Interim study report - Executive Summary (January 2008)
(The final study report will be available by the end of September 2008.)
This document is an interim report. It contains parts of a sector study on e-business activity in the retail industry. Its objective is to describe how companies in this industry use Information and Communication Technology (ICT) for conducting business, to assess impacts of this development for firms and for the industry as a whole, and to indicate possible implications for policy. The analysis is based on selected data from an international survey of retail enterprises, expert interviews and case studies, an econometric analysis of ICT impacts, an evaluation of recent literature, and on secondary statistical data. The final report will include further primary survey findings.
The retail industry as defined for this study includes business activities of NACE Rev. 2 Division 47, covering ‘retail trade, except of motor vehicles and motorcycles; repair of personal and household goods’ (section 2.1).
The key issues examined in this report are the impact of ICT on retail firms and the retail industry as well as drivers and barriers to adopt ICT. The retail sector is studied through the lens of supply chain management, divided into three elements: the upstream supply chain (supplier relationships), in-house supply chain (internal e-operations) and downstream supply chain (e-sales, marketing and logistics).
Retail is one of the most important industries in terms of numbers of enterprises and employment: in 2004, the industry comprised of approximately 17 million firms that employed 3.74 million people in EU-27. Employment and turnover is concentrated on large and small firms; medium-sized firms are less important. The retail industry covers a very wide array of enterprises in terms of firm size, business models and goods on sale. Two types of retail trade activities are particularly important in the EU: the sale of non-food items in store accounting for 50% of turnover of the retail sector and the sale of food items in store accounting for 44%. The remaining categories, retail sales not in-store and repair of personal and household goods accounted for together 6% of turnover. These patterns are usually repeated across Member States (Section 2.2).
Retail industry performance is heavily depending on macro-economic developments. In late 2007, the general economic environment for retail has turned to become less favourable. There is uncertainty about the prospects for economic growth, mainly due to the turmoil in financial markets. Despite positive developments in real disposable income and favourable labour market conditions, private consumption showed signs of weakness at the end of 2007.
As regards competition within the retail industry, concentration processes have been taking place in many retail sub-sectors in the past decades, driving out smaller players and leaving a smaller number of players, often large chains, to fight for profit margins. As regards customers, there are at least three trends that retailers face: demographic changes towards a larger share of older people with particular consumption needs, customers who are increasingly well-informed about products and share such information with other customers, and consumers demanding sustainable products. Retailers need to adapt to these trends with appropriate strategies and operations (Section 2.3).
The results of the e-Business Survey 2007 survey presented in this report can be compared with a similar survey conducted by e-Business Watch in 2003. The 2003 study found that the use of e-business in the retail sector was far from being a pervasive reality and below the average adoption rates in other sectors. The 2007 survey found that ICT and e-business use have become more prevalent in retail firms of all size classes. The 2003 study argued that the main opportunities stemming from e-business, similarly as in other sectors, were efficiency and productivity gains and, thus, cost savings. This was found to be still the same in 2007. (Section 3.2.)
The quality of SMEs' internet access has significantly improved between 2003 and 2007. However, there is scope for further improvement. Currently, retailers comprising about 45% of the sector's employment are connected by broadband (>2 Mbit/s). Diffusion of internal W-LANs has been fast. More than 50% of large retailers operate a W-LAN, and 35-40% of small and medium retailers. As regards ICT skills, only about 10% of all retail companies employ ICT specialists; even among large retailers, only about 50% do. Many companies completely outsource ICT services to external service providers. The attitude towards ICT investments and budgets is more positive than a couple of years ago. A third of the retailers plans to increase their ICT budgets, only few expect budget cuts for the forthcoming financial period. (Section 3.3.)
The function of upstream supply chain management (SCM) is to design and manage the processes, information and material flows between retailers and their suppliers. SCM is of utmost importance to retailers, as it is a major cost driver and opportunity for competitive advantage. Case studies demonstrate that ICT have a high potential in this context, not only to cut costs, but also to improve service levels for customers. However, companies have to balance availability with inventory levels and associated costs (Section 3.4.). Key findings about e-procurement and SCM include:
Internal e-business operations can significantly enhance workflows and business processes and thus increase productivity. However, companies representing almost half of the industry’s employment said that they only conduct some processes by e-business. 22% even said “none”; a “good deal” was stated by 20%, and in 11% most processes are conducted electronically. As regards particular systems, firms representing 60% of employment reported to have a software application to manage the placing or receipt of orders, 59% a bar-coding system, 51% a warehouse or depot management system, and 16% an ERP system. RFID is not yet very common in the retail industry. Retail firms representing 8% of employment reported to use this technology, and RFID use is very rare in micro and small retail firms. (Section 3.5.)
Electronic sales and distribution doubled since 2003
Retailers representing 38% of the industry’s employment stated that they sell goods “through the internet or other computer-mediated networks”. Almost half of the large retail firms (45%) and 35% of the medium-sized ones sell online, but only 24% of the small retailers and 26% of the micro retailers do so. The share of companies that sells online doubled from 19% (employment-weighted) in 2003 to 38% in 2007. There was an apparent increase in all size classes. There has also been an increase in the amount of sales conducted online. Compared to the figures about general sales areas, it appears that online sales helps to extend the geographic focus slightly from regional to national sales while the international focus remains on the same low level. The e-Business Survey 2007 also found that retailers representing 20% of the industry’s employment use a CRM system, an increase from 8% in 2003. (Section 3.6.)
Micro, small and medium-sized firms lag behind large firms in almost all indicators of ICT and e-business use presented in this report. Exceptions include the level of internet access which is close to 100% in SMEs, the average share of employees with internet access which is higher in SMEs than in large firms, and the practice of sending electronic invoices to customers which is on the same level in all size classes. Nevertheless it is notable that micro and small firms have been increasing their ICT adoption in recent years. (Chapter 3.) The SMEs’ lag behind large firms is most pronounced for internal e-operations, followed by ICT infrastructure. As regards e-sales, the usage gap is between large and medium-sized firms on the one hand as well as micro and small firms on the other. In e-procurement, SMEs are almost on the same level as large firms. (Section 6.1.)
In most indicators discussed in this chapter, EU-7 retailers are lagging behind the US. In some cases the differences are large, for example for placing online ads on other companies’ website (43% in the US versus 16% in the EU) and for options offered to pay online (higher percentages in the US for all options). Exceptions include the share of firms with internet access, the average share of employees with internet access, and the use of internal systems for which the levels are similar or even higher in the EU. Surprisingly, the overall importance of e-business stated by the firms is very similar between EU-7 and US retailers. The reason may be that US retailers answered the question about e-business importance with a higher reference level in mind. (Chapter 3.)
Data from the EU KLEMS database on the retail sector show that ICT capital investments alone are insufficient to significantly increase labour productivity growth: the capital-skill-complementarily indicates that organisational changes and investments into labour force training are necessary to significantly increase labour productivity growth. Furthermore, they show that the significant acceleration of productivity growth observed in the US retailing sector originates from the “in-the-box-effect” and is not related to value added created by the retailing sector. Within the sector, employment substitution effects are taking place between full- and part-time employees; and labour productivity growth is medium-skilled biased, depending significantly on using more medium-skilled labour and less low- and high-skilled labour.
Data from the e-Business Survey 2007 shows that increasing market competition is a driving force behind ICT usage in the retail sector: intense competition makes companies use innovative technologies in order to cut costs and search for innovative ways of conducting business. Relationships between companies also play an important role for the diffusion of ICT: close relationships between firms facilitate investments in specific technologies. The success of ICT-driven innovative processes however depends on the availability and quality of complementary assets such as employee skills and IT know-how.
Companies advanced in terms of ICT usage are more likely to have outsourced business activities. This provides support to the hypothesis that ICT enables companies to redefine their make-or-buy decisions. Hardware infrastructure however is already a commodity that does not offer companies any potential to create a competitive advantage. Overall, ICT usage has a positive impact on company performance, with firms that introduced ICT-enabled innovations being more likely to have experienced sales growth and having increased their market share.
Based on preliminary research findings, there are several implications for public policy to promote ICT and e-business use in the retail industry or to prevent unwanted effects:
