strategies for optimizing online commerce/media/informa-shop-window/... · online returns are...

Publication Date: 28 March 2017

Gilles Ubaghs

Strategies for Optimizing Online Commerce

The UK merchant's perspective


© 2017 Ovum. All rights reserved. Unauthorized reproduction prohibited.

Summary

Catalyst

For retailers in today's highly competitive UK market, a strong digital presence that helps to meet

consumer expectations and ultimately drive transactions is essential. Simply enabling online and

mobile commerce is no longer enough; consumers now demand an improved experience that suits

their rapidly shifting lifestyles and ways of interacting with retailers.

In light of these shifting market challenges, UK analyst house Ovum was commissioned by payments

fintech Klarna to undertake a study of 100 UK merchants, to investigate the state of online commerce

and better understand how the industry perceives its own challenges in 2017 and into 2018. This

study included a detailed questionnaire asking merchants about their online capabilities and perceived

challenges and opportunities. The survey focused on merchants with a large online presence, and/or

large-scale retailers with revenue of over £200m per year. This white paper summarizes those

findings.

Ovum view

The retail experience is in flux, and many merchants risk a state of complacency by assuming that

merely having an online sales channel is enough in today's dynamic digital environment. Shoppers

are changing, and they expect more. This has repercussions across the merchant ecosystem,

incorporating both the front and back office – there's a need to enhance the customer experience,

reduce friction, improve payments, and simplify the returns process.

Recommendations Retailers need to understand that their customer base is changing and adapt their

channels accordingly. Consumers are increasingly fickle, and millennials will quickly

move elsewhere if the experience is poor and friction is too high. This means retailers

must continually invest in their customer experience rather than taking a "once and

done" development approach.

Improving the customer experience online will not only help entice millennials but

also potentially draw in older consumers who may be more skeptical of online

commerce. Age segmentation should be factored into user-friendly design, because

older consumers remain a largely untapped opportunity.

Payments are a critical point of friction in the checkout process, and improving these

capabilities will reduce shopping cart abandonment rates. Improvement means not

only offering more payment tool choices but also introducing new ways to pay, such

as consumer finance or the option to pay after delivery at the point of sale.

Online returns are quickly emerging as a competitive differentiator. Retailers of all

sizes need to think more strategically about how returns are implicated in their overall

customer experience offering. Returns are not just a logistics issue; they are core to

the customer experience of today's online shoppers.



Retail pressure across all channels

Digital channels are key to success Online shopping is well established in the UK

and is a common occurrence for consumers

and merchants alike; for an increasing number

of the surveyed retailers, online channels now

account for the majority of their sales.

Furthermore, the typical customer journey is

changing, with online and mobile channels

increasingly critical for in-store transactions. A

good digital presence acts as more than just a

sales channel – it is also a showroom for

deeper engagement.

Among the sample of merchants surveyed by

Ovum as part of this white paper, respondents

reported that in 2015, online channels

accounted for 47% of their sales, and forecast

that this will increase to 52.5% of sales by

2019. Mobile channels, by contrast, are

growing at a much faster rate, increasing from

1.8% in 2015 to a forecast 12.8% by 2019.

This more than sevenfold increase is likely to

be even higher among certain merchant

segments, particularly those targeting younger

and more digitally connected consumers, such

as fashion and electronics.

Ovum notes that the proportion of sales from

digital channels shown here is very high

compared with market averages due to this

study's focus on merchants with a strong

online and mobile presence. However, the

pattern of growth, particularly in mobile

channels, is indicative of broader shifts in the

way consumers shop online. Traditional online

channels continue to account for most activity,

and growth here remains positive, but the shift

to mobile is rapid and signifies the

development of a more complex commerce

environment.

Figure 1: Digital channels will account for nearly two-thirds of sales among respondents by

2019

Source: Ovum UK Online Merchant Survey 2017



Investment is booming and creating competitive pressure

Given the growing importance of digital

commerce to merchant sales strategies,

merchants are heavily increasing their

investment in their payments capabilities for

both online and mobile channels. This will in

turn help improve capabilities and add further

to competitive pressure.

Close to three-quarters of surveyed UK

merchants, among both pure-play and

multichannel retailers, reported that they will

be increasing investment in their payments

infrastructure in the next 18–24 months. By

contrast, over 90% of respondents reported

growing levels of investment in their payment

capabilities on mobile channels. Almost half

(45%) of the surveyed UK merchants reported

that they are increasing their investment in

mobile payments by 6% or more.

Increases in investment of this scale,

particularly within the mobile channel, extend

well beyond simple ongoing maintenance and

suggest that merchants are aiming to improve

in more fundamental ways to deepen

engagement and drive transactions. With such

a high level of investment, this is likely to lead

to a race when it comes to mobile payments.

Merchants that opt for the status quo will soon

be left behind.

Figure 2: Over 90% of merchants will increase investment in their mobile payments infrastructure by 2019




Millennials and Generation Z now make up a majority of online shoppers

The retail channel mix is changing, and so is

the underlying customer base. It is little

surprise that younger generations, the so-

called digital natives within the millennial and

Generation Z cohorts, are underpinning much

of this change. The critical nature of the digital

natives is being felt across merchant

categories, and their impact will only increase.

As these consumers grow older, their digital

shopping habits will be carried with them.

The impact of millennials is being felt across

all retail segments, with millennials now

accounting for over 50% of digital channel

sales by volume, particularly among e-

commerce specialists and department stores.

However, Generation X (those aged 35–50)

also maintain a strong presence online,

accounting for roughly a third of all online

sales.

By contrast, baby boomers (those aged 50–

70) only account for near 10% of online sales.

The large disparity between these age cohorts

is reflective of broader consumer attitudes to

online commerce. In much the same way that

younger consumers have more quickly taken

to digital banking, with many never setting foot

in a branch, the expectations of different age

groups are shifting. Generation Z and

millennials will undoubtedly grow in

importance as their spending power increases.

For all merchants, this poses a challenge as

the disparity between age groups means they

must cater for each segment. Long-term

success will mean meeting the expectations of

the young while ensuring ease of use to

maximize opportunity with the older

generations.

Figure 3: Millennials account for over 50% of respondents' online sales




Retailers should invest to meet the demands of younger consumers

Much like the growing levels of investment in

mobile, merchants are aware of the

importance of millennials to their online

channel, with over 90% of merchants reporting

that the demands of millennials are a driver

behind their technology investment.

Interestingly, this is felt even more strongly

among fashion and footwear retailers, where

41% strongly agree that they are investing to

meet the demands of millennials.

Fashion, even more than other retail

categories, feels the impact of these younger

consumers. These shoppers are more

comfortable buying fashion items via digital

channels and show decreasing levels of

loyalty to brands and outlets. Fashion is

rapidly turning into the most competitive space

in online commerce as merchants seek to

target these consumers more effectively.

Figure 4: 95% of fashion and footwear retailers are investing to meet the demands of

millennials




Improving payments in the online experience is a must to reduce friction

A frictionless checkout is more critical than ever All online merchants continue to struggle with

high levels of shopping cart abandonment.

With estimates that anywhere from 20% to

60% of all shopping carts are abandoned,

merchants are understandably eager to find

means of avoiding lost sales when they come

so close to a conversion.

From a merchant's perspective, friction in the

checkout process is the top factor driving

shopping cart abandonment – this was cited

by 52% of respondents. This was followed by

40% of merchants who cited not accepting a

payment method consumers want to use, and

39% a lack of lending or credit options. By

contrast, only 21% of merchants felt that

security concerns drove shopping cart

abandonment, underlining consumers' growing

comfort with shopping online.

The strong focus on friction in the checkout

process and a lack of particular payment

methods underscores how critical payments

has become to online conversions. In an

increasingly mobile and fast-paced commerce

environment, a combination of too much

hassle and not enough choice can be enough

to lose a sale.

Figure 5: 52% of merchants think friction in the checkout process is a top driver of shopping cart abandonment




76% of retailers want to offer new financing options online Improving online payments requires offering

not only more options for how to pay but also

new ways of financing transactions beyond

traditional cards. Offering new forms of

financing is of high interest to online

merchants in the UK and is likely to become

more common in the near term.

When asked about the specific payment

methods at the online checkout that they

would like to introduce in future, 77% of

respondents cited in-app payments and direct

debits. Both methods have the potential to

reduce payment friction, and in the case of

direct debits and faster payments can help a

merchant to reduce its processing costs from

interchange fees. Close behind this was

offering consumer finance at the point sale,

cited by 76% of merchants. Online consumer

finance remains relatively unknown in the UK

today, but with such high levels of appeal to

merchants, it is likely to become a common

feature of the market in the near term.

Online consumer finance will likely strike some

shoppers as an unusual payment tool, and

some may be initially skeptical. However,

recent consumer research commissioned by

Klarna suggests that nearly two-thirds of

consumers (62.1%) agree with the statement

that increasing the variety of financing options

will help drive greater sales online.

Furthermore, 71% of consumers agree that

making the checkout easier and simpler would

make them more likely to complete a

purchase.

Not having the liquidity to finance a purchase

is a major friction point for most consumers.

However, new payment tools and financing

methods can help improve the checkout

process and act as a strategic advantage for

merchants.

Figure 6: Over three-quarters of merchants are interested in offering consumer finance at the

online checkout




Despite the potential, retailers feel current financing options are too

complicated and expensive

Consumer finance at the online checkout

remains rare in the UK, and despite the high

levels of appeal to consumers and merchants

alike, most merchants are unsure of how to

proceed. In-store credit is not a new concept,

but it traditionally took the form of complex

paperwork undertaken in-store for high-ticket

items, such as furniture and white goods.

However, even here the in-store financing

market has largely been superseded by co-

branded credit cards, a proposition that is not

appealing to many, particularly younger

consumers with weaker credit histories.

It is unsurprising that many merchants picture

this style of merchant credit as their only

available option and may be wary of the

complexity and suitability of offering direct

consumer financing.

Eighty-five percent of surveyed merchants

believe that online consumer finance is too

complicated and expensive to offer.

Furthermore, 78% of merchants are

concerned that consumers may be rejected for

finance, while 56% feel that high APRs will put

most customers off consumer finance.

Merchants undoubtedly stand to benefit from

offering credit as a means to boost sales, but

there remains reluctance to add any friction to

the checkout process by introducing further

complication to the customer journey.

Providers that can bridge this need for new

consumer financing or pay-later solutions,

coupled with smart risk analysis and a simple

online application process, will gain traction

among UK merchants in the online space.

Figure 7: 85% of merchants think online consumer finance is too complicated and expensive




Returns are a battleground in driving online sales

Free returns increase online sales but place pressure on

merchant margins Key to the significant growth in online retail

among Generation X, millennials, and

Generation Z is their growing expectation for

an easy returns process. This expectation is

reflected in where and how consumers shop

online today.

In the UK, 98% of retailers believe that free

returns help increase sales, with 84% strongly

agreeing with this statement. Likewise, 98%

feel that customers expect to be able to easily

return online purchases, with 80% also

agreeing that the shopping behavior of

millennials is shaping their returns policy. In

light of this, 78% feel their returns policy is a

competitive differentiator. Despite the growing

importance of returns to online shopping, 83%

of merchants feel they need to improve their

returns capabilities.

Backing up this perception among merchants

is the finding that 80% of surveyed consumers

report they are more likely to shop with online

merchants that offer free returns, while 90%

want a broader range of options that help

make the process easier. This might include

in-store returns for online purchases or pay-

after-delivery services to allow shoppers to try

goods before they ultimately part with their

cash.

With such a critical focus on returns, the need

for strong capabilities will likely lose its

positioning as a competitive differentiator to

instead become a hygiene factor for long-term

survival. For merchants, easy returns pose

significant potential to entice consumers and

increase sales.

Figure 8: 78% of merchants feel their returns policy is a competitive differentiator




Retailers of all sizes are struggling to improve their returns capabilities

Managing returns is a growing challenge for

merchants online, and this extends to

organizations of all sizes. Although consumers

may perceive free returns to be simply an

issue of free postage and handling, the

logistical issues are a growing pain point. In

addition to the shipping and handling, returns

involve the inspection of returned stock and

the return of SKUs to their inventory;

otherwise, these items become dead stock

and ultimately a cost center for merchants.

Combined with this is the need for payment

processing and account management

capabilities to process returns and refunds to

consumers accordingly. With consumer

expectations of speed growing in all aspects of

online life, long refund processes are likely to

alienate customers in a hypercompetitive

online market.

Given these many challenges, it is

unsurprising that managing the logistics

around returns is an operational issue for

merchants of all sizes, especially the largest

merchants – those with revenues of £200m+

(84%) – and the smallest, with revenues of

less than £10m (80%). Scale does not appear

to confer any benefit as merchants rapidly try

to adapt to this shifting returns environment.

Any areas in which merchants can improve

their returns capabilities, including through

refund and account management capabilities

or pay-later solutions, can help to garner a

competitive advantage in the near term.

Figure 9: 84% of large merchants feel managing the logistics around returns is a growing operational issue




Retailers need to get creative to stand out on returns UK merchants know that returns are now a

critical component of their online sales

strategies. The implications of this extend well

beyond logistical considerations and have

ramifications for wider business strategies.

Consumers are clear that what they seek is

ease of use and a simple, no-fuss process.

However, there remains scope for innovation

in the returns space, and merchants able to

capitalize on this will gain a differentiating

point.

In a recent survey conducted by Klarna of

more than 1,800 UK consumers, 35% reported

that unlimited returns would make the returns

process easier, followed by more options for

how to return items (32%), guaranteed courier

time windows (30%), and pre-printed return

postage labels (28%). These features are now

already on the market from some major e-

commerce retailers, such as Amazon and

Asos, among others.

Interestingly, 27% of consumers report they

are interested in pay-after-delivery options,

essentially an alternative form of financing by

invoice whereby consumers would only pay for

items they kept and not what they returned.

Alongside point-of-purchase consumer

finance, this potentially serves as a means of

reducing friction, by improving consumer

liquidity and making online returns even more

hassle free.

As the digital commerce space becomes more

dynamic, and consumer expectations shift

toward increasingly convenient returns

options, merchants capable of enabling a

greater range of options for consumers,

consistently integrated across all channels, are

likely to gain an advantage amid the growing

competition of UK retailers.

Figure 10: Returns are now an omnichannel consideration

Source: Klarna UK Consumer Survey, February 2017



Appendix

Methodology

For its UK Online Merchant Survey 2017, Ovum, in conjunction with Klarna, created an 11-point

questionnaire to understand how the current and future landscape of the market in the UK merchant

industry is evolving. The study examines a range of themes, including the following:

Key technology investment drivers

Forecast payments spending

Key frictions and causes of shopping cart abandonment

Attitudes to online returns and financing models

The research focuses on a mixture of industry verticals, incorporating both business structure (e.g.

department store, e-commerce specialist, franchise, independently owned, etc.), as well as key

merchant verticals. The lead vertical categories are as follows:

Clothing, footwear, and accessories

DIY and home improvement

Electronics

Furniture and home goods

Sportswear and equipment

White goods and household appliances

The fieldwork was conducted with senior executives responsible for payments strategy and/or

payments IT strategy in each business, and was in the field from January to February 2017. In total,

100 executives were interviewed, all in the UK, with a focus on large-scale retailers with annual

revenue of over £200m, or online sales equivalent to at least 50% of annual revenue.

Author

Gilles Ubaghs, Principle Analyst, Financial Services Technology

[email protected]

Ovum Consulting

We hope that this analysis will help you make informed and imaginative business decisions. If you

have further requirements, Ovum's consulting team may be able to help you. For more information

about Ovum's consulting capabilities, please contact us directly at [email protected].

mailto:[email protected]

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CONTACT US

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