The Tipping Point in Online Retail

Around the world e-commerce now accounts for around 7% of total retail sales. However 7% is an average that masks massive variation between sectors. For example in electronics, travel reservations and books the online share is already above 20%. In groceries, autos and health products the online share is below 5%.

There are many theories of disruption and plenty of advice for both incumbents and new entrants, the classic text being Clayton Christensen’s The Innovator’s Dilemma. However I’ve not seen a simple model that provides a long-term perspective on the drivers of online disruption.  If you’re interested to understand the likely tipping point in a sector, try breaking the problem down into two questions:

(i)    To what extent is the online experience better for customers
(ii)   To what extent is online cheaper for the retailer to operate

A couple of examples can illustrate this. Books was the first sector to reach an online tipping point after Amazon’s early entry in 1994. Jeff Bezos didn’t have a particular interest in books - he just believed it had potential for rapid online growth:

“books are incredibly unusual in one respect and that is that there are more items in the book category than there are items in any other category by far.”

By going online, Amazon offered customers the opportunity to browse a wider range of books, more quickly, and with more information to make a decision. And because Amazon didn’t own the stock it could do this more cheaply than its bricks and mortar rivals. Jeff Bezos had spotted the ideal conditions for an online tipping point. Of course he also needed to get the execution right, which he did, and the rest is history.

In contrast grocery is a much bigger sector than books, and many customers see grocery shopping as a chore they’d love to avoid. From the customer’s perspective online grocery has huge potential.  However from the retailer’s perspective it’s expensive, mainly because of the operational challenges of picking and distributing fresh food. The result is that customers tend to pay a premium for online grocery - so the retailer can cover their costs - and it remains a small part of the market.  

A few retailers (not least Amazon) have spotted the opportunity and are investing now to develop an online grocery model that is cheaper to operate than a store. However most grocery retailers are still in the early stages of e-commerce evolution and will face huge challenges if a competitor’s online model reaches the tipping point conditions over the next few years.

1.    Where is your market now in the tipping point matrix?
2.    Are new models emerging that could create a tipping point?
3.    Are you ready to respond?