The driving force behind the third wave has been the rise of online marketplaces, which allow thousands of third-party vendors to sell goods through common merchandising and payment platforms in exchange for a commission, oftentimes while the marketplace sells its own inventory as well. Under this model, Taobao, Rakuten, Amazon, and others are taking huge and growing portions of sales in many markets. In 2011, Amazon had a 12 percent online share in North America (up from 10 percent in 2010); Taobao, 80 percent in China; and Rakuten, 30 percent in Japan. These platforms will drive e-commerce growth to well over $1 trillion in annual sales.
From the consumer’s perspective, online marketplaces offer near endless assortments, sometimes up to 80 times that of traditional retailers, even in categories outside traditional strongholds such as books and electronics—facial moisturizers, for example. (See Exhibit 1.) They also offer unprecedented price transparency and competition among vendors. Online marketplaces are exploiting the increasing ubiquity of mobile devices with apps that allow consumers to compare prices and purchase anywhere, anytime. Marketing and pricing innovations such as free shipping (Amazon Prime and Tesco Delivery Saver, for example) build customer loyalty, and the resulting volume leads to economies of scale that reduce infrastructure and logistics costs and improve negotiating positions with downstream providers.
In addition, by aggregating third-party inventory, online marketplaces spread the cost of customer acquisition across thousands of sellers. In some cases, they are acquiring their most successful sellers, gaining footholds in new categories. Amazon’s purchase of Quidsi, which operates an array of consumer-targeted sites such as Diapers.com and Soap.com, is one example. The result is unprecedented: retailers with annual sales on a magnitude of $50 billion growing at rates of 40 to 50 percent per year.
In the fourth wave, just in its infancy, several trends converge. First, dry groceries and other inexpensive fast-moving consumer goods, long the purview of brick-and-mortar stores, will move online. In South Korea, the penetration of online grocery so far is approximately 11 percent; in the U.K., it is approximately 6 percent—up from 1.5 percent in 2006. We expect other markets to follow suit as online marketplaces and “click and mortar” operations improve the consumer experience and bring down the cost of delivery through improved warehouse technology, subscription purchases, bundled or “add on” items, and, perhaps most significantly, new services such as “click and collect.”
The rise of click-and-collect services—the second major trend—enables consumers to order a basket of goods on their computer, tablet, or smartphone and pick it up at a store or dedicated facility. These services are gaining popularity in many markets, particularly where home delivery is problematic. Major grocers in France, including E.Leclerc and Auchan, will have established some 1,200 click-and-collect sites, many operated as “drive throughs,” by the end of 2012, fueling online sales growth of 25 percent per year through 2015. In the U.K., Tesco.com began offering click and collect in 2011 and saw a 30 percent increase in online nonfood sales over 2010. Likewise, Walmart.com now estimates that half of its online orders in the U.S. are picked up in stores.
The main challenge for retailers will be executing profitably, particularly when the picking of goods takes place in existing or “dark” stores (stores closed for walk-in shopping but used by employees to prepare customers’ orders). While some retailers have opted to charge convenience fees, others are using technology and optimized warehouse footprints to reduce costs.
One variant of this model, which has been employed by online pure players, is delivery from centralized distribution facilities to “parcel lockers”—temporary storage facilities in convenient locations where individual online orders are held for pickup. These are gaining momentum in several countries, including Denmark, Russia, and Turkey. Amazon piloted the concept in New York, Seattle, and London and has now expanded to additional markets such as San Francisco and Washington. We estimate that parcel lockers can reduce the cost of delivery by as much as 30 to 40 percent compared with direct delivery to the home, thus significantly improving retailers’ economics for fast-moving goods.
Omnichannel retailing—the interaction of consumers and retailers anytime, anywhere, on any kind of digital device—is another major trend that is growing in importance. It is being driven by multiple factors, primarily the explosion in mobile and other interconnected devices. Annual smartphone sales are estimated to reach 935 million units globally by 2015, while tablet sales will reach 370 million units in 2016.
Although mobile commerce will remain a relatively small portion of total e-commerce (approximately 10 percent), this interconnectedness is enabling “e-influence”—shoppers researching online but purchasing in stores—like never before. Already, three-quarters of smartphone users have said that the research they performed on their device resulted in a purchase. We expect this number to grow, particularly as CRM and targeting technologies continue to improve, and as marketers can deliver ever more targeted and timely messages, such as ads for sports drinks or running gear minutes after somebody tweets about completing a run.
The ubiquity of mobile computing is propelling the rise of social shopping. The number of Facebook users has passed 1 billion (one-seventh of the world’s population). More than half of millennial consumers report using social media to check out brands. Already, the number of people following some celebrities’ Twitter feeds has surpassed the population of major countries.
Tapping into these networks will give brands and retailers the opportunity to reach consumers in new environments, interact with them in innovative ways, and create entirely new shopping experiences and occasions, all of which will evermore blur the lines among retailers, suppliers, and media—and, of course, between the online and offline experience.