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Digitisation will continue to disrupt retail business models

by Ozva Admin

A new study has confirmed that the challenge e-commerce presents for retail is not getting back to “business as usual” as most economies have seen it rapidly gain market share during the pandemic. The researchers believe that most segments are also nearing a “tipping point,” where brick-and-mortar stores will no longer be viable business options for businesses.

The gradual shift of consumers to online retail received a huge boost during the pandemic, as most non-essential commerce went digital. This also presented opportunities far beyond the established names of e-commerce. In recent years, e-commerce has offered many brands a new lease on life, with the benefits of digitization and the creation of omnichannel shopping experiences that increase convenience and reduce costs for the consumer, something that the global pandemic has emphasized, as bricks-and-mortar retailers that have not adjusted to life online have faced huge losses in the last 24 months.

Now, however, analysis by World Retail Congress and OC&C Strategy Consultants suggests that rather than ushering in a new era of hybrid retail, it is more likely to usher in a particular type of retail. According to the researchers, when digital retail gains 30-40% of the market share, the retail sectors in any given market will reach a tipping point, where the margins of brick-and-mortar stores become unviable.

We estimate a 'frontier' in online retail penetration rates, around 30-40%, which represents an inflection point for physical retailers.

By 2025, nearly half of all retail categories will be at or beyond the “traditional retail frontier,” where digital will be the dominant force. In fact, due to the decisive acceleration of the digital shift from Covid-19, many markets have found that the progress of this trend has been years ahead of schedule. Even with older customers profoundly changing behaviour, the UK in particular has seen an acceleration of e-commerce of 4.5 years, according to OC&C. This is faster than any other economy analysed: from China at 1.6 years, France at 2.6 years, and the world average of 3.6 years.

James George, International Managing Partner at OC&C, commented: “The acceleration driven by Covid has pushed many sectors past a tipping point where the traditional retail economy begins to break down. This has resulted in 30% of sectors having already passed the tipping point, and in the next three years this will increase to over 40%. We are about to reach the steep part of the ‘S-curve’ of the digital transformation of the retail industry, when we can expect the landscape to change more in the next five years than in the previous ten.”

According to OC&C estimates, the ‘tipping point’ comes when the contribution margins of physical stores become unviable, losing out to online channels. This occurs when digital sales reach up to 30% of total retail sales. This is called the ‘retail frontier’. Showing how dramatically the picture is changing, in 2015, entertainment retail alone demonstrated an online share of more than 40% across all geographic markets. However, electrical products and clothing and footwear had only crossed the border in the most advanced markets. Today, clothing and footwear are also speeding across the border in Europe, North America, and APAC developed markets.

Retail Market Share Purchased Online, 2007-22 for Top 15 Markets

But what does that mean for retailers facing disruption? According to OC&C, the firm previously found that 76% of the world’s leading retailers believed their model needed to change to remain relevant in the next five years and another 21% said they had doubts about the sustainability of their business models.

Speaking to that end, Ian McGarrigle, President of the World Retail Congress, added: “This report shows what this continued trajectory of online growth really means for the existing retail model and physical stores in particular. Retailers around the world need big decisions to embrace this new balance between online and offline and how to best serve their customers in this emerging new era of digital transformation.”

The relative positioning of retailers at the border will affect the strategic actions that retailers must take. In market segments beyond the 40% mark, brick-and-mortar retailers must be proactive in seeking partners in the digital sphere, or face irrelevance. Between 20% and 40%, companies need to take a position where they build flexibility into the cost base and operating models, and find ways to improve customer retention, as they can still find ways to ensure loyalty. to your offer. But companies in markets below 20% have the most leeway. As well as learning from the segments that came before them, they can also develop their own digital offerings, to try and avoid disruption from e-commerce players.

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