The last few months of the year may be dubbed the golden quarter for retailers, but it has been a lacklustre period for the online businesses of Britain’s leading groups.
The below-par performances revealed by the likes of John Lewis and Marks and Spencer, along with anecdotal evidence suggesting that big privately owned companies such as Arcadia and Debenhams did little better, have been partly blamed on the failure of their online businesses to deliver significant sales growth.
This has reinforced concerns that some of these historic names moved online too late, and with too little conviction, in what may prove a costly mistake as consumers increasingly use their tablets and phones to shop.
Ivan Mazour, founder of marketing consultancy Ometria, said that with the benefit of hindsight the mid-1990s might have been the moment to steal a march on the online market when ecommerce first appeared.
Then, traditional retailers were flush with profits and could have afforded the expensive technology required.
But, with few exceptions, they failed to take it. “Most just crossed their fingers and hoped it didn’t catch on,” said Jonathan Pritchard, an analyst at Peel Hunt.
Now, barriers to entry are much lower and nimble insurgents such as Boohoo have taken full advantage.
Many traditional retailers have since invested heavily in their ecommerce capability. John Lewis pointed out that it had spent more than £150m just on the Milton Keynes warehouse that serves its online operations.
M&S spent a similar amount on its Castle Donington facility, to which it added extra capacity last year. It said it had also moved its website to a cloud-based platform to reduce costs and increase flexibility.
But, judging by their trading over the festive peak period, these moves are a long way short of bearing fruit.
Debenhams’ online sales are also thought to be have been weak, partly because of technical problems with its website over Black Friday on November 29.
At Next, considered a leader in adapting to the reality of ecommerce, online sales were up 15.3 per cent — but much of that growth is likely to have come from lower-margin sales of third-party products on its Label platform.
Analysts said context was needed; although UK online non-food sales grew 5.4 per cent in December, according to Office for National Statistics figures, that masked wide variations across sectors. Textiles, clothing and footwear sales were down 2 per cent year on year, for instance.
John Lewis and Next are also fairly mature online operators; the channel accounts for more than two-fifths of revenue at the former, and over half at the latter.
Yet online-only retailer Boohoo posted sales growth of more than 40 per cent even in the UK, a market where it has operated for over a decade, and its market value now exceeds that of M&S. Longer-established rival Asos, which updates on January 23, is expected to show a 15 per cent increase.
Even allowing for the fact that such companies are much younger and growing from a lower base, the contrast is vivid.
The problem is that many established retailers tend to approach ecommerce as an extension of their physical activity, according to Andy Halliwell, a senior partner at consultancy Publicis Sapient.
“It’s often seen as another flagship store that just takes products and uses the existing supply chain. There often isn’t the innovation or radical rethinking of how the organisation works.”
Next is working towards the concept of single inventory, but Mr Pritchard said most traditional retailers still operated separate pools of stock, often in different warehouses, for stores and online.
Mr Halliwell said companies like Asos or its bigger German rival Zalando thought differently. “There’s a focus on agility and they will not sacrifice the ability to chase trends for cost savings.”
He acknowledged it was particularly hard for quoted retailers to re-engineer their businesses while also grappling with the declining profitability of their physical operations.
“They are very focused on trading the next week or month. It is very hard to do strategic investment when there are so many calls on your capital.”
Marketing is another area where traditional retailers are caught between the old world of newspaper campaigns or Christmas television adverts and the new era of digital and influencer marketing.
Next’s spend on digital marketing has gone from £8m in 2016 to an estimated £46m in the year to January 2020. But this is still only around 2.5 per cent of its online revenue.
By contrast Boohoo spends almost 10 per cent of sales on marketing. Although it still uses traditional advertising channels such as outdoor and television, almost half its spend goes to social media influencers who have huge Instagram followings among its target consumers.
The more basic forms of online marketing often used by traditional retailers are becoming more expensive and less effective. Optimising websites for search engines has become less relevant because “natural” search results have been pushed further down Google’s homepage, forcing companies to pay for better exposure.
That has raised prices; John Lewis told analysts last September that its pay-per-click costs had risen over 30 per cent in just a year.
Remarketing, where “cookies” help advertisers follow consumers as they browse other websites, will be curtailed as Apple and Google restrict cookie use in response to privacy concerns.
“This kind of advertising will disappear very soon because customers just do not like it,” predicted Mr Mazour.
The good news for retailers is that the online channel should continue to grow overall; many expect that in some sectors it will account for up to half of sales, rather than the current fifth.
The costs of running a physical store estate should also come down in time as rents fall and business rates follow suit. And stores give established retailers an advantage when it comes to returns, which are an expensive logistical problem for online-only operators.
Meanwhile, Boohoo has declared it wants to be the online equivalent of H&M or Zara. Asos has similar ambitions to be a global player. The competition from online-only operators and their purpose-built infrastructure will only get more intense.