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E-business Watch
Tracking the
online media to bring you the key e-business trends
September
19, 2000
Getting
Ahead in Online Retail
For those
companies selling goods over the Internet, the last 12 months have not been
easy. In the heady days of 1999, anything seemed possible, as aggressive
Internet-based retailers, such as Amazon.com, eToys and Beyond.com appeared
poised to displace traditional retailing giants. This changed abruptly in 2000, however, as pure Internet
retailers went from Internet darlings to dogs. In recent months, many of these
companies have struggled not just for profitability, but for their very
survival.
Unlike
1999, when success was measured by how quickly revenues were growing and the
size of the potential market, today’s criteria are a retailer’s efficiency and
the likelihood that it will turn a profit.
In the wake of a flood of high profile collapses – including Boo.com, Reel.com,
Petstore.com, Toysmart.com and ValueAmerica.com – online retailers
now face tremendous scrutiny from investors and analysts over their margins,
marketing expenses, cost of customer acquisition, fulfillment strategy, and the
lifetime value of their customers.
While few
online retailers are currently profitable, a recent survey from the
Boston Consulting Group and Shop.org has found that the survivors are inching
closer towards break-even. E-tailers have cut back on marketing expenditures --
mainly by cutting out expensive television advertising campaigns and by
renegotiating advertising deals with major portals. Meanwhile, order conversion
rates, the ratio of the number of orders to the number of visits, have
increased slightly.
In the
meantime, brick and mortar retailers have begun to throw their full weight into
online retail. Armed with strong
brands, large cash reserves, well-established relationships with suppliers, and
often decades of experience, traditional retailers have quickly become major
forces in online retail. Brick-and-mortar
retailers now make up a
third of the top 20 Internet retailers, and are
expected to account for two-thirds of all online retail sales by 2002.
Brick-and-mortar retailers, however, have had their own
difficulties selling goods online. Many
of their initial online ventures have been hampered by fears of cannibalizing
existing sales channels, poor integration of legacy IT systems, and reliance on
distribution systems not well suited to fulfilling online orders. Staples.com,
for example, has
repeatedly issued electronic coupons that gave online shoppers access to
free or heavily discounted merchandise, while Toys “R” Us and six other
Internet retailers were recently forced to pay $1.5
million in fines for failing to deliver presents on time last Christmas.
A multi-channel future
As retailers of all stripes struggle toward online
profitability, it is clear that the best strategies are ‘multi-channel’ in
nature, integrating the online and offline shopping experiences. Companies that are able to deliver this
integrated, multi-channel shopping experience are emerging as the strongest
forces in online retail. Giga
Information Group estimates that by 2002, $92
billion of the $152 billion in North American online retail sales will come
from retailers with both online and offline stores.
The most effective retailers will be those that combine the
Internet’s anytime, anywhere convenience with the tangible benefits of physical
stores, leveraging three key areas: size, physical channels, and partnerships.
Leveraging Size
While
small, Web-only retailers are being forced to cut back on their costs to stay
in business, large established retailers are able to continue spending on their
online operations. Sears, for example, plans
to double its spending on its online operations this year, to nearly $100
million. Elsewhere, retailers such as Borders, J. Crew and Hallmark are spending
millions of dollars building data warehouses that will help them track their
customers across multiple sales channels – online, through their catalogues and
in stores.
Finally,
large retailers such as Wal-Mart are able to negotiate volume discounts with
suppliers, allowing them to continue to offer low prices while struggling
Internet-only start-ups have had to increase prices or add delivery charges in
order to cut losses and increase their margins.
Leveraging physical channels
Physical stores, once dismissed as a costly legacy of the
old economy, are now seen as powerful tools for building brand recognition and
increasing online sales. As one
analyst recently
noted, pure-play retailers must
spend upwards of $50-$100 million annually to build a brand from scratch.
Companies with physical stores, however, can use these stores to reach
customers much more cheaply, spending a fraction of these amounts through
low-cost advertising on store placards, store windows, grocery bags and
receipts to their customers. Furthermore, the presence of a physical
store reassures customers about delivery of goods and the handling of returns.
In fact, a recent Jupiter Communications survey of roughly 2,000 consumers found
that 95 percent want the ability to return online purchases to a physical
store.
Companies such as Office
Depot, The Gap and Spiegel Group (which owns Eddie
Bauer) -- have been among the most effective in combining the strength of their
physical stores with their online shopping initiatives.
Most recently, Home Depot has
begun an interesting experiment aimed at integrating their warehouse-size
stores with their online operations.
The company recently announced that online orders would be fulfilled at
the physical store nearest to
the customer. Unlike most online retail
initiatives, which rely on separate warehouses and IT systems for their online
inventory, Home Depot will draw on its existing physical and technological
infrastructure. The company has
launched a pilot of this in Las Vegas and plans to eventually roll the strategy
out to its more than 1,000 North American stores.
Leveraging partnerships
Perhaps the most interesting development in multi-channel
retailing is the recent announcement that Amazon.com and Toys “R” Us will
combine their online toy stores into a single operation, hosted on the
Amazon.com website.
Both companies have struggled in the highly competitive
online toy market. For Toys “R” Us, their efforts to establish toysrus.com have
been marred by a series
of missteps as they battled with eToys for dominance in the toy
market. Amazon.com, for its part, has realized that
dominating other retail categories as it has books will be no easy task. As the Industry Standard recently
remarked, the Toys “R” Us/Amazon alliance “marks the end of an era in online retailing.” While it once appeared that Amazon would be able to replicate its
success in the book market across other online retail segments, the Industry
Standard considered that “the deal with Toys “R” Us is Amazon’s recognition
that doing the same in other retail categories isn’t so easy.”
The deal also reflects a concession from each of the
companies that they are unable
to become multi-channel retailers on their own. This partnership focuses each company on what they do best:
Amazon.com will handle site design, order fulfillment and customer service,
while Toys “R” Us will manage merchandise and inventory.
As a retail
channel, the Internet is still in its infancy. Over the next several years, the
face of online retail will continue to rapidly evolve as retailers experiment
to find the right blend of online and offline activities. At the same time, new technologies promise
to shift the landscape. On the horizon are new wireless services, which will
give customers the option of using wireless devices for payment, in-store comparison
shopping and location-based marketing. For
retailers, this means that the learning and experimentation will only continue.
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