June 2007 - European e-commerce

While certain important generalities can be made, to truly understand the dynamics of European Internet retailing, one needs to take a closer look at the many disparate markets that collectively drive the region’s e-commerce.

By Tom Dellner

Any attempt to summarize the current state of European e-commerce is bound to be flawed in certain respects. Sure, there are some assumptions and generalities that can safely be made. E-commerce in the United Kingdom, Western Europe and Scandinavia has lagged behind the U.S. in almost every measurable aspect. Retailers’ websites have tended to be less commerce-enabled, lacking in transactional functionality and more focused on branding.

However, the e-commerce landscape is shifting, and shifting fast. European e-commerce is undergoing rapid expansion. Simply put: more online Europeans are spending more. (In fact, online consumers in the U.K. now outspend their American counterparts.) Retail websites are becoming more sophisticated and are, in some cases “leapfrogging” American sites. (According to Randi Barshack of Mercado-a Calif.-based search and merchandising solutions company with a growing European presence-there is an advantage to being a “second mover.” While early-adopting American e-tailers have suffered the growing pains associated with breaking in new commerce-enabling technologies, European companies, although later to the game, are able to go straight to the most sophisticated and robust technologies.) Broadband penetration is increasing, as is online consumer confidence.

But there’s a fundamental problem undermining this sort of broad analysis: the mistaken assumption that European e-commerce exists as a single market. In fact, it is comprised of dozens of distinct markets, each with its own particularities and defining characteristics. Perhaps the best approach is to first take a high view to discern regional trends and growth patterns, and then examine some of the individual traits of the disparate markets that collectively drive what we know as European e-commerce.

By all accounts, European e-commerce is growing, and growing rapidly. According to Forrester Research, the number of Europeans shopping online has increased by 37 percent in the last two years alone, with 63 percent of Europe’s population estimated to be online in 2007 and 37 percent of this group shopping on the Internet. Forrester estimates that these figures will grow to 74 and 54 percent, respectively, by 2011, which constitutes a pool of more than 176 million online shoppers.

Estimates of the overall size of the market vary, but most are bullish in terms of predicted growth. According to eMarketer, Europe’s e-commerce market is currently growing at an approximate rate of 37 percent. (America’s growth rate is currently estimated to be in the low 20s.) eMarketer projects total e-commerce sales in the amount of $140.7 billion this year, ballooning to almost $235 billion in 2010.

Although the highest percentage growth is likely to be seen in countries that are just beginning to see increased Internet penetration (e.g., Ireland, Portugal and Greece), the real drivers of online retailing in Europe are the “Big Three” of the United Kingdom, Germany and France, which currently account for 63 percent of the market and which are expected to continue to dominate through 2010. (Other significant players include Sweden, Italy, Spain and the Netherlands.)

The Big Three might more accurately be described as the “big one and medium two”-the U.K. accounts for half of all retail sales in Europe, according to eMarketer, with Germany a distant second (25.7 percent) and France third (15.4 percent). The British spend more online, too. With an average annual spend of an eye-popping $2,171 per capita (according to a 2006 eMarketer study), they far outspend Germans ($945), the French ($1,226) and even Americans, for that matter ($1,831). On the other hand, Germans have the highest number of online users and Internet shoppers, while the French, according to JupiterResearch’s Dorothee Vogel, are the most active, buying in the most different product categories.

The Big Three also, predictably, lead the way in online ad spending. According to a report from Price-waterhousecoopers and Wilkosfsky Gruen Associates, the U.K. will spend more than $4.7 billion in online advertising this year, followed by France ($2.5 billion), Germany ($522 million) and Sweden ($253 million). The lion’s share of the ad spend is and will continue to be paid search, although social networks are gaining prominence.

The most popular categories for online purchases are, for the most part, similar to those in the U.S. In addition to leisure travel (which leads the way), books and CDs, electronics (especially in the U.K. and Sweden), apparel and home products (furniture, appliances, garden supplies, etc.) are popular. One interesting difference is the popularity of online grocery shopping, particularly in Great Britain.

What’s driving European e-commerce growth? Broader Internet and broadband penetration, as well as the increasing tenure of the average user. (A clear correlation exists between users’ experience on the Internet and their propensity to purchase online, according to Vogel, which helps explain why the nations with the most experienced Internet users-like the U.K. and Scandinavian countries-have a higher percentage of online purchasers. Consumers with two or more years of online experience are far more likely to buy online than those who are newer to the web. Other factors spurring online purchases (and helping new Internet users overcome an initial reluctance to shop online) include more sophisticated retail websites, a proliferation of comparison shopping sites and an increasing movement online of traditional brick-and-mortar retailers.

There remain obstacles to growth that must be overcome in the short run. JupiterResearch’s Galina Naydenova points out that low penetration of credit and debit cards in many countries will inhibit growth and that alternative payment mechanisms (cash on delivery, bank transfer and check) must be made available. Naydenova also notes that delivery of purchases has been problematic in certain regions.

As mentioned above, however, European e-commerce defies neat and easy characterization-it truly is a collection of individual markets, each with unique and disparate traits. A quick country-by-country snapshot helps reveal some of these particular characteristics.

The U.K. is the largest and most mature online market in Europe. As noted previously, Great Britain accounts for half of Europe’s online retail sales. According to Forrester Research, almost 10 percent of Britain’s total retail sales are conducted over the Internet, more than Germany (5 percent), France (4 percent) and the U.S. (9 percent). An eMarketer 2006 report reveals that while adults age 35 to 44 account for the highest percentage of Internet sales, the fastest growing age group, in terms of percentage of total online retail sales, is age 55 and older-an indication of a rapidly maturing market.

JupiterResearch’s Vogel notes that British consumers shop more frequently online than those in other European countries, spend more and attach more significance to brand names while shopping online. They also show a greater willingness to purchase big-ticket items and rely heavily on comparison shopping sites. According to Holger Kamin, USA regional manager of Zanox-a leader in global online marketing-travel, films and music, books and apparel are important verticals. In addition, more groceries are sold online in the U.K. than anywhere else in the world.

The German online market is an interesting one, to say the least. All the research indicates that Germany has the largest number of Internet users and the most online shoppers-by a wide margin (a quarter of all European online shoppers, according to Forrester). And yet online retail sales are half that of the U.K. The reason? German Internet shoppers simply spend less and their buying decisions are very much motivated by price, according to Vogel. Interestingly, a recent Forrester survey reveals that Germans also are skeptical that bargains are easily found on the Internet. eMarketer’s Jeff Grau also suspects that German consumers are very wary about running up debt. Online credit card purchases are relatively rare in Germany; debit card use is much more prevalent.

There is some indication that German online spending may be increasing, with market research firm Gfk Group predicting that online appliances will be one of the fastest-growing e-commerce categories.

France lagged behind many of its European neighbors in terms of Internet adoption. Many attribute this to the early popularity of a videotext system, called Minitel, which many French households used in lieu of the Internet. However, France is quickly catching up when it comes to e-commerce, with the growth of the French online retail market outpacing that of most of Europe.

According to Vogel, the French tend to be extremely loyal consumers, exhibiting more brand loyalty online than other consumers across Europe. (According to eMarketer, the French also show a strong preference for local merchants, with French mass marketer Cdiscount and Fnac-a seller of media products-attracting more visitors online than Amazon.) She also notes that the French place a heavy emphasis on a website’s ease of use and on product selection.

Fashion/apparel is a popular category, says Holger, as are electronics and computer equipment, especially among men.

Sweden boasts an active and highly sophisticated population of online consumers. According to Vogel, Swedes-in contrast to the French-exhibit less brand loyalty and are more price-driven, comparing and utilizing a broader portfolio of retail websites. Despite tending to make price-driven purchasing decisions, Swedes are willing to purchase relatively expensive items; Sweden is Europe’s most highly penetrated market in the consumer electronics category.

According to Forrester, while Spain and Italy make up a fifth of Europe’s online population, the two nations account for less than 7 percent of its e-commerce. Interestingly, while Spanish online shoppers tend to be infrequent buyers and low spenders, according to Vogel, Italians tend to spend more, perhaps due to the relative wealth of its population of young, male early adopters. Spain and Italy are rapidly emerging markets, however, and eMarketer predicts that both will grow at a compound annual rate of 30 percent through 2010.

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