Is ecommerce now net-positive for physical retail?

For years the prevailing narrative in the retail market has centred on how ecommerce is negatively impacting physical retail. However, the threat of online is now arguably receding. Have we reached the stage where ecommerce is now a complementary and beneficial tailwind to physical retail? We explore the evidence for and drivers behind this trend below.

Monthly data remains erratic, but the broad direction of travel is one of slowing ecommerce growth. Ironically, the exponential growth during Covid positively impacted the retail sector, leaving the prospect of incremental (and manageable) growth in online sales and a mature ecommerce market. We fully expect online sales (and ecommerce related logistics take up) to keep growing, but at a much slower rate (c.<1% p.a.).

There is also a degree of confusion around official ONS ecommerce statistics (currently c.27% of total retail sales, as an average across subsectors). For a start, the ONS definition of ‘internet sales’ includes 20% of ‘non-store retailing’ such as catalogue sales, door-to-door sales and sales from market stalls. If ‘non-store retailing’ is excluded, having had negligible structural impact, this leaves online sales of around £110bn (c.22% of total retail sales). Of this, a conservative estimate of 20% are collected ‘out of home’ – leaving pure home delivery as low as 17% of total retail sales (c.£88bn), a stark contrast to the complete takeover of online predicted by some during Covid.

Around a third of this figure is attributed to Amazon (c.£27bn), with most of the remaining online sales made through multi-channel retailers (M&S, Next, Zara, Boots etc.). Amazon’s sales should arguably be treated in isolation because of its unique business model, leveraging direct-to-consumer sales to generate advertising revenue, paired with market leading cloud solutions. Amazon aside, there is now a very small proportion of ‘pure play’ online retail sales in the UK, with many brands having fallen into administration including Matches, Net A Porter and Farfetch in 2024.

Recent research from Retail Economics supports the notion that stores continue to play a vital role in the value chain. When analysing the entire customer journey, which spans from pre-purchase to purchase to delivery to returns, the research shows that c.50% of online sales rely on physical touch points along the way.

All evidence that the official ecommerce statistics are too simplistic and fail to appreciate how online is evolving and the nuances by subsector.

As the retail market has evolved, so has the economics of online with increased operating costs affecting profitability after a period of sustained inflation, notably for lower margin goods. In particular, the returns rate for online sales (typically 30-50%) has huge cost implications. Asos, for example, claims that 6% of its customer base (as serial returners) are responsible for c.£100m of cost, through ‘wardrobing’ and ‘bracketing’. The number of retailers charging for returns is increasing and return windows are shortening to combat these practices. In some extreme cases repeat offenders are being blacklisted. Even Amazon is susceptible rising costs – its global fulfilment costs as a percentage of net retail sales has risen from 13% is 2014 to 23% in 2024.

In-store fulfillment has become more cost-effective than home delivery for many retailers (particularly the grocers), and they are increasingly encouraging customers back into store to mitigate the cost of operating online. Retailers are using various strategies. The growth in Click-and-Collect (see Primark’s national roll out) and free in-store returns (an effective hedge against the ‘dead mile’) are rising rapidly. Both are win-win strategies for retailers, as consumers value the convenience of browsing at home but also the speed and lower cost (often free) of collection or returns in-store (the latter has been automated by Zara for added convenience). Click-and-Collect’s share of online sales is forecast to grow to 19.1% in 2027, from 14.4% in 2022 according to Emarketer - other research estimates that we are already at this level.

Increasingly stores are being used as local fulfilment hubs. The ‘hub and spoke’ concept was established by Argos in 2012 where larger regional ‘hub’ stores were used to hold more stock which delivered to the smaller ‘spoke’ stores, allowing for faster fulfilment of local online orders. More recently, B&Q announced that 85% of direct online sales of c.£900m are fulfilled from 53 strategically located stores, following a programme of upgrades to store infrastructure. Tesco and Sainsbury’s (with a combined 40% share of the online grocery market) fulfil the vast majority of online sales (between 85-90%) from store too. As such, there is now a rental premium on fulfilment-enabled stores – as Ben Smith, Joint Head of UK Retail Value and Risk Advisory, comments, “we are increasingly seeing grocers lock in premium rents for the best omni-channel stores.”

Shipping orders from stores instead of central distribution centres can improve delivery time whilst driving down cost, as an extensive store network allows inventory to be placed closer to the consumer. However, significant investment is needed up front in IT and automation to manage inventory which can be prohibitive for smaller retailers. AI (which is in the early stages of adoption) is potentially game-changing for retail too, in helping retailers learn and quickly adapt to consumer preferences and predict future behaviour, improving supply chain efficiency and reducing the risk of costly returns.

The continued evolution of stores into fulfilment hubs raises significant questions for the leasing market, in particular around the structure of turnover clauses. Firstly, certainty is needed on how click-and-collect sales are accounted for. Should they be included in turnover calculations, for example, which has often met resistance from retailers that are unable to accurately quantify due to unsophisticated, legacy IT systems? And then there is the impact of returns on turnover data - should online returns be excluded from turnover calculations, as retailers frequently argue that they can lead to additional purchases?

Nobody doubts the significant impact of ecommerce (and home delivery in particular) over the past ten years. However, following a better appreciation of the cost of online, the threat to physical stores is much reduced today and they are seen as a vital component of retailer strategies. In particular, the way in which online sales are fulfilled is evolving and a combination of physical stores and online channels is the ideal mix to capture demand. Arguably the ‘point of fulfilment’ should be recognised and measured as a KPI by retailers and the broader retail industry.

Looking forward, further growth in online sales is forecast, but it will not necessarily be detrimental to physical retail (indeed ecommerce will likely be the driver of overall retail market growth, which in turn will benefit stores). There is now broad acceptance that stores (particularly after significant rebasing of occupational costs) hold the key to both profitable fulfilment of many products, and to overall retailer profitability.

Pre-pandemic uncertainty about the future role of physical retail has been replaced with a real sense of optimism, as the recovery of physical retail gathers pace. Ironically, this resurgence was expedited by COVID, which artificially accelerated online growth. As Paul Marshall, Head of UK Retail Leasing, comments, “the cost of online now underpins certainty in physical retail destinations - this has led to a bull occupational market for the last 18 months to two years.” This certainty is also being reflected in the investment market – according to Jonathan Heptonstall, Head of UK Retail Investment, “the buoyant occupier market is providing real conviction to investors - demand is strengthening and there is healthy appetite for resilient retail across the spectrum.”

Contact
Ben Smith
Jonathan Heptonstall
Paul Marshall