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Do The Economics Of Online Retail Make Sense?

– Contributed content –

Shopping by phone

(PhotoMix Company, Pexels)

20 Aug. 2020. Whenever Warren Buffett invests, he considers what he calls the “economics” of a company. By this, he usually means the extent to which rivals can chip away at the profits, reducing long-term predicted returns. But it also encompasses things like the regulatory environment and the general, prevailing culture.

The consensus appears to be that online retail offers excellent economics. Operations cost less than the regular brick-and-mortar variety because of lower real estate and staff costs. Consumers are happier because they don’t have to travel or worry about parking their vehicles. And profits are good for some online retailers because they have created network monopolies (think eBay and Amazon).

Thus, from the outside, it seems like all is rosy for the industry. Nothing can stop it.

Commentators that have done in-depth analyses on the likely future performance of the sector also seem to agree that things will get better. Before the pandemic last year, research firm Retail Economics produced a report predicting that the sector would account for 53 per cent of all retail sales within the next ten years. That’s up from around 15 per cent today. If that happens, the impact on the high street will be tremendous, and we may have to rethink the purpose of city centers completely. Perhaps there won’t be one.

The report based its predictions on survey responses from British consumers. It asked them about their current shopping habits and how they expected them to change in the future. The responses indicated that most people were either thinking about moving their shopping online or had already done so. Nine out of ten people say that they intend to visit ecommerce websites more often in the future.

New and emerging technologies are also driving things forward for the sector in a way that just isn’t possible for brick-and-mortar counterparts. CRO agency Avex says that companies are now better equipped than ever before to optimise for conversion, review their analytics and improve their UX. And that’s helping to accelerate their market share.

Digital retail, in other words, can do something that the garden variety could never do: conduct real-time experiments on which formats work, and which don’t. When you have an online operation, you’re free to play around with it pretty much how you like. Further to this, new digital technologies are making this process even more comfortable than it was before. Artificial intelligence enabling the automation of deliveries and allowing personalised marketing for the first time.

Progressive commentators are, however, worried about these trends. Even though consumers love them, ecommerce enterprises have become a modern-day boogeyman. There are ongoing concerns about the treatment of workers and anticompetitive practices. Amazon and other companies are big fish in a pond that seems to be shrinking in size. We’re not seeing a proliferating of online retailers but rather a concentration.

The effects on the high street are also being felt – especially during the present pandemic. Landlords have to slash rents to keep tenants. And demand is largely drying up. We’re seeing some stores move out of cities entirely. Paying for regular shop floor space just isn’t worth it financially.

The critical question, though, is whether this shift is sustainable. Does economics make sense when examined more closely?

The answer is more challenging than you might think. Ostensibly, online retail appears to offer a host of compelling benefits that the high street can never hope to match. But human behavior is complex, and many factors go unconsidered until they reveal their effects in the fullness of time.

Think about how different a world with no shops would ultimately wind up being. The days of “shopping trips” would come to an end. And people wouldn’t have stores as a place to go for something to do during the day. Instead, they’d be clicking optimized calls-to-action on their online feeds.

Changing human behavior isn’t possible on a large scale. All new technologies, therefore, have to slot into existing behavioral paradigms. Online retail, though, is something fundamentally new. We still don’t know which way it is going to go. Are people willing to give up the utility of taking a trip into town and viewing products in person? It’s not entirely clear.

What is evident is that a lot of individuals still enjoy that aspect of shopping, even with ecommerce readily available. That already says a lot about the state of the industry. People expect it to top 50 per cent of all sales, but it could stop well short of that in the final reckoning. 30 per cent could be the ceiling.

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