7 Reasons Why E-Commerce Is Set to Grow in Emerging Markets
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7 Reasons Why E-Commerce Is Set to Grow in Emerging Markets

The Emerging Consumer Survey 2018 shows that today's emerging consumers are just as connected as their peers in Europe or the USA, and are as likely, if not more so, to opt for online retail services. Smartphones are a key driver for online access.

The rapid adoption of smartphones and subsequent access to the internet has allowed emerging market consumers to be a major global force across a range of online activities including online retail, gaming and eSports. Internet access among Emerging Consumer Survey respondents is now around 80 percent or more in all countries except Indonesia and South Africa. Quite clearly, lower average spending power has not deterred consumers across our emerging economies to gain access to the internet and start benefiting from its range of services. In conjunction with total population sizes, it clearly makes them stand out among the economies surveyed as the biggest online retail markets.

There is huge growth potential for online retail. We note that current online spending of around USD 1.29 trillion across the economies surveyed would increase to around USD 2.7 trillion if the share of online retail spending were to increase to just 25 percent in China and 15 percent elsewhere, and assuming that total retail spending increases at 5 percent per year.

In our view, there are a number of factors indicating that online retail spending across emerging markets is far from played out.

1. Urbanization Coincides with Greater Propensity to Shop Online

As urbanization is set to continue to rise across emerging markets, it should coincide with a growing share of online consumer spending in our view. This is due to the fact that greater urbanization and population density help to ease the logistical challenges that online companies face when developing their services.

2. FMCG and Food Delivery to Support Growth

At present, online shopping is dominated by more price-elastic consumer items such as books, electronics or apparel. Going forward, however, we expect stronger online retail growth to be generated by so called fast-moving consumer goods (FMCG), such as beverages, food or toiletries. To indicate the upside potential of FMCG, we note that, in Europe, only 2.4 percent of grocery sales are made online compared to over 12 percent of other retail sales. Not only is the share of FMCG and groceries purchased online very low (with the exception of China), but continued urbanization should also help to lower logistical challenges.

Share of FMCG goods executed online

Share of FMCG goods executed online

Source: Kantar Worldpanel, Credit Suisse Research

3. Traditional Retailers Developing Online Capabilities

Given their dominance in terms of market share, it seems that only a few companies have been quick to realize the demand potential for e-commerce services. As a result, companies such as Amazon have been able to grab market share, leaving traditional retailers under significant pressure due to their lack of online presence. Recently, omni-channel strategies (e.g. offline retailers developing online capabilities) have become increasingly popular. For example, Google and Walmart are cooperating in the US, while Lidl has set up a collaboration with DHL in Germany. These developments are likely to intensify competition among the various companies active in the segment, but should still allow for continued growth in online consumer spending.

4. Pure-Play Online Companies Expanding Offline Offerings

Though connectivity and mobile access are the most relevant factors for more traditional purchases, other factors such as improved delivery logistics, ease of buying and retailer presence are also relevant, not least in the area of online FMCG.
Some of the key online players have realized that they need to expand their service offering to cater for these consumer demands. Improving consumer access and convenience should help grow e-commerce revenues further as "saving time" is one of the key reasons why consumers buy online according to Nielsen.

5. Cross Border E-Commerce As an Additional Driver

Greater connectivity allows consumers to become familiar with products and services that are not necessarily produced locally. According to Nielsen’s 2017 Online Shopper Trend Report, the share of Chinese consumers who buy products from overseas websites has doubled to 64 percent since 2014. Although the share of Chinese consumers who buy from overseas websites is rising, we note that the lion’s share of their buying remains domestically focused leaving lots of potential for further development.

6. Data Analytics Can Drive Online Revenues Further

The proliferation of the number of online sales channels (e.g. desktop, mobile, tablets) implies a growing need for advertisers and retailers to understand consumer behavior across these channels in order to maximize the benefit from online sales. Technology, and specifically data analytics, can help in this regard as these allow for the optimization of consumer marketing, which in turn should help drive online commerce growth further.

7. Greater Adoption of Mobile Payments in Emerging Markets Drives Growth

Owing to the development of internet access and smartphone ownership, digital non-cash payment systems are possible. At the same time the intensity of a country's e-commerce activities correlate with the willingness to make non-cash payments. India is likely to follow China, where the share of cash in retail transactions has fallen from 61 percent in 2010 to 38 percent in 2016. At the same time, the share of mobile-based payment transactions has increased to more than 11 percent in China from zero five years ago.

E-commerce growth correlates with non-cash payments

E-commerce growth correlates with non-cash payments

Source: eMarketer, WorldBank, Credit Suisse Research

The speed of technological progress and the subsequent sharp decline in the cost of technology has allowed emerging consumers to leapfrog various stages of development compared to consumers in developed markets. There is every reason to believe that there is still much to come in this area.