Lena Suchanek

Policy AdvisorCanadian Economic Analysis

Digital Transformation in the Service Sector

Insights from consultations with firms in wholesale, retail and logistics

29 November 2017

2

What is the digital economy?

E-COMMERCE

MOBILE TECHNOLOGIES

ROBOTICS

ARTIFICIAL INTELLIGENGE

CLOUD COMPUTING

3

Why do we (=central bankers) care?

What does all this mean for inflation?

4

?Inflation

Digital Transformation

Digital transformation: Implications for inflation

5

Digital Transformation

Prices for ICT goods and

services

Inflation

E-commerce

Price transparency and comparability

Greater Competition

Improvements in operational

efficiencyPressure on

wages

Source: Adapted from Riskbank (2015) and Bank of Canada (2017)

Costs

Rise of superstar firms and market

concentration

Employment, skill mismatch

Automation?Big data analysis

Price discrimination Dynamic pricing

6

Some clues from surveying firms

Sample: chosen to understand retail prices and supply chain effects

42 firms+ industry associations + consulting companies

Questionnaire: designed to learn about and understand impacts

– Based on: existing surveys, literature on digitalization

– Questions: broad, open ended; followed by specific, scales

Conduct of Survey: face-to-face to allow interaction

– 1h interviews

– 2017Q3

Survey results -A few general insights

8

Survey results: Adoption of digital technologies

0

1

2

3

4

5

6

Adopting firms generally do betterSize of bubbles refers to number of firms

no

t at

all

← E

xte

nt

of

ado

pti

on

→ c

om

ple

tely

(1 =

no

ad

op

tio

n,5

= co

mp

lete

ad

op

tio

n)

negative ← past sales → strong

9

Survey results: Type of technologies

0 10 20 30 40

Advanced automation

E-commerce

Digital platforms

Big data analytics

Customer interaction

Digital tracking

No plan to use Plan to use in 3 years Use somewhat Use extensively

Firms most often cite digital tracking and technologies to interact with customersNumber of firms

10

Survey results: Impact on investment

15 5 5 15 25

Investment in digitaltechnologies will

be…

average share of ITin

overall investment

...same

…somewhat lower

…somewhat higher

…significantly higher

%

Firms plan to increase investment in IT

(number of firms)

24% : share of IT in investment

67% plan to increase IT spending

Spending on IT includes both

– Investment (capital): IT goods, such as hardware

– Expenses: IT services, such as cloud services, Software as a Service (SaaS), etc.

Tendency towards more expenses

Digital transformation: Implications for costs

11

Digital Transformation Inflation

Improvements in operational

efficiencyPressure on

wages

Source: Adapted from Riskbank (2015) and Bank of Canada (2017)

Costs

Employment, skill mismatch

Automation

12

Survey results: Impact on prices – costs

Increase in costs: firms still in installation phase, spending on IT outweigh gains

67% see a reduction in costs

(often modest)

26% pass on cost savings to

their clients (i.e. downward pressure on prices)

10

5

0

5

10

15

20

25

30

35

Decrease inoperational

costs

Lower pricesas a result

0 - Costsincreased

1 - Not at all

Firms saw a modest reduction in operational costsNumber of firms

On a scale from 1 to 5, by how much have costs been reduced?

2

3

45 - Very importantly

13

Survey results: Impact on prices – returns to scale

69% operate an increasing

returns to scale (IRTS) business model

43% link IRTS to digital

technologies

0

5

10

15

20

25

30

35

40

45

Scalability of operational model

…less than proportionally

(share: related todigital)

… proportionally

… more than proportionally

Most firms would see a decrease incost per unit if volumes increasedNumber of firms

If sales volumes increased, the firms' costs would increase...

14

Survey results: Impact on employment

Effect on employmentambiguous

– Automation, efficiency

+ Need for IT staff

More flexible types and arrangements

Labour costs effects ambiguous

– Automating low-skilled tasks

+ High wages for IT professionals20 0 20 40

Number of employees

Proportion of high-skilledworkers

Proportion of part-time workers

Proportion of subcontracting

Flexible work arrangement

Training and development

Labour costs

Decrease Increase

Digitalization transforms the workforceNumber of firms

Digital transformation: e-commerce and competition

15

Digital Transformation Inflation

E-commerce

Price transparency and comparability

Greater Competition

Source: Adapted from Riskbank (2015) and Bank of Canada (2017)

Rise of superstar firms and market

concentration

16

Survey results: Impact on prices – e-commerce

47% sell online

19% : average share of online

sales in total sales

Most firms charge the same price

online and in store30 10 10 30

If so, impacton average

prices

If so, average% of total

sales

Do yousell

online?

down up none

No Yes

%

Chart 9: About half of firms sell online, with small negative direct price impact (number of firms)

17

Survey results: Impact on prices – competition

02468

101214161820

...from newfirms

...fromincumbents

General(offline)

competition

Online competition

Somewhat deflationaryVery deflationary

Disinflationary impact from online competition no stronger than from offlineNumber of firms

25% cite a downward impact on

prices from online competition

Impact from traditional (offline) competition is bigger

48% see downward pressure

due to increased price transparency and comparability online

= Amazon effect

Some mention price-matching and price-beating strategies

Digital transformation: big data and price strategies

18

Digital Transformation Inflation

Source: Adapted from Riskbank (2015) and Bank of Canada (2017)

Big data analysis

Price discrimination Dynamic pricing

19

Survey results: Impact on prices – big data analysis

52% : collect big data

Few use it in their pricing strategies:

– Dynamic pricing

– Price discrimination

25 15 5 5 15 25

Do you collectand use big

data?

…somewhat lower …somewhat higher

…significantly higher …the same

No Yes

Few firms use big data for pricestrategiesNumber of firms

Impact of dynamic pricing on average price level

Impact of price discrimination on average price level

Summary of results: Impact of digital transformation on prices

2030 25 20 15 10 5 0 5 10

Impact onoperational costs

Reduced prices becauseof cost savings

Increasing returns to scalerelated to digital

Dynamic pricing

Price discrimination

Firms' own online sales

...from new competitors

...from traditional competitors

Changing customer behaviour(price transparency/comparability)

Co

sts

Pri

cin

gst

rate

gyb

ased

on

big

dat

a

On

line

com

pe-

titi

on

DIR

ECT

IND

IREC

T

Summary of survey questions on how digital technologies may affect prices(Number of firms)

← Disinflationary vs. inflationary →

Overall impact of technologies on prices

very important reduction vs small vs. increase

Effect on average price ← significantly negative vs. significantly

positive →

21

Key takeaways and areas for future research

Digital transformation puts some downward pressure on inflation via

1. Operational efficiency and productivity gains

2. Growing e-commerce and competition

Quantitative effect difficult to discern and to disentangle from other trends such as globalization

Policy implications: depends on whether impact is temporary, or structural. Question of “good disinflation”

Lots of interesting work in the area to be done: understanding the sharing economy, the gig economy, manufacturing 4.0, etc.

Thank you!

Additional Slides

24

Survey results: why do firms invest in digital tech?

86% : increase operational

efficiency

64% : respond to external

forces (customer demands, competition, regulation, etc.)

69% : incrase revenue sources

20 10 0 10 20 30 40

Enhancingrevenue sources

Respondingto external

forces

Enhancingoperationalefficiencies

Not at all Somewhat Very

The main objective is to reduce costs(Number of firms, relevance of objectives)

Note: The main objectives are not mutually exclusive.

25

Survey results: Conclusion: overall impact on prices

Firms judge the overall impact to be disinflationary, on balance

– Retail sector overwhelmingly cites downward pressure

– Most important factors: more-transparent pricing and increased competition

– cost savings, operational efficiencies

0

5

10

15

20

25

30

35

40

Impact on prices

...somewhat higher

…the same

...somewhat lower

...significantly lower

Overall impact of digital technologies is viewed as somewhat disinflationaryNumber of firms

Prices are overall...

26

Key insights from the literature on digitalization and inflation

Direct impact: falling prices of information and communications technology (ICT) goods and services– Small downward impact in advanced counties, but almost nil in Canada

(limited competition in TelCo sector)– Prices fell earlier on this decade, not much recently

Reshaping traditional retail market structure and increasing (e-)competition – Evidence in advanced economies that digital superstar firms become

dominant– Amazon effect: increased competition, especially through e-commerce– limited empirical evidence; in Canada, e-commerce is small as of yet

Cost-efficient technologies should lead to increased productivity– Little evidence so far in the statistics– Some benefits may yet to be reaped, i.e. future productivity gains could

put downward pressure on prices