Questions and answers about coronavirus and the UK economy
Questions and answers about coronavirus and the UK economy

Update: Are small businesses ready to compete as consumers move online?

The shift to online shopping during the pandemic is a big challenge for small firms and ‘micro enterprises’, large numbers of which are not used to e-commerce. Many lack a website, let alone the option for customers to make online purchases.

There is considerable evidence that small businesses are far behind larger firms in terms of selling and competing online. With the pre-pandemic trend for increased buying online having been turbocharged by Covid-19, many smaller companies could go out of business. Here we look at the latest data, which unfortunately do not provide much cause for optimism.

What do the most recent figures tell us?

E-commerce is defined as ‘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 latest official data on e-commerce available for the UK still stop short of when the pandemic hit in early 2020 (Office for National Statistics, ONS, 2021). But they show that in 2019, less than 10% of micro enterprises (those with fewer than ten employees) were engaging in e-commerce or online sales (see Figure 1). Surprisingly perhaps, this figure is even lower than in the year before when it was 12.7% of micro businesses.

The good news is that over the same period, e-commerce activity increased by 4 percentage points for small firms (those with 10-49 employees). But, it has fallen by nearly 3 percentage points for medium-sized enterprises (those with 50-249 employees).

As in previous years, selling online is much more common for large enterprises (those with more than 250 employees). Note that this is all pre-pandemic, as data do not include 2020 yet. The updated figures confirm the focus by UK firms on direct online sales to final consumers rather than to other businesses. The vast majority of e-commerce sales are via websites, which tend to be to final consumers, rather than electronic data interchange (EDI) sales, which are mostly business to business. This holds across firm sizes.

Figure 1: UK firms engaged in e-commerce by firm size (2018-2019, % of total)

Source: Office for National Statistics; and authors’ elaboration

Looking internationally, when excluding data on micro enterprises, UK businesses are more likely to engage in e-commerce than their counterparts in the European Union (EU). According to Eurostat (2021), the figure in the EU is 21% as compared with the 28.6% ONS figure for the UK. This constitutes a widening gap relative to 2018 when the shares were 20% and  25.7%  respectively.

As is the case in the UK, figures for the EU also show a considerable difference between small and medium-sized enterprises (SMEs) and larger firms, both in e-commerce engagement and e-commerce share in total firm turnover, with larger firms being much more likely to sell online.

The latest data still show that participation in e-commerce in the UK differs considerably across sectors (see Figure 2). For example, almost half of firms with over ten employees in trade-intensive sectors such as wholesale or retail undertake e-commerce activities. The take-up is much lower in other sectors, such as manufacturing and construction.

Engagement in e-commerce activities was also generally lower in 2019 than in the previous year, apart from firms in those trade-intensive industries and other services, which includes real estate, professional, scientific and technical work and administrative and support services. As in previous years, across all sectors, figures are lower when micro enterprises are included.

Figure 2: UK firms engaged in e-commerce by industry sector (2019, % of total)

Source: Office for National Statistics; and authors’ elaboration

Among the reasons for this evident gap in online sales by firm size, the ONS again highlights the lack of website use by the smallest firms, as shown in Figure 3. Clearly, if a small business doesn’t have a website, it will be unlikely to offer online purchasing.

Indeed, only around 40% of micro enterprises (those with fewer than 10 employees) had a website in 2019, while over 80% of firms with more than ten employees do. What’s more, of the micro enterprises and SMEs that actually have a website, less than 30% provide their clients with the ability to order online, and less than 10% offer the option to track those orders.

Alarmingly, these figures also tend to be lower than in 2018. While evidence on what could be causing this gap is limited, it could be driven by a lack of digital skills or available funds to invest in building an online presence and shopping cart.

Figure 3: Use of websites and e-commerce tools in the UK firm by size (2019, % of total)

Source: Office for National Statistics; and authors’ elaboration
Note: The first two series consider only firms that report having a website.

This latest review of e-commerce activities by businesses in the UK shows that the departure point for small and micro firms prior to Covid-19 put them in a difficult position to keep up with the growing online demand by consumers. It is likely that this contributed to a fall in revenues and rising closure rates of smaller firms (Facebook, OECD and World Bank, 2020). More data and evidence are needed on what barriers are preventing smaller firms from competing online, as well as case studies of success stories and best practices.

Where can I find out more?

  • E-commerce and ICT activity, UK: 2019: This ONS report assesses the use of ICT and the value of e-commerce activity by UK businesses.
  • E-commerce statistics: This Eurostat report presents statistics for the European Union, based on the results of the 2020 survey on ICT usage and e-commerce in enterprises.
  • Global state of small business report: This joint work by Facebook, OECD and the World Bank presents the findings from The Future of Business Survey, which aims to develop a better understanding of the impact of this crisis on small and medium-sized businesses.

Who are UK experts on this question?

Authors: Manuel Tong, The National Institute Of Economic and Social Research
Editor’s note: This is an update of an Economics Observatory article originally published on 19 October 2020 (previous version available here).
Photo by Polina Tankilevitch from Pexels
Recent Questions
View all articles
Do you have a question surrounding any of these topics? Or are you an economist and have an answer?
Ask a Question
OR
Submit Evidence