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Oct. 2008, pdf, 2.4 MB

Objectives of the study

This study explores the effects of information and communication technology (ICT) and e-business on the retail industry. The objectives of the study are to illustrate how companies in this industry use ICT for conducting business; to assess the effects of this development for firms and for the industry as a whole and to supply implications for policy. The analysis is based on an international survey covering seven European Union (EU) Member States and the USA. Additionally, ten case studies, illustrating various issues, were conducted. An econometric analysis of ICT impacts, an evaluation of recent literature as well as secondary data sources complete the report. The retail industry covers business activities of NACE Rev. 2 Division 47: ‘retail trade, except of motor vehicles and motorcycles; repair of personal and household goods’ (section 2.1).

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 and marketing).

Retailing - a diversified industry

Retailing activities form one of the most important industry sectors in the EU 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).

Trends and challenges: macro-economic developments uncertain

Retail industry performance is heavily dependent on macro-economic developments. In late 2007, the 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 and rising cost for energy and food. Private consumption continues to show signs of weakness in early 2008.

Concentration processes have been taking place in retail in the past decades, driving out smaller players and leaving a smaller number of large chains to fight for profit margins. Large enterprises from outside Europe are seeking to enter new markets in Europe which is further increasing competition.

Regarding customers, there are at least three trends: 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).

General increase of ICT and e-business since 2003

Compared to the 2003 e-Business Watch retail industry findings, the 2007 results indicate that ICT and e-business use have become more prevalent in retail firms of all size classes. Nevertheless, the use of e-business in the retail sector was found to be still below the average adoption rates in other sectors. The 2007 study also confirmed the 2003 conclusion that the main e-business opportunities in the retail industry, similarly as in other sectors, are efficiency and productivity gains and, thus, cost savings (Section 3.2).

The quality of SMEs' internet access has significantly improved between 2003 and 2007. However, there is scope for further improvement as only about 45% of the sector's firms weighted by employment are connected via 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-sized retailers. While 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 retailers plan to increase their ICT budgets, only few expect budget cuts for the forthcoming financial period.

Electronic procurement prevalent

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 both 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. Key findings about e-procurement and SCM include:

e-Procurement:  Retailers representing more than 50% of the sector's employment order at least some of their goods online. The Sectoral e-Business Watch estimates the total share of goods ordered online ( in those companies that procure online) at about 25-30%the average share of goods procured online has increased by 10-15 percentage points compared to 2003.

SCM systems: Advanced software systems specifically for SCM are still not widely diffused (about 20% of retail companies); however, adoption has seen a dynamic development among large retail firms, where it has increased from 7% to 35%.

Different levels of integration: The digital integration between retailers and manufacturers can evolve on a step-by-step basis. Simple applications such as e-invoicing are widely used already. Advanced forms such as sharing information about inventory levels online are only used by some companies.

Benefits also for small firms: Case studies show that even small companies can gain significantly from ICT-enabled improvements in their supply chain. However, the potential benefits differ between segments and retail business models.

Internal e-business systems: intense e-business and RFID rare

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.

Micro and small firms lag behind medium-sized and large ones

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 gap between SMEs and 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.

EU retailers lag behind US

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.)

e-Commerce environment less vibrant in the EU than in the US

Overall, the e-commerce environment is less vibrant in the EU than in the US: across the majority of variables, EU retail firms lag behind US retailers. In some cases, the differences are large, for example for placing online ads on other companies’ websites (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.

Results of an econometric analysis of ICT impacts

Productivity: ICT-capital investments have not been key drivers in the growth of real value added in European retailing. Total Factor Productivity, which includes for example organisational changes, was found to account for much stronger contributions. As regards labour productivity, intermediate inputs intensity were found to be the main components. This may predominantly be due to outsourcing activity. ICT capital investments as well as the employment of a large share of medium-skilled workers play a positive but minor role in labour productivity growth. Overall, the findings indicate that ICT capital investments alone are insufficient to increase labour productivity significantly. It may be necessary to also invest into organisational changes and training (Section 4.2).

Innovation: In the retail industry, the e-Business Survey 2007 found the impact of ICT to be mainly on process innovation but it also plays an important role in product and service innovation. An econometric analysis found, firstly, that employing people with a university degree as well as employing IT practitioners significantly increases retail firms’ propensity to use ICT to develop new products and services. Secondly, the use of applications and practices that support the electronic exchange of information between companies positively affects the likelihood of conducting ICT-enabled innovations. The analysis also found that ICT-enabled innovation is positively related with turnover increase irrespective of firm size and age. Secondly, ICT software is an important driver of organisational changes, while hardware apparently is not (Section 4.3).

Market structure: The relevance of increasing market competition for the intensity of ICT adoption was confirmed. Findings also indicate that ICT and e-business can be used to open up new markets, to cross boundaries of industries and markets and to increase the number of customers (Section 4.4).

Value chains: The econometric analysis found that ICT intensity indeed increased the propensity to outsource business activities (Section 4.5).

Policy implications

Barriers for increased uptake of e-business in retail can be found along the complete value chain. Consequently, policy makers should seek to promote e-business along the whole retail value chain and business ecosystem.

Promote SCM among SMEs: Policy makers may support supply chain development in retail through e-business use. While the European Commission should have a focus on cross-border activities, Member States may naturally promote national or regional activities. A sector focus facilitates such policy initiatives as it drives the involvement of experts and associations with sector background.

Promoting e-business on a regional level: Since retailers are generally rooted in the local and regional economy, support to e-business should predominantly take place at the local and regional level. Retailing associations or chambers of commerce could take a leading role in promoting the adoption and extension of e-business practices in retail.

Foster dissemination of e-business knowledge: Many retail firms consider ICT as a cost factor rather than an investment in benefits. Improved awareness and knowledge about the effects of e-business would be important. Key findings from this report which are of interest for retailers include e.g. that ICT investment should be complemented by organisational changes, employee training and rooting ICT in the company’s strategy. Dissemination activities about e-business in the retail industry could be improved.

Promote e-ordering by consumers: The low level of e-sales penetration in the EU may also be due to a relatively low affinity towards ordering over the internet on the part of consumers. They may have security concerns, they may find online shops too complicated, and they may require enhanced personal communication. Policy makers can promote examples of secure, simple and personal e-sales practice among consumers and retailers.


Further resources