European retailers will continue to lose their home market to more experienced US competitors if they do not become more aggressive in creating innovative e-commerce businesses, according to a report by Boston Consulting Group (BCG).
According to the report “The Race for Online Riches — E-Retailing in Europe,” the battle to dominate online retailing in Western Europe begins in earnest this year as the market enters a stage of hypergrowth with three types of players — European incumbents, European start-ups, and US online retailers.
“US players have already been able to scoop up 20 percent of the European market by coming in with large-scale pan-European businesses,” said Patrick Forth BCG vice president and author of the report. “This approach contrasts with that of typical European incumbents who have focused on their national markets only. US online retailers, however, will also find it difficult to deal with the European online market since it is a conglomeration of regional markets, each at a different level of development.”
As a whole, European online retailers have preferred to take a narrow focus, generating 93 percent of their sales in their home markets. This is partly due to the tremendous differences amongst online markets within Europe, which pose a challenge retailers trying to span the entire continent. Even established online retailers from the US are finding it difficult to adapt their one-size-fits-all approach to the diverse European market, according to BCG.
Among the market differences facing retailers in Europe:
- Sweden has developed a relatively advanced online market. With an online retail penetration of 0.7 percent, second only to the US, it stands out from the rest of Europe. Its absolute market size, however, is relatively small.
- Despite lower levels of penetration, Germany and the UK are the most important markets by virtue of the size of their economies. Already, they account for 60 percent of the online market and the majority of market growth in absolute terms by expanding more than three-fold over the space of a year.
- In Spain/Portugal and Italy the development of online retailing lags behind the rest of Europe, as shown by their lower online retail penetration rates. They do, however, have the potential to become important markets as their penetration rates rise and they migrate more of of their sizeable retail markets online.
- France’s population has been buying direct through Minitel for almost two decades. These high Minitel penetration rates have yet to be translated to the Internet-based online retailing market.
- Belgium, the Netherlands, Switzerland, Austria, Norway, Finland, and Denmark claim smaller positions in the European online retail market as a result of moderate online retail penetration rates and small market sizes.
“European retailers need to step up to this challenge and determine what part of their business can be scaled on a pan-European basis and what part needs to be tailored to appeal to local preferences within the European market,” Forth said. “The rewards will be huge for the small number of retailers, either European or American, who find the right balance between the two.”
The BCG study is based on comprehensive interviews with 546 European retailers, in addition to other publicly available data sources. Other findings of the study include:
- European retailers’ online revenue increased by more than 200 percent in 1999, outpacing growth in the US market of 145 percent. Yet, sales online currently account for 0.2 percent of total retail revenues in Europe, compared to 1.2 percent in the US.
- Total online revenue in 1999 was 3.5 billion and will reach about 9 billion by the end of this year.
- Online retailing will continue to grow at exceptional rates over the next few years. Total European online retail revenue is expected to reach approximately 45 billion in 2002, a 13-fold increase from 1999.
- Multichannel retailers, those with other existing sales channels, are taking advantage of their strong existing brands and established customer service functions and, as a result, account for two-thirds of the online market.
- “Pure-plays,” retailers who sell only online, account for the remaining third of the market and are outperforming multichannel retailers, experiencing growth rates that are on average 25 percentage points higher.
- Total exports beyond national borders account for only 7 percent of European online retailers’ revenue; exports out of Europe generate just 2 percent.
- Four categories — travel, computer hardware/software, books, and financial brokerage–account for three-quarters of the market.