6 European nations to see $35 bn in reduced profits due to e-shopping

06 Jul '21

4 min read

Pic: Alvarez and Marsal

COVID-19 has had a profound impact on retail industries across Europe and store closures, social distancing measures and heightened anxieties over transmission has elevated ‘digital’ to new heights, according to a report by Alvarez & Marsal (A&M). Online shopping will result in €35 billion in reduced profits across six European countries by 2025, it said.

The research by the New York-based global professional services firm contains insights drawn from a consumer panel of over 3,000 households across six countries—the United Kingdom, Spain, Switzerland, France, Italy and Germany—and analysis of over 250 European retailers, accounting for over €2 trillion worth of spending in 2019-20.

The retail pre-tax profit margins across the six key European markets studied fell from 6.4 per cent to 4.5 per cent due to online shopping, suggesting as e-commerce penetration rises, margins fall.

In the initial stages of the pandemic a seismic shift was witnessed towards e-commerce throughout major European retail markets, as consumers embraced new paths to purchase goods and services.

Online sales growth rose rapidly, with markets such as the United Kingdom witnessing online penetration rates peak at almost 40 per cent during 2020. Throughout the six regions, the proportion of online sales increased from an average of 12.1 per cent in 2019 to 14.8 per cent in 2020, A&M said.

For many businesses striving to remain relevant and survive the disruption, their transition will likely mean a challenging readjustment as business models are aligned with the ‘new normal’. Profitability will come under intense pressure as operating models that are disproportionately weighted towards physical channels struggle to rebalance costs as online accounts for a growing proportion of sales.

Just under a third of European consumers think their shopping habits will change permanently because of COVID-19, with a significant and permanent shift towards online shopping particularly for apparel, homewares and electricals, A&M’s research shows.

In some countries such as the United Kingdom, a permanent change in shopping habits rises to almost four in ten shoppers. The majority of consumers intend to continue to do more online shopping post-pandemic, but the extent will vary significantly between category, demographics and country.

For apparel, the magnitude of the online shift varies with consumer age group. Younger and middle-aged shoppers are more likely to permanently shift Apparel spending online compared to senior shoppers. Just 17 per cent of over 65-year-olds expect to shift fashion spending online after the virus subsides, compared with 27.3 per cent for 35 to 44-year-olds across the countries analysed.

The shift towards online will leave many retailers exposed with cost structures disproportionately weighted towards their physical channel, while facing rising variable costs as online accounts for a growing proportion of sales.

Many retailers will be left with more physical outlets than they can commercially justify, often tied to inflexible lease structures which will inhibit their ability to pivot business models as quickly as they need.

Analysis by the company shows average pre-tax profit margins for pure online retailers across the key European markets analysed resided at 1.4 per cent, compared with 5.4 per cent for the total industry This reflects the difference in cost structures, business models and the price sensitivity of consumers, where transparency in price, service and quality places further downward pressure on margins.

A&M forecasts that an acceleration in online growth will lead to profit margins falling to 3.2 per cent by 2025 for the six European countries, compared with 3.7 per cent for a ‘no COVID-19 impact’ scenario. Total profits will be €11 billion less by 2024-25, compared with the scenario where COVID-19 does not impact consumer behaviour for the six countries.

Fibre2Fashion News Desk (DS)

More E-commerce News - United States Of America...