The Oliver Wyman Online Retail Report

For customers, online shopping means unprecedented choice, value, and convenience.

For established retailers, it means tough strategic choices and, in many cases, a difficult long-term outlook. This selection of articles focuses on how e-commerce is changing the rules of the retail game and suggests ways an incumbent retailer can emerge as one of the winners.

All sectors are vulnerable, some more than they seem

Because retail is characterized by high fixed costs and modest operating profits, small volume losses can quickly wipe out a retailer’s profitability and sectors with thin margins are more sensitive than others.

High margin and easy-to-ship products are an obvious vulnerability, but this also highlights the risk to low margin sectors, such as grocery and home improvement, which have the lowest structural profitability and as such are the most sensitive to any volume loss, however small.

Overall, we think that although the growth of e-commerce will be uneven across sectors, it is likely to drive market consolidation almost everywhere.

1What is the current and future outlook of non-food online shopping?

Online retail has already captured 15% of the market and we expect average store sales to decline by 3–6% every year over the next three years. This could result in the closure of up to 30% of stores, but of course this is an average number: competitors already struggling with weak profit margins will suffer disproportionately.
2Which retail sectors will be most vulnerable to online disruption?

High margin, easy-to-ship, and easy-to-digitalize products are the most obviously vulnerable – as we’ve seen in the book and music sectors. But there is also a risk in low margin sectors, such as grocery and DIY, which have low structural profitability; but today maintain high turns. If digital offers succeed in taking even relatively small volumes, the pain will be substantial.
3What about Amazon? How can bricks-and-mortar retail fight back?

There are areas where other retailers can look to excel in comparison to Amazon. In particular, in situations where the purchasing decision is particularly complex, and where a tailored shopping experience featuring a more comprehensive high-end range can allow specialist retailers to deliver a more attractive proposition.
4What determines where online grocery can be profitable?

Fundamentally, there are three key drivers of in any given grocery market. First, population density as it determines the economics of serving the “last mile”. Second, total population and grocery spend as they determine the extent to which capacity utilization in delivery and fulfillment can reach the levels needed to be competitive. And, third, market price levels: if the local market provides a price umbrella for an online player, the writing is on the wall.