With Game, HMV and Maplin all reporting falls in online sales, has the ecommerce boom plateaued, or is it a case of a few retailers underperforming?
If once is an accident and twice a coincidence, is three times a trend? That’s the question Retail Week has been asking after a trio of major retailers, operating in sectors that are among the most mature online, recorded falls in their ecommerce sales.
Does this signify that online retail has reached a stage of maturity - at least for the entertainment and computing sectors online - and is it a problem for retailers to experience sales falls?
It is worth noting that there is no evidence that the online market as a whole is going to come to a standstill any time soon. The IMRG/Capgemini e-retail sales index shows year-on-year growth was 14% in 2009. In the latest figures, total online sales were up 15% year-on-year in March.
The figures from the BRC-KPMG retail sales monitor are consistent with this. Non-food non-store sales have averaged growth of 15.8% in the 12 months to April this year.
But there is also anecdotal evidence from the British Retail Consortium that online sales growth can no longer be relied upon as a given. BRC director-general Stephen Robertson notes that retailers are having to work harder to maintain non-store sales growth: “They are running more promotions, discounts, especially on big-ticket items, and sending out more email marketing and brochures to alert potential shoppers.”
A BRC spokesman adds: “Participants [in the retail sales monitor] were telling us they are having to work harder to tempt people to shop online - the same as retailers are doing in stores.”
The spokesman says the internet is still a fundamental driver for growth, but adds: “It is hard to say there is still masses of growth in online retailing; how the economy will shape up, and the impact on consumers’ willingness and ability to spend remains to be seen.”
Capgemini vice-president, retail consulting and technology Chris Webster says that the figures Capgemini and the IMRG produce each month for online retail do show a slowdown in online sales growth, and for the electricals category in particular since the beginning of this year. He says: “When the index was initially set up it was growing at 30% to 50% per annum, then dropped to 15% to 18% range throughout 2009 and that’s continued in 2010.” (See the graph overleaf for the growth trends over the past nine months).
The entertainment category is included within electricals in the IMRG’s figures. Webster adds: “Electricals in 2009 had quite a strong performance - growth averaged in the low 20s - but it has slowed down in 2010 and is now tracking at about 6% to 7% year on year.” However, he explains the fall in value of sterling has meant prices of larger consumer electrical items imported from abroad have increased, and so it is possible the index figures for the electricals sector do disguise particularly sluggish entertainment sales.
Game is quick to point out the overall games market was down 20% in 2009, and so it is happy with the way its online sales performed. A spokeswoman says: “The games industry declined 20% last year, and we worked hard to mitigate the decline as much as possible. We are pleased that we outperformed the wider games market.”
And she adds: “We have seen strong growth in online sales over the past five years, driven by significant improvements to the functionality and service offering of our websites, and also by the growth in the video games industry.”
Certainly this point is backed up by Oriel Securities analyst Jonathan Pritchard, who says it is not a surprise that retailers of computer games have seen their online sales fall as “the games market has been tough, and of late the release schedule has been uninspiring”.
However, it is harder for HMV to use this to explain its poor ecommerce sales, as its product mix is much more diverse. In a note Oriel Securities put out on HMV on April 30, it said HMV UK’s fourth-quarter total sales were worse than expected, and said that online sales were down 7.5% as well.
HMV declined to comment on the reasons for its falling online sales, or whether this would be a continuing trend, as the Group is in a closed period.
Planet Retail research director Greg Hodge is less forgiving of poor online sales at Game caused by supply factors. “I don’t buy into the console excuse. As a business it is standing still for too much of the time,” says Hodge, explaining that the release of new games should drive sales even when new consoles are not being launched.
He adds: “It is a sign that it is a rigid business in structure, as everyone knows when new consoles will be launched well in advance.”
It is hard to tell whether either Game or HMV have underperformed in terms of ecommerce sales as their main online competitors are not UK-based. But their pure-play competitors appear to be continuing to grow, unaffected by the lack of a multichannel proposition. Play.com ranks much higher in the IMRG and Hitwise Hot Shops List than either HMV or Game. This measures the number of visits retailers receive to their sites, and IMRG says it is a key indicator of online merchant performance. Back in February 2009, Play.com was still reporting double-digit positive growth year on year.
And another competitor, online retail and white label site provider The Hut Group, raised £14m from institutional investors in April with plans to recruit an additional 100 to 150 staff in the next year or so, indicating that it is also very much on a growth path.
Although a lot of HMV’s woes are put down to the poor games market, the music and video sector should also cause concern - HMV believes that the physical music market will decline 12% a year for the next three years, and 5% a year in the physical vision market, according to Oriel.
Broker Execution Noble adds to this. In its note on HMV it says: “A 7.5% decline in fourth-quarter online sales was passed over very quickly, but adds to our concerns on HMV’s ability to address longer-term structural threats.”
Much is made of the move to digital entertainment products, although it still comprises a small amount of total entertainment sales. But in any case, both Game and HMV have digital offerings and Webster says that downloading games is a challenge anyway because of bandwidth issues, and a move to streaming games is still some time away.
Perhaps instead the technology focus should be on building better relationships with customers, however they choose to purchase. Webster believes that with the right technology investment there is an opportunity for even the entertainment sector - acknowledged as being among the most mature within online retail - to continue to grow. “Newer technology allows you to engage in a real conversation with customers,” he explains, adding that social customer relationship management should allow retailers to enhance the way they deal with their customers.
Game’s spokeswoman would not directly answer whether the company expected to see online sales return to growth this year, but said with new services launching the company is “excited about the opportunities ahead”.
She added: “We’re expanding our multichannel offering, with more content online including more digital game downloads, and better connectivity with our stores. We’ve been listening carefully to customers, and developing new services that will help them buy all of their games content from Game.”
Deloitte head of retail Ian Geddes points out the other driver for growth online will be mobile, highlighting how Marks & Spencer only last week launched a mobile-optimised version of its site. He says research suggests online sales via mobile phones will double this year, and while it is off a small base, it is still a significant trend.
Both Game and HMV will also begin to face competition from Best Buy. Though Best Buy will only open a handful of stores this year, it plans to launch its transactional website in the autumn. In late April, Best Buy head of entertainment Mark Spence declared his intention to beat the entertainment specialists at their own game.
Best Buy says it can’t yet confirm what will be live on the site at launch, however, a press spokeswoman did not rule out either digital downloads of music or games, saying further details would be available closer to the launch.
Geddes believes Best Buy will be a competitor that everyone will watch closely, both in terms of what it does in its stores and what it does online. He adds that retailers of products - digital or physical - will need to focus on higher value service in stores and digital techniques to add value online.
But is it even important for a multichannel retailer to continually grow online sales, or is overall sales and profitability what really counts?
While Maplin saw a fall in its ecommerce and mail order sales in 2009, its total store sales grew 1.1%; though like-for-like store sales were down 5%.
Webster says that despite the online retail market being more mature in the UK than other parts of the world, retailers still need to aim to grow their online sales channels year on year.
He says that if you are not growing your internet channel alongside your offline business then your market share will be taken by your competitors.
KPMG head of retail Helen Dickinson says: “The line between online and other sales is much more blurred and less important than it was before. It is more difficult to put things in boxes and there is a measurement issue with how you put things in pots. Consumers expect to have things every which way they want - so you have got to have a multichannel presence.”
Geddes agrees. “The analysis we have done is that online will grow faster than stores, but the real growth channel is multichannel.” He says research Deloitte has done with Forrester in the US suggests more than 40% of purchases are cross-channel, and this is expected to rise to more than 50% this year.
Geddes says the lines between store and online sales are harder to define. “If you are in a store and get a price on your phone using something like the Red Laser app, and then go online and buy, is that really an online or an offline sale,” he says.
Dickinson suggests that rather than worry where sales are coming from retailers should focus on whether they have the right portfolio of stores and the right online presence for the consumers they are trying to attract.
She says that when it comes to investment decisions for online, retailers should be led by what their customers want. But even in sectors where online sales are still growing fairly strongly, such as fashion, there is something of an online arms race, with retailers investing in ecommerce to keep up with the competition and maintain online market share.
It is too early to call the top of the market for entertainment online, but those retailers that expect their ecommerce channel to be the engine of their growth - whichever channel is the final customer touch point - need to be watching this space closely and responding to changing market conditions quickly.