Tuesday, July 24, 2001

Online Shopping Is Alive in Europe

With European online retail growing to 152 billion in 2006, retailers must focus on capturing the 103 billion in potential gross profit generated over the next six years by targeting ripe categories and countries, according to a new Report by Forrester Research B.V.

"The days of easily justified online retail investment are long past -- euros committed to the Net will only be approved through sound business cases," said Forrester Senior Analyst Julia Woodham-Smith. "But while retailers fear that media reports of dying dot-coms will erode demand for online shopping, the hard data tells a different story. During the past six months of 2000 as dot-coms crashed, the share of Europeans online grew by 20% from the previous six months to 32% of the population 16 and older. In the UK and Germany, the percentage of consumers online reached 40% and 39%, respectively. The longer people are online, the more they buy -- consumers in their first 12 months online spent 134 on average on their last online purchase; those online for 13 to 24 months spent €150; and online shoppers with more than 24 months experience spent 176. This upward trend applies to all European countries.

"Also, as consumers make purchases across more diverse product categories, online spending patterns will more closely approximate offline retail spending, and the products that they purchase will diversify beyond low-value books and music. Going forward, only a small fraction of sales in Europe's biggest retail categories -- groceries, clothing, leisure travel, and new autos -- must shift to the Net to dramatically boost online spend per shopper. The 5.8% of groceries sold online in 2006 will be bigger than Europe's entire market for books, online and off."

Forrester contends that European countries will fall into three distinct groups. Switzerland, Germany, the UK, and Scandinavia will form the vanguard accounting for more than 8% of sales online. Austria, France, Ireland, Finland, and the Benelux countries will occupy the middle lane, driving 4% to 8% of online sales. Laggards Portugal, Spain, Italy, and Greece will contribute less than 4% of all European online sales in 2006.

"A supply-constrained environment creates opportunities for retailers to exploit unmet demand, but investments only make sense if enough gross profit will be generated to put them in the black," Woodham-Smith added. "By building additional layers to our model we calculate that online retail will generate 103 billion in gross profit through 2006 -- gross profits will rise from 3.9 billion in 2001 to 35 billion in 2006."

Forrester segmented categories across all of Europe and found four segments of products -- high gross profit, high supply; high gross profit, low supply; low gross profit, high supply; and low gross profit, low supply.

"High gross profit, high supply categories, such as travel where airlines, cross-border firms, and local outfits compete in every country will see fierce battles that will leave only the biggest firms standing," she concluded. "High gross profit, low supply categories such as health and beauty contain Europe's unexploited opportunities, and the retrenchment of health and beauty pure plays has created a supply gap for multichannel retailers to grab 3 billion in gross profit through 2006. In the low gross profit, high supply segment -- categories like music and books -- too many retailers contend for too little gross profit, and continued consolidation and shifting business models will reign. Finally, categories such as jewelry in the low gross profit, low supply segment don't justify dedicated online stores. However, a dearth of competitors makes these categories prime range extensions for retailers."

For the Report, "Europe's Online Retail Profits," Forrester spoke with 50 European retailers about their online selling experiences in 2000 and their predictions for 2001. Twenty were pure plays and the remaining 30 were multichannel retailers. The average interviewee sells online in 2.5 European countries. We also obtained sales data from more than 170 confidential interviews with executives at online retailers over the past 12 months, as well as reviewing publicly cited results from more than 250 retailers. Our market-sizing methodology incorporates Forrester's proprietary Technographics® data about European consumers' online behavior drawn from 65,000 surveys over the past 18 months. We also drew upon information about offline market sizes across Europe based on new data from Eurostat, Euromonitor, and 15 trade associations and publishers. Our forecast has three principal drivers -- online shoppers, retailer supply, and spend per shopper.