The Digital Single Market (DSM) is one of the priorities of the European Commission for the years to come. But realising it is not as simple as it may seem. Besides language barriers preventing consumers from buying on e-commerce platforms based in other countries, the sector also faces other difficulties. Delivery costs, low consumer trust related to delivery and after-sales support, and low consumer awareness of foreign retailers are just some of the many issues to deal with. To overcome these barriers, the DSMFACIL (Facilitating a digital single market in Europe through cross-border alliances) project, undertaken with the support of the Marie Skłodowska-Curie Actions programme, suggests cross-border alliances leading to win-win situations for all partners involved. Project partners investigated such solutions and laid the groundwork for their facilitation. Nevin Mutlu, assistant professor at Eindhoven University of Technology, discusses the team’s work and potential impact on Europe’s DSM.
What would you say are the main barriers to the DSM right now?
Nevin Mutlu: There are several issues that need to be dealt with in order to realise the DSM in Europe. Since the conceptualisation phase of our project (around 2016), the European Commission has passed regulations to address some important legislation-related issues like overly complicated VAT rules for cross-border purchases and geo-blocking. But I think additional challenges remain. I think geo-blocking for instance is a symptom of a much bigger problem: Most retailers choose to implement geo-blocking not because they want to block sales from foreign consumers, but because the fulfilment of such orders can be extremely costly and unreliable. As such, I believe that an important barrier to the DSM concerns differences across countries in terms of their logistics infrastructure (both physical and non-physical aspects). This leads to fulfilment issues in cross-border order delivery, which in turn impacts consumer demand and leads to a big fragmentation in the European digital market.
How does DSMFACIL explore this issue?
We use an interdisciplinary approach to provide not only predictive analyses through econometric models, but also prescriptive insights via supply chain optimisation techniques. To give you an example, our first study with Ton de Kok, Sarah Gelper and Faranak Khooban focused on consumers’ cross-border purchases. We used individual-level online purchase data on close to 21 000 consumers across 27 EU countries and investigated whether the differences in logistics infrastructure indeed contributed to fragmentation in the European digital market. More importantly, we tried to find out whether the effects of such differences could be mitigated (or exacerbated) by other macro-level factors in these countries such as economic wealth, regulative environment or culture. The insights we gained from this study have been essential in developing realistic supply chain optimisation models, as they helped us identify the settings under which cross-border alliances can be successful.
Speaking of which, what makes you think cross-border alliances could be the solution? Could you provide a couple of examples of successful such alliances?
The motivation for cross-border alliances in the retail sector comes from the airline industry. Through code-sharing practices, airlines from different countries can collaborate to extend their portfolio of route offerings to customers. The key to success here is to identify alliance building as a win-win situation. The situation is quite similar for the retail industry, albeit with different sets of constraints. Traditionally, the transportation infrastructure in Europe is designed for large-volume freight transport, not for small-sized e-commerce shipments. Unreliable logistics is a key issue that leads to fragmentation. So, what we did with our project is explore the idea of cross-border alliances where retailers can leverage their own domestic networks for marketing, storing and delivering their partners’ products more efficiently in their own country. Collaborations between local retailers have been observed in practice. For example, Marks & Spencer collaborates with Ocado in the United Kingdom for the delivery of its e-commerce orders. German retailer Aldi makes use of the unoccupied space in Kohl’s stores in the United States so that consumers can combine their grocery shopping with fashion shopping in a single visit to the store. There are several other successful examples which demonstrate how resource sharing between retailers can be useful for all parties involved. Our study explores if such mechanisms can work in international markets.
What are the project’s most important outcomes so far? What do you still need to achieve?
We have shown that the variations in logistics infrastructure across European countries contribute to fragmentation. In their cross-border purchases, consumers favour retailers from countries with high logistics capabilities. But our findings also show that improved logistics capabilities do not always lead to higher cross-border sales, and that the rule of law in a country is a big determinant in how much demand retailers can attract from abroad. Consumers would indeed be very reluctant to buy from countries where regulatory systems cannot be trusted, no matter how good the logistics performance is. This highlights the potentially complementary nature of these two aspects (logistics and the rule of law) in policymaking, emphasising that government investment and policies focusing on one issue may not substitute for the lack of the other. Our findings also provide important insights for retailers looking for suitable locations and trying to identify partners with whom cross-border alliances can work. Currently, we are in the process of analysing the precise impact of such collaboration on retailers’ win-win revenue/cost sharing schemes. We believe that there is a lot to be explored in this realm.
In COVID times, the ‘buying local’ concept has grown to become a mainstream marketing argument. How can such evolution be reconciled with your work?
Buying local means protecting the environment by reducing transport and supporting local economies. It may be a good alternative for produce, but not everything can be bought locally. At the end of the day, it may actually be more environment-friendly to produce items where raw materials are readily available, or in places where more renewable energy is used. In such a setting, additional transport may be justified. Since not everything can be accessed locally, our project focuses on making cross-border e-commerce flows more efficient by sharing resources such as distribution centres or last-mile delivery. As such, alliances can also support the environment. Additionally, by developing a win-win mechanism between retailers, the setting we envision is not only a competitive setting where domestic and foreign retailers compete. They can also collaborate.
What do you hope will be the long-term impact of the project?
Being a publicly funded project, it is our genuine goal to see European society benefit from our work. I see this happening through policymaking and efficiencies gained in retail logistics operations. In the long run, I hope that our insights will help increase cross-border e-commerce engagement in Europe, which will directly benefit retailers by expanding their markets, and consumers who will enjoy a wider variety of goods and services. Hopefully, this will also set the ground for innovation and price reduction incentives due to increased competition.
DSMFACIL, online sales, e-commerce, Digital Single Market, cross-border alliance, retail