Don’t underestimate the web’s impact

Invariably discussions about online retailing now refer to its ‘maturity’. While online sales growth mirrors the volatility of retail sales generally and exceptional growth rates are history, growth remains and will remain significantly above average.

The maths are compelling and leave no room for complacency. If we assume that in 2010 the online share of the retail market is about 7%, then on relatively conservative assumptions - continued growth in the mid-teens in a relatively flat consumer environment - by 2015 it will be 12% and by 2020 more than 20%.

As I see it, the risks are on the upside: online growth could re-accelerate. The online market has moved way beyond ‘generic’ items, such as books and DVDs, with clothing now the third most popular online transaction. Imagine if today’s teenagers translate their current social behaviour online into their everyday shopping habits in their 20s. If click-and-collect gains momentum, especially in grocery, the retail landscape could soon need to look very different. Factor in the almost inevitable impending consumer recession - the current optimism expressed by Sir Terry Leahy is an inflationary illusion - and the online share could be in the 25% to 30% range in 10 years.

Consumer surveys already show that 50% of respondents think internet shopping is better and there are only four categories in which regular shopping consistently outscores online significantly - enjoyment, customer service, trust and ease of obtaining a refund.

The trust issues are likely to decline as online familiarity grows. The challenge for conventional store retailing is clear - to provide entertainment (along the lines of the 1980s retail-as-theatre concept) and service.

Failure to rise to this challenge raises the prospect of carnage, as witnessed at the leading edge of the internet revolution. From Blockbuster and Borders to Woolworths and Zavvi, the book and music retail scene is reminiscent of a First World War battlefield. HMV has flirted with live music and now men’s clothing (it still sees the music customer as predominantly male) but has yet to come up with a solution for Waterstone’s. Ministry of Sound has moved into retail with its Hed Kandi brand, a decidedly ‘girly’ offer, with everything for a party from the dress through to accessories and the fake tan. Following a successful pilot with Topshop, it has opened two solus stores and plans five more in 2011.

This brand certainly ticks the entertainment box and a collaboration with HMV would seem logical, certainly since music has moved away (regrettably in my view) from the male obsession with guitar heroes and heavy rock.

The name of the game is a seamless offer providing delivery in-store or at home. The retail challenge is appropriate allocation of costs and identification of profit centres - arguably Tesco stores subsidise its online offer.

And, as we know from Ocado, a pure online grocery offer is not a profit model that works. The danger is that the welcome online growth disguises the extent to which store footprints need to be rationalised and downsized in order to maximise profitability.

John Richards Independent Retail Consultant