Oct, 2017     

Understanding the inflection point for Online Retail 


The evolution of E-commerce has taken varied paths for developed and developing nations. We benchmarked four countries (USA, UK, China and India) on their online retail penetration indexing from the year they reached 0.5%.

China is a clear outlier with online penetration reaching 15% in 6 years compared to 16 years it took for the UK (as shown in figure 1) to reach a similar level. On the other hand, India’s online retail growth seems to be evolving at a pace in between UK and US growth.

Figure 1: Online retail penetration trends – indexed from the year the market reached ~0.5% penetration

 

online-retail-penetration-trends

We’ve also noticed that typically within the first 2-3 years of crossing 0.5% online retail penetration, markets go through a sudden upsurge – “a tipping point”, in the otherwise more gradual growth, of online retail (as shown in figure 2).

Figure 2: Online retail growth – indexed from the year the market reached ~0.5% penetration

 

online-retail-growth-trends

These spikes in growth broadly coincide with two macro waves: Internet/PC penetration increase in the late 1990s/early 2000s, and the smartphone penetration increase in early 2010s(as shown in figure 3), ably supported by other supply related factors.

Figure 3: The two macro-level waves that helped reach the tipping points observed till now

 

online-retail-growth-percentage

The Triggers for Tipping

Our analysis on four countries (USA, UK, China, and India) has shown that there are typically two types of triggers that cause this“tipping point”: Digital infrastructure triggers and supply side triggers.

Digital infrastructure triggers: These are triggers that are driven by provision of infrastructure critical for online retail to flourish.These can be further divided into three types:

1. Access: Refers to the devices used for accessing online retail. Devices typically include personal computers and mobile devices such as smartphones.

2. Connectivity: Refers to the internet connectivity available in the country. Good internet connectivity enables customers to have a good online buying experience.

3. Payment: Refers to the payment infrastructure that is available for online retail. This would include payment gateways, e-wallets, online banking, prepaid cards, etc.

Supply side triggers: These are triggers that are driven by etailers. Typically, they are driven by large scale investments, product innovations and aggressive competition. We classify these triggers further into three types:

1. Availability: Refers to the availability of products online – higher the availability of products at a reasonable value to the customer, higher would be the propensity of customers to purchase online. Triggers here typically include new product launches, new players entering the market, etc.

2. Marketing Aggression: Refers to the discounts offered/campaigns launched by etailers to attract customers. Such campaigns are typically targeted to incentivise customers to change their buying behaviour and try online shopping. Typical examples would include providing free shipping, flexible return policies, discounts on products, etc.

3. Operational Efficiency: Operational efficiency is one of the most sustainable source of etailer differentiation. Etailers achieve operational efficiency through opening multiple fulfilment centers, integrating supply chain to reduce delivery times, provide clear shipment tracking mechanisms for customers, etc.

While our study points out that triggers are the key factors that contributed to the tipping points, we have also highlighted preconditions (Digital infrastructure/Supply related requirements that were already in place), that served as the platform for the triggers.

Based on our observations from the case studies on the 4 countries, there are broadly 3 ways in which these triggers occur that leads to the “tipping point” in online retail growth:

 

types-of-triggers

To sum up, we’ve seen that although online retail penetration has taken varied paths for different nations over the years, each country has witnessed a similar trend in the initial years (as shown in figure 2) where they experienced a period of hyper growth (a “tipping point”), supported by digital infrastructure and supply triggers.

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