Authors: Jeff Buckland – director, head of corporate and chairman of the management board & Zaheer Moosa – Associate
The shift to an online, digital economy has been accelerated by changes in consumer behaviour brought about by the Covid-19 pandemic. There is opportunity for business growth by investment in e-commerce technology, while e-commerce enterprises have become attractive targets for mergers and acquisitions. But with opportunity comes risk, and we examine some of those here.
The Covid-19 pandemic has wrought profound changes in how we live and how we do business. Online buying of goods and services has rapidly increased and become the norm as countries across the globe have implemented various types of lockdowns and social distancing measures. Businesses across different sectors have adopted different approaches in response to the pandemic. An increasing number have responded to the shift to a digital economy by harnessing the efficiencies offered by digital technology, including developing applications to enhance the consumer experience, deploying sophisticated marketing strategies made possible by advanced digital marketing technology, trading completely online, and developing entirely electronic supply chains. Even before the pandemic, the digital economy and associated technologies were assisting businesses to achieve efficiencies, extend market reach, grow global trade, increase profits and improve customer/client satisfaction. The recent behavioural changes brought about by the pandemic have thus seen a rapid spike in consumer demand for e-commerce goods and services.
According to the Organisation for Economic Co-operation and Development (OECD): “The resulting shifts from brick-and-mortar retail to e-commerce are likely significant across countries. For example, while in the United States the share of e-commerce in total retail had only slowly increased between the first quarter of 2018 and the first quarter of 2020 (from 9.6% to 11.8%), it spiked to 16.1% between the first and second quarter of 2020. The development is similar for the United Kingdom, where the share of e-commerce in retail rose from 17.3% to 20.3% between the first quarter of 2018 and the first quarter of 2020, to then rise significantly to 31.3% between the first and second quarter of 2020. Similar changes are also observed for other regions, including the People’s Republic of China (hereafter China), where the share of online retail in total accumulated retail sales between January and August 2020 reached 24.6%, up from 19.4% in August 2019 and 17.3% in August 2018.”
Rand Merchant Bank has forecast that the value of e-commerce transactions in South Africa “is expected to surge 150% to R225bn by 2025 in response to a marked shift in consumer behaviour and also changed expectations brought about by the unprecedented events of this year (2020)”.
As the economy shifts towards increasingly efficient online transactions, we anticipate that more established e-commerce enterprises may become an attractive target for mergers and acquisitions as investors and businesses leverage and respond to the significant behavioural changes triggered by the pandemic. Businesses see the advantage of investing in and expanding their own e-commerce offerings and are responding to these behavioural changes by investing internally (in their own business) and externally (by acquiring e-commerce enterprises) thus capturing market share and positioning themselves as potential new market leaders functioning in a pandemic environment.
With increasing prospects of higher consumer demand for e-commerce, along with anticipated profits and returns on investment, we anticipate a steady increase in merger and acquisition activity within the e-commerce sector through the usual acquisition methods including purchases and sales of shares and businesses, business divisions, outsourcings, bolt-ons and mergers, with the usual tax, accounting, legal and regulatory planning required.
Risks and Challenges
The prudent business should be wary of the risks and challenges to be faced in the evolutionary and increasing shift towards the digital economy and associated e-commerce markets and digital trading. Cyber security and hacking remain an area of deep concern, with many businesses experiencing breaches in their systems by hackers retrieving and/or stealing confidential, sensitive and proprietary information. Cyber fraud and scamming are an ever-present threat in a digital economy.
These evolving risks often result in businesses needing to spend a significant portion of their budget in ensuring that effective cyber security measures are in place – a factor to be taken into account when investing in an e-commerce-driven business.
A particular concern is still the lack of a predictable legal environment governing online transactions and digital markets. Concerns around digital identity, digital contracts, contractual enforceability, privacy, security, and liability have resulted in businesses and consumers exercising caution and restraint. There remains the risk that goods or services purchased online may disappoint and not meet expectations when the customer receives the actual good or service and can finally touch, feel and/or engage with what was ‘thought’ to have been purchased online.
The Electronic Communications and Transactions Act 25 of 2002 and the Consumer Protection Act 68 of 2008 (and its amendments) have gone some way in addressing some of the consumer concerns mentioned above, including:
Imposing an obligation on a webtrader/supplier to provide certain important information on its website.
Obligating the webtrader/supplier to provide the consumer with an opportunity to review the entire electronic transaction, to correct any mistakes and to withdraw from the transaction, before finally placing any order.
Imposing an obligation on the webtrader/supplier to utilise a payment system that is sufficiently secure with reference to accepted technological standards at the time of the transaction and the type of transaction concerned.
Conferring a statutory entitlement on a consumer to cancel without reason and without penalty any transaction for the supply of goods within seven days after the date of the receipt of the goods or to cancel any services within seven days after the date of the conclusion of the services agreement.
A legal and regulatory framework for e-commerce exists and those engaging in online transactions will need to take time to understand their reciprocal rights and obligations to reap the far-reaching advantages and to avoid some of the risks of doing business online.
In addition, cryptocurrencies, crypto assets and blockchain technology continue to be a disruptive influence in the business world and it is becoming necessary for both e-commerce and traditional enterprises to explore methods of incorporating this type of technology into their business models and making or accepting payment in the form of cryptocurrencies or crypto assets. With a regulatory framework for cryptocurrencies and blockchain technology fast approaching, businesses are advised to watch this space attentively.
Due to the already-significant global shift towards online transactions now spiking due to the pandemic, we anticipate that both start-up and more established e-commerce enterprises will become a target of mergers and acquisitions. Businesses are increasingly seeing the advantage and necessity of investing in and expanding their own e-commerce capabilities to function within a digital economy and maintain a competitive edge. Businesses that respond to the behavioural changes occasioned by the Covid-19 pandemic by investing strategically internally (in their own business) and externally (by acquiring e-commerce capabilities) could capture market share and position themselves as potential new market leaders in an ever-changing and evolving economy.
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