The rate of online sales growth is forecast to slow to single digits this year for the first time. What are the implications for retailers and how should they respond?
This forecast, from the IMRG Capgemini E-Retail Sales Index, follows a subdued end to 2017 in terms of online sales growth.
Look at any Christmas retail round-up and it would appear that ecommerce was the industry’s shining star.
However, while online sales did significantly outperform stores in the festive period, that story belies a general downward trajectory in online retail’s growth rate that deepened over the last quarter of the year.
Online retail sales growth in December was the lowest of the entire year, up 9.1%, and sales growth in November was at nearly half the rate of growth of the same period in 2016.
In fact, March and April were the only two months of 2017 during which the rate of online sales growth was significantly above that of 2016.
So with momentum expected to slow again this year, what has triggered this downward drift?
Peaks and troughs
According to forecasts by IMRG and Capgemini, online sales momentum has settled into a three-year pattern of new technology being introduced, prompting a spike in sales when it is adopted by shoppers, and then that interest levelling off over the following two years.
The most recent spike, in 2016, was driven by smartphones as retailers’ investment in their mobile-responsive sites and apps bore fruit. Sales growth through the channel averaged 77% each month from July to December 2017.
Following this pattern, the next jump in the rate of ecommerce sales growth is set for next year – and it will be driven by voice.
“It may be that we see shopper behaviour shift significantly over the coming period”
Justin Opie, IMRG
IMRG managing director Justin Opie said: “2018 does look set to be a transformational year for retail, with an increasing use of AI services anticipated plus the rise of browserless commerce through devices such as voice assistants.
“It may be that we see shopper behaviour shift significantly over the coming period.”
However, retailers need to get through this year before their online sales are buoyed by voice technology – which they will be only if retailers have adopted the necessary technology to benefit from this forecast trend.
And in the meantime, the industry has to contend with continued consumer uncertainty, inflation, increased operational costs and fierce competition.
IMRG forecasts show a diverse picture for retail in the year ahead, with the rate of online fashion and homeware sales growth expected to be 9% and 10% year on year respectively.
However, these uplifts will be offset by a more subdued rate of growth for health and beauty, expected to be up just 2% overall, and another tough year for electricals, which is forecast to fall 4% in terms of online sales growth.
A cause for concern?
So is this anticipated slowdown in online sales growth a cause for concern for retailers?
Asos chief executive Nick Beighton doesn’t think so.
“Clearly we aren’t experiencing single-digit growth even in the market we’ve been operating in the longest – the UK,” he says.
“Those that win will be those that are really good at running tests and then actually rolling out”
Bhavesh Unadkat, Capgemini
“And the reason we’re doing that is because we focus on our product, on our customer experience and we move at a relentless velocity. That’s how we will continue to win.
“Those are the things that are really important and core to the DNA of Asos. And they’re core to the Asos customer – the customers move really, really quickly.
“Those are things that we do to keep us ahead of those sorts of growth numbers. You will see if you look back over the last 17 years we have always grown ahead of the ecommerce growth.”
This ebullient outlook is all well and good, but many onlookers might think of Asos as the exception rather than the rule – it is a past master at operating online and has generally delivered skyrocketing sales and profits.
Capgemini’s principal consultant in retail customer engagement Bhavesh Unadkat believes that it is Asos’ ability to experiment, gauge what is or isn’t working for its shoppers, and scale or stop it quickly, that has made the fashion retailer resilient to the peaks and troughs of online sales growth – an approach other retailers could adopt.
“The innovation card has been big on a lot of people’s agenda last year. Those that win will be those that are really good at running tests and then actually rolling out, or those that don’t just keep a technology prototype running for the sake of it,” he says.
“Don’t be distracted by new things, only keep trying what actually works.”
He observes that even though online sales momentum in the UK is slowing, pureplay retailers have plenty of levers to pull to increase sales, either by entering new categories or ramping up their international footprint.
Innovation is key
But might more traditional players such as Marks & Spencer, which are in the comparative infancy of their ecommerce journeys, fear that they have missed the boat when it comes to gaining significant sales uplift online?
Co-founder of Dynamic Action and Figleaves.com Michael Ross doesn’t think so.
“There are big opportunities for businesses [like M&S] to leverage their scale,” he says.
“I expect the UK online beauty market to grow by up to 25% in the next 12 months and 15% to 20% per annum over the next five years”
Jim Buckle, FeelUnique
“The big players that can successfully build platforms and plug smaller etailers into them, like The Hut Group, will do well. My hunch is that in this climate you want to be very big or a very niche player – you don’t want to be in the middle.”
One of those more niche players is FeelUnique, which is a relative newcomer to the health and beauty market but is notching up rapid sales growth in an increasingly crowded field.
The etailer’s chief operating officer Jim Buckle says: “While growth in some more saturated segments of online retail may have slowed, beauty is a massively under-penetrated category compared to other verticals.
“I expect the UK online beauty market to grow by up to 25% in the next 12 months and 15% to 20% per annum over the next five years. A pureplay, such as FeelUnique, is perfectly placed to benefit from this trend.”
Although IMRG predicts that online sales growth in health and beauty will rise just 2% this year overall, it expects millennial-focused retailers such as FeelUnique to outperform the market.
Buckle adds that keeping pace with technological innovations will continue to be the key to continuing FeelUnique’s growth online.
“FeelUnique is a technology-led ecommerce experience so voice commerce technology is very much on our agenda given the recent proliferation of devices and digital voice assistants such as Siri, Alexa and Google Home,” he says.
“With 65% of our customers being millennials we have to continue innovating, and we keep a very close track of new and emerging technologies.
“We have recently launched an innovation partnership with digital agency Holition, who will help us to keep an even closer eye on technology trends and which ones we need to incorporate into our customer experience.”
Online sales growth may be set for a relatively subdued year, but there are still plenty of opportunities for retailers of all sizes and operating models to build sales momentum through innovation, expansion and a second-to-none understanding of their customer.