Scottish e-commerce Study

May 2012

Contents 1: Introduction... 1 2: E-commerce in the UK... 3 3: Scotland s relative position in e-commerce... 9 4: Enablers and barriers in Scotland... 29 5: Quantifying e-commerce in Scotland... 33 6: Options for enhanced public sector support... 40 7: Conclusions and recommendations... 44 Annex A: Consultees... A-1 Annex B: Data sources explored... B-1 Annex C: Research documents... C-1 Annex D: Sector definitions... D-1 Annex E: Examples of online retail awards... E-1 Contact: John Nolan Tel: 0131 225 4007 email: jnolan@sqw.co.uk Approved by: David Mack-Smith Date: 31/05/12 Director www.sqw.co.uk

1: Introduction 1.1 In February 2012, SQW was commissioned by Scottish Enterprise (SE) to undertake a study into Scotland s competitive position in relation to the adoption of e-commerce by Scottish based businesses. The aim of the research was to identify the value and potential impact on the Scottish economy of current activity, to consider if businesses are using e-commerce to maximise their efficiency and performance, and to consider ways in which public sector support for e-commerce could be improved. Definition 1.2 Defining the term e-commerce is challenging, making benchmarking of performance difficult. The OECD (2009) uses the following definition: An e-commerce transaction is the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders. The goods or services are ordered by those methods, but the payment and the ultimate delivery of the goods or services do not have to be conducted online. An e-commerce transaction can be between enterprises, households, individuals, governments, and other public or private organisations 1. 1.3 According to this definition, e-commerce includes orders made though websites, extranets or EDI (Electronic Data Exchange). It excludes orders made by telephone calls, facsimile, or manually typed e-mail. On the basis of this widely accepted definition, e-commerce therefore relates to all sectors, not solely online retail which is the most recognisable type of e- commerce. 1.4 The brief for this commission defined e-commerce as follows: E-commerce refers to the selling or trading of goods and services online (through web or other digital channels e.g. mobile apps) and related digital marketing activities to drive traffic to the online presence e.g. Search Engine Optimisation, web advertising etc. The focus should be on businesses transacting B2B or B2C. 1.5 This latter definition was used during our consultations. However, when assessing statistics on Scotland s relative position, we have allowed flexibility in the definition to ensure that our statistical analysis draws on a range of sources to inform the study. Methodology 1.6 This research study has involved the following main tasks: A review of available research on e-commerce including publications by the Office for National Statistics (ONS), Interactive Media in Retail Group (IMRG), Boston 1 OECD (2011), OECD Guide to Measuring the Information Society 1

Consulting Group and business surveys carried out by Department for Business Innovation and Skills (BIS), Federation of Small Businesses (FSB) and Scottish Government. Contacting public and private sector organisations to ask about the availability of data beneath the UK level, i.e. for Scotland and the other nations and regions. A list of the different avenues of enquiry is provided in Annex B with information on the outcome of our enquiry. Consultations with industry stakeholders in the public sector and with businesses involved in e-commerce both in terms of e-commerce suppliers and traders. A list of consultees is attached as Annex A. Structure of the report 1.7 The remainder of the report is structured as follows: section 2 provides some context in terms of e-commerce activity in the UK section 3 presents data on Scotland s relative position in e-commerce activity section 4 summarises the main enablers and barriers to e-commerce in Scotland section 5 quantifies the economic impact of e-commerce in Scotland section 6 assesses options for enhanced public sector support section 7 summarises our conclusions and recommendations. 1.8 We have also included the following annexes: Annex A provides a list of project consultees Annex B summarises the different data sources that have been explored Annex C provides a list of the main research documents used in this study Annex D includes sector definitions Annex E provides examples of online retail award winners. 2

2: E-commerce in the UK E-commerce in the UK - summary Based on the ONS E-commerce Survey, e-commerce sales as a proportion of total sales among UK businesses increased to 17% in 2010 from 14.5% in 2008. The estimated value of total e-commerce sales in the UK was 385.4bn in 2010. Just over 40% ( 156bn) of these sales came from the wholesale sector, and 30% ( 114bn) from the manufacturing sector. Sales over websites (as opposed through other ICTs such as EDI and extranets) accounted for about 25% of all e- commerce. Research by the Boston Consulting Group (BCG) suggests that the UK is one of the world s leading economies for e-commerce with a higher proportion of online retail transactions than any other major economy. BCG predicts that the UK s internet economy will continue to expand at a rate of 11% per year for the next four years. 2.1 While the focus of our research has been on the position of Scotland in terms of e-commerce, this section provides an overview of UK level statistics. 2.2 The ONS annual e-commerce survey 2 estimates that e-commerce sales as a proportion of total sales among UK businesses increased to 17% in 2010 from 14.5% in 2008. Sales through websites represent about a quarter of e-commerce activity as defined by ONS: 4% of total sales compared to 13% of total sales through ICTs other than a website (Figure 2-1). This second category mainly describes B2B transactions relates to orders placed through mechanisms such as EDI (Electronic Data Interchange), which is described by the OECD as: an e-business tool for exchanging different kinds of business messages. EDI is..a generic term for sending or receiving business information in an agreed format which allows its automatic processing (e.g. EDIFACT, XML, etc.) and without the individual message being manually typed 3. 2 ONS (2011) 2010 Annual E-commerce Survey (Note: this covers UK non-financial sector businesses with 10 or more employees) 3 OECD (2011), OECD Guide to Measuring the Information Society 3

Figure 2-1: E-commerce sales as proportion of total sales (2010) Source: ONS (2011) 2010 e-commerce Survey 2.3 The estimated value of total e-commerce sales in the UK was 385.4bn in 2010. Just over 40% ( 156bn) of these sales came from the wholesale sector 4, 30% ( 114bn) from the manufacturing sector and only 4% from retail ( 16bn) as shown in Figure 2-2. 2.4 However, if we are to look at the value of website sales alone the wholesale sector had the strongest website sales with sales valued at 37.5bn and the retail sector showed the second highest website sales of 12.8bn in 2010. Figure 2-2: Value of e-commerce sales by sector (2010) Source: ONS (2011) 2010 e-commerce Survey 4 The E-commerce survey provides data for groupings of SIC 07 divisions. For example, wholesale includes SIC 45 (Wholesale trade and retail trade; Repair of motor vehicles and motorcycles) and SIC 46 (Wholesale trade, except of motor vehicles and motorcycles. The retail category includes SIC 47 (Retail trade, except of motor vehicles and motorcycles. A full list is provided in Annex D 4

2.5 Over three quarters of UK businesses (79%) had a website in 2010 but a comparatively small proportion of businesses used the website for selling (15%) as shown in Figure 2-3. The proportion of businesses that sell over a website increases as the business size increases 41% of businesses that employ over 1,000 people use a website for selling. Figure 2-3: Proportion of businesses with e-commerce sales (2010) Source: ONS (2011) 2010 e-commerce Survey 2.6 When examined by sector, the retail sector has the greatest proportion of businesses that sell over a website (31%), followed by the information and communication sector at 27%. As shown in Figure 2-4, the construction sector had the lowest number of businesses with online sales at 4%. Figure 2-4: Proportion of businesses with e-commerce sales by industrial sector (2010) Source: ONS (2011) 2010 e-commerce Survey 2.7 Table 2-1 shows the location of e-commerce customers for businesses with website sales and non-website sales. Nearly all businesses who reported website sales had customers in the UK 5

(15% of all businesses); a little under half of these (6% of all businesses) reported also selling to customers in other EU countries through website sales, and a third (5% of all businesses) to customers in the rest of the world. 2.8 Nearly 7% of all businesses reported non-website e-commerce sales to UK customers. Table 2-1: Location of e-commerce customers 10-49 employees 50-249 employees 250-99 employees 1000+ employees All Businesses with website sales to customers located In UK 13.4 23.3 23 41.3 15.3 Other EU 5.5 10.4 9.4 17.2 6.4 Rest of World 4.3 8.2 7.5 13.4 5 Businesses with nonwebsite sales to customers located In UK 5.0 11.9 23.1 33.1 6.7 Other EU 1.2 4.2 8.6 15.2 1.9 Rest of World 0.7 2.1 5.3 10.4 1.1 Source: ONS (2011) 2010 e-commerce Survey 2.9 The pace of growth in UK e-commerce activity has been significant. IMRG s e-jobs Index 5 estimates that there were 228,000 online retail businesses in the UK in 2010, an increase of 30% on the year previous. It estimated that 730,000 people work directly in or support the e- commerce industry (note that this uses a different definition of e-commerce to ONS). The e- jobs Index shows that just over 80% of e-commerce businesses and channels have been established since 2000. However, the start-up rate has been stabilising, with growth levels remaining at a constant rate of just over 7% in both 2009 and 2010. 2.10 The IMRG research highlights that for every person employed by an online retailer, another works in support of the online industry - providing services such as distribution, delivery, customer support, payments, marketing, security and administration. Distribution and delivery are the most important supporting sector, and IMRG estimate that 115,700 workers delivered approximately one billion parcels from online businesses to customers in 2011. 2.11 Research 6 by the Boston Consulting Group (BCG) suggests that the "internet economy" was worth 121bn to the UK in 2010 (note that this again uses a different definition to that of ONS for e-commerce), equivalent to 8.3% of the UK economy, representing more than 2,000 per person. 2.12 The UK is one of the world s leading economies for e-commerce with a higher proportion of online retail transactions than any other major economy (see Figure 2-5). Approximately 13.5% of all retail purchases were conducted over the internet in 2010 compared to 7% in Germany (the country with the next highest level of retail sales). 5 IMRG (2011) e-jobs Index 6 Boston Consulting Group (2012) The $4.2 Trillion Opportunity: The Internet Economy in the G-20 6

Figure 2-5: Online retail as a proportion of total retail 2010 Source: SQW analysis of Boston Consulting Group (2012) The $4.2 Trillion Opportunity: The Internet Economy in the G-20 2.13 In terms of employment, research by BCG specifically on the UK internet economy estimated that it supported 250,000 jobs in the UK 7. The BCG research further demonstrates the UK s position as a leader in e-commerce and reports that the UK is now a net exporter of e- commerce goods and services, exporting 2.80 for every 1 imported. This is the opposite of the trend seen in the offline economy, which exports 90p for every 1 imported. Future trends in e-commerce 2.14 Overall the UK s e-commerce activity is expected to continue to grow strongly. BCG 8 predicts that the UK s internet economy will continue to expand at a rate of 11% per year for the next four years, reaching a total value of 221bn by 2016 representing 12.4% of GDP an increase of 4 percentage points on 2010. That compares with projected growth rates of 5.4% in the US and 6.9% in China. 2.15 Estimates from Datamonitor forecast 9 a similar rate of growth with the performance of the online retail sector in the UK anticipated at a CAGR of 11.6% for the period 2010-2015, resulting in a value of 42bn by the end of 2015 (note that the BCG and Datamonitor values are not comparable as one measures the total Internet economy and the other the value of the online retail sector). m-commerce 2.16 Mobile e-commerce, or m-commerce, is an area earmarked for significant growth in the coming years. Recent research by Incentivated 10 shows that the UK has the highest smart phone ownership in Europe and 46% of internet users access the internet via their mobile in the UK. 7 Boston Consulting Group (2010) The Connected Kingdom: How the Internet Is Transforming the U.K. Economy 8 Boston Consulting Group (2012) The $4.2 Trillion Opportunity: The Internet Economy in the G-20 9 Datamonitor (2011) Online Retail in the United Kingdome 10 Incentivated (2012) Mobile Data Summary 7

2.17 In 2011, approximately 7% of all e-commerce traffic was accounted for by mobile devices, compared to 1.4% in 2010. According to Incentivated, just over 3% of e-commerce purchases were made from mobile devices in 2011, up from 0.4% in 2010. These are significant growth rates over a 12 month period. Total m-commerce spend is forecast to be 19.3bn for 2021, and already over 10% of all e-bay UK sales are accounted for by mobile: in 2010, global ebay sales via a mobile device more than tripled, generating $2 billion in sales up from $600m in 2009. 8

3: Scotland s relative position in e-commerce Scotland s relative position in e-commerce - summary The ONS E-commerce Survey provides data at the UK level on the proportion of businesses with e-commerce sales. Due to issues around its methodology, data is not available for the UK nations and regions. In order to look at the relative performance of Scotland to other parts of the UK, we have reviewed a number of business surveys and proxy indicators of e-commerce activity. There are various messages emerging from these data sources. Firstly, the proportion of businesses in Scotland trading online (B2B and B2C) would appear to be broadly in line with the UK, or in some cases marginally below (35% in Scotland vs 36% for UK in the FSB survey; 36% in Scotland vs 39% for UK in the BIS survey). However, other indicators suggest that Scotland is way behind other parts of the UK in terms of having e-commerce people. Our analysis of LinkedIn found that about 1,200 members located in Scotland s cities mentioned e-commerce in their profiles, compared with 13,000 members based in London. Data from itjobswatch.co.uk found that Scotland had the lowest proportion of any nation/region in terms of advertised IT jobs citing e-commerce over the last 3 months: 2% in Scotland versus 11% in London and 10% in the East Midlands. Data from Google Insights for Search suggests that the search intensity for certain relevant terms was about 40% lower in Scotland than in England over the last 12 months. Based on the ONS E-commerce Survey, a large proportion of e-commerce takes place in the wholesale and retail sectors, and website-based sales are particularly important for these sectors. Although data shows that the overall growth of Scotland s retail and wholesale sector has been broadly in line with that in other parts of the UK, Scotland s export performance in retail/wholesale appears to be falling. This trend warrants further investigation; it could potentially point to some weaknesses in the adoption of web-based e-commerce in these sectors in Scotland, though we do not have sufficient evidence to confirm that hypothesis. 3.1 In this section we use a variety of data sources to compare e-commerce activities and performance in Scotland to other regions and nations of the UK, and at the UK level more generally. Demand for e-commerce 3.2 In terms of consumer usage of e-commerce, Scotland appears to have fallen somewhat below the UK average perhaps reflecting the slower growth here of home internet access in the last few years. The most recent data from Eurostat for 2010 highlights that 64% of adults in Scotland have ordered goods and services online over the previous year, slightly lower than 9

East of England South East East Midlands South West West Midlands London UK Northern Ireland North West Wales Scotland Yorkshire and The Humber % of individuals who ordered goods & services over the internet for private use North East Scottish e-commerce Study the UK average of 67% (Figure 3-1). The highest consumer demand for purchasing online would appear to be the East and South East of England. Figure 3-1: Demand for online purchasing of goods and services 80 70 60 62 68 75 73 73 72 72 71 71 69 63 53 68 68 65 66 67 67 63 61 60 57 53 2008 2009 2010 69 67 64 64 64 61 61 58 56 55 53 63 53 50 47 47 46 40 30 20 10 0 Source: Eurostat 3.3 As highlighted earlier, mobile e-commerce is likely to become a more important aspect of e- commerce. Data produced by ebay shows that in 2010, 7% of ebay s unique m-commerce consumers lived in Scotland. Surprisingly, this is similar to the level of activity in London, but substantially behind the relatively small North East region (Figure 3-2). The highest proportion of users (22%) were based in the South East of England. Although this data on m- commerce only relates to ebay, this nevertheless will account for a sizeable proportion of this type of activity and is a useful barometer. 10

South East North East North West East Anglia South West West Midlands London Scotland East Midlands Wales Northern Ireland Share of unique UK ebay m-commerce consumers Scottish e-commerce Study Figure 3-2: ebay m-commerce data (2010) 25% 22% 20% 15% 14% 13% 10% 11% 8% 8% 7% 7% 6% 5% 3% 2% 0% Source: ebay UK Mobile Commerce - 2011 research Businesses trading online 3.4 A key aim of this research has been to assess to what extent Scottish businesses have adopted e-commerce relative to other parts of the UK. As highlighted in the previous section, results from the ONS e-commerce survey provides data on the proportion of businesses with e- commerce sales, and the value of these sales broken down by different UK sectors. However, unfortunately this data cannot be broken down by UK nations and regions including Scotland. We understand from discussions with ONS that there are methodological issues around the collection of the survey data which prevent this disaggregation (particularly in relation to large retailers with multiple sites around the UK). 3.5 However, there are some other business surveys which provide useful data at the regional level. The BIS Small Business Survey (2010) results show that 36% of SMEs in Scotland are currently using the internet to sell goods and services through a website (Figure 3-3). This is slightly lower than the UK average of 39%. These results should be caveated due to sample sizes at the regional level, but nevertheless they do provide a useful comparison. Based on these results, the areas with the highest proportion of businesses trading through a website are the East Midlands and East of England. 11

South West West Midlands Wales East Midlands North West UK North East South East Scotland East of England Yorkshire and The Humber Northern Ireland % of businesses using the internet for online trading London East Mids East of England London UK North West South West Northern Ireland West Mids Yorkshire and Humber South East Scotland Wales North East % of businesses selling goos and services through a website Scottish e-commerce Study Figure 3-3: Proportion of small businesses selling online 50% 45% 40% 35% 44% 43% 42% 39% 39% 39% 39% 38% 38% 37% 36% 33% 30% 25% 22% 20% 15% 10% 5% 0% Source: BIS Small Business Survey 2010 [Unweighted sample: 1901, of which 115 in Scotland] 3.6 A similar picture is presented by looking at the latest FSB members survey from 2011 which asks how many (small) businesses are using the internet for online trading. The results show that 35% of Scottish businesses are trading online compared to a UK average of 36% (Figure 3-4). In this survey, the highest performing region appeared to be the South West (40%) followed by the West Midlands (38%). Figure 3-4: Proportion of FSB members trading online 45% 40% 40% 38% 38% 38% 37% 36% 35% 36% 35% 35% 35% 35% 32% 32% 30% 25% 20% 15% 10% 5% 0% Source: FSB 2011 Members Survey [Unweighted sample: 10,698, of which 1,066 in Scotland] 3.7 In 2011, the FSB carried out some specific research on online trading using 1600 companies that form the Voice of Small Business Panel. Although this involved smaller sample sizes than the annual members survey, it is interesting to note that in this case Scotland compared 12

Less than 10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90% 91-99% 100% - All turnover is generated through online trading % of total turnover generated online North East Wales Scotland London West Midlands South West UK North West South East East Midlands East of England Yorkshire and The Humber Northern Ireland % of businesses currently selling goods/ services online Scottish e-commerce Study reasonably well with other parts of the UK, with an estimated 40% of businesses currently selling goods and/or services online (Figure 3-5). Figure 3-5: Proportion of FSB panel members trading online 50% 45% 40% 35% 30% 25% 20% 44% 44% 40% 39% 34% 34% 33% 32% 30% 30% 27% 24% 19% 15% 10% 5% 0% Source: FSB Voice of Small Business Panel Survey 2011 [Sample: 1,626, of which 175 in Scotland] 3.8 The same survey asked about the proportion of sales that are generated online. Nearly half (48%) of Scottish businesses stated that up to 20% of their sales are generated online (Figure 3-6). Just under a third of businesses with online sales (29%) stated that over 50% of their sales are generated online. Overall, the scale of Scotland s online sales is broadly in line with the UK average, according to this FSB research. Figure 3-6: Proportion of turnover generated online (of those businesses with online sales) 40% 35% 38% 31% UK Scotland 30% 25% 20% 15% 15% 17% 10% 9% 9% 8% 9% 5% 5% 6% 6% 6% 5% 5% 6% 6% 4% 4% 5% 4% 2% 1% 0% Source: FSB Voice of Small Business Panel Survey 2011 [Sample: 1,626, of which 175 in Scotland] 13

East of England London Scotland South West Midlands North West South East Yorkshire Wales North East Northern Ireland % of SMEs Scottish e-commerce Study 3.9 The BCG research on the internet economy in the UK also found a relatively high proportion of high web SMEs in Scotland (71%) compared to other regions and nations (Figure 3-7). This put Scotland level second with London and behind only East of England in terms of the proportion of high web businesses. It should be noted that the sample for this research was 900 businesses, a somewhat lower sample than the other surveys described above. Figure 3-7: Levels of internet use amongst UK SMEs 100 90 80 70 60 72 71 71 67 66 66 63 62 58 56 47 50 40 30 20 17 22 20 21 19 17 22 19 17 18 31 10 0 11 8 8 12 15 17 14 19 25 26 22 No web businesses Low web businesses High web businesses Source: BCG (2010), The Connected Kingdom [Sample: 914 businesses] 3.10 Another proxy that we have considered for assessing the level of interest or demand for e- commerce services in Scotland is to use Google Insights for Search to identify how popular certain web searches are in different parts of the UK. Figure 3-8 shows the popularity of searching for the term e-commerce or ecommerce and also for the names of leading e- commerce platforms such as Magento and oscommerce. With these terms being predominantly of relevance to businesses rather than consumers (and bearing in mind the dominance of the Google search engine), we conclude that the intensity of business interest in web-based e-commerce (which is what most people would be thinking of by the term ecommerce and the various platform names) appears to be far higher in England than in Scotland. 14

Search popularity (normalised to 100) Scottish e-commerce Study Figure 3-8: Google Insights for Search analysis search popularity of key words (over last 12 months) 100 90 80 70 60 50 40 30 20 10 0 100 100 82 75 60 60 57 57 England Northern Ireland Wales Scotland E-commerce +ecommerce magento + oscommerce + volusion + "zen cart" + prestashop Source: Google Insights for Search, March 2012. Figures reflect the number of searches that have been done for a particular term, relative to the total number of searches done on Google over the last 12 months, normalised to 100 for the country with the highest ratio. Note that + is the OR operation on Google Insights for Search SIC 47.91 3.11 Employment and business activity for different sectors are typically defined using SIC codes. However, since e-commerce is effectively a sales channel or way of doing business rather than a sector in its own right, there are no SIC codes that can be used to define e-commerce activity. In carrying out this research we did confirm that companies that compile business databases such as Experian and Dun & Bradstreet do not collect information on e-commerce based sales and/or employment. 3.12 The one SIC code which is perhaps the most useful and identifiable to e-commerce is SIC 47.91 (using SIC 2007) which covers retail sales via mail orders and via the internet 11. Data drawn from SIC 47.91 is presented below to provide some comparisons of Scotland and other parts of the UK. We accessed employment data through the Business Register and Employment Survey (BRES) and also financial data through contact with the Scottish Government and the ONS Annual Business Survey team. 3.13 In this SIC 47.91, there are just over 1700 employee jobs in Scotland with around 400 businesses generating annual sales of 514 million. Most of the employment in Scotland is concentrated in Inverclyde, Glasgow, Edinburgh and North Lanarkshire. As is shown in Table 3-1, the highest level of employment is to be found in the North West of England with over 16,000 jobs, reflecting the traditional strength of the mail order sector in this part of the UK. The East of England and the South East also have significant employment in this activity relative to other regions. 11 This SIC code will only have a small fraction of the companies involved in e-commerce (with much of the activity relating to mail order activity). Nevertheless, it provides information on some e-commerce activity which can be analysed by region and nation 15

Table 3-1: Employment in SIC 47.91 (2008-2010) by UK region and nation 2008 2009 2010 North West 13,700 12,100 16,100 East of England 7,400 9,000 9,400 South East 6,100 6,800 8,200 London 8,200 5,500 6,700 West Midlands 4,000 3,000 5,500 Yorkshire and The Humber 7,300 5,000 4,600 East Midlands 6,700 4,600 4,100 South West 5,300 6,000 3,600 Wales 1,700 2,200 2,300 Scotland 1,900 1,900 1,700 North East 700 2,400 900 Northern Ireland - 900 - Source: BRES and Northern Ireland DETI (only 2009 data available for Northern Ireland) 3.14 Most sales from companies in this SIC code are also being generated in the North West of England, with a total of nearly 2.4 billion in 2009 (Table 3-2). Next highest in terms of sales are the East of England ( 1.7 billion in sales) and London ( 1.5 billion). Table 3-2: Business base and turnover in SIC 47.91 (2009) Business units Turnover ( m) North West 1,008 2,393.7 East of England 948 1,682.2 London 1,489 1,525.0 Yorkshire and The Humber 657 945.0 South East 1,564 863.5 Wales 298 519.9 West Midlands 776 516.9 Scotland 401 514.5 South West 903 504.6 East Midlands 678 483.9 North East 214 249.6 Northern Ireland 101 36.6 Source: BRES, ONS Annual Business Survey, and Scottish Government 3.15 Although the total level of activity in this specific SIC code in Scotland is relatively small, it should be noted that this sector is likely to be dominated by established mail order businesses, 16

Change in turnover 2008-09 ( m) Scottish e-commerce Study rather than internet sales. The annual change in turnover figures for the UK nations and regions is shown in Figure 3-9, and it is interesting to note that between 2008 and 2009, there was an increase of 157 million in business turnover (44%) in Scotland: it is not unreasonable to assume that much of this increase in Scotland will have been down to increased online sales, counteracting a negative trend in mail order business (which, as illustrated below, appears to have had a particularly adverse effect on regions with more established mail order operations, such as the North West). Figure 3-9: Change in business turnover for SIC 47.91 (retail sales via mail orders and via the internet), 2008 to 2009 400.0 347.4 336.5 300.0 200.0 184.2 171.5 156.8 100.0 0.0-100.0 83.2 28.7 2.6-6.3-59.9-200.0-300.0-400.0-337.8-500.0-454.6 Source: ONS and Scottish Government Online retailers 3.16 From a review of recent online retail rankings, it is clear to see that most of the leading UK online retailers are based outside Scotland. IMRG, the industry body for online retail regularly produces rankings of the top online retailers in the UK. In Table 3-3 we have presented the top 30 and identified the location of their head office in UK (with the exception of Ryanair, based in Ireland), working on the assumption that this is where most of the e- commerce related development activity will take place. 12 It is notable that the majority are based in London or the South East of England. Based on this list there are no headquarters in the North East, North West, West Midlands, South West, Wales, Northern Ireland or Scotland. Table 3-3: IMRG Experian Hitwise Hot Shops List and HQ location in the UK Rank Company UK region Rank Company UK region 1 Amazon UK SE 16 Tesco Direct SE 2 Argos SE 17 Thomas Cook East 12 However, it must be noted operations, customer services and fulfilment services (part of which will relate to e- commerce) will be located in various parts of the UK 17

Rank Company UK region Rank Company UK region 3 Apple London 18 LoveFilm.com London 4 Amazon.com SE 19 Topshop.com London 5 Tesco SE 20 B&Q SE 6 Next East Mids 21 New Look London 7 Play.com East 22 ASDA Yorkshire 8 Your M&S London 23 The Train Line London 9 John Lewis London 24 Sainsbury s London 10 ASOS London 25 Ryanair Ireland 11 Debenhams London 26 IKEA London 12 Thomson East 27 River Island London 13 Expedia.co.uk London 28 Lastminute.com London 14 easyjet East 29 British Airways London 15 Currys East 30 Comet East Source: SQW analysis of IMRG Experian Hitwise Hot Shops List February 2012 3.17 We have also considered other examples of online retail awards 13. The IMRG annual awards for 2010 and 2011 have more of a geographic spread across the UK in terms of company headquarter locations but do not feature any companies based in Yorkshire, North East, Wales, Northern Ireland or Scotland. However, the 2011 winners Online Retail Awards do include one company from Scotland, Labels4Kids, which won independent online retail site of the year. Full details of these award winners are included in Annex E. 3.18 Some other Scottish based online retailers were acknowledged in the 2010 Scottish Retail Awards with the relevant awards shown in Table 3-4. Table 3-4: Scottish Retail Excellence Awards 2010 Large on-line retailer of the year Location Small/Medium on-line retailer of the year Location M&Co - WINNER Renfrew ROX Diamond & Watch Specialist - WINNER Glasgow Advanced MP3 Players.co.uk Edinburgh Blackcircles.com Ltd Peebles Toolstop.com Uddingston Demijohn Glasgow Source: Scottish Retail Excellence Awards 2010 Online banking 3.19 Another example of e-commerce is online banking (though note that the financial sector is excluded from ONS s e-commerce survey). Even after the financial crisis of 2008, Scotland 13 Although we have presented data for various UK online retail awards, it is not possible to know the extent to which these awards have been promoted in the various nations/regions of the UK which would likely have a bearing on where nominees are drawn from. 18

continues to have a strong financial services sector and is home to a number of major banks such as RBS, Bank of Scotland, Clydesdale Bank and the Scottish Widows Bank. In Table 3-5 and Table 3-6 we show the recent award winners for online banking, many of which are headquartered in Scotland (the table shows NatWest as headquartered in Scotland, as it is part of the RBS Group). 3.20 Feedback from our discussions with e-commerce suppliers highlighted the increasing demand from financial services for web and e-commerce development support. Edinburgh s financial services sector has been boosted recently by the decision of Swiss banking software company Avaloq to create 500 jobs in the city over the next five years. Table 3-5: Best Online Banking Provider Money facts Awards 2009 HQ 2010 HQ 2011 HQ Winner Bank of Scotland Corporate Scotland NatWest Scotland HSBC London Highly commended NatWest Scotland HSBC London Bank of Scotland Corporate Scotland Commended The Co-operative North West Santander London NatWest Scotland Source: SQW analysis of http://www.moneyfactsgroup.co.uk/awards/ Table 3-6: Best Internet account provider Money facts Awards 2009 HQ 2010 HQ 2011 HQ Winner ICICI Bank London Intelligent Finance Scotland AA Banking South East Highly commended Principality BS Cardiff ICICI Bank UK London Scottish Widows Bank Scotland Commended Yorkshire BS Yorkshire Yorkshire BS Yorkshire Tesco Bank Scotland Source: SQW analysis of http://www.moneyfactsgroup.co.uk/awards/ E-commerce jobs 3.21 One proxy indicator for the scale of e-commerce related employment in Scotland compared to other parts of the UK is the number of advertised e-commerce jobs. One of the top UK jobs websites is Reed.co.uk. In Figure 3-10 we have extracted data for most parts of the UK on the number of IT jobs 14 being advertised in that area and identifying the proportion that relate to e-commerce compared to software development and web development. This data (basically a snapshot from early March 2012) shows around 250 IT jobs being advertised in Scotland, with a small number relating to e-commerce (7). In fact, only the North East of England had fewer e-commerce jobs advertised. In percentage terms, for most areas around 2-3% of IT jobs advertised related to e-commerce (including Scotland where 2.8% of IT jobs related to e- commerce). Since these percentages are based on the number of IT jobs advertised, it is noticeable that the number of IT jobs in Scotland is substantially lower than some of the English regions that have similar populations such as the West and East Midlands. 14 We recognise that IT jobs in e-commerce are only a sub-set of total e-commerce jobs, but the comparison remains useful 19

Figure 3-10: E-commerce jobs as a proportion of all advertised IT jobs (by region) 25% 20% 15% % E-commerce % Software development % Web development Total IT Jobs 6,067 7,000 6,000 5,000 4,000 10% 2,619 3,000 2,000 5% 0% Scotland 249 North West 748 North East 154 464 West Midlands London South East 386 488 Yorkshire East & Humber Midlands South West 649 1,000 0 Source: Analysis of reed.co.uk (1/3/12)* no replies for East of England 3.22 The website itjobswatch.co.uk arguably provides a more comprehensive picture of the UK s overall IT jobs market, with information on demand for particular skills and salary levels that can be expected for different jobs. In Table 3-7 we present data on e-commerce jobs as a proportion of all process and methodologies positions for the different parts of the UK, clearly showing the higher proportions of e-commerce employment in areas such as London and the East Midlands, with Scotland at the bottom of the table. The data also shows the significant differences in salaries for e-commerce positions. Table 3-7: Listing of e-commerce jobs in IT Jobs Watch (March 2012) E-commerce jobs as % of the Processes & Methodologies category E-commerce average salary London 11.04% 50,000 East Midlands 9.60% 31,000 Yorkshire 9.38% 35,000 England 9.01% 45,000 East 8.89% 47,000 North West 7.25% 30,500 South East 5.90% 40,000 South West 5.06% 35,000 West Midlands 4.80% 35,000 North East 3.77% 26,500 Scotland 1.94% 34,000 Source: itjobswatch (March 2012) 20

3.23 The information shown below, again from itjobswatch.co.uk, for the share of processes and methodologies permanent IT jobs citing e-commerce does appear to suggest that the growing importance of e-commerce within the UK s IT job market may not have been matched in Scotland over the last few years. Figure 3-11: 3-month moving total of permanent IT jobs citing E-Commerce within Scotland, and within the UK, as a proportion of the total demand within the Processes & Methodologies category Scotland UK Source: itjobswatch.co.uk 3.24 Another interesting unofficial source of data on e-commerce activity can be found using a search of the LinkedIn network, of the term e-commerce (we also searched on ecommerce, but this spelling returned many fewer members, so we report our analysis of the former here). Using this search, nearly 44,000 members are to be found in the UK, with London representing just under a third with around 13,000 network members. Figure 3-12 shows the numbers based in the largest 50 cities and towns in the UK (excluding London). With 714 e- commerce members, Edinburgh is currently ranked fifth. Glasgow has 369 members which puts it 17 th in the list of UK cities. 3.25 Drilling down into the companies of these LinkedIn members located in Scottish cities, we note the prominence of the financial services sector especially in Edinburgh, with Royal Bank of Scotland (33), Standard Life (28), Lloyds Banking Group (18), and Tesco Bank (13) being the four companies with the largest numbers of employees located in Scottish cities returned through this search. 21

Figure 3-12: Number of LinkedIn members in the UK s largest 50 cities and towns found through a search for e-commerce Reading Manchester Brighton Edinburgh Birmingham Leeds Nottingham Coventry Leicester Bristol Southampton Oxford Northampton Milton Keynes Newcastle upon Tyne Glasgow Warrington Portsmouth Bournemouth Norwich Peterborough Sheffield Derby Swindon Stoke-on-Trent Preston York Luton Liverpool Cardiff Ipswich Blackburn Bradford Swansea Southend on Sea Wakefield Bolton Doncaster Plymouth Huddersfield Wigan Hull Telford Newport Dundee Blackpool Sunderland Belfast Aberdeen 452 450 450 442 431 407 396 377 369 333 324 301 300 299 296 249 241 226 193 186 183 170 167 165 140 132 128 125 121 114 108 106 91 71 63 61 57 52 51 43 32 30 0 200 400 600 800 1000 1200 No. of LinkedIn members Source: SQW analysis of Linkedin, March 2012. Note that London, with 13,000, is excluded from this chart 3.26 Aggregating the top 50 cities into UK nations and regions results in the figures in the chart below. Scotland (based on the four cities of Glasgow, Edinburgh, Aberdeen and Dundee) is around half the way down, on this measure, with about 1200 members mentioning the term e-commerce in their LinkedIn profiles. 525 719 714 660 637 852 1130 22

London SE NW Yorkshire East Mids West Mids Scotland SW East NE Wales N Ireland Number of LinkedIn members Scottish e-commerce Study Figure 3-13: LinkedIn members found through a search on e-commerce those located in UK s largest 50 cities and towns, grouped by region 14000 12876 12000 10000 8000 6000 4000 3442 2000 0 1924 1634 1631 1399 1165 1098 1072 420 352 32 Source: SQW analysis of LinkedIn, March 2012 3.27 Another picture of the relative performance of e-commerce in Scotland can be seen from the members of Econsultancy (econsultancy.com). Globally, they have a membership of 115,000 digital marketers. They advise us that currently around 3% of the UK membership (individuals) are based in Scotland, significantly lower than would be expected based on population and overall business base within the UK. Trends in wholesale and retail activity 3.28 As highlighted earlier in the discussion about the ONS E-commerce Survey, a large proportion of web-based e-commerce takes place in the wholesale and retail sectors. It is therefore interesting to examine overall trends in these sectors in Scotland, relative to other parts of the UK, in order to see whether there is any notable under- or over-performance in recent years. 3.29 Figure 3-14 shows how GVA generated by Scotland s wholesale and retail sectors has increased between 2003 and 2009 compared to other parts of the UK. Based on the most recent 2009 GVA data, Scotland is generating around 10 billion p.a. in these sectors, broadly similar to regions such as East Midlands, Yorkshire and the South West. 23

Headline workplace GVA in wholesale and retail etc. at current basic prices ( m) % growth in headline wholesale & retail etc. GVA 2003-2009 Northern Ireland South East East Midlands London East of England East of England South East North West Scotland West Midlands Wales South West London Yorkshire & Humber South West East Midlands Yorkshire & Humber Scotland Wales 12% 12% 10% West Midlands North East North East North West Northern Ireland Scottish e-commerce Study Figure 3-14: Headline workplace based GVA in the Wholesale and retail trade, repair of motor vehicles industry sector at current basic prices, by region 2003 and 2009 25000 20000 15000 10000 5000 0 2003 2009 Source: ONS Regional Accounts 3.30 Between 2003 and 2009, Scotland s retail and wholesale sector grew by 18% in GVA terms which compares reasonably well with other UK regions and nations: 5 th highest GVA growth over that period out of 12 nations and regions. Figure 3-15: Growth in headline workplace based GVA in the Wholesale and retail trade, repair of motor vehicles industry sector at current basic prices, by region, between 2003 and 2009 25% 23% 22% 20% 19% 18% 18% 18% 16% 15% 15% 10% 9% 5% 0% Source: SQW analysis of ONS Regional Accounts 3.31 Looking at the retail sales index for Scotland, this data suggests that Scotland s indexed value of retail sales has grown somewhat faster than the Great Britain average between 2007 and 2011, as shown in Figure 3-16. 24

Retail sales value at current prices (2007=100) Scottish e-commerce Study Figure 3-16: Indexed retail sales value at current prices (2007=100) 120 115 110 105 100 95 90 85 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Scotland GB Source: Retail Sales Index for Scotland - 2011 Q4 Data Tables, Scottish Government Trends in exports 3.32 E-commerce could be a major opportunity for increasing Scotland s exports. The annual Global Connections Survey produced by the Scottish Government shows the value of exports from different broad industry groupings. Unfortunately there is nothing currently in the survey asking about e-commerce sales. However, it is interesting to look at the performance of the wholesale, retail and hospitality sectors compared with other industry groupings. 3.33 Figure 3-17 shows that in 2010, the wholesale, retail and hospitality sectors generated around 1.4 billion in international exports and 5.8 billion in exports to the rest of the UK, which combined resulted in total exports of 7.2 billion. By way of context, the overall value is broadly similar to food and drink manufacturing ( 7.8 billion) and business services ( 7.3 billion) but these other industry groups export a higher proportion outside of the UK. Total exports from Scotland in 2010 were 67 billion ( 22 billion in international exports and 45 billion in sales to other parts of the UK). 25

Figure 3-17: Value of exports to rest of UK and international, by broad industry group (2010) Financial Intermediation Manufacture of Food Products and Beverages Business Services Wholesale, Retail & Repairs, Hotels & Restaurants Manufacture of Coke, Refined Petroleum Products & Mining, Quarrying & Extraction of Petroleum Electricity, Gas & Water Supply Manufacture of Transport Equipment Electrical and Instrument Engineering Land, Water & Air Transport & Auxiliary Transport Mechanical Engineering Other Manufacturing Industries Manufacture of Paper, Print and Publishing Construction Manufacture of Metals and Metal Products Agriculture, Forestry & Fishing Education Real Estate & Renting of Equipment Manufacture of Textiles, Footwear, Leather & Post & Telecommunication Other Services International Rest of UK 0 2,000 4,000 6,000 8,000 10,000 12,000 Value of export ( '000s) Source: Scottish Government Global Connections Survey 2010 3.34 At the Scotland level it is possible to identify the performance of the wholesale, retail and hospitality sectors compared with other industry groupings. Starting with international exports between 2002 and 2005, the value of international exports from wholesale, retail and hospitality averaged at around 1 billion. Between 2005 and 2008, it then saw a steep increase to around 1.7 billion, but then fell to 1.4 billion in 2010. The indexed change since 2002 compared to selected other sectors and Scotland s economy as a whole is shown in Figure 3-18. 26

Change in Rest of Uk exports (2002 levels = 100) Change in international exports (2002 levels = 100) Scottish e-commerce Study Figure 3-18: Indexed Scottish international exports for selected industry groups (2002 =100) 200 180 160 140 120 100 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Scottish Government Global Connections Survey 2010 Manufacture of Food Products and Beverages Wholesale, Retail & Repairs, Hotels & Restaurants Business Services Total International Exports 3.35 In terms of exports to other parts of the UK, the value of exports from wholesale, retail and hospitality increased significantly from 4.6 billion in 2002 to 6.5 billion in 2004 (Figure 3-19), but has since reduced to 5.8 billion in 2010. Figure 3-19: Indexed Scottish exports to the rest of the UK for selected industry groups (2002 = 100) 170 160 150 140 130 120 110 100 90 80 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Scottish Government Global Connections Survey 2010 Manufacture of Food Products and Beverages Wholesale, Retail & Repairs, Hotels & Restaurants Business Services Total Rest of UK Exports 3.36 The scatter diagram below (Figure 3-20) uses data from the Global Connections Survey for different industry groupings and shows the change in Scottish exports to the rest of the UK (on the Y-axis) and change in international exports (on the X-axis). The diagram shows that over the last three years the value of both types of exports from the wholesale, retail and 27

Change in Rest of UK exports 2007-2010 m Scottish e-commerce Study hospitality sector has decreased whilst most of the other sector groupings have either remained the same or in some cases grown in value, notwithstanding the difficult economic conditions (in particular, exports from food and drink manufacturing have grown by around 1 billion p.a., both to other parts of the UK and internationally). Figure 3-20: Change in value of exports to Rest of UK and international by industry grouping (2007-10) 2,000 1,500 1,000 Manufacture of food products & beverages Electrical and instrument engineering 500 0-500 0 500 1000-500 Financial intermediation Wholesale, retail & repairs, hotels & restaurants -1,000 Construction Change in international exports 2007-2010 m Source: Scottish Government Global Connections Survey 2010 28

4: Enablers and barriers in Scotland Scottish e-commerce Study Enablers and barriers in Scotland - summary Through consultations with stakeholders and desk based research we have highlighted what we believe to be some of the main enablers and barriers for e- commerce in Scotland. The main enablers include the availability of digital agencies (particularly in the Glasgow and Edinburgh areas) that can provide a range of e-commerce related services to traders looking to develop their online sales channels. There are also some good examples of e-commerce traders based in Scotland which can act as exemplars for others to follow including Schuh, Toolstop, Black Circles, Donald Russell and Skyscanner. Stakeholders generally thought that Scotland was comparing well to other parts of the UK in terms of broadband infrastructure with perhaps the exception of the more rural areas. Most consultees believed that due to the mix of technical, design and marketing skills required for e-commerce jobs it is generally quite difficult to recruit for positions that combine these skills sets. The feedback also suggested many Scottish companies currently do not fully understand the potential of online sales channels and the work and investment that is required to become a successful e- commerce trader (i.e. management of their supply chain and fulfilment processes). Finally, there was also a general sense that Scotland does not currently have the same critical mass of e-commerce activity compared to London, the South East, parts of the Midlands and North West and has some scope to increase the levels of e-commerce activity. 4.1 In this section we summarise our view of the main enablers and barriers to developing e- commerce in Scotland. This is based on our review of secondary sources and consultations with industry stakeholders. Enablers Availability of e-commerce suppliers 4.2 Most of the consultees believed that Scotland had a reasonably good supply of e-commerce suppliers, particularly based around the two main cities of Glasgow and Edinburgh. This includes a range of digital agencies that focus on e-commerce to varying levels. The types of services offered include Search Engine Optimisation, web analytics, advice on the use of social media, digital marketing, and the development of the e-commerce website. According to recent research carried out for e-skills UK, there are over 60 IT service companies offering a wide range of IT services and support that includes e-commerce. 29