For the Time Being, the Big E-Commerce Boom Is Over – But New Concepts Are Already Stimulating Fresh Growth

Share of e-commerce in total sales

In 2022, e-commerce claimed a share of nearly 20% out of the retail sector’s total revenues, making it one of the most established markets in Europe. In fact, it is the highest level among the major EU countries and second only to the UK (26.5%). The online retail share in Spain and Italy, by contrast, is around 10%, a threshold that Germany already crossed in 2014. In fact, the share in Germany is expected to increase by roughly another 10% by 2028.

Online Retailing as Floor Space Demand Driver during the Pandemic

The brisk expansion of online retailers during the COVID-19 pandemic was matched by a significant increase in the demand for logistics facilities by this same group of occupants. While the demand generated by them started to flag noticeably in the second half of 2022, classic retailers picked up the slack. Having accounted for 19% in 2020 and for 20% in 2021, online retailers saw their share in the take-up total tumble to as low as 13% in 2022.

During the first nine months of the ongoing year, physical and online retailing together claimed a mere 19% of the total logistics take-up. This means the take-up decreased by around 70% over prior-year period. So, do the latest take-up figures point to a market saturation? And how is online retailing likely to develop in general going forward?

Realtime-Fashion & On-Demand-Fashion

The business model is referred to as “real-time fashion” or “on-demand fashion.” It means that customers can order goods anywhere in the world directly from manufacturers, which are predominantly located in China. The price level is even lower than that of the established “fast-fashion” chains.

It is estimated that the number of parcel shipments to Germany this year to date already adds up to around 30 million for Shein and to roughly twice that number for Temu. Both groups take advantage of the duty-free import of individual consignments (up to a value of EUR 150). Driven by their runaway growth, the companies have been investing in their logistics concepts in Europe. They already set up distribution facilities in Poland. The idea is to create a network of goods warehouses in Europe so as to be able to move inventory freely within the EU. This would also make it easier to comply with pertinent EU regulations. One risk that comes with the expansion is the contentment of customers who expect the product quality to meet the European standards they are accustomed to.

E-Commerce-Solution: TikTok Shop

In the years ahead, TikTok could emerge as yet another potential demander. Its Chinese parent group, Bytedance, is currently investing heavily in the expansion of “TikTok Shop,” the platform’s integrated e-commerce solution. It enables users to order products directly as they are displayed on the app. Selling goods and services in this manner is also called “social commerce.” The concept has already proven quite successful in some parts of Asia. On a global scale, the market segment is projected to see tremendous growth in the years to come. In Europe, the concept is a rather recent arrival, and has mainly been applied by Shopify so far. Choosing the UK as its pilot market, Bytedance has now started to invest in Europe as well – and it may expand into other countries.

But even Amazon has felt the impact of declining online retail sales lately. Premises in 13 sites are to be sublet temporarily either whole or in parts in order to avoid overcapacities during the current market cycle. The advantage of subletting is that the floor area remains available on short notice whenever the need for extra space arises. It is therefore unlikely that Amazon will have a serious need for additional floor space to accommodate its classic online retailing business in the near term.

Rather, demand may be generated by the new “Supply Chain by Amazon” service that the company presented in September, offering third-party logistics (3PL) services. The new business model includes the options to supply the warehouses of other retail companies, to let warehouse space at Amazon facilities to others, and to provide goods fulfilment for other retail channels. This business line would not only make more efficient use of the company’s proprietary real estate but also move it closer to its goal to become “the world’s largest transport operator.” The US conglomerate would also enter into direct competition with delivery companies like UPS and FedEx. A successful implementation of this service offer would make it reasonable to predict further space requirements beyond Amazon’s existing sites.

Share of online grocery shopping should increase

The intention is to bring the e-grocery retailing share up to 8% by 2030 (c. EUR 22 billion). To keep others from muscling in on this market, Germany’s major players are investing in proprietary platforms or in collaborations with strategic partners. In addition to Picnic (EDEKA), there is Flink (of the REWE grocery chain) and REWE Digital. Both ALDI discount supermarket chains (Nord and Süd) have started operating a joint online shop for bulky goods specials. On top of that, ALDI Süd is currently trialling a delivery service in Mülheim, Duisburg and Oberhausen, three neighbouring cities in the Ruhr.

Given the firmly established structures of the German market, it is reasonable to assume for the longer term that online grocery retailing will be dominated by the four current top dogs. Players like Amazon have already withdrawn from the segment because setting up a proprietary new logistics network would have required prohibitively large investments in what is already a fiercely contested market. Future demand will primarily be generated by digitisation and the reorganisation of logistics processes as well as by the set-up of (small-scale) distribution centres.

Outlook

The current geopolitical and economic parameters make it hard to venture reliably forecasts regarding the future demand for space in online retailing. The one thing safe to say is that the boom driven by the pandemic has come and gone, and that many companies have revised their growth strategies since.

At the same time, new players and business models are emerging that are either created from scratch (Shein, Picnic) or represent the spin-offs of physical retailers (Zara, ALDI). The associated space requirements are blurring the distinction between e-commerce and traditional in-store retailing.

Floor space take-up by online retailers will probably remain muted in the near term because of the current economic situation. Constantly shifting consumption patterns as well as the steadily growing market share of e-commerce are likely to ensure that online retailing will continue to be one of the major demand groups on the logistics real estate market.