Seizing The Cross-Border Opportunity How Small And Medium-Size Online Businesses Can Go Global

A Forrester Consulting Thought Leadership Paper Commissioned By FedEx Seizing The Cross-Border Opportunity How Small And Medium-Size Online Businesses Can Go Global December 2014

Table Of Contents Executive Summary... 1 Global Shoppers Are Active And Similar In Their Cross-Border Purchase Behavior... 2 Logistics, Reputation, And Cost Concerns Curb SME Cross-Border Competitiveness... 4 Logistics Services And Selling Platforms Help SMEs Capitalize On Their Natural Strengths... 7 Key Recommendations For SMEs...10 Appendix A: Methodology... 11 Appendix B: Supplemental Material... 11 Appendix C: Demographics/Data...12 Appendix D: Endnotes... 14 ABOUT FORRESTER CONSULTING Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forrester s Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit forrester.com/consulting. 2014, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to www.forrester.com. [1-N5M8VX]

1 Executive Summary Through trends such as the rapid emergence of China as the global ecommerce leader and quick growth elsewhere in Asia and Latin America, online shopping has gone truly global. The combined online retail market in countries studied by Forrester is projected to exceed $1 trillion in 2014 and nearly double within four years. These figures don t include various developing countries and territories currently experiencing dramatic ascendancy of their online 1 consumer bases. As domestic markets develop, consumers armed with various devices and payment methods have become increasingly familiar with the mechanics and benefits of shopping virtually. In parallel, the Internet has raised awareness of new online shopping destinations. Brands and products not available in their own markets become visible, desirable, and available. What may seem like a good deal at home sometimes doesn t look as good when compared with superior offers from abroad that may not have been accessible a few years ago. The result is that consumers around the globe, armed with information and means, are shopping cross-border, seeking hard-to-find items and looking for deals. Small and medium-size enterprises (SMEs) have seized upon this opportunity. For many, crossborder trade has become a highly important revenue stream too valuable to be ignored. However, in order to succeed in the competitive online retail market, SMEs must address logistical and reputational obstacles that their larger competitors don t face. Cross-border trade is a large and growing opportunity for savvy small and medium-size businesses. To understand global consumer behavior around crossborder ecommerce, as well as that of SMEs with such practices, FedEx commissioned Forrester Consulting in April 2014 to evaluate what is accelerating and slowing these buying and selling behaviors from both sides of the transaction. Then, to further explore this topic, Forrester developed the hypothesis that SMEs face specific marketing and logistical hurdles in reaching their target customers around the globe, but they have the opportunity to tap into this sizable and lucrative market. In conducting an in-depth survey of 9,006 global online shoppers, as well as interviews with 34 SMEs with crossborder ecommerce operations in 17 countries and territories, Forrester found that cross-border shoppers have consistent and specific needs centered on seller reputation and logistics as they purchase overseas. Forrester also found that SMEs that sell cross-border realize they need to offer services typically associated with larger companies to overcome the concerns of international customers. KEY FINDINGS Forrester s study yielded three key findings: Cross-border ecommerce is a major revenue opportunity for small and medium-size enterprises. Online consumers in every corner of the world are shopping cross-border for physical goods. SMEs are well positioned to win this business by highlighting their strengths and leveraging the availability of services that bridge the competitive gap with larger companies. SMEs must differentiate by offering unique merchandise while providing world-class service. SMEs are in a special position to provide hard-to-find products and personalized service. At the same time, they must offer great logistics and assuage concerns about reputation that their larger competitors address through scale. The good news is that there are third-party logistics providers and global/regional online marketplaces that can help SMEs with these challenges. Limited variability in global shopper preferences means SMEs don t need drastically different regional ecommerce strategies. Shoppers around the world generally discover the merchants they do business with through similar methods and seek similar levels of service, negating the need for multiple overarching strategies to reach and serve them. Certain consumers, however, have somewhat varying needs based on factors such as where they live, what they are shopping for, and how much they are willing to pay. Agile SMEs can further expand their cross-border business and delight their global customers by taking advantage of these market nuances.

2 FIGURE 1 ecommerce Has Gone Global Global Shoppers Are Active And Similar In Their Cross-Border Purchase Behavior Global ecommerce is growing across a variety of regions and countries, with online buying behavior currently representing over $1 trillion in sales per year and forecasted to nearly double within four years (see Figure 1). Through forces such as rapid growth in emerging markets and the proliferation of digital channels through which to search for and engage with businesses, consumers all around the globe are becoming online shoppers. Beyond the products and brands consumers know locally, the Internet is introducing them to new merchants and unique products not readily available in their own markets. The Internet, therefore, has unleashed a new global shopping reality: Not satisfied with what is around the corner or online locally, shoppers from all corners of the earth are going crossborder seeking hard-to-find items and great deals. Our survey s comprehensive view of cross-border purchasing trends across a broad sample of global markets reveals shopping behavior that, while exhibiting a few notable regional differences, is remarkably similar. This is good news for merchants, as consumers in various markets want generally similar experiences from the businesses they patronize, and thus going global doesn t require a unique approach for each market. Specifically, we found that: Physical items dominate online purchases. Sixtyseven percent of global shoppers conduct at least 10% of their monthly spending online. More importantly, 57% of global shoppers reported that more than half of their online purchases are of physical items shipped to them, as opposed to digital purchases such as music files and airline tickets. Clothing and apparel is by far the most popular physical item consumers buy online, with 61% of respondents reporting such a purchase, but other categories have strong showings as well. At least a quarter of respondents shop for books, consumer electronics, cosmetics, footwear, appliances, and computer hardware online. North Americans shop for video games more than others, while those in the APAC region are far more likely to purchase food. North Americans shop online for physical items the most, with 72% spending at least half their online purchasing on physical items. Even in Latin America, where a relatively low 44% shop cross-border, online retailers are making 2 notable entries into the market. Source: Forrester Research Online Retail Forecast, 2013 To 2018 (US), Forrester Research, Inc., March 21, 2014; Forrester Research Online Retail Forecast, 2013 To 2018 (Western Europe), Forrester Research, Inc., April 28, 2014; Forrester Research Online Retail Forecast, 2014 To 2019 (Asia Pacific), Forrester Research, Inc., October 14, 2014; and Forrester Research Online Retail Forecast, 2013 To 2018 (Latin America), Forrester Research, Inc., December 12, 2013 Cross-border shipments are a significant part of global ecommerce. Global shoppers aren t just buying physical items online they re buying many of those items cross-border. In fact, 82% of global respondents reported making an online purchase from a merchant outside their home country. These rates vary minimally across regions (see Figure 2). They demonstrate some fluctuation across countries, with 90% of Canadians reporting purchasing cross-border compared with a low of 59% of Japanese. On average, customers reported spending about $300 on cross-border items in a given 3 year. The merchants we interviewed reported supporting statistics: About 80% of my business is international. I always intended to sell internationally because there s a relatively limited market [at home] for the items I sell, said the owner of a small collectable and memorabilia shop in Australia. The owner of a small South Korean clothier concurred: We export about 70% of our orders. I started the business in 2010 with the intent of selling overseas because I saw a market opportunity to find quality local products and introduce them to foreign countries online.

3 Primary online shopping destinations are the US, China, and the UK. While shoppers buy cross-border from all countries included in our study, the US, China, and the UK are the top three exporters of online purchases. Ninety-one percent of Canadians are making cross-border purchase orders from the US, with Latin American shoppers sourcing from the US as well, including 68% of Brazilians. Europeans have a tendency to order within the EU, although UK businesses ship primarily to the US and Australia. As opposed to typical European behavior, the main countries ordering from China are not necessarily geographically driven. The No. 1 source of Chinese orders is Hong Kong (where 68% purchase from China), followed by Brazil (where 63% purchase from China), and then the US (where 52% purchase from China). Carrying on this globally dispersed sourcing pattern within APAC, shoppers in Japan and Korea purchase more frequently from the US than they do from their APAC neighbors. Discovery is primarily through online search. With shoppers making so many cross-border purchases, how do they discover merchants and products? Search is the overwhelmingly preferred discovery method, used by 58% of global shoppers, followed by online ads (39%) and word of mouth (33%) (see Figure 3). Search is less critical in Latin America, where other digital channels play a larger role than in other regions. In fact, online advertisements are the primary discovery method in Latin America, with social media and email also demonstrating levels of influence not seen elsewhere. In APAC, there are nuances by market with online advertisements favored by China (53%), but less so in Japan (27%) and Australia (30%). FIGURE 2 Most Global Consumers Have Shopped CrossBorder Base: 9,006 global online shoppers Source: A commissioned study conducted by Forrester Consulting on behalf of FedEx, September 2014 FIGURE 3 Shoppers Discover International Merchants Primarily Through Search And Other Digital Methods Base: 9,006 global online shoppers

4 Logistics, Reputation, And Cost Concerns Curb SME Cross-Border Competitiveness As consumers seek good deals around the globe, their biggest concerns and poorest experiences involve logistics, such as receiving the item ordered in a timely and costeffective manner. A second major area of concern is reputation. Cross-border shoppers seek out specific products rather than particular online merchants, but they want to do business with companies that they trust will provide smooth transactions and delivery of authentic goods. Shipping-related concerns are paramount when considering cross-border purchases. Consumers have a variety of concerns with cross-border purchases, regardless of whether or not they ve actually experienced them firsthand, ranging from shipping cost to transaction fraud. Shipping and logistics, however, are top of mind, as consumers cited shipping cost (51%) and long delivery time (47%) as the top two concerns when considering cross-border purchases (see Figure 4). North Americans are more concerned than shoppers in other regions about both costs and delivery (63% and 53%, respectively), while Latin Americans are concerned with transaction security (50%) and damaged products (50%). What constitutes a long delivery time is dependent on customer FIGURE 4 Logistics Leads The List Of Perceived And Real Cross-Border Challenges Base: 9,006 global online shoppers *Base: 6,148 global online shoppers

5 expectations, but most shoppers expect cross-border delivery within one to two weeks of purchase. On the high end of the spectrum, 45% of Brazilians, 36% of Australians, and 33% of Americans expect cross-border shipments to take two weeks or longer. Some merchants also expressed frustration at fulfilling orders on time. As the owner of a small Italian furniture company described it: The transit time can change depending on the time of year, depending on the destination... if [customers] buy and I say you need to wait eight days before delivery, people will say, You guys are crazy! Many cross-border shipping issues are based on experience. Long delivery times and high shipping costs are the two main problems that shoppers have experienced when making cross-border purchases. Shoppers in Latin America have the most issues with long delivery times, especially in Brazil (52%). Delivery time issues plague APAC, as well, with Koreans (46%) and Singaporeans (44%) also experiencing such issues at particularly high rates. High shipping costs are also a worldwide impediment, particularly in India (49%), Canada (43%), and Singapore (41%). At a regional level, North Americans experience the most problems with high shipping costs (39%). Small and medium-size retailers also struggle with long delivery times. A small musical instruments company in Germany commented: In some countries, the delivery time is not as fast as we want it to be. It's hard to deliver to some areas. It can take too long to deliver or even find the address. Cross-border shoppers prefer multibrand retailers and online marketplaces. As a result of their concerns, cross-border shoppers prefer to purchase from wellknown major multibrand retailers and global online marketplaces. In fact, the majority of respondents in every country we surveyed ranked major multibrand online retailers or marketplaces as their first choice out of five business types for cross-border purchases. Independent SME retailers (i.e., those not affiliated with an online marketplace) ranked fourth, behind brand or manufacturer websites and brick-and-mortar retailers (see Figure 5). Shoppers in APAC are particularly reluctant to shop directly with SME retailers, with 57% of respondents ranking this category as their last choice. The US also demonstrates this hesitation, with the largest portion of respondents (28%) ranking SME retailers fourth. As an antidote to this hesitancy on the part of shoppers, many SME retailers have embraced marketplaces, recognizing the value to customers and the convenience they offer their own operations. One supply chain and logistics manager for a small printer and publisher in the UK said: We use [marketplaces] and stick with them based on their presence, efficiency, and reliable service. I find them to be understanding and straightforward. FIGURE 5 Global Cross-Border Shoppers Strongly Prefer Online Marketplaces, With SMEs Trailing Base: 6,148 global online shoppers

6 SMEs face reputational hurdles in addition to logistics issues. Shoppers shy away from SME retailers for many reasons: reputation, logistics, price, and quality. Reputation verification is the primary concern for global shoppers (49%) and is even more pronounced in Latin America, where 54% of respondents indicated difficulty with verifying seller reputation. For global shoppers, the No. 2 reason for SME aversion (42% of respondents) is the lack of reputation or recognition (see Figure 6). Logistics are still a concern when shopping from SMEs, with returns and shipping costs identified as the No. 3 and No. 4 challenges. For North America, shipping costs continue to be a challenge, with 42% of shoppers citing this as a barrier to purchasing from SMEs. Duties and taxes curb cross-border activity. While shipping cost and delivery time are top of mind with shoppers, duties and taxes are also a factor. Thirty-five percent of global respondents cited high duties/taxes as a concern for cross-border shopping, with the most significant numbers coming from North American shoppers. More specifically, 62% of Canadians believe duties and taxes are an issue higher than in any other country and many have experienced this with past cross-border purchases. Hesitation resulting from a fear of high duties isn t limited to one region, however. Germany and Brazil tied for the second highest level of concern at 48%. The impact of duties and taxes was even more pronounced when we explored creating a standard dutyfree threshold. Fifty-six percent of global respondents would increase their cross-border shopping if purchases under US$200 (localized) were duty free (see Figure 7). Regionally, the hypothetical limit had the greatest impact on Latin American shoppers, with 80% of those respondents predicting an increase in their cross-border shopping. At the country level, 80% percent of Chinese respondents and 71% of Indian respondents indicated the same. How much would they up their spending? Global respondents estimated increases ranging from 26% to 75%. Twenty-two percent of Latin American shoppers anticipate a staggering 90% increase over current spending, compared with 13% of global shoppers. FIGURE 6 SMEs Face Reputation Perception Issues In Addition To Logistics Concerns Base: 9,006 global online shoppers

7 FIGURE 7 Duties And Taxes Curb Cross-Border Shopping Volume Base: 9,006 global online shoppers *Base: 5,053 global online shoppers influential or influential. Sixty-seven percent of respondents also believe item uniqueness is either very influential or influential in buying from international markets (see Figure 8). In North America, for instance, where shoppers are often interested in handicrafts, art, and jewelry from other parts of the world, uniqueness of items is even more influential than in other regions. The Chinese, concerned about quality of products in their own country, are big buyers of baby products from Japan and other countries. Logistics Services And Selling Platforms Help SMEs Capitalize On Their Natural Strengths Despite the concerns outlined above, the situation for SMEs is encouraging. SMEs have an ability to nimbly adjust merchandise to provide the unique or locally unavailable goods that international shoppers seek. To address the logistics and reputational concerns, the merchants we interviewed, along with our consumer survey data, revealed some clear best practices: Seize on advantages of item availability and uniqueness. SME retailers can differentiate themselves by highlighting the uniqueness of the items they offer. Shoppers are influenced by a variety of factors when making cross-border purchases, but the most influential reason cited is that the item is not available in their home country, with 75% of respondents considering this very SMEs have the opportunity to emphasize this item uniqueness and availability when targeting global consumers. As the owner of a German musical instrument shop stated, We decided to sell internationally to get higher revenue due to the fact that what we offer is not available anywhere else, so there s no direct competition. Tackle logistics and reputation head-on. While crossborder logistics may seem complex, resolving logistics

8 FIGURE 8 Cross-Border Shoppers Seek Items Not Available To Them Locally At Competitive Prices Base: 9,006 global online shoppers and reputation concerns represent the top eight of the 15 most influential reasons to shop with a cross-border merchant (see Figure 9) Leverage shipping and logistics expertise. Many of the successful merchants we interviewed work closely with at least one major logistics company. Such providers can provide global coverage, delivery speed/consistency, and competitive cost. What really distinguishes the preferred providers, though, is the service and support in calculating taxes and duties, filling out paperwork, allowing a merchant to bill upfront for duties, and simplifying cross-border returns. They do everything, said the sales and customer service manager for a Puerto Rican beverage company about her firm s logistics provider. Every time I have worked with [the logistics provider], everything has gone well. Some merchants also see such providers as critical to their expansion plans. As one supply chain manager at a UK printing and publishing company noted of her international documentation: This is something you have to make sure is done absolutely right.... it s becoming very complicated. Every country has specific taxes, currencies, payments, etc. So I m looking for somebody who may be able to facilitate those requirements. Leverage trusted marketplaces to placate reputation concerns. Successful merchants often maintain their own domestically oriented site while also listing at least some of their merchandise on global marketplaces. In fact, out of the 34 SMEs we interviewed, 24 leveraged at least one of these sites. Among the benefits cited are global reach, language localization, and active marketing in-country through search engine optimization (SEO) and search engine marketing (SEM). Additionally, and very importantly, they have reputation systems and often buyer protection to build trust with shoppers. For SMEs, reputation is paramount for consumers to become comfortable with purchases, and the global online marketplaces offer a quick way to establish and improve brand reputation. Specifically, a marketplace allows SMEs to sell through a trusted, recognized partner and generate positive consumer reviews. We use them because it s a

9 FIGURE 9 SMEs Must Address Logistics And Reputation Concerns In Addition To Leveraging Their Strengths Base: 9,006 global online shoppers good way to reach further with few risks, described the owner of a small German music supply shop. We can reach many more potential customers with no complications; it s very straightforward. The sole proprietor of an Australian collectibles retailer concurred: I have my page set up for international visibility. I like the reach it gives me and the fact that I get reviewed. Appeal to the needs of global customers. While global shoppers may generally behave in similar ways, there are also clear differences among and within regions. North American shoppers, for instance, look to SME retailers for specialty and unique items: 51% of Americans versus 34% of global respondents cited the availability of specialty/hard-to-find items as a reason for shopping cross-border. In another example, Europe, the Middle East, and Africa (EMEA) shoppers are less concerned with shipping times and costs, with 44% indicating concern with long delivery times versus 47% globally. Residents of certain APAC countries view SMEs as having relatively low costs. For example, 57% of Japanese and 56% of Australians indicated such a belief, as opposed to 50% of all respondents. Finally, social media and reputation factors in online global shopping are more important in Latin America than in any other part of the world, with 41% of Latin Americans using social media to discover international merchants versus 31% globally. Latin Americans also have a significantly higher fear of transaction fraud, a consideration for any merchant seeking to penetrate that market.

10 Key Recommendations For SMEs SMEs have a significant opportunity through international business to expand their market and grow revenue. These next steps can set you on the path to success: Study your current international traffic and business. A large number of merchants interviewed started their cross-border business unintentionally, as international customers found them through easily accessible methods such as web search and online ads. Mine the traffic coming to your website to understand the natural demand for your goods and inform future priorities. Learn from your peers. Look to other SMEs to understand what they offer internationally. Explore competitive sites and pages to understand the logistics offerings and how the purchase process works. Look to see if you can also find them on an online marketplace. Identify an interesting peer from the same industry or a different one and call them up; merchants are generally open about discussing the lessons they ve learned when expanding internationally. Decide whether to go broad or narrow. Are you going to try to serve many markets, or focus on a few? Does your merchandise have broad appeal or is it more attractive to certain countries? Are there logistics considerations that would make certain markets more difficult to serve or, for instance, process returns? If you are focusing on a few markets, consider whether it s worth investing more in services such as website translations, web advertising, and broader payment offerings. Focus on limited geographies at first to test your approach and partners. Even if you opt for a broad global strategy, it s best to make sure you ve figured out a few geographies before expanding further. Each country will have its specific requirements and complexities. Ensuring you can meet your customers expectations in the first countries before moving on increases your chances of success. Identify the right partners based on your strategy and needs. Your international strategy and type of business will dictate your needs from partners. Think about services and offerings that will make a difference to the customers you want to reach. For instance, if you want to sell to China, you ll need to consider a marketplace with penetration in that specific market. Similarly, if you want to be able to offer return services to your customers, you will need a logistics partner that can handle international returns smoothly and efficiently. Many other small and medium-size businesses are already profiting from cross-border trade how will you?

11 Appendix A: Methodology In this study, Forrester conducted an online survey of 9,006 global online consumers and interviewed 34 small and mediumsize businesses with international ecommerce operations in Australia, Brazil, Canada, China, Colombia, France, Germany, Hong Kong, India, Italy, Japan, Mexico, Puerto Rico, Singapore, South Korea, the UK, and the US to evaluate the current attitudes toward and experiences with cross-border shopping and order fulfillment, including the challenges and concerns faced by both groups in expanding these practices. Consumer survey participants included those aged 18 or older who have ordered a physical item shipped to themselves or another recipient over the Internet within the past 12 months. Interviewed business stakeholders included those at companies with fewer than 500 employees and an ecommerce practice that consists of at least 5% of orders shipped to other countries. Questions provided to consumer participants asked about their experience with and concerns around purchasing physical items from other countries over the Internet and factors that may increase their frequency of doing so. Small and medium-size business interviewees were asked about the factors leading to their decisions to start an international ecommerce business, their experiences and challenges with fulfilling such orders, and the factors that may enable them to expand this practice. Consumer respondents were offered a small incentive determined and administered by their respective survey panels. Interviewees were offered a small monetary reward, variable by country, as a thank you for their time. The study began in July 2014 and was completed in September 2014. Appendix B: Supplemental Material RELATED FORRESTER RESEARCH Asia Pacific Online Retail Forecast, 2013 To 2018, Forrester Research, Inc., November 26, 2013 European Online Retail Forecast, 2013 To 2018, Forrester Research, Inc., May 29, 2014 The Evolution of Global ecommerce Markets, Forrester Research, Inc., March 28, 2014 The Global ecommerce Opportunity, Forrester Research, Inc., March 28, 2014 Five Global Marketplaces All Brands Must Know, Forrester Research, Inc., June 9, 2014 Identifying Partners To Help Streamline Global Expansion, Forrester Research, Inc., September 17, 2013 International Shipping Solutions For US Online Retailers, Forrester Research, Inc., September 17, 2013 Latin America Online Retail Forecast, 2013 To 2018, Forrester Research, Inc., December 17, 2013 Take Your ecommerce Business Global, Forrester Research, Inc., March 13, 2014 US Online Retail Forecast, 2012 To 2017, Forrester Research, Inc., March 13, 2013

12 Appendix C: Demographics/Data FIGURE 10 Consumer Survey Demographics Base: 9,006 global online shoppers Note: Percentages may not total 100 because of rounding.

13 FIGURE 11 SME Interview Firmographics Base: 34 global SME ecommerce decision-makers

14 Appendix D: Endnotes 1 Forrester estimates the combined 2014 online retail sales of the US, UK, Germany, France, China, India, Japan, Australia, Brazil, Argentina, and Mexico at just over US$1 trillion, and projects this figure to rise to $1.84 trillion by 2018. Source: Forrester Research Online Retail Forecast, 2013 To 2018 (US), Forrester Research, Inc., March 21, 2014; Forrester Research Online Retail Forecast, 2013 To 2018 (Western Europe), Forrester Research, Inc., April 28, 2014; Forrester Research Online Retail Forecast, 2014 To 2019 (Asia Pacific), Forrester Research, Inc., October 14, 2014; and Forrester Research Online Retail Forecast, 2013 To 2018 (Latin America), Forrester Research, Inc., December 12, 2013. 2 In Brazil, by far Latin America s largest online market with $19 billion annual spend, online shopping has extended into the middle class. At least one major American retailer has launched ecommerce operations in Mexico, and a German clothing manufacturer recently went live with an ecommerce site in Colombia. Source: The Global ecommerce Opportunity, Forrester Research, Inc., March 28, 2014. 3 Global survey respondents reported spending an average of $300.10 annually on cross-border purchases. APAC respondents spend an average of $347.87; EMEA respondents spend an average of $269.34; North American respondents spend an average of $368.21; and Latin American respondents spend an average of $232.85. Averages were calculated based on midpoints of spend ranges in USD from which respondents were asked to estimate their average cross-border spend.