3 June 2008 | Published by Verdict

London - With Internet shopper numbers at an all time high and online spending growing at its fastest rate for six years, e-Retail shows no sign of succumbing to the economic downturn, says Verdict Research in its latest report – UK e-Retail 2008.  In 2007 online spending by consumers on retail purchases’ rose by a substantial 35.0% to £14.7bn – a rate of growth almost 10 times higher than that experienced by the total UK retail market*.  With Internet access growing and users purchasing more frequently and more heavily online, this strong growth is set to continue, with online retail set to reach £44.9 billion by 2012, 13.8% of total online spending. Yet despite some degree of cannibalisation, physical shopping is far from doomed. There is still a need and place for physical locations, the key is to ensure that synergies with online retailing are exploited to drive footfall to stores.  While having an Internet presence is vital, giving the consumer choice by establishing strong links between the in-store and online offer is now essential.

Online shopping is becoming an integral part of UK retail with retailers and consumers alike getting onboard

In 2007 total retail growth was just 3.6% as consumers’ disposable incomes were starting to be squeezed by higher living costs.  However, the online market expanded by over a third in 2007, driven by a 5.9% increase in internet users – to 33.1m – and a 24.7% increase in online shoppers – to 22.6m. Furthermore these shoppers are purchasing more regularly (an average of 16.9 times per year, an increase of 2.7 trips on 2006) and each spent an average of 7.8% more than 2006.

The convenience of the channel is the main reason for its continuing success and is mentioned by more than half of the online shoppers from the 4,059 adults surveyed for Verdict’s report. With people working longer hours, making effective use of their limited leisure time is of the utmost importance, whilst ever-improving Internet technology is constantly increasing the speed and ease of online shopping – 55.5% of online shoppers had broadband access at home in 2007, up from just 30.0% in 2006.

“The internet is widely perceived as a cheaper and easier way of finding lower prices and bargains in most sectors,” says Malcolm Pinkerton, Senior Retail Analyst at Verdict Research and author of the report.  ”As the cost of broadband falls, consumers become accustomed to Internet shopping and retailers continue to enhance their online propositions, the channel will find itself extremely well-placed to capitalise on the falling consumer confidence and lower levels of disposable income currently impacting the retail market.”

New entrants to the online arena, such as IKEA, whose home shopping service launched nationwide last year, have contributed to the swelling in the number of online shoppers in 2007. However, the most significant factor is that the majority of retailers are enhancing and expanding their online offers, realising that demand is a long way from maturity and retains plenty of scope for growth, at a time when the high street is struggling.

Longer term, growth is set to be driven by the ageing population. As today’s younger shoppers get older and their income and spending power increases, the amount they spend online is likely to increase. The Internet will be seen as a normal way to buy goods, as this generation replaces one that is more predisposed to make purchases from physical shops. However, this does not necessarily signal a death knell for physical stores.

“In many cases online and in-store sales channels will simply blur into one, becoming fully integrated,” adds Pinkerton. “There is still a need for physical locations, but the number of stores required will vary according to sector – with the rise in music downloads, there will not be such a need for music & video stores for example. Having an Internet presence is now vital and the combination of an in-store and online presence with strong links between the two is essential, giving the consumer choice by becoming multichannel is the key to success.”

The findings of the report, launched at an industry briefing held by Barclays Commercial Bank confirm the increasing value for retailers to have a dual presence, both on the High Street and online. Jeremy Rance, National Director of the Retail and Wholesale Sectors at Barclays Commercial Bank added, “Over the last few months retailers have been telling us they are feeling the slowdown in the housing market feed through to footfall and spend per head on the high street. However, online sales have remained buoyant, partly driven by youth spending but also by the convenience and value offered by the channel.

“Increasingly our clients are talking to us about investing in their online offering. The dream of an integrated ‘Clicks and mortar’ business model is becoming a reality. There is growing evidence of the innovative and creative applications which the internet brings including, for example, the complementary application of placing computer terminals in stores to widen the offering to customers whilst helping to manage stock levels. The winners will be those who can harness the power of the new frontier as well as delivering the more traditional, physical retail model. In a nutshell, you have to be first class at both channels.”

Electricals and food & grocery dominate the online market, accounting for around half of all sales

Electricals and food & grocery made up just under half of all online retail spending in 2007, with electricals taking the lion’s share at 25.1%. However, with a faster online growth rate in 2007 and much lower maturity, second largest sub sector food & grocery is on course to leapfrog electricals into the top spot, accounting for 29% of all online sales in 2012, compared to 22% for electricals.

Music & video retailing has the highest online penetration, with Internet sales making up 30.8% of total sector sales. Verdict estimates that by 2012, online sales will account for over two thirds of the music & video market.  With technology advances and faster broadband connections, downloading films, games and music will become more commonplace, which will see the number of physical stores diminishing over the next five years. The sector with the next highest penetration – electricals – is set to see its 15.1% penetration more than double in the next five years.

Despite an increase in female Internet shoppers, men continue to make more online purchases and spend more when doing so.

Men tend to buy big-ticket items online, such as electrical goods, which have a higher ticket price, pushing up their average spend. There was also a marginal increase in their number of purchases in 2007, mainly driven by a rise in the number of men buying clothing online. The nature of the channel renders it attractive both to inherently lazy male shoppers as a convenient, hassle free way of saving free time and to the increasing number of fashion savvy and brand aware men who find it easier to get what they want online.

Verdict’s consumer research reveals that a long standing AB bias to the online shopper base persists, but there has been a substantial rise in the number of C2s and DEs as a result of the falling cost of broadband. The number of C2 shoppers has increased by 35.5% to 4.2m and the number of DE online shoppers has increased by 38.9% to reach 2.5m. This is in contrast to the 23.2% rise in the number of AB shoppers and the 19.3% rise in C1 shoppers, where growth is beginning to slow due to the user base maturing.

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