$900,000,000,000. That's how much more was spent at online retailers globally in 2020 as Covid-19 kept consumers at home.¹ Across the world, e-commerce made up roughly $1 out of every $5 spent on retail in 2020, up from about $1 out of every $7 spent in 2019.² Digital momentum continues in 2021 for markets and industries around the world. But the transformation has been neither universal nor uniform as some players were earlier adopters and adapted better than others. So, what will commerce look like in 2021 and beyond?

This report, developed by the Mastercard Economics Institute and the third in Mastercard's Recovery Insights series, looks at how Covid-19 contributed to retail's digital acceleration, how much of that digital spending we expect to be permanent by country and by sector, and the impact to the globalization of e-commerce.

Key takeaways include:

• Early digital adopters go into overdrive: Economies that were digital leaders before the crisis saw larger gains in the domestic shift to digital—and those gains look to be more permanent—than countries that were late adopters or had a smaller share of e-commerce before the crisis.
• Grocery and discount store digital gains look sticky: Essential retail sectors, which had the smallest digital share before the crisis, saw some of the biggest and more permanent gains as consumers adapted.
• Cross-border commerce making strides: The shift to digital was also seen across borders, as international e-commerce got a boost both in terms of year-on-year growth and in the number of different countries where shoppers placed orders.
• Agility is key for small businesses as trends evolve: For every $1 spent at a large restaurant chain, just 70-75 cents was spent at a small restaurant, representing a significant opportunity for those who can adapt.
• A one-year jump in in-store electronic payment adoption: We estimate Covid-19 lockdowns accelerated the transition from cash to digital payments in-store in the U.S. by one year.
  

As Covid-19 made its way across the globe in 2020 and governments launched mandates to contain the virus spread, people traded in their heels and loafers for fuzzy slippers and started buying nearly everything from toilet paper to fitness classes online. According to an analysis of aggregated and anonymized retail sales activity in the Mastercard network, domestic retail e-commerce surged, ranging from 60% to 90% year over year in various countries from March 2020 to the end of February 2021.

Covid accelerated the shift to e-commerce spending already well underway in certain markets, such as the UAE and the US, but also for countries that were in the early stages of their digital retail shift, such as Egypt and Brazil.

"The pandemic may be the purest test of the world's progress towards digitalization to date," said Bhaskar Chakravorti, Dean of Global Business, The Fletcher School at Tufts University. "Proving in the starkest possible terms how dynamic digital economies have been most resilient to the economic turmoil and are best positioned for future growth."

Not surprisingly, the digital retail journey also accelerated for more populated, urban areas. City dwellers were less willing than exurb dwellers to take public transport and venture out to stores to avoid contact with potentially infected people.

Density also makes the delivery logistics for restaurants and grocery—two of the biggest e-commerce growth drivers—more feasible. The convenience factor is a better sell for car-free city dwellers, especially for grocery and household essentials. Countries such as Singapore, Malaysia and the UK, with high levels of urbanization, showed some of the largest gains in retail e-commerce.

Digital trust is also an important factor for e-commerce growth and sustainability. We found that countries such as Canada, with a strong rule of law and ease of doing business, have seen bigger gains in e-commerce over the longer term.

Digitally advanced economies see pop in e-commerce share shift

Source: Mastercard Economics Institute

In Mastercard's APAC Covid-19 consumer sentiment tracker, 23% of respondents in India and 22% of respondents in China said they were shopping more online and intended to continue.New habits are hard to form, but throughout 2020 and now into 2021, consumers have become accustomed to buying more food and other goods online. According to Mastercard Economics Institute estimates, 20%-30% of retail's global digital shift in 2020 will be permanent. When economies reopen, we can expect an over-rotation back to in-store purchases and then a stabilization in the shift to digital.

During the March-April 2020 lockdown period, e-commerce's share of total retail reached a peak. This peak varied by country but was closely related to the share of e-commerce pre-crisis. While most countries have yet to fully reopen for business as of February 2021, we have seen a similar pattern for the share shift in economies that have reopened, both temporarily and more permanently.

Looking at the economies that have reopened as a guide, the expected "Covid boost", or permanent shift in the share of e-commerce to total retail, is expected to be about 20%-30% of a country's peak. In general, countries that had higher shares of e-commerce before the crisis (early adopters) saw a larger Covid boost. Meanwhile, countries that entered the crisis with lower proportions of e-commerce are expected to experience a smaller permanent gain. Countries that were below a minimum threshold of about 5% e-commerce share saw a more limited response in terms of kickstarting the digital relationship.

While e-commerce will permanently take up a bigger piece of the retail pie than before the pandemic, the variation among sectors is significant. In particular, the two retail subsectors that have historically had some of the lowest e-commerce penetration globally are rapidly shifting more online: grocery and discount stores.

Just 7% of grocery shopping was done online before the crisis. Once the pandemic hit, though, many retailers expanded click-and-collect operations, which enabled contact-free shopping without the steep logistical delivery costs. With new consumer habits forming, and starting from a low user base, we expect that 70%-80% of the close to 3 percentage point Covid-related digital shift to grocery will be permanent. For example, as a result of the UK lockdowns, roughly one-fifth of all grocery store shopping is now done online.

Discount stores started the crisis with an online share under 10% and experienced close to a 10-percentage point surge in the share of total retail - here we expect about a 40%-50% permanent shift.

Other retail sectors were already shifting to digital before the crisis, with a discernable digital acceleration for restaurants and retail starting around 2018.

Clothing, restaurants and sporting-toy stores saw the biggest boost in online spending as restrictions closed non-essential retail. The gain in clothing stores was significant but faded quickly, keeping only about 10%-20% of its boost.

E-commerce made up about 18% of total restaurant sales before the crisis. Then with strict lockdowns, restaurants that were able to swiftly shift to digital became the only food option for consumers. Because of this low market penetration pre-crisis and the rapid adoption, we expect about 30%-40% of restaurants' e-commerce peak will stick.

Evolution of e-commerce share by sector

While online sales weren't enough to offset steep declines in restaurant and clothing sales overall, sporting goods and toys benefited as home-bound consumers looked for entertainment.

Electronics and department stores had the greatest pre-crisis penetration - around 55%-60% and 40%-50%, respectively. The expected permanent shift to e-commerce for these two sectors is likely to be around 20%-30% of their peak jumps, which briefly experienced a market share of close to three-quarters and two-thirds of the retail market, respectively.

E-commerce knows no geographic boundaries. This means that retailers, entrepreneurs and consumers are no longer restricted to the stores in their communities, state or even country.

With infinitely more choices at their fingertips, consumer spending on international e-commerce—or goods purchased online from another country-grew around 25%-30% year over year from March 2020 through February 2021.

The number of e-commerce trading partners tied to purchases made by consumers who live in Germany increased between 20%-30% year over year. We have also seen this with consumers living in the UAE, where the number of high-volume e-commerce trading partners increased 44% year over year.

When we look around the world, we see quite different trends on the international e-trade front.

In countries that face isolation challenges when it comes to international shipping logistics for direct-to-consumer sales, like Australia, Brazil and South Africa, we have seen very little increase in the number of countries from which consumers are importing retail goods. Perhaps more remarkable are countries like UAE, Canada, US and Germany, which have equally as little in common as the previous group yet saw a 20%-50% increase in the number of countries consumers purchase retail goods from online - equating to as many as 10 additional countries for places like the US and Germany.

Pre & Post covid digital trading partners

Count of countries with more than 1,000 e-commerce retail transactions per week, excluding gas

Source: Mastercard Economics Institute

The expansion of digital commerce merchants has been another key trend accelerated by Covid: consumers started buying from more online stores rather than just relying on just a few sites.

The expansion of online marketplaces was another opportunity for consumers to buy items from all over the world while also allowing retailers, especially those that didn't have a robust digital presence, to quickly reach consumers not only in their domestic market, but globally. The rise in the unemployment rate has also driven people to use online marketplaces to soften the blow and create and sell wares.

Our analysis shows that consumers worldwide are making purchases at more websites and online marketplaces across sectors, with residents in countries like Italy and Saudi Arabia buying from 33% more websites, on average, followed closely by Russia and the UK. This increase includes e-commerce sites based in other countries.

The challenges facing brick-and-mortar businesses—and particularly small business owners—have been well documented throughout the pandemic. Our analysis furthers this, showing that small business owners who were able to establish a digital presence or expand an existing one saw benefits, but many weren't equipped to make the transition online-or lagged behind their larger counterparts.

The trend was particularly evident for restaurants worldwide. In looking at in-store and online spending at restaurants in the US, for every $1 spent at a large restaurant chain, just 70-75 cents was spent at a small restaurant.³ Before the pandemic, small and large restaurants were generally on more equal footing, but the pandemic created this gap as large restaurants were better able to continue their business during restrictions.

We also see a stark difference in online consumption at small and local restaurants relative to large and global fast-food chains, which in some cases are seeing massive growth.

When looking at small businesses generally, it's clear that being able to invest in their digital presence resulted in a sales boost. To dig into the impacts of digital enablement on small business, Mastercard conducted a separate study drawing upon its Test & Learn® solution. We found that US businesses with annual revenue under $500,000 that started accepting e-commerce transactions during the pandemic saw an average monthly sales increase of roughly 6%, compared to a control group of similar businesses that did not create a digital presence.

The global health crisis not only influenced what we buy and where we shop, it had a big impact on how we pay for it. Even in store, Covid-19 accelerated the transition from plunking down cash or inserting a card. Instead, shoppers increasingly opted for touch-free interactions using devices and contactless cards, which also create more fluidity in a consumer's ability to buy online as they become more accustomed to digital payments.

In looking at retail and restaurant locations in the US, we found that Covid-19—and the focus on hygiene and personal distancing—accelerated the shift to electronic payments by about one year, according to our analysis of payment forms at brick-and-mortar retail stores and restaurants.⁴ Before the pandemic, the share of cash use as a portion of all sales declined roughly 2.5% per year. After lockdowns began, we saw non-cash payments jump by an additional 2.5 percentage points beyond the trend.⁵ At quick-service restaurants specifically, we saw an even larger one-time shift away from cash of about 3.9 percentage points, on top of the previous trend of about 3 percentage points per year.

T&L Index cash penetration in US retail & restaurant sectors

Source: Mastercard Economics Institute

Covid-19 has led to unprecedented personal and economic upheaval, and its impact will be felt for years to come. In the realm of commerce, it accelerated already existing trends-the growth of online shopping, increased globalization of consumer spending and a shift toward touch-free experiences.

The Mastercard Economics Institute estimates that some of these shifts to digital will remain permanent parts of the retail landscape. For some companies-those that were digitally ready, this has been a tremendous opportunity. With a strengthening economic backdrop and experience gained from such a challenging year, others, including smaller businesses, may be poised to take back some market share.

With the greater ease of purchasing online, competitiveness among producers increases, leading to more consumer options and improved prices driven by business innovation across the supply chain.

However, when given the opportunity, we believe many shoppers will return to stores and in-person recreational activities, where the transaction, not the experience, is often digital.

2020 is behind us, but there's no doubt the increased number of people who were pushed to go online, in droves as never before, have changed the retail landscape for the long run.