A perspective on the retail sector
Retail performance in Q2 2021
The retail sector experienced its first quarter of uninterrupted business for the first time since Q3 2020, and as a result retail sales by volume were up?24.2% in Q2 2021 compared to the same period a year ago and up by 12.5% compared to the previous quarter, according to the Office for National Statistics (ONS). These results are encouraging and point to the pent-up demand for buying goods and services which drove consumers to shop in the more discretionary categories. As the weather improved, the dream of the England team in the final of the Euro 2020 football championships was the perfect excuse to go out and socialise.
Quarterly UK retail sales (incl. Fuel) seasonally adjusted -?% change in value and volume year on year
Beyond these strong results, a structural shift is taking place in the retail sector. Consumers have been forced to change their shopping and consumption habits during the pandemic and they will have adopted some of those new habits for good. In fact, online retail sales remained strong accounting for 26.7% of all retail sales in June, slightly down from the previous month but still considerably higher than their pre-COVID-19 baseline. Many retailers have increased their investments in their online capacity and capabilities making the online channel work better and more profitably for them. As a result, online spending could be sustained over the coming months because for many consumers online shopping has become as convenient as the physical store experience.?
UK internet sales as a % of total retail sales
Online grocery maintains its market share
The reopening of restaurants and other food outlets since mid-May impacted food demand for grocers. Our research shows that the number of people using large supermarket stores as their main channel for grocery shopping continued to decline in Q2 2021 dropping by three percentage points (to 54%) compared to the same period a year ago. However, the use of online as the main channel for grocery shopping remained stable at 26% in Q2 2021. Since the reopening of the economy, the grocery sector has been going through a gradual normalisation of shopping patterns, and while it is still too early to say whether it is permanent, the growing proportion of food sales acquired by the online channel during the pandemic does not seem to have declined. With the reopening of non-essential stores, grocers will also naturally lose some of the share they took from non-essential stores that were unable to trade during the pandemic.
Channel usage for main grocery shop
Some non-food categories become established online
According to our Tracker, on average 64% of consumers made their last purchase online across all non-food categories, representing a three percentage point increase compared to the same period a year ago. Interestingly these results are up compared to Q2 2020 a period during which most of the country was in lockdown. According to ONS data, the online channel represented 23.1% of non-food sales in June compared to 25% the previous month. However, it remains significantly higher than the 15.1% reported for the same period two years ago.
The categories that saw the largest yearly increase include digital services, cars, motorcycles and bicycles, and children and baby products. These categories are now well established online. With people focusing their spending on the leisure and hospitality sectors as they reopened, some categories saw their share of online decline compared to the same period a year ago, notably clothing and footwear, electrical equipment and entertainment.?
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Channel usage for last purchase in the category
A new approach to shopping post pandemic
Although April 12th marked the full reopening of the retail sector, businesses in the sector accept that even when the pandemic is under control, they will not be returning to business as usual. Many businesses have already announced that they are making a certain level of working from home permanent, which will have an impact on footfall in city centres and local high streets.
In the last year the online shopping experience has become more important. Many consumers shopped online for the first time and the experience increased their awareness of the convenience and choice offered by online shopping. Retailers should now be asking how they can retain these new customers. At the same time, more experienced online shoppers have increased their expectations. Businesses that have responded by delivering a flawless online path to purchase have been able to build a strong customer base that will likely remain loyal despite physical stores having reopened.
Online has been able to offer better services than physical stores in some areas including levels of convenience and choice. Of course, some categories lend themselves to online sales better than others. For example, the shift to online will continue beyond the end of the pandemic for clothing and beauty categories, while for other categories such as the grocery sector, a more hybrid approach with a mix of online and in-store shopping could well become the norm. According to Google, among experienced online shoppers, 81% expect to always or mostly shop online in the beauty category in the next six months. Perhaps more interesting is that 34% of consumers who made their first online purchase in the beauty category during the pandemic also intend to always or mostly continue to shop online in the next six months.[1]
Over the last decade it became clear that online played a role in the exploratory phase of a shopper’s path to purchase. This trend has accelerated during the pandemic, and with the availability of more and more platforms on which to exchange views and research products and services, consumers turned to online to find inspiration. This means that consumers are also more open to trying new brands – driving increased competition as a result.
While online will never totally replace the customer experience of visiting a store, cross-channel shopping will continue to grow in importance. This reflects a wider debate in the industry about how much physical space retailers will need after the pandemic. Many retailers are considering the role the store plays in the shopping journey and how it needs to evolve. Online may offer a better experience on some aspects of shopping such as the ability to read other customers’ reviews. However, the physical store offers other benefits difficult to replicate online such as being able to see the size or colour of a product as well as receiving advice from store sales assistants. While the role of the physical store will remain important, the wider retail landscape will likely see reinvention. A new era of ‘hyper-localisation’ and ‘fast fail’ shops could herald a revived and more relevant local high street in the longer term.
A more pressing issue: Shortages in the retail sector
Just when pent-up demand is being unleashed, the capacity constraints of the logistics sector has led to some major supply chain shortages for the retail sector. Moreover, EU nationals returning home post-Brexit combined with the growth of online are putting pressures on the logistics sector. In addition, the speed of the economic recovery, is creating a war for talent and pushing wages higher across the retail sector. The net effect of these pressures could be higher business costs and potentially higher prices for consumers. But with 1.7 million unemployed, part of the solution could be for businesses to bolster their training and development programmes.
Outlook
As consumers start to accept that they will always be living with COVID-19, retailers will be closely examining consumer behaviours during the pandemic to predict which are likely to stay. For some consumers, the move to remote working has enabled them both to save and pay down debts. For others lockdown periods provided an opportunity to experiment, for example shopping online or exploring new products at home. With greater consumer interest in buying locally, the question for retailers is where to focus their efforts in a post-pandemic world.