The Future of E-Commerce: 3 predictions for retailers

It’s been a while since I last got out my crystal ball: back in 2016, I wrote an article on what I thought retail would look like in 2025 (in German), and a lot has changed since then, so when Upload Magazine asked me if I’d join forces with Edmund Frey from Spryker to peer into the future once again, I leapt at the chance. Then, in between Upload contacting us and us actually writing this piece (original here in German), Corona happened. Originally, we would have produced a stark, but classic assessment, based on the increasingly undeniable development that almost all forms of retail whose business case is based on selling bought-in products onwards at a mark-up have little prospect of surviving in future – regardless of whether they operate in stores or on the internet. The only exceptions we see to this are extremely large online marketplaces or extremely large category specialists, neither of whom, however need the mark-up to earn money these days as they have hit on the far more lucrative idea of hiring out their access to the consumer to third-party merchants. This was true before Corona, of course, but our timeline for predicting how it plays out would have been something between five and ten years; as our world was turned upside down in a matter of weeks this spring, we realised that the Covid-19 pandemic is operating as a catalyst, condensing changes in the market we expected to see over a decade into the space of six, twelve, or eighteen months. So this is what we expect to see in that timeframe for customers, for retailers, and for producers and brands.

The future from the retailer’s perspective

Bricks-and-mortar retail is all but dead

High-street and shopping-centre retail hasn’t had an easy time of it over the past ten years – and that wasn’t even primarily due to the strong growth in e-commerce. Rather, the main issue was a damaging race to expand the available retail space far beyond what consumers actually required. The fast pace of the expansion in recent years will make the consolidation underway all the speedier.

In this world of gigantic platforms who are often able to cover costs or even earn money selling only a few fractions of a penny above ex works prices, there is simply no place any more for retail concepts which require expensive real estate and high staffing costs. It’s not that the customers consider it to be superfluous, by the way – they actually quite like shops. It’s just that the shops can’t offer the same prices, the same levels of service, the, above all, the same range of options as online retailers can. However much consumers like the idea of Marks & Spencer or John Lewis stocking their favourites, they can only come to consider them as second best after receiving exclusive digital offers tailored to their needs – and that make them feel like individuals.

Big platforms have got even bigger

More choice, lower prices, better service, faster fulfilment: the competition isn’t between retailers, but between the best retail systems. In the digital world, the best system is the platform – or, in some segments, its embryonic predecessor, the marketplace. The immediate future will see today’s big platforms (Amazon) get bigger while the smaller ones start cooperating and eventually merge: expect to see tie ups between the likes of Zalando, AboutYou, and Asos in order to lower prices and increase product range to attract more customers and then lower (cont. p. 94). So the Jeff Bezos virtuous cycle will keep turning. Try as we might, we simply can’t conceive of a scenario in which this development will be arrested. There don’t seem to be legal or political barriers, and for all the overall damage the current crisis is causing to consumer spending overall, it will, of course, accelerate this particular development.

What is boils down to is that the customer is king – and the king has no pity for the poor high-street shop in town or honest retailers who pay corporation tax. No, the king wants the best offer. And the best offer is currently to be found with the likes of Amazon, not with M&S. Not, at least, unless Marks and Sparks manages to transform itself into a platform…

The best retailers are technology companies

So is that the light at the end of the tunnel for retailers? Become a platform? Sorry to break it to them, but: no. There is no shortage of retail chains who’ve understood the theory and told their investors that they have a platform strategy: it’s just that saying you’re a platform doesn’t mean you’re actually becoming one. Platforms aren’t created as last resorts: platforms are born from a position of dominance. A strong central purchasing department does not a platform make. Instead, you need IT firepower – and by “IT”, I’m not talking about the departments most legacy retailers name as such, but real information technology. Proper tech.

If you look at the IT operations of large online retailers such as Zalando in Berlin or Bol.com in Amsterdam, you can, on average, attribute roughly two to three million Euros of turnover to each member of the tech team. So as a rule of thumb, a digital company selling B2C and running a turnover of one billion Euros will have around 500 people in IT – and around 500 people doing other things.

Why does this ratio matter? Because it explains why so many of the “digital transformations” declared by this or that particular high-street chain are doomed to failure: trying to catch up to Amazon with a tech team of 20? “But what about all those trendy start-ups in Kreuzberg and Shoreditch who revolutionise whole industries on a shoestring?” I hear them cry: “If they can manage it, surely we can, too!” The reason the answer is no is simple: mindset. The big chains move slow and don’t take risks. That’s fine – they’re big chains with thousands of staff and big-name investors, not eight twenty-somethings and a coffee machine. That means, however, that they need to make corresponding investments running into the millions – and make sure that their management really gets behind the transformation and advocates it at all levels. Hmm.

A week ago I wrote about the the customer perspective. Next week will be about the manufacturer perspective.