Our recent Megatrends in Retail research paper identified that online retail is currently growing at an annual rate of 22 per cent across Europe and over the next decade a quarter of sales will take place online. However, in order to see this phenomenal paradigm shift realised, there are still some challenges to the retail infrastructure to overcome.

The most important factors for consumers when choosing a delivery option in the UK are cost, speed and flexibility. It is reasonable to assume that these issues will be just as important in other countries across mainland Europe where online retailing is still in its infancy. Meeting the consumer demands has strong implications on the logistical challenges facing retailers – so what are the issues?

Distribution Space

A recent Savills Research paper indicated that in order to service the growth in online retail across Europe by 2020, at least 94m sq ft of logistics property will need to be built. This is equivalent to 1,200 football pitches.

Transportation

Delivery costs for retailers relate to the distances goods have to travel and the number of hubs they have to pass through. Given consumers generally want free delivery, this poses a significant problem in profitability. Efficient infrastructure and optimisation of routes are therefore key, and countries where the transport networks are less well developed and populations dispersed are likely to find significant challenges in the development of online retail.

Delivery Points

The rise in click and collect has been positive for retailers, having the potential to lift in-store sales by 25 per cent. While retailers do have to find the extra space in store to hold the packages, click and collect remains the most cost-effective means of providing an online service with the benefit that the customer still visits the store. Failed home deliveries remain a problem for consumers and retailers alike, and alternative solutions to help get goods delivered more conveniently and cheaply for both parties will continue to be trialled.

Returns

The processing of returned orders is complicated for retailers. Returns are said to be costing retailers in the UK £0.5bn, but the critical mass of consumers and strong competition from both on and offline retail make it a prize worth playing for. In smaller or more disbursed countries in less affluent parts of Europe there might not be the critical mass for a retailer to provide its full online offer. Instead, it is likely to be the larger companies that trade cross border that are likely to find the economies of scale required to grow their online businesses most quickly.

Internet connectivity

Although we are seeing the nature of retail change at a phenomenal pace, we have to remember that access to the internet is a key factor in the growth of online retail. There is a strong correlation between a country's GDP, internet connectivity and the proportion of retail spend that is online, and at present there is a significant variation in these metrics across Europe. Mobile connectivity also has a vital role to play but relies on signal, bandwidth and speed, which also vary across the continent. The health of the Eurozone and development of vital infrastructure will therefore have an impact on whether online retail can take off across the region in equal measure.

With European online sales set to double from €165 to €330 between 2013 and 2019, and 70 per cent of sales currently being attributed to UK, France and Germany, the greatest scope for change (and challenges) is surely in the emerging markets of Southern and Eastern Europe. With 77 per cent internet penetration already and a recovering retail economy, Spain might be one to watch.

Further information

Read our Research articles on Megatrends in European Real Estate and Spotlight European Logistics