How Digital, Green and Skills Shifts Are Reshaping Retail SMEs Across Europe’s Towns

The OECD report finds that Europe’s retail SMEs remain central to jobs and local life but are steadily losing ground to larger firms as digitalisation, green pressures and skill shortages reshape the sector. Whether these small retailers decline or renew themselves depends on simpler support policies, better skills and place-based strategies that help them adapt while keeping towns and city centres vibrant.

Produced by the OECD Centre for Entrepreneurship, SMEs, Regions and Cities with support from the European Commission, a report, Local Retail, Global Trends examines how Europe’s retail sector is being reshaped by digitalisation, environmental pressures, and changing skill needs. Retail is one of the EU’s most important economic ecosystems, employing nearly 30 million people and serving over 450 million consumers every day. Small and medium-sized enterprises dominate the sector numerically and remain deeply rooted in local economies. Yet the report makes clear that retail SMEs are facing a decisive turning point, as long-term structural changes challenge their competitiveness, business models and role in towns and cities.

SMEs Growing, but Losing Ground

Retail SMEs have increased their output in absolute terms over the past decade, even after accounting for the disruption of the COVID-19 pandemic. However, their share of turnover, value added, and employment has steadily declined. Larger firms and retail chains are capturing a growing portion of the market, reflecting increasing concentration across the sector. Productivity gaps remain wide: small retailers typically generate less output per worker than large firms, and unlike in wholesale, this gap has barely narrowed over time.

Retail continues to attract entrepreneurs and remains one of the main entry points into business activity in Europe, but scaling up has become harder. Business churn is still high, yet the share of fast-growing firms has fallen, signalling structural barriers that prevent many SMEs from expanding. The pandemic accelerated consolidation, as some small shops closed permanently while larger players expanded their footprint.

Digital Tools: Opportunity with Uneven Access

Digitalisation is one of the most powerful forces reshaping retail. Online sales have expanded rapidly, and many SMEs now operate websites, use social media and sell through e-commerce platforms. Cloud computing and artificial intelligence are spreading, particularly in Northern and Western Europe.

However, the report highlights sharp divides. Advanced digital tools such as customer relationship management systems remain underused, and few SMEs employ dedicated ICT specialists. Original OECD analysis shows that retailers adopting more sophisticated web technologies tend to be more productive, but adoption varies strongly by firm size, ownership structure and country. For many small retailers, limited skills, time and financial capacity prevent digital tools from being fully integrated into their business models, turning digitalisation into a source of inequality rather than a universal solution.

Green Transition and Workforce Pressures

Retail has reduced greenhouse gas emissions faster than the EU average, mainly through energy efficiency improvements and structural change. Yet progress is uneven and difficult to measure at the SME level due to data gaps. Many small retailers face high upfront costs and regulatory complexity when investing in greener operations, despite growing consumer interest in sustainability. Circular practices such as repair, resale and rental exist, but remain far from mainstream.

At the same time, retail labour markets are under strain. Employment growth has been flat since the mid-2010s, and labour shortages are widespread. The nature of work is changing: traditional customer-facing roles are declining, while demand for digital, logistical and advisory skills is rising. Retail still provides accessible jobs, especially for women and young people, but widespread part-time and temporary contracts, low pay and limited career progression make it harder to attract and retain workers in tight labour markets.

The Future of Retail in Towns and Cities

Beyond economics, the report emphasises retail’s vital role in shaping towns and city centres. Shops generate footfall, animate public space and support local social life. Yet e-commerce, remote work and demographic ageing are altering shopping patterns and contributing to rising vacancies in many urban centres.

The OECD argues that retail revitalisation must be place-based. Digital tools should complement, not replace, physical presence. Investments in walkability, public transport, mixed-use development and cultural activities can help bring people back to city centres, but must be carefully managed to avoid displacement and gentrification. Effective local governance, partnerships between public authorities and businesses, and better monitoring of outcomes for people and places are essential.

A Sector Too Important to Ignore

Retail SMEs are under real pressure, but far from obsolete. Their future depends on simpler and better-targeted policies, stronger support for skills and digital integration, and local strategies that recognise retail as a cornerstone of community life. If the twin digital and green transitions are managed well, retail SMEs can remain engines of employment, innovation and urban vitality across Europe, rather than casualties of global change.