In 2020, many investors believed that government-ordered lockdowns would provide the conditions for the ascent of the e-commerce industry. Traditional brick and mortar retailers had witnessed market share being eaten away long before Covid-19, but this was supposed to be the final nail in the coffin.
Between April and September last year, online grocery retailer Ocado (OCDO) saw its share price increase 83 per cent. AO World (AO), which delivers appliances and electrical equipment to customers' doors, jumped 230 per cent and the value of online fashion business ASOS (ASC) almost quadrupled. Recent events demonstrate that this optimism now seems misplaced.
Supply chain storm
All three companies are now caught in the eye of a supply chain storm, which has led to a swathe of profit warnings. In ASOS’s full-year results, it forecast pre-tax profits for 2022 to be between £110m and £140m. This is around a 30 per cent drop from the £177m earned in the year to 31 August. Its active customer numbers grew by 13 per cent, but increased cost pressures and higher returns (as people buy and send back more formalwear) means profits will dip.
AO World, meanwhile, said in a recent trading update that “the nationwide shortage of delivery drivers and ongoing disruptions in the global supply chain” had affected revenue growth. It is expecting adjusted earnings for the year to 31 March to be between £35m and £50m, around a 34 per cent drop from last year’s £64m and 20 per cent below the consensus forecast.
Increased competition for online sales
The pandemic has forced traditional retailers to improve their online offering. Next announced that its online sales increased 56 per cent in the first half of this year compared with 2019, and subsequently increased its full-year profit before tax guidance by £36m to £800m. Tesco's (TSCO) first-half online sales were up 74 per cent on a two-year like-for-like basis. It recently opened its second urban fulfilment centre in Lakeside, just east of London, which has the capacity to process 1,000 orders a day.
Even when the supply chain issues clear, ASOS and Ocado with be left fighting competitors with re-energised digital offerings. In the past six months, ASOS’s share price has fallen 52 per cent, while Ocado and AO World are down 19 per cent and 48 per cent, respectively.
Online market still growing
Despite the drop in sales by some of the online-only operators, the e-commerce market is still growing, albeit at a slower pace. Investment research company Third Bridge said the e-commerce market is expected to grow at between 5 and 10 per cent over the next two years. In contrast, global e-commerce sales grew by 16 per cent to 19 per cent of all sales in 2020 and by 47 per cent in the UK, according to the United Nations Conference on Trade and Development.
“People call it a slowdown, but 5 per cent annual growth is still good momentum. The top-line growth is still going to be there, the key is how long these cost pressures will last,” said Third Bridge analyst Harry Barnick. He suggested that one way for online operators to protect margins is to find ways to reduce returns. Pre-Covid return rates for fashion retailers were as high as 30 per cent.
"To bring these down, companies need to be really good on sizing and how they present the clothes on websites,” he said.
The Retail Think Tank, an industry forum led by KPMG and Ipsos, said the growth of online supermarket sales doubled from 7 per cent to 14 per cent in the past year and that online now makes up around 13 per cent of the market. “Our projections are that online will still retain 15 per cent of sales by the end of 2023. This is a structural change in the food retail industry and this is becoming a permanent habit,” said think tank member Mike Watkins of Nielsen IQ. Although Ocado is now facing more competition from Tesco and J Sainsbury (SBRY), Watkins still expects its top line growth to continue as the market expands.
Retailers are meeting in the middle
Despite the higher online demand, bricks and mortar retail will remain the mainstay in the UK. A survey by consultant Kearney found that 81 per cent of Gen Z shoppers (aged between 9 and 24) like to make their purchases in store, while 73 per cent use stores to discover products. “Digitisation isn’t just about online. Supermarkets are investing in ways to automate the in-person experience,” said Watkins.
Amazon has opened stores across London – in Ealing, White City, Wembley and Canary Wharf – that don’t require checkouts. Customers can just walk out of the stores and are automatically billed for their purchases. Tesco has followed its lead and opened its first checkout-free store in the Holborn area of the capital.
The market now appears to see more value in traditional retailers that are successfully making the transition to an omni-channel offering. ASOS also appears to be moving in that direction, given its recent partnership with department store chain Nordstrom (US:OK8J) that will be selling ASOS's Topshop brand in its stores from 2022. Rather than becoming a battle between bricks and mortar and online-only, retail companies increasingly want to operate somewhere in between.
