The Biggest Threats Posed By The Political Climate To Online Retailers

By Andy Mulcahy - Editor at IMRG

Part 1 in our blog series Threats For Online Retailers 

I was recently asked if I could come up with a list of threats to online retail businesses – not just the obvious ones, but anything that might have a knock-on effect and is therefore potentially worthy of retailer consideration.

So I went away and thought about it, and by the end of the day I’d produced several pages of rough notes. It struck me that this information is probably too useful for retailers generally to just be restricted to a single conversation, so I thought I’d share it in a blog. Well, three of four blogs to be accurate, as there were quite a few disparate topics that popped into my head during this process.

Usual disclaimers apply – it’s not intended to be everything that could possibly happen (it’s a blog!), it’s a dump of information to get you thinking about where the industry (and by extension world) is heading and help you navigate what is a proving to be a pretty testy period.

This blog, the first in the series, focuses on the theme you can’t possibly avoid in news bulletins at the moment – rising instability in the political climate.

Brexit doesn’t mean Brexit

I won’t bore you with the general details about what Brexit means, as you already know it. Instead I want to focus on what Brexit doesn’t mean, as that seems to be a fairly common misconception.

Brexit isn’t a start or end in itself, it’s a symptom of a deep sense of dissatisfaction that people appear to have with traditional political parties and the way that things are being managed. It’s made the environment ripe for the results of elections and referenda to be completely unpredictable as people – particularly those who don’t usually vote or pay much attention to day-to-day politics – take the opportunity offered by less conventional politicians to give the ‘establishment’ a bloody nose.

This is manifesting itself in different ways – as Brexit in the UK, Trump in the US, the constitutional referendum in Italy. To come in 2017 we have key elections in Germany, France and the Netherlands among others. This carries with it potential for a mass changing of the guard and, as we’ve seen recently in the US, sudden and sharp shifts in regulation and policy.

There is a fair amount of political posturing going on at present around retracting existing trade agreements (such as the US withdrawal from the Trans-Pacific Partnership) and establishing new ones. It’s very hard to see, for example, what kind of deal (if any) the UK will end up getting in place with the EU. Or how long it will take to get there.

So, the threats to online retail businesses relating to political instability are:

  • Potential for sudden, even rash changes in regulation for some countries
  • Unstable currencies (not only sterling, others may tumble depending on how things progress)
  • Hits to sterling every time the UK government announces something about Brexit
  • Employment of foreign nationals as immigration rules may be tightened

Incidentally, if you do want a bit more background info on Brexit we published a report back in October 2016.

Identifying the competition

One option that has been mooted by the UK government, depending on how Brexit negotiations go, is lowering corporate taxation rates in order to make the UK a more attractive business location.

It may just be political posturing, but if it does happen we could see a number of non-UK-based retailers move parts of their operations into the UK, perhaps targeting the market for the first time. Most wouldn’t do this without basing this move on a well-considered market-entry strategy, so it wouldn’t just lead to an increase in the overall volume of retailers targeting various demographics – they would be doing so offering product ranges that seem fresh and maybe even fairly unique, in some cases.

In an already congested online market, further increases in competition are likely to ratchet up the pressure on already squeezed margins as well as on maintaining customer loyalty. Understanding who the key competition even are from week to week may become more difficult too.

So, the threats to online retail businesses relating to increased competition are:

  • Needing to identify new competitors quickly and adapting accordingly
  • More brands vying for your customers’ spend
  • Greater pressure to discount if direct competitors enter aggressively 

Shifts in shopper behaviour

Inflation is looming in 2017, with some retailers already announcing that it will lead to a rise in prices for shoppers. There are, of course, some very obvious risks associated with this trend – people may be turned away by higher prices, buy less items, be more focused on getting things they need and cutting out the nice-to-haves etc

But predicting exactly how shoppers will respond is tricky. One early indicator of a shift in behaviour comes from a recent GfK index – where a measure of shopper intention to spend on higher-cost products (such as TVs) fell from 16 in January 2016 to 10 in January 2017.

This corresponds with some data we tracked in our index in November 2016, where the basket value for the online electricals sector (the average spend there is high compared to many other sectors) was down -22.7% on November 2015. That’s the lowest it’s ever been since we started tracking the sector in 2006, and by some distance.

This might have been influenced by discounting (although Black Friday – and therefore November – were discount-driven in 2015 too), but it’s worth keeping in mind this is a basket value (potentially containing multiple items) rather than being specific to individual product prices. Nevertheless, people were spending a lot less during visits to the online electrical retailers in our index, at that point, than the year previous – so it was certainly a new behavioural trend of some kind.

So, the threats to online retail businesses relating to shifts in shopper behaviour are:

  • Responsiveness to marketing campaigns may lessen
  • More pressure to discount on higher-cost lines to stimulate demand
  • Falling basket values and lower conversion rates as people shop around more

The ‘Michael Fish moment’

The Bank of England’s chief economist recently said economists were facing their ‘Michael Fish moment’ in reference to the infamous 1987 weather forecast that dismissed the chances of a hurricane impacting the UK. The forecasting models used were found to be at fault and a huge storm subsequently hit, causing havoc.

This reference was used in relation to the failure of economists to predict the market crash of 2008, as well as incorrectly asserting that there would be financial meltdown in the immediate aftermath of Brexit. Many economic indicators were actually a lot more positive than forecast during the second half of 2016.

This represents something of an issue for business planning, clearly. Economists are, after all, supposed to be good at this stuff. There might be any number of influencing factors at play here, but a major one may be related to technology – which has served to connect everything together, speed it all up and complicate understandings of cause and effect in the process. 

It’s also changed how people do things and I wonder whether the way economic indicators are measured has updated to reflect that. Consider peer-to-peer networks for example – when assessing the average spending potential of a demographic they may look at traditional indicators such as salaries, but do they factor in whether they drive for Uber a few hours a week as well, rent their house out on Airbnb, offer spare space out for storage on Storemates or sell things on eBay?

It’s quite possible that outdated definitions, plus the constantly-evolving social impacts of modern technology, are making it hard for economists to understand what is going on using existing models.

So, the threats to online retail businesses relating to economic forecasts are:

  • Erosion of confidence in forecasts, even from highly-esteemed sources
  • Misunderstanding new customer behaviour trends and their economic impacts

Next time…

Next week I’ll focus on the threats associated with how technology is evolving in this space. 

Download this Brexit review that assesses what we have learnt so far since the UK voted to leave the EU – and the potential impacts for online retail operations.

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