DNBulletin: Growth in e-commerce dampens inflation

Growth in e-commerce in the Netherlands

Consumer purchases of goods and services via the internet have grown sharply in recent years. Compared with 2014, the amount spent online in the Netherlands went up by 16% in 2015 to reach EUR 16.1 billion, in a trend that continued into 2016. Market research bureau GfK estimates a further EUR 3.7 billion increase in 2016 to EUR 19.8 billion, representing 23% growth. This means that e-commerce accounts for 49% of the increase in total private consumption seen in 2016. 

Despite buoyant growth, the Dutch e-commerce sector has potential for further expansion, given that it lags behind internationally. Figure 1 shows the average amount spent online per consumer in 2015 for several countries. At EUR 3,600, the highest amount was spent in the United Kingdom, while the average Dutch consumer spent about one-third (EUR 1,242). Likewise, the share of online spending in actual individual consumption is relatively low in the Netherlands, standing at 3.9% in the Netherlands in 2015, against 4.2% and 7.9% in France and the United Kingdom, respectively. 

Figure 1 Annual amount spent online per consumer (2015)
EUR

E-commerce: lower costs and increased competition

In theory, the increasing popularity of e-commerce may have a two-pronged dampening effect on consumer price levels. Firstly, online retailers may have lower production costs as they spend less on operating a shop in terms of rent and staff. Secondly, e-commerce may fuel competition between retailers, owing to increasing price transparency, as customers can conveniently search the internet for better bargains. However, the price dampening effect of e-commerce primarily stems from the combination of these two factors. After all, in a low-competition environment, lower production costs would drive up business profits rather than push down consumer prices. 

Besides dampening the average price level of consumption, e-commerce may also have a temporary impact on the average rise in consumer prices, i.e. inflation. As long as the share of e-commerce in private consumption increases, it will have a downward effect on inflation. Once that share no longer expands and a new equilibrium is found, the dampening effect on inflation will fade out. 

Impact of e-commerce on consumer prices

Not much information is available on the difference between online and shop prices in the Netherlands. To gain an impression of the impact which e-commerce has on prices, a survey among households that is representative for the Dutch population was held. This revealed that two thirds of online consumers believe they can save money on their purchases by shopping online rather than in a traditional bricks and mortar shop. On average, consumers estimate their price discount to be 6.5%. While this reflects perceptions rather than observed price differences based on statistics, this estimate is fairly closely in line with literature. Other studies, primarily concerning the United States and the United Kingdom, have found effects ranging between 4% and 11%. This price discount only reflects the expected difference between prices in online and bricks and mortar shops. Increased competition and transparency caused by e-commerce may have brought prices down across the board, both online and in bricks and mortar shops.

The dampening effect of the growth in e-commerce on the price increase of private consumption can be estimated based on the perceived price discount of 6.5%, the value and volume of online spending and private consumption. From this it follows that the growth in e-commerce dampened the increase in consumer prices in the Netherlands by around 0.1 percentage points in 2016. This excludes the indirect effect of lower prices in bricks and mortar shops. The size of the downward effect on consumer prices is still modest because the share of e-commerce in private consumption is relatively limited. The effect can be expected to increase over the years ahead, as the share of e-commerce in total consumption will most likely go up. In due course, the growth potential of e-commerce will have reached its limit, and the downward pressure on inflation will ease.