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Verdict Research: online sales in the UK to almost triple over the next five years (22/6/2007)

Retailer investment and low cost broadband lift online growth to a five year high

A new report* from retail analysts Verdict Research reveals the fastest rate of growth in the online sector since the busting of the dotcom bubble in 2001. In 2006 online retail spending** in the UK grew by 33.4%, to a record £10.9bn, almost 13 times faster than the retail sector overall. It means that over £1 of every extra £3 spent on retail in 2006 in the UK was claimed by an online retailer. But unlike five years ago Verdict Research sees no reasons for an end to the boom and the retail analysts expect online sales to almost triple over the next five years (to £28.0bn in 2011).

Much more widespread use of low cost broadband services is a leading reason for the boom in online shopping. Of the 3,000 consumers surveyed for the report, two-thirds of the online shopper population (which now numbers 18 million), said they have broadband access and shop online more frequently because of it.

Verdict Research also highlights retailer investment as proving pivotal in growing the market. Over the past 12 months a host of physical retailers including the Arcadia brand sites, Dunelm, IKEA, Oasis, Superdrug, Waterstones and Wickes have launched new transactional websites. In addition many existing retailers have greatly scaled up their offers including Asda, B&Q, M&S, Tesco and Woolworths.

But not all retailers have been convinced by the virtues of launching online; a significant number are still resisting the urge to jumping on the online bandwagon. Verdict Research highlights three types of retailer who seem set to stay out of the race to build online sales: food retailers where the infrastructure cost associated with an online launch and the strength of competition act as deterrents, value retailers (such as Matalan, Primark and Peacocks) whose business model depends on driving high sales densities from their stores and many smaller specialists whose limited scale makes it challenging to finance major online infrastructure. "For these retailers the case for major investment in transactional websites is far from proven," says Nick Gladding, author of the report.

Even with some retailers staying out of the market, online sales in the UK are still set to almost triple in value - in 2011 Verdict Research expects online spending to reach £28.1bn (equivalent to 8.9% of all retail spending), as the shopping medium becomes more integral to consumers' lives. The growth in spending will be driven by consumers shopping online more often, rather than the result of a further expansion of the online shopping population which Verdict Research expects to grow much more slowly over the forecast period. By 2011 the typical spend of an online shopper will grow to £1,056 per year (up from £606 in 2006) with the clothing & footwear, DIY & gardening and food & grocery sectors achieving the fastest growth.

Despite the scale of this opportunity, Verdict Research urges retailers to take care not to jeopardise the trust of their customers. As shoppers spend increasing sums online they need greater assurance that their financial details are safe, particularly in light of the growing number of 'phishing' scams, where customers have in error divulged personal financial information to third parties. The introduction of chip and PIN online should help to allay security concerns but Verdict research advises smaller retailers that lack the expertise to develop their own in-house payment and security systems to consider outsourcing this process to ensure consumer uptake.

In addition, Verdict Research believes that many retailers could do much more to promote their sites effectively. Many well known retailers do not appear in search engines when a shopper searches for products they sell even though Verdict's research indicates that search engines are the most popular way of finding a retailer's website. This suggests retailers should consider paying more for search engine optimisation even if this requires a shift in advertising budget from traditional media.

Many retailers also have a long way to go to create a truly seamless multichannel operation. Over the last year Tesco and Woolworths have both launched catalogue and online offers, while Home Retail Group (parent to Argos and Homebase) has enhanced its multichannel offer allowing customers a much more flexible service.

"Viewing channels in isolation is more a recipe for failure, than for success and a seamless fusion needs to be achieved between both physical and online channels," says Gladding. "While creating a multichannel operation is by no means an easy task, the rewards for those that successfully attain this feat will outweigh the investment."

Notes:
*e-Retail 2007
** Verdict's e-retail market definition includes all online spending on goods by consumers and therefore excludes spending on services (including flights, tickets and insurance) and business expenditure

www.verdict.co.uk