US online retail sales to reach $1 trillion in 2025 astride thriving Amazon

14 September 2018 Consulting.us

A new report from management consultancy FTI Consulting projects US online sales to reach $525 billion in 2018, $660 billion by 2020, and $1 trillion by 2025. Meanwhile, Amazon will continue to grow its share of online sales as omnnichannel retailers struggle to convert online strategies into sustainable profits.

Here’s the good news: online retail sales are booming , with the growth rate of the market accelerating to 16% in 2017 compared to 15% growth in 2016 and 14% growth in 2015 and 2014. US online retail sales topped $450 billion in 2017. FTI Consulting’s annual US Online Retail Forecast, however, expects that growth rates are peaking and will start to moderate next year, as it becomes increasingly difficult for rates to keep increasing given how sizable the market for online sales has gotten.

Indeed, US ecommerce sales reached a 13.2% share of retail sales last year (excluding auto and gas sales), and 15.7% if the supermarket category is also excluded.  Ecommerce sales have, meanwhile, taken a disproportionate share of overall retail sales growth, accounting for 46% of total retail sales growth in 2017 – a growth of over 15 points since 2014.

The bad news, though, is that online and omnichannel strategy hasn’t been a panacea for the big brick-and-mortar retailers. According to FTI’s report, increased online sales for big retailers has meant little more than a siphoning of sales from stores to online, and is more a survival requirement than an elixir for growth. For example, Pier 1 Imports has doubled its online share to 25% in the past three years, while at the same time its market value has plunged 80%.U.S. E-commerce Retail Sales ExhibitRetailers have had to invest big money into setting up online shops, as well as costly incentives to lure shoppers online like lower prices, expanded product ranges, free shipping, and generous return policies – with little sign that consumers will bear the costs. FTI says these accommodations have caused margin compression, and with everyone implementing them, have caused a ‘cancelling-out’ of these efforts as retailers compete with each other.

“Online sales are growing at a respectable rate for many omnichannel retailers in large part because they continue to bear nearly all the associated costs of attracting and accommodating online shoppers, while their store-based sales often languish,” said Christa Hart, a Senior Managing Director in the Retail & Consumer Products practice at FTI Consulting. “This has made the omnichannel strategy far less lucrative for retailers than once anticipated, even though they collectively claim a majority of online sales.”

“An omnichannel strategy that is well executed and achieves respectable scale has allowed those retailers to remain competitive as the retail shakeout continues, rather than boost profitability and return on invested capital."U.S. E-Commerce Retail SalesWhen Amazon is excluded, the 2017 online sales growth rate is 10%, which is roughly what store-based chains are achieving. According to the report, that’s not very impressive and in most cases isn’t enough to offset declines of store-based sales. With many large retailers failing to achieve double-digit online share or annual online sales growth, they can expect a slow retrenchment and a future of negligible or negative total sales growth.

In the meantime, Amazon stands to gain the most from online sales’ rising share in the US, while thwarting omnichannel retailers’ effort to retain or gain market share without compromising their profitability. Amazon already takes a highly disproportionate share of US online sales, with its market share continuing to increase. About 50% of shopping searches start on Amazon rather than search engines or other company sites, and FTI estimates that Amazon has upwards of 66 million lucrative and loyal Prime subscribers in the US.

Amazon first-party sales have been increasing by an average 20% per year, while its third-party ecosystem of sellers has also been thriving – with 3P sales growing 45% per year. FTI estimates that Amazon (1P+3P) grabbed 35.7% of total online retail sales in 2017, compared to 30.7% in 2016 and 26.7% in 2015. Thus, Amazon is gaining online market share at an accelerated pace; indeed, the report estimates that Amazon captured 30% of overall US retail sales growth in 2017.

“We all recognize that Amazon is the preeminent online retailer, but what we’ve come to realize in the last couple of years is that Amazon’s total retail reach, particularly its third-party sales, is considerably larger than previously thought,” commented Khaled Haram, a Senior Managing Director in the Retail & Consumer Products practice at FTI Consulting. “The Amazon ecosystem is taking the vast majority of U.S. online retail sales growth.”U.S. Online Retail Sales and Market Share

Online present, online-ier future

Based on a tweaked forecast model, FTI expects online sales to reach $525 billion in 2018, increasing 15.9% over 2017. Meanwhile, the firm expects online sales to top $660 billion by 2020 and crack $1 trillion by 2025. Their current forecast has a CAGR of nearly 10%.

The projection estimates the online share of US retail sales to level off at the 25% mark around 2030, roughly double today’s 13% share.

Amazon is projected to expand its domination of online sales market share, growing to 39.7% (1P+3P) in 2018, 45% in 2020, 50% in 2023, and then finally levelling off near 60% in 2030. As such, Amazon is projected to reach a majority of online US sales in five years.

According to FTI, the trend toward online sales isn’t likely to change and isn’t a fad. “There’s little chance that today’s Prime-age consumers ever will rediscover their love of frequent store-based shopping as a fulfilling use of their time,” the report concludes. “Moreover, Amazon has the audience and the infrastructure in place to keep extending its reach and taking market share.”

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US grocery sector in store for further hard discounter expansion

01 April 2019 Consulting.us

Hard discounters offer customers bulk food at low prices in an unassuming shopping environment. German firms Aldi and Lidl have considerable clout in Europe, and in recent years have globally expanded their store footprints. Aldi is well-positioned in the US, garnering high-level support from consumers, while Lidl, which entered in 2017, has quickly built a strong reputation. As the rollout of the discounters continues, local brands face stiff competition.

Competition among supermarkets has heated up in recent years as consumers increasingly sought out discounters and moved away from hyperstores. German discounters Aldi and Lidl in particular have asserted their dominance across global markets with the former opening of hundreds of new stores and the latter entering the US market in 2017.

New analysis by Bain & Company analyzes how far the rise of discounters has affected grocers in the US market. The report, titled "How US Grocers Are Standing Up to Europe’s Hard Discounters," is based on a survey of 17,400 consumers, among other data sources.

Hard discounters NPS

To better understand the impact of hard discounters Aldi and Lidl on the US market, the firm’s recent survey of consumers asked respondents about their grocery shopping habits using the Net Promoter Score function. The Net Promoter Score measures how likely it is that a consumer will recommend a product, service, or brand to friends and family. 

In terms of the regular grocery shopping trip, hard discounters have managed to top the market at 43 points, with supermarkets around seven points behind. Mass merchants have the lowest score in the category at around 20 points. For big stock-ups, hard discounters, with their large bulk offering and appeal, score 60 points – well above that of warehouse clubs (45) and supermarkets (38). The analysis shows that even for quick trips for a couple of items, hard discounters top the score at around 10, compared to six for supermarkets and negative scores for warehouse clubs and mass merchants. The only category in which the hard discounter segment performs relatively poorly is buying prepared foods for today – at 25 compared to 50 for warehouse clubs and 35 for supermarkets.

Aldi customer advocacy

Aldi, which has been in the US market since 1976, has resonated strongly with consumers, coming in the top three for NPS for consumer advocacy. The company has managed to increase its position on last year by nine points, arriving at 55 – 15 points behind the leader. Aldi was noted in particular for its delivery of “best everyday low prices” and “best value for the money.” Lidl, a relative newcomer to the market, has a middle-of-the-road score.

Consumer advocacy is crucial to success within grocery

The success of discounters generating high consumer advocacy scores, according to the Bain, mean they are likely to show strong performance in the future, The firm notes that promoters purchase more than twice as frequently as detractors, with 70% of promoters shopping two times a month or more compared to detractors at 32%. The firm also found that the average monthly amount spent among promoters is almost three times as high as detractors, at $111 against $39. Promoters additionally tend to be more loyal to their chosen company, netting 28% of the total wallet compared to 11% for detractors.

“Lidl and Aldi are just beginning to flex their competitive muscles,” Mikey Vu, a partner with Bain & Company’s Retail Practice and a coauthor of the report, said. “What we’re seeing is that US grocers can effectively stand up to these hard discounters, but that they need to remain vigilant and innovate in strategic areas to keep their edge.”