How Covid is changing the way we shop
The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.
With the high street either shut down or harder to access during the pandemic, consumer habits had to change. In our Short Briefings on Long Term Thinking podcast, Moritz Sitte explores what this means for the future of shopping.
Germany is Europe’s largest economy, but in terms of online shopping the UK takes the prize. A higher percentage of consumers bought goods or services online in the UK last year than anywhere else in the EU. Germany came in fifth.
Moritz Sitte, joint manager of the Baillie Gifford European Growth Trust and the European Fund, is well placed to compare both countries having divided his time between Munich and Edinburgh during the pandemic. He saw first-hand a big shift in his parents’ generations attitude to shopping online, “For Germans, sharing credit card details online is a big thing because you’re always distrustful of giving away too much information. But people are realising the convenience of having things delivered to your house. The habits being formed will stick.”
Moritz Sitte, joint manager of the Baillie Gifford European Growth Trust and the European Fund.
The crisis has sped up the digital disruption of retail, but the changes in how people shop predate the pandemic and will persist once high streets and ‘non-essential’ shops reopen. Ecommerce grew from 7 per cent of retailing in western Europe (UK, Germany, France, Netherlands, Italy and Spain) in 2014 to 12 per cent in 2019. By the end of 2020, it’s expected to reach 16 per cent and continue growing steadily from there.
Understandably, in the near future, ‘bricks-and-clicks’ retailers will fare better than those overly dependent on footfall. At the peak of the first lockdown in April, the Spanish company Inditex (owner of the Zara and Massimo Dutti brands) saw sales plummet by around 70 per cent year-on-year. But Sitte is pleased with how quickly the company has adjusted, “Over the years, it built a strong ecommerce business, which pre-pandemic was about 10-15 per cent of sales. That should now be substantially higher.”
Another European company to stand out for Sitte has been Zalando, Europe’s leading online fashion retailer. It was already shifting from being an online store that takes inventory and controls much of the supply chain towards a platform model, offering services including warehousing, distribution and marketing to suppliers. He says, “What has stood out is how well it has executed on the opportunities presented to it, accelerating the shift towards the platform business model.” Zalando’s platform sales and gross merchandise volumes have grown to upwards of 30 per cent as a result, and its marketplace, which attracts customers in their millions, has also proved a lifeline for many of businesses selling their goods on it.
Europe’s luxury brands, largely reliant on their retail footprint to provide a high-end shopping experience, have also had to adapt creatively. Sitte singles out Kering, the French holding company that controls or owns the Gucci, Alexander McQueen and Bottega Veneta brands, for managing the online transition successfully. Rather than viewing online as a distribution and sales channel, the company has used Instagram and its websites to engage both existing and potential customers.
Kering is one of the many brands eschewing traditional advertising in favour of experimenting on YouTube, Instagram, Twitch and other platforms. Sitte points to Burberry’s recent fashion show on Twitch, a video streaming platform for video gamers, as an example of the experimentation and innovation released by the pandemic.
Burberry’s fashion show for spring/summer 2021 season, streamed on Twitch.
These brands are being met online by an audience eager to engage. Adidas’ one-minute YouTube film with Siya Kolisi, the first black test captain of the South African rugby team, has been viewed over 45 million times. Sitte expects the presence of European companies on social media to continue growing and evolving. “TikTok has been one social media platform that has really seen a massive ascent during this pandemic in the west. I wouldn’t be surprised if this became an important platform to engage consumers and to create that direct connection with consumers” he says.
Social media is something that Adidas excels at. “Once you’re on consumers’ smartphones as an app, you can engage through notifications. You can come up with special deals. And we’ve seen that already happening with Adidas’ close relationship with the consumer. It gets more information, learns more about the consumer, and not just what they like, but what they don’t like.” And as relationships deepen over time, Adidas and Nike have demonstrated that consumers become more brand conscious, less interested in discounts and more willing to up their spending on special editions of products.
From a purely financial point of view, the direct-to-consumer online business cuts out the middleman and therefore should, even in the medium term, lead to higher margins. All it takes is an app, your own warehouses, and a production model that works for the platform. That’s why Sitte believes it’s an avenue that companies will pursue more aggressively. It’s also a good indicator of how innovation, born of necessity during the pandemic, means there’s no going back to our old shopping habits.
Words by Gillian Christie
You can hear more of Moritz’s thoughts on the future of online shopping in the Baillie Gifford podcast Short Briefings on Long Term Thinking.
You can listen to the podcast at www.bailliegifford.com/podcasts
This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
Investment markets and conditions can change rapidly. The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
The trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. The Baillie Gifford European Growth Trust is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority.
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