What it is and the value it drives
E-commerce or digital commerce has been around for over 25 years. For the greater part of that timeframe, innovation has been driven by digital-native internet marketplaces or portals, most notably Amazon, which took a significant share and helped drive Business-to-Consumer (B2C) e-commerce penetration (i.e., the percentage of people buying online in a certain category) across categories such as books, electronics, personal care, auto parts, and others worldwide. Other retailers or marketplaces also rose to prominence, and finally a few innovative traditional retailers followed, launching their own digital commerce storefronts by leveraging desktop and mobile websites and native phone apps. Traditional retailers that have been slow to react to the channel shift have seen their shares dwindle, resulting in store closures and in some cases disappearing brands.
In 2020, an estimated 9% of total retail spend was transacted through e-commerce.The Japanese e-commerce landscape—according to data from SimilarWeb from August 2020—has over 10,000 websites. However, the top ten e-commerce websites make up an estimated 63% of the traffic and have a combined 1.5 billion monthly visitors. Visitor traffic is 60% mobile and 40% desktop, showing how traffic has evolved significantly as more users take to their phones to buy the products they need. Among top e-commerce players are B2C companies Amazon and Rakuten, and Consumer-to-Consumer (C2C) players such as Mercari.
In Japan, and particularly in large urban areas where the population is concentrated, physical retail still has a strong value proposition: stores are easily accessible and available for long hours, and they are operated efficiently by helpful staff, which makes e-commerce less compelling than in regions with lower availability. Moreover, a number of leading brands across sectors have held their products back from general e-commerce channels in order to retain exclusivity. In 2020, the Ministry of Economy, Trade, and Industry (METI) estimated e-commerce penetration at 7% in 2019, below the double-digit levels of other mature economies.
Despite these factors, according to Statista, Japan is expected to see e-commerce continue to rise in popularity and penetration. Overall penetration will rise by 11 percentage points over the next four years, with average revenue per user also climbing by 16%, an encouraging figure that shows that value is increasing as well as volume. Moreover, 70% of the user base will be younger than 35; and a preference for e-wallets that simplify payment will continue to grow.
Over the next ten years, companies with established digital storefronts and digital marketing infrastructure will reap the benefits, while others will miss out on the revenue shift from physical to online. The good news for companies is that unlocking the value in e-commerce is more a matter of assembly than creating a whole new process. Many available tools can be quickly assembled to drive traffic, conversion, and ultimately revenue.
E-commerce can drive significant value by shifting a proportion of revenue with high cost of sales to a lower-cost channel. In today's environment, for incumbent retailers, it is a required defensive move as customer preferences shift, but can become an expansionary move as it enables more cross-border sales.
Like with all other types of digital transformation, cybersecurity is key to successful e-commerce. Data breaches on e-commerce sites have become a major issue in Japan: in fact, damage from unauthorized credit card transactions amounted to ¥27.4 billion in 2019, up 140% from 2014. In 2018, Japan took steps to secure websites from fraud, amending commerce law to mandate that enterprises adopt chip-enabled card processors or not store credit card details, and comply with the Payment Card Industry Data Security Standards.
Where it is today
Digital commerce revenue has several drivers as shown in the below exhibit. It starts with traffic driven to a site using various digital marketing tools. Some of this traffic bounces given the relevance of what is shown to the user or the speed at which it is shown – users tend to leave slow-loading sites. Users then convert depending on factors that correlate to ease of shopping and convenience of delivery. They will decide to spend a given amount based on the prices and discounts offered. Lastly, customers often cancel or return items that do not live up to expectations, and returns can be high. It is a tricky equation that requires dedicated e-commerce organizations to test and learn many different tactics.
As a starting point, Japanese companies can leverage over 1,000 different technologies to stimulate any of the drivers that make up digital revenue. These can be easily procured online and leveraged as a service, often not requiring large up-front expenditures. A few notable ones that have been enabling companies to get e-commerce off the ground are:
Overall e-commerce platforms: A complete site to sell online can be easily put together today. Solutions such as Adobe Magento or Shopify enable companies to set up their own storefronts with manageable up-front costs.
Traffic: Content management systems such as WordPress or video hosting platforms like YouTube allow businesses to generate online content which is then indexed by search engines to attract traffic. Moreover, companies can invest marketing budget on paid search traffic, by purchasing “keywords” on Google Ads or Microsoft Bing. Leveraging tools from companies such as Adobe to drive traffic with email campaigns or purchasing hyper-targeted ads from social networks such as Facebook are also options. Digital marketing spend in these channels can be accurately measured based on click-through rates.
Bounce rate: Many tools exist to debug websites and reduce loading time to create speedy experiences for consumers. For example, Google's PageSpeed Insights helps companies identify tactical ways to streamline their websites to make them speedier, which consumers expect. Other technologies such as Tealium help sites optimize what to load when, in order to create fast user experiences.
Conversion: Technologies such as Algolia can enable smooth visual site search so that users can find their products easily. However, conversion generally reflects the adoption of good practices that minimize the number of clicks required to check out and show users the right amount of information to inform but not overwhelm.
Average order value: There are many options for online sellers to adopt systems that "recommend" additional products. Amazon Personalize and other tools allow simple access to recommendation engines. Moreover, online prices are often dynamic, and there are many tools to enable dynamic pricing on the web.
Cancellations and returns: With the goal of minimizing these metrics, end-customer service tools such as Zendesk or conversational chat bots help address customer complaints in a timely manner.
As described above, this is an assembly process that requires piecing together many small technologies that together can drive the revenue outcomes. All these technologies are available in the cloud today.
How the technology will continue to evolve
Consumer preferences will continue to favor growth of e-commerce, on grounds of convenience and personal choice. Yet e-commerce technology will also continue to evolve, in particular in improving predictions on when and why customers will buy. Some likely evolutions include:
Mobile commerce: As the mobile share of e-commerce continues to grow, experiences will need to be designed for the phone first rather than for desktop computers with responsive capabilities for mobile.
Conversational commerce: A larger share of commerce will be enabled by smart speaker devices such as Amazon Alexa and Google Home. These make it frictionless to reorder household items and familiar purchases.
Social commerce: Social networks will increasingly intersect with e-commerce allowing users to purchase items that are shared by influencers or brands.
Messaging apps: Another new channel that will emerge are chat bots, or other messaging apps that enable texting to purchase products.
ML-driven digital marketing: Nearly all areas of digital marketing will be impacted by ML, which will drive better predictions of ads that work, products that are likely better paired together, dynamic pricing, and other benefits.
The key future applications
E-commerce is not only a retail phenomenon. Industry is also increasingly transacting goods and services online. Below are some examples applicable to large industry sectors of the Japanese economy.
Omnichannel retail: Enabling omnichannel experiences that allow customers to shop in any channel such as mobile web, desktop web, native mobile apps, and stores; seamlessly starting their journey and checking out in any of these; and further enabling a variety of fulfillment options.
Industrial aftermarket: Many industrial companies have significant aftermarket part businesses that are high turnover and high margin, lending themselves to e-commerce. Moreover, even high-value purchases such as automobiles are now being transacted online, and this will continue to increase.
Real estate: The process of viewing, reserving, and seamlessly transacting new rentals or real estate purchases lends itself to online environments well. Customers discover properties online and then visit a narrowed down list.
These are just a few examples, but nearly all industry sectors have a unit of value that can be transacted and can be put up for sale on the web through the continuum of traffic, bounce, conversion, and transaction.