Ecommerce in the United Kingdom

Given the digitization spree, ecommerce as a global marketplace has gained significant momentum. This report aims to understand, highlight, and evaluate the growth of this industry in the UK. 

1. The Backdrop

The United Kingdom (UK) is a thriving financial  and culture-driven island nation located in northwestern Europe, which operates under a constitutional monarchy. It hosts a population of ~66 mn, covering an area of 243,610 sq. km. The GDP has grown from GBP 1,706.9 bn in 2012 to GBP 1,903.6 bn in 2017 (CAGR of 2.2%), and is forecast to reach GBP 1,931.4 bn in 2018, at a year-on-year growth of ~1.5%. The British population is projected to grow by another 0.7% this year with over ~70% of constituents under the 55 age bracket and ~41% concentrated between the ages of 25-54 (i.e. the working class). This is why ever since the aftermath of the global financial crisis, the unemployment rate in the UK has been on the decline, dropping from 8.1% in 2011 to 4.4% in 2017. Hence, with people working and earning more, along with being exposed to latest technological developments, various industries such as retail – specifically online retail – are gaining significant footing in the domestic market. Further, there is a strongly-connected infrastructure base and well-developed institutional framework, which despite a negative internet penetration growth of ~-2.2% has maintained an internet user base of 95%.

Performance wise, the UK ranks 7th out of 86 countries and 4th amongst EU on the Inclusive Internet Index, which outlines the current state of internet availability, affordability, relevance and readiness. The UK fares quite well when it comes to availability and affordability (with affordability being a key strength in its competitive environment), while relevance is a stumbling point. Its local content ranked 35th in the world, due to its low concentration of websites with country-level domains. Hence, there is greater need to build connect with the local population, given a diverse area of ground that falls within the nation, as well as the presence of other non-English languages such as Gaelic, Welsh & Irish.

Logistically, the UK ranks 1st on UN’s E-Government Development Index, which showcases a high-level of concurrent past and present investments in telecommunication, human capital and online services - hence, the building up of a strong e-infra base. Apart from that, it is also placed 8th on the LPI (Logistical Performance Index), highlighting a strong customs clearance process, trade and logistical services quality, as well as transport infrastructure. While ease of doing business is also there, many SMEs are left under the grips with Brexit uncertainty looming over the next 2-3 years. Certainly the EU support in terms of increased demand, supplier network, logistics etc. will decrease and smaller retailers will find it hard to remain competitive in a constantly evolving marketplace with global giants. However, the key here would be to keep a flexible business model, focus on high performing activities and emphasize upon delivering exceptional quality service so as to secure a loyal consumer base. Retail organizations providing support at the government level can in-turn facilitate firms in their export strategies. Meanwhile, newer opportunities may crop up here, such as the imposition of lower/zero tariffs and charges that were previously put in place by the EU. Firms, especially those engaged in e-services, can leverage this competitive position to streamline their supply chains and global logistics.

On a macro level, the UK hosts a promising digital market due to its heightened online connectivity and utilization. 77% of households use a fixed broadband for access and 21% make use of mobile broadband services via a mobile phone network, in order to generate a surge of multi-purpose online activity such as sending/receiving email, browsing for information on goods/services, social networking, e-banking etc. Internet usage is over 90% for almost all the age groups (95% for the aggregate population), making the online domain become a bustling market for various players.

2. Thriving Ecommerce Landscape

Specifically, these developments have largely fueled the growth of the ecommerce industry till date, with internet purchases growing year-on-year to constitute over 16% of total retail sales in 2017 (as opposed to 3.4% in 2007). UK online spending now amounts to over GBP 1.1 bn per week, with local consumers being viewed as one of the tech-savviest and go to market in Europe for online shopping.

Consumer Confidence Soaring High 

The largest boost for the ecommerce landscape is growing demand and belief in e-sales. Over half of consumers surveyed feel there is more choice online when compared to in-store shopping and prefer the ease at which they can compare products to get the best deals. This also works well on the domestic front, given that UK webshops are still by far the most popular, with national sellers accounting for 93% of the shopping share as opposed to 31% taken by sellers in other nations.

In terms of preferences, clothing/sports goods are the most purchased online category, constituting 64% of online purchases; this is followed by travel & holiday accommodation and household goods, with a share of 58% and 56% respectively. Choices here are dependent on the types of customers that readily engage in online shopping. While over 80% of people aged 16-54 and ~50% aged 55+ shop online, the greatest concentration lies in people between 35-44 years. These are the highest spenders on average, with 31% of the lot having e-shopped over 11+ times in the last 3 months of 2017. All this has contributed to a substantially growing UK ecommerce demand, which kicks in even stronger during the holiday season. For example, internet retail sales have jumped by 12.1% and 8.3% between September-October in 2016 and 2017 respectively, with the activity steadily increasing till the end of the year.

However, the mix between online and traditional sales is not a zero-sum game. Over 93% of consumers surveyed in 2017 stated they also shop in-store. This is because each avenue has its own features – i.e. 24/hour availability & ease in e-markets vs. greater product examination/trial in physical markets. Given the nature of their purchases and contextual setting, consumers either make a choice between the two or opt for a complete omnichannel experience altogether. This preference will keep rolling ahead as over 82% of Generation Y and 79% of Generation Z are omnichannel shoppers. Meanwhile, though gender-wise priorities differ slightly when it comes to e-shopping – i.e. men placing greater weight on price whilst women concerned more with convenience – both the groups readily purchase online.

Increased Logistical Options 

The prevalence of cash is slowly depleting in the retail arena as various new e-payment options have cropped up. This further creates buzz in the ecommerce domain as consumers utilize debit/credit cards, bank transfers, and e-wallets to make payments beforehand, getting hassle-free deliveries. In-fact PayPal has become the most preferred method of payment for all kinds of online purchases with a 46% share, while the cash on delivery option stands at a mere 1% preference. This trend will keep mounting ahead as even more digital wallet players open up in the space, amidst mobile banking on the rise.

Meanwhile delivery has become a market of its own, with e-shoppers preferring to choose between multiple options such as home/workplace/secure locations etc. Over 54% of consumers prefer the “Click and Collect” in-store feature, while local collect from the Royal Mail is also popular. With that consumers also demand proof of postage, proof of delivery, ability to track the status of purchase etc. This need centered on availability and convenience is largely present in the e-shopping platform.

The SMART surge 

The purchasing journey is far from singular and consumers no longer make use of a single mechanism to transact. Rather, the rise of various SMART devices – i.e. smartphones & tablets – have also become a part of different stages in the shopping experience. For example, over 48% consumers generally search and browse for products via mobile/tablet and then place an order on Desktop. Alongside this, some also make use of mobiles in-store to cross-check purchases and make comparisons.

All this has fueled the growth of the online retail market, where global giants such as Amazon largely dominate the sphere, being the choice amongst 91% share of respondents. In-fact, over 49% of the respondents check prices on Amazon itself. Meanwhile, eBay is the most popular retail app across mobile devices, with a market reach of 24% and 21% on iOS and Android respectively.
 

Growing Social Media Power

Greater use of smartphones also paves the way for social media penetration, where consumers can actively network and communicate around the clock with other buyers on platforms such as Facebook, WhatsApp, Twitter, Messenger, Instagram etc. Facebook is the most used app in the UK, capturing a 37% and 28% population share of women and men respectively. Such social media sites are largely used as a review platform, as well as an advertising base. Hence, though search advertising leads the way with a 46.5% revenue share (and over 54% of surveyed consumers finding about retailers via Google), social media is also gaining rising importance due to its fundamental effect on product awareness – 48% individuals state they had brought something online after seeing recommendations on Facebook. Along with this, 22% state they would directly buy on Facebook itself.

 

Promising Market

Given the online activity and preferences towards SMART channels, the turnover growth for online retail has been on an upward trend, with B2C ecommerce revenue growing at a CAGR of 16.4% between 2014-17; it is projected to reach GBP 15.7 bn in 2018. With this, the E-GDP share of total GDP has also steadily grown from being ~0.5% in 2014 to ~0.7% in 2017, and is forecast to reach over 0.8% in 2018. Market sentiment is largely positive for the upcoming years.
 

3. Key Challenges

Nevertheless, while the ecommerce landscape has potential to develop further in the UK landscape, given its advanced infra and institutional standing, there are key issues and external uncertainties that firms must watch out for when designing their business models.

Achieving Sustained Efficiency

In general, digitization opens up buyer options and hence makes them habitual to getting things done in real-time. This is evident in the UK where given the advanced infra development and online connectivity, consumers expect instantaneous service and feedback mechanisms. For example, if a product is scheduled for a 10 am delivery, the consumer will start to engage with the concerned retailer on social media should there be no delivery made by 10:05 am. Delivery speed is the most common obstacle faced by online consumers in 2017, accounting for 25% of share of problems. In-fact, time is of great importance when it comes to ecommerce, with 54% internet users rating e-tailing websites that take more than 9 seconds to load as “poor.” People expect a site to load in less than 2 seconds.
 

Apart from this, there is also demand for a variety of feedback mechanisms such as phone, email, text and live-chat agents, so that support can be provided 24/7. In light of this, firms must pay extra caution when it comes to designing supply chains and streamlining business processes so that each phase of the purchasing journey is catered to in a timely manner, keeping the review platform largely positive.

Upgrade of Purchasing Steps and Procedures

Returns are an inevitable, regardless of the nature of sale. While firms can mitigate potential call backs by ensuring products are well packaged and entrusted to a credible logistics supplier, this step cannot be negated in entirety. Rather, high performing firms are those that take this into account and have in place a clear, free-of-cost and expedited returns process, where consumers are provided with a return label and re-sealable packaging. While over 63% UK consumers believe that the return mechanism is getting easier, firms should continue seeking for more improvement and informing consumers at each step. Around 96% of surveyed consumers want to be notified when their refund has gone through. Meanwhile 60% say they are less likely to purchase from a webshop with a difficult returns process.

With this, users are also demanding upgraded security procedures such as biometrics to not only protect their privacy but also take their payment experience to a new level.
 

Brexit Uncertainty 

Undoubtedly Brexit instability poses one of the greatest challenges to any industry in the UK, given the fact that employee retention/recruitment will become an issue, supply chains will change and firms will need to operate within a new regulatory ambit. The extent of impact depends upon the nature of each industry – i.e. SMEs in tech/ecommerce sectors, which are largely reliant on EU national workers that require no visa processing steps, can come under a significant bottleneck once the free movement of people is minimized. On the contrary, SMEs that have much of their target base outside the EU may not suffer too much. While the exact repercussions to ecommerce are yet unknown, all companies are required to rethink their market positioning, both on a strategic and operational level. In-fact, fostering new partnerships and flexible business models can rather turn this challenge into to a new opportunity.
 

4. Way Forward

On the whole, ecommerce is deeply embedded in the UK market and this trend will only mount ahead as consumers become even more entrenched in going for the omnichannel experience. The nation has the requisite infrastructure, amidst a backdrop of equally enthusiastic consumers.

There is no double that Brexit poses a significant challenge as the entire market is in a fix of what to expect come the end of the transition period – i.e. agreement on the Irish border, agreement on a dispute resolution mechanism, divorce costs etc. While the exact implication on ecommerce players is yet to be seen, the key remains in maintaining high efficiency standards and creating a global trust mark to bridge the trust gap post Brexit. The online space can flourish devoid of any borders.  

Download the report: