Pure-play online retailers will be the biggest beneficiaries as ecommerce grows

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by richardf

In the wake of our recent research into the Top 100 eCommerce Companies in the North, Richard Faulkner, Northern Head of Tech, Media and Telecoms at Barclays, considers the factors that will separate the unicorns from the rest.

Ecommerce is growing fast. Consumers are becoming more tech-savvy, have less spare time and are increasingly aware of products available outside their local area.

This growth is contributing to a rise in the number of unicorn companies which often have a large online presence and very rarely a traditional bricks and mortar structure. The Top 100 list includes current Northern unicorns AO, Boohoo and The Hut Group.

However, despite this strong growth, ecommerce still only represents 10% of global retail sales of $17 trillion, proving there is much more market penetration possible.

Additionally, there is a continued structural shift in retail from physical stores to online.

John Lewis recently announced that it expects online sales to account for half of its revenue by 2020 and online retailer Boohoo has seen like-for-like sales growth of 78% for the three months to the end of May 2017. Pure-play online retailers will be the biggest beneficiaries of this structural shift.

The big are getting bigger. Just as we see with Amazon, as technology matures we see the Top 10 on the list are all growing and scaling to an extent where it is harder for others to play catch-up due to the availability of resources, namely talent and innovation. The question that needs to be answered is whether new tech such as AI, Voice and Super-apps will disrupt these larger incumbents or accelerate their growth.

Barclays' research identifies the winning traits in online retail as the four pillars of Identity (low friction, payments and personalisation), Distribution (scale across a large volume of customers), Store (seamless UX across a broad range of categories or a narrow niche) and Logistics (high service through strong in-bound and out-bound logistics).

We are now 10 years on from the launch of the iPhone and global mobile internet penetration is now over 50% with mobile increasing the global user internet base from two to four billion. Whilst smartphone penetration in the West is reaching maturity, we note emerging markets are still seeing strong growth and UK ecommerce players are keen to tap this growing market with clearly defined internationalisation strategies - for example, The Hut Group now has 70% international sales.

A concern which traditional retailers and ecommerce players may have is the market domination of Amazon, which has surpassed Google in terms of retail search. Amazon is a well-established, familiar and trusted online retailer, accounting for 50% of all online sales growth in 2016. This is only set to become even more pronounced in the future with the proliferation of Alexa, ‘super-apps’, machine learning and Artificial Intelligence and 30-minute deliveries. We are encouraged that ecommerce companies choose to enter the market despite this threat, offering a differentiated proposition.

So what's the future of ecommerce? Automation at every level, starting at factory level production, to self-driving cargo ships and floating warehouses, to robotic serviced fulfilment centres and automated retail stores through to drone and automatic delivery totes. It may appear unlikely today, but we will see...

Richard Faulkner plays an active role in financing the growth of ecommerce and other TMT companies. The Prolific North Top 100 eCommerce Companies in the North was jointly sponsored by Knight Corporate Finance and Barclays, with research compiled in association with Knight.