shopping, says Piner. However, the size of this demographic in proportion to the general population means it will eventually become a crucial target for retailers. Websites are already making more of an attempt to educate and engage older internet shoppers by encouraging them to use features such as customers reviews, item recommendations and forums to find out more about products. Moreover, in just 10 years time, the heavy internet using 3544 year olds will move into this demographic and take their internet shopping habits with them.

Verdict also predicts a significant alteration in the products and sectors which consumers shop for online, to be catalysed by the end of the recession. Online retail will enjoy a sizable jump in big-ticket purchases as the housing market and economy eventually pick up, says Piner. As shoppers have become more used to shopping online they are more likely to use this channel for big-ticket items when they are able to buy them again. Moreover, the credit crunch and subsequent recession are likely to have a long lasting impact on the attitude of consumers towards spending, fostering increasing austerity. With its clear price advantage over the traditional bricks and mortar channel, online will become even more attractive to recession-hit shoppers as they venture back to buying big-ticket items.