Footprint 2020: Offline retail in an online world

Marco Kesteloo, Marc Hoogenberg
May 3, 2013

Executive summary

By 2020, we expect online sales shares in the Netherlands to grow from 9% to 27% in four categories analyzed (Health and Beauty, Consumer Electronics and Appliances, Toys and Games, Apparel). Offline sales will decline as a result of online growth. Our estimate is that by 2020, 2.0 to 2.5 million square meters of sales area in urban areas will have become redundant. This is 17% to 21% of the current sales area of 11.7 million square meters in city centers (excluding grocery retail). To prepare for these developments, retailers should start developing their (physical and virtual) footprint for 2020, which includes location management, new store formats, digital technology solutions, and store productivity management capabilities. Not responding is not an option — we see big shifts in customer needs and behaviors happening fast, resulting in different roles for stores to play in the future. Customers expect a seamless shopping experience across channels, and retailers need a solid multi-channel plan.

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Introduction

While focusing on establishing and/or growing a profitable online business, traditional retailers often overlook a looming problem: the liability of a physical store network in the face of shrinking offline sales.

Strategy& analyzed the possible impact of online sales growth on offline sales and physical sales area in stores in the Netherlands in four retail categories: Health and Beauty, Consumer Electronics and Appliances, Toys and Games, Apparel. We present implications for retailers and a path forward when planning the retail footprint for 2020.

The impact of e-commerce on offline sales

While many retail categories show limited overall sales growth (or even a decline), online sales continues to boom in spite of the economic downturn. Consumer adoption rates are growing as commonly stated barriers to online shopping are starting to disappear. Free delivery and returns are becoming more common. Although currently still mostly used as a marketing tool to stimulate repeat purchase (for example at Internet retailer Wehkamp), or as a way to differentiate the customer value proposition from competitors (like Zalando), free delivery and returns will at some point in the future become a standard service for web shops. Dutch postal company PostNL is taking away the barrier of inflexible or half-day time slots for parcel delivery with their ‘Checkout’ service for retailers which allows to set a much more accurate delivery time. Even the main consumer barrier of not being able to try or test the product is to some extent alleviated by augmented reality technologies such as Top Shop’s virtual dressing rooms and ditto.com’s 3D video technology to try on glasses and sunglasses at home. Ironically, new service propositions offered by some pure play online retailers which were primarily meant to remove online shopping barriers are starting to create ‘barriers’ for offline shopping. For example when traditional retailers refuse to accept in-store returns for items purchased online.

By 2020, we expect online sales shares in the Netherlands to grow from 9% to 27% in four categories analyzed (Health and Beauty, Consumer Electronics and Appliances, Toys and Games, Apparel). This is largely at the cost of offline sales. Online sales shares will reach different levels across these categories. In apparel (including shoe stores, sportswear and department stores) we expect Internet sales shares to grow from 5.6% in 2012 to 26% in 2020. In health & beauty (including drugstores, perfumeries and grocery health & beauty segments), online share is currently 1.6% but could end up between 5% and 10% of category sales by 2020, mainly in health & wellbeing products (e.g. vitamin pills, nutrition and dietary products) and high-end cosmetics, beauty and perfumery products. In toys & games (including digital games) online sales could grow from 17% in 2012 to 50% or more in 2020. This is largely driven by the fact that category growth is almost exclusively driven by online games sales, which is boosting online shares. We expect offline sales to drop 17% from the 2012 level. Online consumer electronics sales is expected to grow from 20% to 40% or higher in 2020. Household appliances currently have an online share of just below 10%, which could grow to 25% in 2020. In an accelerated scenario this could grow to 50% because for this category offline shopping has limited value over online shopping; customers do not have to see nor try appliances and retailers. might actively stimulate online sales as this will free up store space.

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Marc Hoogenberg

Partner, Netherlands

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