Internet Retailing Blazing Growth Path

June 2011

Retailing: Internet

Euromonitor International

Introduction Post-Recession Consumer Key Domains Stars in the Virtual Economy What Does the Future Hold?

Introduction

Retailing: Internet

Euromonitor International

Scope
This briefing covers the following retail distribution channels, focusing on 2010.

Retailing

Grocery Retailers

Non-Grocery Retailers

Non-Store Retailing

Internet Retailing

Disclaimer Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies opinions, reader discretion is advised

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Introduction

Retailing: Internet

Euromonitor International

Objectives of the report

The core objective of this report is to examine the state of global internet retailing in 2010, including any impact that

continued global economic uncertainty is having on the performance of specific markets. The report will compare and contrast sales performance globally in terms of how different markets are contributing to global growth in value terms. Developed and developing markets are contrasted and in doing so, lessons learnt will be highlighted and conclusions drawn on how overall performance is changing and key factors impacting it. Key product categories contributing significantly to internet retailing growth are examined in detail in reviewing key geographies and retailers. Key trends within the industry such as m-commerce, coupon sales and flash sites are highlighted and their impact on internet retailing examined. The report does not claim to be comprehensive, focusing on key industry categories, but rather seeks to offer highlevel insight into key changes in the market at a time of manifest macroeconomic instability.

Introduction

Retailing: Internet

Euromonitor International

Key findings
US$317 billion online sales in 2010 Compared to individual countries retail sales, the global internet market would rank in the top 10 and be similar in size to Canada or Russia, for example. The two biggest and fastest growing online retailers Apple and Amazon, a pure player and a multichannel retailer, are evidence that company strategy and execution are more important than model alone. Following constrained consumer spending, the online channel has benefited within most fast moving industries increasing in 2010 in share of the distribution with wideranging products; from apparel to pet care. The top 10 biggest online markets together account for 85% of global internet sales and within those developed markets in North America, Western Europe and Asia Pacific lead the way. Combined online sales in the EU are US$104 billion in 2010, making it only comparable to the US in size, however it remains a very fragmented market. Overall sales of media products are undergoing a long-term and structural shift away from physical products to digital music and e-books. M-commerce has come to the forefront in internet retailing in 2010 with the rise of the smartphone and tablet devices, with Japan taking the lead in this form of online sales. While online access will continue to expand in developed markets in double-digit growth terms, the biggest growth will be in Asia Pacific. China is expected to have 700 million online users compared to 280 million in the US by 2020.
5

Online performance depends on more than just business model alone

Consumer squeeze on spending impacts online sales positively Internet retailing concentrated within just a handful of countries The US and EU are the biggest markets

Media is fastest-growing product online in the last five years

M-commerce opens new frontiers Internet retailing to grow five times faster than store-based retail

Retailing: Internet

Euromonitor International

Introduction Post-Recession Consumer Key Domains Stars in the Virtual Economy What Does the Future Hold?

Post-Recession Consumer

Retailing: Internet

Euromonitor International

The impact of the recession

With developed and emerging economies alike suffering a downturn in the course of 2008 and 2009, the global

retailing market followed suit. Internet retailing was not entirely immune to the trend. Although sales through this channel remained strong at double-digit growth, they slowed down over 2008 and 2009. The impact on internet retailing would have been even stronger had sales of travel services been included in the comparison. Overall the slowdown in online sales was softened by growth in the number of consumers who used the internet to shop. This helped offset some declines in unit prices of products sold online. The economic downturn exercised even more pronounced impact on store-based sales, as consumers either cut out some discretionary purchases or embarked on shopping around for better deals, producing a combined effect of lower prices and purchase occasions. 2010 witnessed a rebound in both store-based and internet sales growth as overall economic conditions improved. Positive development aside, however, some lasting impact from the recession on how consumers shop is expected, by accelerating some existing trends such as consumer migration online and creating some new trends such as the active search for value.
30 % growth, fixed exchange 20 10 0 -10 2006 2007 2008 2009 2010 2011 7

Retailing and GDP Growth 2006-2011

Store-based Retailing Internet Retailing World GDP Growth Developed Countries GDP Growth Emerging and Developing Countries GDP Growth

Post-Recession Consumer

Retailing: Internet

Euromonitor International

Big squeeze on spending: The new consumer mindset

Although the global economy is recovering, the lingering

Internet Sales by Industry 2009-2010

impact will remain for longer and will negatively impact 4.5 consumer spending which will remain frugal and tightly 4.0 controlled for some time. 3.5 The constraints will mainly affect consumers in developed 3.0 markets. However, these consumers still generate the bulk of 2.5 online sales. 2.0 Among the key factors constraining consumer spending 1.5 remain: 1.0 Stagnant income growth - with constrained salary growth in 0.5 real terms; 0.0 High level of unemployment; Wealth destruction through lower house prices and declines in stock valuations; High levels of personal debt or increased savings which generally limit domestic demand; Increasing prices of food and fuel especially in 2011 which is 2009 2010 expected to impact shopping trips in markets such as the US. One of the main benefits for internet retailing is All these will inevitably put pressure on the level of consumer that this new consumer mindset has accelerated spending, impacting online sales as well. migration online. The online channel has been a During the growth spurt years pre-2008/2009 consumers grew major beneficiary, with the share of online sales in accustomed to more upmarket, premium products. While postalmost every industry on the rise, from apparel to recession consumers search for value, this does not pet care. Online food and drink sales, however, necessarily equate to lower-quality products. They may not still lag behind this trend. want to compromise on quality so the search is for cheaper options, for example making things last longer, buying second- Similar to the increase of online sales there has also been a rise in discounters and dollar stores. hand, DIY etc.
% value share 8

Retailing: Internet

Euromonitor International

Introduction Post-Recession Consumer Key Domains Stars in the Virtual Economy What Does the Future Hold?

Key Domains

Retailing: Internet

Euromonitor International

E-commerce in the top 10

In 2010 overall internet retailing generated US$317 billion in sales. Compared to individual countries retail sales, the

global internet market would rank in the top 10 and be similar in size to the total Canadian or Russian retailing market, for example. In turn the US and EU internet retailing sizes fall within the top 20 retail markets and are comparable to the retailing markets of the Netherlands, Indonesia and Poland, individually. The overall scale of internet retailing is making it a very attractive market for both pure players, traditional retailers and manufacturers alike who are all trying to tap into the potential it offers in order to find new areas for growth.
2.7

Top 20 Retail Markets 2010

Retail Sales

1.2 1.0

Internet Sales US$ trillion 0.8 0.6 0.4 0.2 0.0

Note: US sales fall outside of scale 10

Key Domains

Retailing: Internet

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Internet retailing in context

Retail Sales Growth by Channel 2005-2010
30
Within overall retail, internet retailing grew

25 % growth, fixed exchange rate

20

15

10

-5 2005 Retailing Non-grocery Retailers 2006 2007 2008 2009 2010

Grocery Retailers Internet Retailing

in double-digit terms, much more strongly than the other retail channels and consistently throughout the review period. While store-based channels continued to slide in both 2008 and 2009, internet retailing growth was more uniform, as higher numbers of consumers moved online to search for better prices which compensated for any price reductions which might have eroded average value sales. Within store-based retailing, non-grocery in particular suffered the most in the downturn, as consumers focused on limiting their non-discretionary spending, postponing some purchases and cutting back on others, while grocery retailers such as supermarkets/hypermarkets, and particularly discounters, remained more resilient or grew again benefiting from consumers search for value. Although internet retailing showed strong growth, different geographic regions performed differently; however in all cases internet retailing maintained stronger growth than store-based channels.
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Key Domains

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Euromonitor International

Asia Pacific and Latin America lead the growth

Developing markets have been driving growth in 2010. Latin America and Asia Pacific achieved the highest growth

rates in 2010, almost 25% in fixed currency year-on-year terms, while North America and Australasia the lowest. In historic terms over the review period Eastern Europe and Latin America performed the best, with Eastern Europe lagging behind in 2009 and 2010 due to strong overall contraction observed in these markets. At the same time, Asia Pacific benefited from the explosive growth of almost 90% observed within the Chinese internet retailing in 2010. Despite the rapid growth Latin America and Eastern Europe still represent a fairly small share of global internet sales with a combined share of less than 10%, while the bulk of sales is still concentrated and generated within the developed markets of Western Europe, North America, and Asia Pacific. These also accounted for the biggest dollar increase and had a combined 89% share of all new sales in 2010. Within Asia Pacific the bulk of internet sales are generated within Japan and South Korea, however China is rapidly catching up, having moved to third place in 2010.

Regional Growth 2005-2010

45% 40% 35% % Growth 30% 25% 20% 15% 10% 5% 0% 2006 2007 2008 2009 2010 2005-10 CAGR - 05-2010 CAGR Latin America Asia Pacific Australasia

Actual Internet Retailing Sales by Region 2010

100%

80%
Eastern Europe

60%

Middle East & Africa 40% North America 20% 0% 2010 Sales 12

Western Europe

Key Domains

Retailing: Internet

Euromonitor International

Top 10 internet markets

Internet retailing sales are concentrated within only a handful of countries. In 2010, the top 10 biggest online markets

together accounted for 85% of global internet sales and within those the difference between developed and developing could not be more pronounced. Within the top 10 markets by sales only the three largest BRIC markets, China, Brazil and Russia, are present. In per capita terms, only the developed markets within Asia, Europe and the US rank at the top, with Canada missing from both rankings highlighting its lower penetration of internet retail. Within the European markets there is also a shift between the biggest and the most developed. Germany is being replaced by some of the smaller but more developed Northern European markets and Switzerland which boast a more developed internet retail. The top five markets which lead in both actual and per capita sales account for 70% of global internet sales. These markets also offer the best opportunity for immediate expansion due to the established consumer base and sales growth. All the top five markets were impacted by the economic downturn, suffering a slight contraction in 2009, yet in actual terms these markets generated the biggest increase in overall internet sales for 2009-2010. And while developing markets offer rapid growth and promising future potential, actual sales are still limited and relatively small compared to developed markets. US$ per capita Top 10, US$ billion US EU Japan UK Germany France South Korea China Brazil Russia Netherlands 110 105 37 36 20 20 17 12 8 7 4 UK Denmark USA South Korea Finland France Sweden Japan Switzerland Netherlands EU 580 470 360 350 330 320 310 290 280 260 209
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Top 10 internet retailing markets: Actual sales Per capita Both actual and per capita terms

Key Domains

Retailing: Internet

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Developed markets
The US is the biggest market accounting for almost a third of global sales; in size it is comparable only to the combined EU market. In per capita terms, however the US is much lower than the UK with US$360 compared to US$580 in the UK. This clearly indicates that if the US market is to reach the same penetration as the UK, it still has room for growth. Internet retailing growth remained strong even during the downturn as many consumers increasingly moved online to search for better deals. Growth in coupon services and daily deal sites such as Groupon is a clear indication of consumer interest in lower prices. In the last couple of years, brick and mortar retailers in the US have placed internet retailing at the heart of their retail strategy integrating the channel more fully in their operations.
The UK enjoys the highest per capita spend globally and a very high share of internet sales as a proportion of retail sales. High spending on a wide variety of products helped increase UK sales. One of the reasons for the high per capita online expenditure in the UK is the popularity of all types of fmcg products sold online. In addition to the traditional internet products such as electronics and media, the UK also has one of the highest shares of grocery sales online. Early adoption of the online sales model by leading UK grocery retailers has laid the foundations for strong growth in online sales of grocery products supplementing or replacing some consumers weekly trip to the supermarket. Japan is the second biggest internet market but with much lower per capita spending. It ranks eighth globally, and has a relatively underdeveloped online market. Internet sales represent only 3.2% of total retail sales, and are much lower compared to those of the UK or the US. This is attributed to the relatively low share of PC penetration in Japan compared to other developed markets. Instead, the country boasts a much higher penetration of game consoles such as Playstation. Mobile phones have emerged as a key means of accessing the internet particularly for younger consumers, so it is not surprising that Japan boasts much higher share of mobile internet sales compared to any other market. Leading Developed Internet Retailing Markets Country US Japan UK EU US$ billion 110 37 36 104 US$ per capita 360 290 580 210 % retail 4.0 3.2 7.7 3.4
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Key Domains

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Case study: EU - a fragmented internet market

Combined online sales in the EU reached US$104 billion in 2010, largely comparable in size to the US. The

combined sales of the 27 EU members posted a 21% CAGR over the period 2005-2010, slightly ahead of global growth, and are expected to post an 11% CAGR over the next five years, slightly lower than the global average. While harmonisation and the single market have been at the heart of EU growth over the years, the same cannot be said for internet retailing, at least not yet. There still exist a number of barriers which are limiting the uniform development of online sales throughout the EU. A recent study by Eurostat found that only 9% of consumers ordered goods or services from another EU country, compared to 36% ordering from domestic markets in 2010. Cross border trade is growing at a much lower pace than overall internet retail due to a number of constraints. In addition to the 23 official languages in the EU, consumers engaging in internet shopping from businesses based abroad need to consider different rates of VAT and other taxes which might be applicable and the somewhat limiting delivery options. Payment options also widely vary. While credit and debit cards are widely used in the UK, German consumers prefer to use bank transfers or the post office, and payment on delivery is a popular method within Eastern European markets. Individual Orders Over the Internet Deliveries and more specifically lack of suitable delivery 40 options can be one of the biggest obstacles to EU-wide internet retail. At present there is no unified approach, with 30 each retailer offering different options and prices. The EU Commission has drafted plans to make mandatory, delivery to 20 any part within the EU. Currently industry associations are 10 worried that this and other provisions within the Directive will increase costs of doing business. On the other hand, clear 0 rules and costs to the consumer could increase cross border 2008 2009 2010 trade particularly within the smaller EU markets which might not be tempting enough for retailers from other EU countries to National orders establish presence. Increased cross border online sales could EU cross border orders have the spill over effect of increasing competition in local Non-EU cross border orders markets and for local retailers. Source: Eurostat community survey on ITC usage
% of all individuals 15

Key Domains

Retailing: Internet

Euromonitor International

EU: The north/south divide

Growth and development in internet sales within the individual EU markets remains disparate, with the north

European and Western markets achieving the highest penetration of online sales, while the south European and Eastern markets enjoy much lower penetrations. At one end of the spectrum is the UK with an enviable US$580 per capita spend, while at the other is Bulgaria with just US$5. Northern European markets are enjoying faster adoption of the internet, with Germany lagging slightly at the lower end of the spectrum compared to its Northern peers.
While the variation between markets is

EU Internet Retailing per Capita 2010

partly due to different purchasing 300 powers (which remain most evident between the Eastern and Western EU 250 members) this does not account for all variations. 200 Better internet infrastructure such as PC ownership in households and 150 penetration of faster ADSL, or broadband internet is higher within the 100 northern Western markets, yet southern consumers still seem to 50 prefer traditional retail methods compared to their northern 0 counterparts. However with better pricing online it is expected that consumers who are still reluctant to use the internet to shop will be more tempted to move online. Proliferation of member-only websites North West North East South West South East in Spain for example shows how Note: East/West division based on Euromonitor International geographic groupings consumers are embracing deals UK, Denmark, Finland, France and Sweden sales fall outside of scale online.
UK Denmark Finland France Luxembourg Sweden Netherlands Germany Belgium Ireland Austria Malta Spain Cyprus Greece Portugal Italy Czech R. Slovenia Poland Hungary Slovakia Lithuania Latvia Estonia Romania Bulgaria 16

Key Domains

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Emerging markets
China, the biggest emerging market, also has the highest potential for growth, due to the current very low level of online sales. Per capita spending in 2010 is just US$9 compared to over US$40 in both Brazil and Russia. Chinese consumers are also very price conscious and prominent bargain hunters. They use the internet to search for better prices. The Chinese online market is characterised by a high level of C2C sales, which so far have been competing with B2C internet sales. However in 2010 the biggest C2C player, TaoBao, part of Alibaba Group, launched a B2C portal, Tmall, which has been very successful achieving a 35% market share in its first year, and driving overall growth for the market.

Brazil is the second biggest emerging market, and also the biggest market in Latin America. Internet retailing is competing with direct sales in both Brazil and the rest of Latin America, where direct selling is a bigger non-store channel than the internet. One of the reasons for this is that consumers in Latin America prefer the social aspect, the interaction and the ease of accessing products through the direct selling channel. The other reason is that direct selling can reach even consumers in remote locations, and those that do not necessarily have online access.
Russia is similar and has an even wider geographical area than Brazil and China, and not surprisingly the majority of direct sales are concentrated in the two main metropolitan areas, Moscow and St Petersburg. Delivery is still a problem as the postal system cannot be relied upon, forcing retailers to invest in their own delivery networks. This, combined with higher disposable incomes within Moscow and St Petersburg, has limited sales to these two markets. Similar to other emerging markets, electronic payment and penetration of payment cards are relatively low, which has been generally overcome with the wide adoption of payment on delivery. Leading Emerging Internet Retailing Markets Country China Brazil Russia US$ billion 12 8 7 US$ per capita 9 42 46 % retail 1.1 3.1 2.1
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Key Domains

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Electronic payment and PC penetration constraints

There remain some key differences between developed and emerging markets in terms of internet retailing growth

and development. PC and internet penetration are among the key limiting factors for the adoption of e-commerce. In addition, low adoption of electronic payment methods such as debit and credit cards, and weak delivery systems are also limiting online sales. The number of PCs per 100 inhabitants and also card payment transactions per capita in emerging markets is still low. However companies in emerging markets are finding ways around this. For example, payment on delivery is a popular method in markets such as Russia or China which also solves issues related to product or credit card fraud. Some online companies are investing in their own delivery networks as well, to circumvent weak postal services or to combine with payment on delivery. Different levels of retail infrastructure also have a different impact on online sales; in more developed markets high competition from the high street, and lower sales through store-based channels are pushing companies to invest more in e-commerce which is not necessarily the case in emerging markets. Traditional brick and mortar retailers are still enjoying rapid growth through expansion of retail outlets.
12 10 8 6 4 2 0 Number of PCs per 00 people

Card Payment Transactions 2010

US$ 000 per capita

PC Penetration 2009
160 120 80 40 0

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Retailing: Internet

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Introduction Post-Recession Consumer Key Domains Stars in the Virtual Economy What Does the Future Hold?

19

Stars in the Virtual Economy

Retailing: Internet

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Brick and click - the top 20 online retailers

Online performance depends on more than just business model alone. Among the best performers in 2009-2010 are

both pure internet players and multichannel retailers. At the top the two fastest-growing online retailers are Amazon and Apple, a pure player and a multichannel retailer, respectively, evidence that company strategy and execution are more important than model alone. The majority of the top 20 online retail brands are US based, and most of them continue to generate their sales in a limited number of markets.

Top 20 Global Internet Retailers 2009-2010

30 US$ billion, RSP exc tax 25 20 15 10 5 0 30% 25% 20% 15% 10% 5% 0%

2009

2010

Growth 20

% growth

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Media, electronics and apparel lead internet sales

Three product categories, consumer electronics, apparel and media products, have remained the top-selling

categories over the internet in the last five years, accounting for just under 50% of all product sales online. Media products have achieved the highest growth despite the decline in book and CD sales, due to the shift to digital formats. Consumer electronics remained the most popular product online, since 1999, however apparel is quickly catching up with it and growing faster.

Internet Retailing Sales by Product 2005-2010

120,000 US$ billion, RSP exc tax 100,000 80,000 15 60,000 10 40,000 20,000 0 5 0 % CAGR 21 25

20

2005

2010

2005-10 CAGR %

Stars in the Virtual Economy

Retailing: Internet

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Amazon strengthens its hold

Amazon is the biggest internet retailer, holding on to its leading position in 2010. The key to the companys success

is its investment in good customer service, wide product portfolio and very competitive prices. Amazon reacts to price changes by other companies very quickly and updates its own prices almost immediately as it tries to offer the best price online. This internet retailer is further helped by its wide geographical reach. The company delivers to more than 160 countries, and has operations in seven national markets. Italy was the first new international market since 2004, opened in 2010. Amazon is now planning to open a dedicated Spanish website in the near future. It still generates the biggest share of its sales in the US, where it also has the highest market share.

Amazon Country-specific Websites

35 30 25 US$ billion 20 15 10 5 0

Amazon Market Share

15% 12%

9%
6% 3% 0%

Country Dedicated Websites Shipping From Other Country Websites Planned Country Dedicated Websites Sales Share 22

Market Share, %

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Kindle and the cloud at the heart of the Amazon strategy

Media products continues to be a key category for

Amazon Product Breakdown 2009-2010

100%

Amazon. The company has been trying to reduce its reliance on media products and in 2010 the share of media products fell below 50% of company sales. Yet media products remains an important driver for growth. This is not surprising as global media sales reached US$41 billion and the product category was the fastest growing between 2005 and 2010. Overall sales of media products are undergoing a long-term and structural shift away from physical products to digital. This creates challenges for companies such as Amazon as well as opportunities. The company has been in direct competition with Apple since the launch of iTunes. In 2010 digital music in the US market surpassed CD sales for the first time. A similar pattern seems to be emerging in 2011 within books and publishing, with Kindle books outselling paper formats in April. Kindle and Cloud Drive, which allows customers to save files on the internet, are at the heart of Amazons media digital strategy to strengthen loyalty and increase traffic to its sites. The company boosted its competitive advantage for e-books with aggressive promotions and strong sales of the Kindle device in order to lock consumers into buying its e-books. E-books outsold printed books on Amazons site in volume terms at the end of 2010 and the trend is likely to continue.

80% Value share

60%

40%

20%

0% 2009 Media 2010 Electronics and Others

Amazon is already making plans beyond the Kindle by

focusing on supplying its content to other devices. It launched an app for use on Android, Windows tablets and for iPad for users to read Kindle books on these devices. Amazon was the first major company to launch a cloud service for music offering consumers the opportunity to stream purchased songs through a browser, and virtually from any location, beating both Apple and Google, and offering an unique service to consumers.
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Apple
I contrast to Amazon, Apple operates a multichannel strategy with brick and mortar stores, online sales and sales

through mobile devices. The company sells mostly its own consumer electronic products online and through its stores, and digital- only products through iTunes, iBookstore and the App Store. Apples strategy is one of the best examples of the integration of online and store-based sales with both channels supplementing each other. Apples penetration within the electronics and appliance specialists channel is relatively small with just over 300 stores, which ranks it 48th globally by number of stores. On the other hand, its strong sales rank it as the sixth biggest electronics and appliance specialist. On the one hand, this big difference in rankings is due to the premium products Apple sells, but on the other is linked to the wide penetration the company achieves through its iconic store design but also through the integrated online services it offers. Company online sales are also boosted by its retail presence as often products are viewed in-store and subsequently purchased online.
US$ million, exc VAT 10,000 8,000

Apple Inc Presence by Channel and Region 2010

6,000
4,000 2,000 0 Western Europe Eastern Europe North America Latin America Asia Pacific

8 7 6 5 4 3 2 1 0

Internet Retailing % market share Electronics and Appliance Specialist Retailers Internet Retailing Share Electronics and Appliance Specialist Retailers Share

Similar to Amazon, the majority of Apples online sales are generated through media products. Apple for example is

the leader in sales of digital music in the US, ahead of Amazon. The company also created a marketplace for software for mobile phones when in 2008 it launched the App Store which is the leading marketplace in both number and value sales of mobile apps. At the same time, the company is lagging behind Amazon in e-book sales due to the universal availability of the Amazon Kindle reading application across platforms and a more limited section of titles available through the iBookstore.
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Consumer electronics competition online intensifies

In contrast to online food and drink sales, consumer electronics

US$ billion exc VAT, fixed currency

is a key product category for internet retailers. Pure players and multichannel retailers such as Amazon, Apple, Dell, eBay are all well-established players in the virtual domain. The category is characterised by strong competition between pure players and multichannel retailers. There has been close integration of internet retailing into the multichannel strategies of consumer electronics retailers as consumers increasingly browse products in-store and purchase online in search of better prices. The growth of DSG, the owner of PC World, Currys, Dixons and Pixmania was driven by developing close synergies between store-based and internet retailing services such as Reserve & Collect, as customers migrate to well-known branded retailers who provide the convenience of the internet combined with store collection. Metro, on the other hand, which is the largest consumer electronics player in Europe remains store-focused. Acquisition of the pure-play internet retailer Redcoon in Germany in spring 2011 marks new ambitions in internet retailing, which will see it compete directly against its Media Markt/Saturn websites to be launched later in 2011 in Germany. New devices such as tablets and e-readers have been driving electronics sales in 2010 with digital formats in turn driving sales for the devices. E-readers and tablets are expected to drive sales of media products such as e-books and apps, and increase the market for subscription streaming services such as those offered by Netflix and LoveFilm.

10,000 US$ billion, fixed currency

E-Readers and Tablet Sales 2009-2010

8,000
6,000 4,000 2,000 0 E-Readers Tablets and Other Portable Computers 2010

2009

Consumer Electronics Internet Retailing 2007-2010

60 50 40 30 20 10 0 2007 2008 2009 2010 Asia Pacific Western Europe North America 25

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Early stages of food and drink internet retailing

Online food and drinks sales are still at a very early stage of

development, with overall sales of US$22 billion or just 7% of total internet retailing. Within packaged food, the internet retail share is even smaller, at less than 1% in 2010. The UK is the most mature market for food and drinks sales online; enjoying both the highest per capita spend and the largest overall sales of US$4.5 billion. The UK market has been largely driven by strong online commitment from leading grocery retailers which have invested in the category over the years with the successful home delivery model. With the help of the store pick-up and home delivery model, grocery internet retailers have succeeded in reaching the majority of UKs population. The remaining developed markets have still relatively underdeveloped online grocery sales, as retailers are more cautious about investing in internet retailing capabilities in particular for perishable food items. Different shopping habits make online shopping for groceries less popular in other countries, in particular in countries where grocery shopping is based around smaller but frequent trips to local grocery stores or supermarkets. However, the market size reached in the UK illustrates that there is significant growth potential in the other markets as well, particularly in markets where consumers have one or two big shopping trips a month to the supermarket. Growing petrol costs are bound to drive consumers online. Major grocery retailers are already starting to enter the channel and to trial different delivery methods.

Food and Drink Internet Retailing

100 90 US$ per capita, exc VAT, fixed exchange 80 70 60 50 40 30 20 10 0 2007 US 2008 France 2009 Germany 2010 UK 26

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UK grocery retailers set the trend

Within the UK, Tesco is the largest retailer overall and also the

US$ million, exc VAT

largest internet retailer offering both groceries and a wide range of non-grocery products. It benefits from a dense and welldeveloped store network that supports the development of internet retailing through store pick up. Tescos strong internet offer has allowed it to increase its reach both for grocery and for non-grocery products. Other major grocery retailers have equally ambitious growth plans. Three of the top four UK grocery retailers (J Sainsbury, Tesco and Wal-Mart) have already established online presence, however unlike Tesco, the other twos reach is confined mostly to grocery products. Ocado is the only pure-play internet retailer, working in partnership with Waitrose. The company floated in 2010 and became profitable in that year. Plans to build new infrastructure to support rapid sales growth are already in place. However, its difficulty reaching profitability shows the challenges for internet retailers which do not have the direct support of a large storebased chain and deliver from central depots. Sainsburys sales of groceries have been boosted by offering click and collect at more stores. The company has also started to trial non-grocery items. Wal-Mart, operating in the UK through Asda, plans to boost nonfood sales and grow in the Southeast. Morrison is the only one of the top four grocery retailers with no presence online. The company bought a pure-play company, Kiddicare.com, in early 2011 in order to build its online platform and invested in 10% of the US online grocer FreshDirect.

UK - Internet Retailing 2007-2010

4,000 3,500

3,000
2,500 2,000 1,500 1,000

500
0

2007

2008

2009

2010 27

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Online grocery still small in key markets

The two leading French retailers Carrefour and Casino are

France - Internet Retailing

1,400 US$ million RSP exc sales tax 1,200 1,000 800 600 400

displaying contrasting strategies. Casino is a major internet retailer through Cdiscount.com, focusing on non-food products. Internet retailing sales offset hypermarket saturation. The company started offering click and collect deliveries at convenience stores and supermarkets. Carrefour on the other hand has a modest online presence which could undermine growth. It considers acquisitions to boosts its prospects. In the US, Royal Ahold and Wal-Mart are the key players, together with pure player FreshDirect. Ahold, the pioneer in US online grocery retailing through peapod.com is presently operational in 11 eastern states. Wal-Mart, on the other hand, has strong share in internet retailing due to the popularity of its in-store collection services. In late 2010, it added same-day collection service on orders taken before 18.00hrs for consumer electronics and video games in selected cities. This test launch demonstrates confidence in its operational efficiency. Key players in Germany have little or no online presence. The strong power of discounters is limiting the scope for traditional supermarkets due to the price pressure and low margins which make online deliveries unprofitable. In 2011, Rewe rolled out a click and collect service in Frankfurt , while in 2010 Lidl teamed up with the Apo-Discounter mail order pharmacy to offer beauty products online. Shopping habits play an important role, with more frequent shopping trips in France and Germany making online shopping for groceries less popular.

200
0 Casino G.-P. SA 2007 2008 Carrefour SA 2009 2010

US - Internet Retailing
US$ million RSP exc sales tax 2,800 2,400

2,000
1,600 1,200 800 400 0 Wal-Mart Stores Royal Ahold NV Inc 28

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Non-grocery retailers: Apparel

Customers are becoming increasingly confident in

shopping for clothes online. They are no longer just surfing but also actively buying, making apparel sales one of the fastest-growing categories online in 2010. While pure-play internet retailers such Zappos, Asos and eBay recorded early successes, store-based retailers are developing their online models rapidly. Department stores have already established a strong online presence. The US retailers were early entrants in internet retailing which helped them secure a lead. In the UK, John Lewis, House of Fraser and Marks & Spencer are already major online players and using the internet for international expansion, with all of them offering shipment to the EU and further afield. Major clothing and footwear retailers have been relatively slow to enter online retail. Inditex and H&M opened online stores only in 2010. However their wide store networks offer opportunities for cross channel synergies such as click and collect services, easy returns and dedicated promotions. 2010 and 2011 have been the years of international online expansion for apparel retailers, with Inditex, GAP and H&M opening online stores in a wide number of markets, which is expected to provide a significant boost to apparel sales over the internet.

Clothing and Footwear Internet Retailing 2007-2010

50 45 US$ billion exc VAT, fixed currency 40 35 30 25 20 15 10 5 0 2007 North America 2008 2009 2010 Asia Pacific 29

Western Europe

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M-commerce in Japan
M-commerce has really come to the forefront in internet retailing in 2010 with the rise of the smartphone and tablet

devices, which has allowed easier access to the internet on the go and away from the PC. It is most prominent in Japan, where it accounts for almost 20% of all online sales. One of the reasons for this is the early introduction and wide adoption of QR bar codes. Software reading bar codes has been installed by default on mobile phones. Network operators have also invested in educating consumers how to use QR codes. In turn, QR codes have facilitated m-commerce; printed codes on advertising allow for easier redirection to URLs, especially useful when looking at magazines or newspapers while commuting. As a result along with digital products such as music and ringtones, apparel has been at the top of purchases through mobiles. Internet retailing in Japan has developed in an unique Japanese way, quite different to the path seen in other developed markets. Usage of the internet was constrained by the difficulty in making searches in the Japanese language, which was not resolved until Google developed its Japanese language search function in 2002. Japan has also lagged South Korea in terms of speed of broadband and penetration, although this has increased rapidly.

Further to this, Japan has relatively lower

penetration of PCs per capita compared to other developed countries, as more consumers have opted for a Playstation instead. Initially this also dampened online usage. In turn, Japans internet connectivity has been heavily influenced by the development of the mobile (cell) phone as a key means of connection, most notably for younger consumers who are frequently on the move as well as those who live in more outlying regions where fixed line connections are either expensive to install or simply unavailable.
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Smartphone explosion to boost m-commerce

In Western Europe and North America, m-commerce has taken a slightly different route, spurred by the proliferation

of smartphones such as the iPhone and android phones, and apps and mobile-enabled websites for these phones. No matter which route is taken, simplicity and ease of use are key for successful implementation. A recent study by Harris Interactive conducted on behalf of Tealeaf has revealed that more than 80% of users of m-commerce in the US have experienced problems such as websites or apps either too slow, not providing enough product details or simply awkward to use. Successful m-commerce apps, or websites need to utilise the tools and specifics unique to the medium. Effective implementation of some unique features of mobile phones can be found in the eBay or Amazon apps for example. Both eBay and Amazon reported very strong sales through mobile devices in 2010 thanks to the way they designed their apps. eBay for example is using push notifications extensively to alert the user if the action is finishing or if he/she is being outbid. Amazon has introduced a bar code reader. Combined with the broad Amazon product portfolio it offers a convenient price comparison tool for shoppers while browsing retail stores; if they find the same product for cheaper they can order it directly.

Share of Smartphones 2009-2010

80 70 2009 2010 60 50

% share

40
30 20 10 0 Asia Pacific Australasia Eastern Europe Latin America Middle East and North America Western Europe Africa 31

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Frugality as a business model

Another prominent development during 2010 has been coupon sites and member-only group buying sites. Frugality has emerged as a major consumer trait following the downturn, and in this respect it is not surprising that

Groupon was valued at close to US$5 billion, and Google tried to purchase the site valuing it at US$6 billion at the end of 2010. Following major consumer interest, Groupon has expanded to more than 30 countries with over 50 million subscribers and is aiming to be the company to reach US$1 billion sales in the shortest time. The success behind Groupon is its relatively simple and straightforward business model. Every day the company offers through its website or e-mail a daily deal on goods or services with substantial discounts of 50-70%. The popularity of the service grows as users share with friends. Member-only sites offering group purchases have not made headlines to the same respect as Groupon, however these have also built their business model on frugality offering branded, designer goods at large discounts. While coupon sites specialise in local deals and experiences, flash sites work as outlet stores which sell excess inventory at large discounts. Both discount models are becoming mainstream; Amazon has invested in Living Social, Groupons key competitor, and also bought BuyVIP, a German member-only site. Google and Facebook are also planning coupon services. The discount models have clearly benefited from constrained disposable incomes and consumers desire to maintain as much as possible similar experiences and the brands and products they were used to before the downturn.
1,200
1,000 800 600 400 200 0 Vente-privee (France) Show Room Prive (France) RueLaLa (US) 32

Selected Private Sale Websites 2008-2010

2008 2009 2010

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Introduction Post-Recession Consumer Key Domains Stars in the Virtual Economy What Does the Future Hold?

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Latin America hottest region

13% 14% 11% 15%

12%
Regional Performance 2010-2015 % CAGR 15-18 13-14 10-12
Considering the key developments online, Euromonitor International expects the internet retailing market to

17%

14%

continue its strong growth. Latin America will see the highest growth over 2010-2015, followed by Asia Pacific. Western Europe, and Africa and Middle East will register the lowest growth over the forecast period. Latin America benefits from very strong growth in Brazil, Argentina and Chile, while in Asia, China remains the driver for growth.
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Developed markets continue to dominate

Looking at actual contribution over 2010-2015,

Asia Pacific, North America and Western Europe are expected to generate 84% of all new sales. Despite the very rapid growth in emerging markets, the large developed markets will continue to generate the majority of new sales. Growth in internet retailing is still dependent on physical infrastructure such as PC penetration, broadband access, payment methods and reliable delivery systems, which are still insufficiently developed in emerging markets. The high level of such systems is benefiting developed markets. In addition, growth within internet retailing is benefiting from both supply- and demand-led factors. Demand for cheaper products, convenience, and wide product choice, in addition to adoption of web 2.0 features such as videorich websites, product recommendations from friends are driving consumers online. On the other hand, both pure players and multichannel retailers, particularly in developed markets, are stepping up their investment online in a race to capture higher share both within the market and consumers minds.

Internet Retailing - Share of Total Additional Value Sales Contributed by Each Region over 2010-2015
27%

1%
4%
5% 1%

25%

37% Western Europe Middle East and Africa Eastern Europe Asia Pacific 35 North America Latin America Australasia

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Internet continues to reshape the world

Half of All Internet Users Will Be in Asia by 2020
100% 90% Million 80% 70% Share % 60% 50% 40% 30% 20%
General internet penetration will increase significantly.

More Than 40% of the Worlds Population Will Be on the Internet in 2020
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2005 2010 2015 2020 Internet Users Internet Subscribers

10% 0%

2005

2010

2015

2020

Asia Pacific Eastern Europe Middle East and Africa Western Europe

Australasia Latin America North America

By 2020, 40% of the global population is expected to be online reducing the digital divide between developed and emerging markets. The biggest growth will be in Asia Pacific. For example, China is expected to have 700 million online users compared to 280 million in the US. Higher numbers of online users will help increase overall growth in internet retailing over the forecast period, especially within emerging markets.
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Internet strong growth to continue

Globally, internet retailing is expected to

post a 13% CAGR over 2010-2015. Grocery and non-grocery store-based retailers will post CAGRs of just 2-3% over the same period. Internet retailing will be the fastest-growing channel, also increasing faster than other non-store channels. Within the top 10 fastest growth markets, China will lead in both CAGR and actual increase terms on the back of rapid increase in its online population and the uptake of the internet not only for searching for better prices but also for shopping.

Top 10 Fastest Growing Internet Markets

Country China Mexico Serbia Indonesia India Hungary Portugal Argentina Czech Republic Brazil % CAGR 2010-2015 41.8 29.9 25.6 22.0 21.1 18.1 17.8 17.7 16.9 16.6 Absolute value growth US$ million 2010-2015 54,322 2,503 67 18 1,135 534 525 1,153 1,445 9,462

Channel Performance % CAGR 2010-2015

Vending Homeshopping -3.1 Direct Selling Internet Retailing 3.4 13.3 -0.7

Non-Grocery Retailers Grocery Retailers

2.8
2.2 37

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Conclusion
The number of internet users will grow by 32% by 2015, and by 2020 the majority of online users will be in Asia Pacific, which will boost online sales significantly M-commerce is becoming increasingly important and further blurring the lines between channels as consumers are able to shop online while in retail stores Emerging markets, particularly BRICs, to exhibit strong organic growth in online consumers, although PC penetration, payment and delivery methods remain major constraints on growth

Internet retailing to grow five times more strongly than overall retail by 2015

Traditional retailers moving more aggressively online even in nontraditional categories such as food and drink

Frugality to remain in the short term, particularly in developed markets impacting internet retailing positively

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Report Definitions

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Definitions
All values expressed in this report are in US dollar terms, using a fixed 2010 exchange rate. 2010 figures are based on part-year estimates. All forecast data are expressed in constant terms; inflationary effects are discounted. Conversely, all historical data

are expressed in current terms; inflationary effects are taken into account. Retailing coverage: Grocery retailers, non-grocery retailers and non-store retailing. Non-store retailing - the retail sale of new and used goods to the general public for personal or household consumption from locations other than retail outlets or market stalls. Excludes specialist retailers of motor vehicles, motorcycles, vehicle parts and fuel. Also excludes foodservice, rental and hire, and wholesale industries. For the purposes of this study, non-store retailing is the aggregation of vending, direct selling, homeshopping and internet retailing. Internet retailing - sales of consumer goods to the general public via the internet. Consumers purchase goods online through the web platform. Sales data are attributed to the country where the consumer is based, rather than where the retailer is based. Also includes orders placed through the web for which payment is then made through a store card, an online credit account subsequent to delivery or on delivery of the product. This payment may be by any mode, including postal cheque, direct debit, standing order or other banking tools. Includes mobile retailing (m-commerce), whereby consumers use wireless devices, such as a mobile phone, PDA, BlackBerry, to connect to the internet and purchase the goods online. Excludes sales of wallpapers and ringtones. Includes digital music and movie downloads. Example brands include Amazon.com, Zappos.com, Apple.com, Tesco.com, Dell.com, Coles Online, Quelle and Americanas. Internet retailing excludes sales of: (a) products generated over consumer-to-consumer sales sites, such as eBay. All sales over such sites are excluded, even if they were generated by companies operating through the site; (b) sales of motor vehicles, motorcycles and vehicle parts; (c) tickets for events (sports, music concerts etc) and travel; (d) sales of holidays; (e) revenue generated by online gambling sites; (f) quick delivery services of food, magazines, household goods and DVD rentals, for example: MaxDelivery.com, LicketyShip.com, Netflix.com, LoveFilm; and (g) returned products/unpaid invoices.
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