Online penetration of the UK retail market has rocketed from just 1.6% in 2002 to 14.8% in 2016, equating to a market size of £47bn last year. While this has supported total sales growth and allowed new brands to enter the market, with many pureplays becoming major market players, the growth in online has come at a catastrophic cost to margins.
Looking at the top 100 retailers in the UK, total operating profit (pre exceptionals) has grown over the last decade, though since 2010 we have seen a 12% fall to £9.5bn in 2015, in part due to the cost of closing underperforming stores and more considered consumer spending but largely due to the necessary investment in delivery and fulfilment to support the growth in the online channel.
Across the board retailers have opened new automated distribution centres, launched dark stores, introduced new fulfilment and IT systems, transformed online platforms and functionality, provided mobile optimisation, expanded delivery fleets – the list goes on. All this to satisfy increasing consumer demand and avoid being left behind. As we enter a period of price inflation, margins and profitability will come under further pressure and are forecast to decline in 2017 and 2018 having stabilised over the last couple of years.
Despite the burden of rising costs, retailers need to maintain investment in the online channel as this will be the only source of growth in retail in 2017 – with offline non-food sales set to decline again this year.