The pandemic ensured consumers did more online shopping in 2020 than expected. The brick-and-mortar retailers were badly hit while online retailers and e-commerce firms saw sharp rise in sales. With the pandemic still continuing in various phases, the boom in online retail is likely to continue leading to an accelerated shift towards digital commerce.
Global retail sales appear to be recovering well, post the Covid induced shock last year. The latest data from China shows that retail sales rose strongly at 17.7 per cent yoy in Apr-21. The year-to-date (YTD) retail sales for 2021 have reached CNY 13.84 trillion, growing 29.9 per cent yoy, on the back of strong e-commerce sales which grew 27.6 per cent yoy during the same period. Retail sales in the US have also recovered well from the lows reached during the pandemic. Total retail and food services seasonally adjusted sales (only store sales) for Apr-21 reached USD 619.9 billion, almost 46.1 per cent growth from Apr-20. Clothing and clothing accessories store sales saw a 726.8 per cent rise, while sales of food services and drinking places went up 116.8 per cent since last year, mostly due to base effect. As these countries relax restrictions, retail sales are expected to grow even further.
But the pandemic has transformed one of the largest contributing sectors to the global economy. Global retail sales are estimated to be around USD 22-24 trillion, which implies a 26-28 per cent share of the global economy in 2019. Overall global retail sales were expected to drop in 2020, and recent numbers also suggest a slight decline or even a small increase in overall retail sales. But the recently released numbers from the UNCTAD show that online retail has crossed all previous expectations and made tremendous gains during the pandemic-stricken year. Data from seven economies, which accounted for 65 per cent of global B2C e-commerce in 2019, shows that online retail sales increased its share in overall retail to 19 per cent in 2020 from 16 per cent in 2019, a 3 per cent jump vs a 2 per cent jump between 2018/19. On one hand, combined retail sales of these economies declined by 0.8 per cent to USD 13.0 trillion in 2020, their combined e-commerce sales rose by 22.4 per cent to USD 2.5 trillion. The UNCTAD report also highlights that all large e-commerce platforms saw their sales jump sharply in 2020. Another source, a leading e-commerce service provider Shopify, estimates that global e-commerce sales grew from USD 3.4 trillion in 2019 to USD 4.3 trillion to 2020, a 26.5 per cent jump.
This increasing preference for ordering online to some extent reflects health concerns and lack of choice due to movement restrictions. But is one year of increased online buying enough to lead to a trend shift in the way people shop? Have participants of the supply chain really bothered about this change and planned significant shifts in the way the industry functions? Will brick and mortar now increasingly become a thing of the past and online the norm sooner than later?
Global retail industry was already undergoing a change. Greater sales through e-commerce platforms each year and global acceptance of digital means of payment had increased confidence in online retail and reduced the need to shop on a store for many commodities. Data from Statista shows that global mobile commerce sales had already grown from USD 0.97 trillion in 2016 to USD 2.32 trillion in 2019, slightly more than 33 per cent CAGR over the period. Certain segments such as travel, fashion, books and music, electronic products have been the largest trend setters. The COVID-19 pandemic has certainly given a level boost to the overall trajectory of e-commerce. But the pandemic also made the vulnerabilities of global supply chains very apparent. It also rendered, even though temporarily, the brick-and-mortar business model of retail quite inadequate and rather unnecessary.
With health and safety becoming a concern and heavy movement restrictions, consumers preference to buy from retail stores saw a sharp reduction. In the US, 2020 saw roughly 50 bankruptcies in the retail space, highest since the 2009 financial crisis. The pandemic forced the retailers, who were still to make a digital shift, to either completely shut shop or make a non-linear jump to digital without fail. Deloittes Retail Industry Outlook 2021 for the US sheds some light on how retailers are coping with the changed rules of the business. 8 out of 10 retailers surveyed by Deloitte expect moderate to major investments in 2021 towards creating more resilient supply chains. A Deloitte research suggests that retailers will most likely invest more in order fulfillment, warehouse management and procurement. The surveyed retailers also mentioned that there are increased health and safety concerns, and investment towards building a brands trust and loyalty by catering to health and safety demands of the consumers will be crucial.
The retail industry is still largely dominated by the brick-and-mortar stores, and e-commerce for large retailers has just slowly garnered more attention. While, physical stores were the norm when the logistics infrastructure and the internet were not up to mark, but in the last decade both have seen tremendous improvement. This has rendered selling stuff online more profitable. Shopify analysis shows that in online retail, profit margins could be as high as 45 per cent, while in general retail and automotive it could be between 20-25 per cent. Quite evidently, the massive shift to e-commerce and online retail was reflected in declining profitability of physical retail chains.
The financial health of the retailers in the US wasnt particularly good. Due to increased competition and increasing debt burdens, margins of retail industry had shrunk tremendously from peak of 7.23 per cent in 2013 to 4.40 per cent in 2019, a Deloitte report shows. COVID-19 compressed those margins even further, leading to brands taking measures to cut costs and rebalance cost structures. Long-contemplated cost reductions such as rationalising store footprints and reducing business travel were now more desperately implemented than otherwise. The financial ramifications of the COVID-19 on the retail industry were not just limited to the US. UK also saw bankruptcies rise sharply. Its largest departmental store chain Debenhams shut its UK operations completely. In China, the impact was less severe for large retailers as its three biggest retailers run operations that are primarily online. Chinas retail industry is largely synonymous with the growth in the global e-commerce market and COVID-19 proved to be a boon for it.
Online retail had proven its worth before the pandemic, but now it has become the need. Large e-commerce firms like Walmart, Costco, Amazon and the likes remained untainted by the pandemic, however, it was the conventional retail industry which saw digital as the only savior. Consumers are not just buying more online but various research suggest, they are doing online searches for products and services for better knowledge prior to a store purchase. After a year of the pandemic, the shopping patterns of consumers are not expected to hark back to those of pre-COVID times. United Nations data suggests that more than 20 per cent population still do not have access to high-speed internet, and this ratio is more than 70 per cent for Africa. Global smartphone penetration also stood at only 46.5 per cent in 2020 (Statista). With internet and smartphone access rising, digital economy is only going to account for a larger share of the pie. The retail industry will only gain from the increasing customer base. With cards heavily stacked in favour of digital, retail industry is more likely to change at an accelerated pace from here on.