Analyst Opinion: Why E-Commerce Is Not “Just 10%” of Retail Sales

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KEY POINTS

  • In the US, e-commerce is often referred to as capturing “just 10%” of retail sales. But this total is depressed by e-commerce’s very low share of sales in grocery—which is a substantial segment of retail.
  • The share of retail sales captured by e-commerce is significantly higher once we strip out food retailing.
  • The UK offers a leading indication of how much share e-commerce could capture in the US and other countries in the coming years.
  • In the UK, around half of all consumer electronics sales are now made online. This provides a realistic indication of the proportion of sales in other hardline categories, such as toys, that could migrate online.
  • In the UK, almost one-quarter of apparel sales are now made online, and we think e-commerce’s share could exceed 40% in the US and the UK over the long term.

What Is the “Real Share” of Retail Captured by E-Commerce?

This analyst has lost count of the number of times commentators have pointed out that e-commerce accounts for “just 10%” of US retail sales. These industry watchers are implying that 90% of sales are therefore made through stores. Such observations, however, are often made by representatives of established, nonfood brick-and-mortar retailers, who have an interest in emphasizing the importance of physical stores.

We think these commentators are effectively looking at the wrong number, because the 10% average includes the exceptionally low share e-commerce captures in grocery, a very substantial retail segment. In the US, in particular, online retailing is predominantly about nonfood categories, and if we look at only those categories, e-commerce’s share of sales becomes more significant.

In the UK, e-commerce’s share of retail sales is greater than in the US and, so, we can look to it as a leading indicator for where the US and other markets will end up. As we show later, e-commerce already captures a 24% share of clothing and footwear sales and around half of all consumer electronics sales in the UK.

In this brief report, we look at e-commerce’s share of sales in nonfood retailing and offer our view on how high that share could reach in selected major categories.

 

Why-E-Commerce-Is-Not-Just-10%-of-Retail-Sales-710-01E-Commerce Rates in Nonfood Retailing

E-commerce’s low share of grocery sales depresses the overall share figure for online retail. We think that stripping out food and beverages provides a more realistic picture of e-commerce:

  • We estimate that 14.6% of all nonfood retail sales in the US were made online in 2016, versus 10.8% of all retail sales including food. That is a 35% higher penetration rate.
  • We estimate that 18.7% of all nonfood retail sales in the UK were made online in 2016, compared with 14.7% of all retail sales including food. That is a 27% higher penetration rate.

It is important to note that these figures strip out food and beverages only, not the full range of grocery products such as household fast-moving consumer goods (FMCGs), personal care products and pet food, which are categories that continue to depress the share of sales captured by e-commerce. Stripping out all grocery items would result in an even higher e-commerce share for the residual nongrocery categories.

A fuller indication of the higher penetration rate for nongrocery categories in total comes from the UK, where the Office for National Statistics (ONS) publishes online retail data by sector. Once we strip out food retailers in total from ONS data, we see that e-commerce accounted for a 22.5% share of nonfood retailing in the UK in 2016. So far in 2017, that share has averaged 26.1%.

 

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Charting E-Commerce by Category

To add further color, below we chart e-commerce’s share of sales for the US and the UK, across retail and split out for key categories. The higher rates in the UK give some indication of what the US picture may look like in a few years’ time.

  • The consumer electronics category in the UK shows just much share e-commerce can grab for products consumers buy primarily on specification in a relatively mature e-commerce market: around half of all consumer electronics sales are now made online in the UK. Toys are also often bought on specification, and some 32% of European toys and games will be sold online in 2017, according to research firm Clavis Insight.
  • In apparel and footwear, e-commerce’s share of sales tends to roughly track the average for all nonfood categories. This is partially due to apparel being at the midpoint on the “tangibility scale”: apparel is not as sensitive to consumer demand to touch and feel the product as fresh food is, nor is it bought based on specification as often as electronics are.

 

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The various penetration rates for the categories shown above reflect the development of e-commerce, as we represent in the figure below. This progression may be obvious to some readers, but it is worth spelling it out:

  • The earliest categories to move online tend to be those purchased largely on specification—such as brand, model and technical specs. With such categories, it is often not necessary to see the product in person before making a purchase and the quality and specifications will be the same across retailers.
  • Semitangible categories such as apparel are the next to migrate online. For these categories, consumers often like to see or touch the products before purchasing them, but being unable to do so is not an insurmountable barrier, as retailers can offer generous return policies and more detailed online information in order to encourage shoppers to buy such products online with less trepidation.
  • Last comes food, where shoppers are keen to choose products they can see and touch themselves. This category presents the highest barriers to retailers selling via e-commerce, including the cost and logistics implications of picking and delivering purchases consisting of a large number of often-perishable products.

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The Trajectory in Fashion: US Lags UK by Around Five Years

As we chart below, the US and the UK are seeing similar trajectories in the share of apparel sales captured by e-commerce. However, the US is lagging the UK on a scale that is equivalent to around five years’ growth.

Kantar Worldpanel data published in February 2017 indicated that e-commerce accounted for 24% of UK apparel and footwear sales. We expect that share to be slightly higher over the full year and to reach fully 25% in 2018. By that time, the US will be getting closer to seeing one-fifth of fashion sales being generated online, according to Euromonitor International.
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How Big a Share Could E-Commerce End Up Capturing?

We envisage e-commerce capturing very substantial shares of major nonfood categories in the US and UK markets.

Hardline goods: Electronics lead the way online, and the e-commerce figures for the UK suggest the possibilities for e-commerce in other hardline categories where products are bought primarily on specification—such as toys and some furniture. In a mature e-commerce market, a share of 50% or more for e-commerce looks realistic in hardline categories.

Apparel and footwear: We think the online channel could capture 40% or more of fashion sales over the long term. The UK, where e-commerce already captures nearly one-quarter of apparel sales, will reach this level more quickly than the US will, but we see few things preventing both countries from reaching that threshold. Assuming that e-commerce gains slow gradually in the coming years as the channel matures, we expect e-commerce’s share of apparel sales to reach 40% in both countries in the 2030s.

 

Key Takeaways

  • E-commerce’s share of all retail sales is significantly higher than is often stated, and this is evident once we strip out food retailing, which sees only a small share of sales being made online.
  • In the UK, around half of all consumer electronics sales are now made online. This provides a realistic indication of the proportion of sales in other hardline categories, such as toys, that could migrate online.
  • In apparel, almost one-quarter of UK sales are now made on the Internet, and we think e-commerce’s share of apparel sales could exceed 40% in the US and the UK over the long term.