Fig. 1.7: Annual e-commerce revenue, Germany
Sources: BEVH, Statista Market Outlook de.statista.com/outlook/243/ecommerce
The shift in the market towards e-commerce can also be read out of the sinking foot traffic figures being posted by stores in recent years. In the USA for example, footfall in brick-and-mortar outlets has dropped by 6.5% - in just the most recent four quarters (see figure 1.8). In Germany, the IFH trade research body is forecasting that 30% of all retail stores will close by 2020 and categorises another 40% as having an uncertain future ahead unless they are able to adapt their business model to suit the new realities on the market62.
Fig. 1.8: Quarterly year over year change in in-store foot traffic, USA
Source: S. Banjo, The Internet Can't Save Retail, www.bloomberg.com
At the same time, it has become clearer than ever that the retail shift is happening under the shadow of one towering giant: Amazon. E-commerce solutions provider Channeladvisor reports that Amazon books somewhere between 40% and 60% of online sales in the US market,63 while figures for Germany suggest it takes between 30% and 50% of turnover online64. In the US, the combined sales volume of the 20 next-biggest online retailers is still lower than Amazon's65. This development has a lot to do with new patterns of consumer behaviour, which we will be referring to in what follows as "Amazon Commerce". It is a phenomenon that is being pushed strongly by Amazon itself and describes a completely new way of purchasing consumers goods which is no longer orientated towards specific products, but towards the actual point or use of the item desired. The typical Amazon Commerce customer is, for example, one of the more than 50 million Amazon Prime customers, many of whom buy products based on utility via Amazon often without even checking the prices and service levels offered by other providers; it is a pattern of consumption that becomes particularly visible in low-emotion categories such as technical/tools and everyday consumer goods.
Fig. 1.9: Purchasing process in-store versus e-commerce versus Amazon
Source: Our graphic in reference to B. Schäfers, Social Shopping für Mode, Wohnen und Lifestyle am Beispiel Smatch.com in Web-Exzellenz im E-Commerce, Gabler, p. 313
From today's perspective, there seems to be nothing which can stop Amazon, and the stock market seems to think so too, with Amazon valued higher than the gigantic Walmart since July 2015. Yet it is not only Walmart which is fighting for its share of the market: whether offline or online, Amazon is squeezing everyone. BestBuy, for example, while increasing online sales to just under 9% of its total revenue66, is bleeding total turnover in 201567, while the Gilt Group, a former unicorn (i.e. once valued at over a billion dollars) has been bought up by Hudson Bay Company for a knocked-down $250m, as has German retailer Kaufhof following poor results. In Chapter 4, we take an analytical look at Amazon with a view to what its development means in strategy terms both for retailers and manufacturers.
2015 has also been the year in which several other developments triggered by the 20-year-old phenomenon which is e-commerce have become clearer than ever:
The increasing price pressure which online business models exert on other market participants has led, as in previous years, to sinking margins. Above all, in store retailers are losing price-sensitive target groups; in 2014, 71% of customers were already convinced that the best prices are to be found on the internet68.
One key development is direct sales from manufacturers and brands to consumers. More and more of the makers are clearing the hurdles in their company and distribution network structures and using e-commerce to open their own online shops, and direct online sales are showing themselves to be an excellent way to complement turnover on third party platforms and provide customers with a positive brand experience - all the while increasing margins. Through to 2015, a long list of formerly sterile brand presences on the internet have been transformed into very competent online shops: the Swiss furniture-makers Vitra or the luxury Burberry brand are typical of this development. Customers enjoy the wealth of information about the products and access to the complete selection - and put their money where their mouths are.
The rapid growth in mobile sales ("m-commerce" in the current argot) is, however, still being underestimated in 2015. Studies have revealed that up to 45% or digital sales are already taking place on tablets or smartphones, and this development has significant technological effects for a range of online retailers, who are investing in improving their mobile user experiences.
Insight
By 2015, almost all participants in the market have become acutely aware of the explosive potential of the current situation; stable strategic decision-making has become almost impossible. As growth in e-commerce accelerates from what was already a high rate of expansion, legacy companies look on as entire sectors change shape: neither Barnes&Noble in the USA nor Thalia in Germany seem to have a plan in the book trade, and it is difficult to make the kind of investments urgently required without a coherent vision for the future. Moreover, for many retailers, that ship has sailed: it is already five minutes before midnight when it comes to setting up the kind of innovation structures which can make a company agile enough to keep producing new business models. In Germany, the Otto Group looks likely to be one of the few who has made the transition in time, building the innovative fashion platform Collins (About You), investing in the Project A incubator, the
e.ventures venture capital organisation, and the Liquid Labs accelerator69.
Prospects in 2015
At present, the biggest marketplaces, Amazon and Alibaba, are unchallengeable and are even beginning to eliminate national champions such as Rakuten in Japan. Ebay, too, the former marketplace pioneer, is feeling the pressure from Amazon as customers and merchants migrate to the rival; partly because products are difficult to locate on the platform, and partly because merchants are becoming less inclined to pay for listings (something they originally did unquestioningly), Ebay is having trouble keeping its figures up. At the same time, the marketplace is making headlines for splitting up with PayPal after 13 years of corporate marriage.70 What is more, Amazon offers merchants potentially higher turnover while reducing their logistics costs - and was able to capture an overall turnover of $107 billion in 2015. At the same time, the question of how and when Amazon turns off the growth expressway and into profitability is still open: for the moment, the marketplace-cum-retailer is still reinvesting every cent in its push for continued growth and expansion.
For online retailers besides Amazon, the situation has changed little since 2012: competitive pricing is keeping margins puny and ever more pure-plays are feeling blue compared to the euphoric mid-2000s. According to the German IFH research body, by 2020, almost 90% of those currently active will have shut down71: the institute cites the "merciless price war", increased online marketing expenditure, and high costs for product returns. At the same time, some exciting niche shops are seeing impressive growth and innovative concepts can still cut a path to profitability.
Many intermediaries have already disappeared; Google is now all-powerful in this segment. Erstwhile rivals such as guenstiger.de in Germany ("cheaper.de") have hit an all-time traffic low. Only the large, well-established travel and finance portals remain - and are unchallengeable in their areas. Groupon remains, but is diversifying rapidly away from its intermediary business model of offering cheap deals, acquiring several smaller online retailers and moving into fresh foods delivery.
By 2015, mail order companies have become more or less a thing of the past. In the USA, most have spent years focussing on brick and mortar and e-commerce, but the catalogue concept has run its course. What is probably the largest traditional mail order company, Sears, is now the fifth largest online retailer in the USA - but only books 18% of its sales on the internet, is losing offline sales, and has gone on a quest to shrink back into profitability in 201572. Other catalogue businesses, such as electronics discounter TigerDirect, suffer the same fate. In Germany, the remaining mail order names such as Bon Prix and OTTO are, in all truth, no longer catalogue companies, but simply companies with catalogues while web shops generate the vast majority of their turnover....
