EC Chapter 5: Retailing on the Web
Chapter 5
Retailing on the web
Established offline retailers such as Wal-mart, JCpenny, Sears
and Target have established brand names, loyal customer
base, efficient inventory controls etc. Online retailing is the
new experience of retailing in which new competencies are
developed.
There are a huge amount of goods and services that are
traded online. Goods include both durable and non durable.
Durable goods are those that are consumed over a long
period of time (generally more than one year) such as
automobiles, appliances and furniture. Nondurable goods are
consumed quickly and have shorter lifespan and include
general merchandise, clothing, music, drugs and groceries.
Services include medical, educational, financial and food
services.
The distinction between good and service not always clear
cut and is becoming more ambiguous over time. Increasingly
manufacturers and retailers of physical goods sell support
services that add value to the physical product. It is difficult
to think of a sophisticated physical good that does not
include significant services in the purchasing price.
The movement towards ‘product based services’ can be
seen in packaged software market. Microsoft’s new Windows
XP and Office XP offer purchasers of the products additional
value added services from a variety of Microsoft web sites.
Retail goods refer to the physical products and retailers refer
to firms that sell physical goods to consumers, recognizing
that retail goods include many services
The retails sector
EC Chapter 5: Retailing on the Web
In order to understand the retailing on the web we will
consider the example of the United States market. The retail
industry of the US is composed of different types of firms.
There are eight major types of firms based on the kinds of
products sold. These are –
1. Durable Goods,
2. General Merchandise,
3. Groceries,
4. Specialty Stores,
5. Gasoline and Fuel,
6. Eating and Drinking,
7. MOTO (mail order/ telephone) and
8. Online Retail Firms.
Each of these segments offer opportunities for online retail
and yet in each segment the uses of internet may differ.
Some eating and drinking establishments use the web to
inform people of their physical locations and menus while
others offers consumers nondurable items of small
denominations on the net.
Retailers of durable goods typically use the web as an
informational tool rather than rather than as a direct
purchasing tool. For instance automobile manufacturers still
do not sell cars over the web, but they do provide
information to assist consumers in choosing among
competing models
The biggest opportunities for direct online sales are with in
those segments that sell small ticket items (generally less
that $100). This includes specialty stores (apparel, shoes,
and sporting goods), general merchandisers, mail order
catalogs and groceries. There seem to be a few online
opportunities for gasoline and fuel dealers
The largest segments of the US retail market are the general
merchandisers and grocery stores. Both segments
EC Chapter 5: Retailing on the Web
particularly the general merchandise are highly concentrated
with large forms dominating the sales. These very large
firms have developed highly automated real time inventory
control systems (systems that collect point of sale data from
cash registers, update inventory records, and inform vendors
of stock levels) large national customer bases and customer
databases containing detailed purchasing information.
The mail order telephone order sector is the most similar to
the online retail store sales sector. In the absence of physical
stores MOTO retailers distribute millions of physical catalogs
(their largest expense) and operate large telephone call
centers to accept orders. They have developed
extraordinarily efficient order fulfillment centers that
generally ship customer orders with in 24 hrs of the receipt.
MOTO was the fastest growing retail segment throughout the
1970s and 1980s. It grew as a direct improvement in the
national toll free call system, falling long distance
telecommunications prices and of course the growth of the
credit card industry and associated technologies with out
which neither MOTO nor e-commerce would be possible on a
large national scale. MOTO was the last technological
retailing revolution that preceded e-commerce.
Online retailing
Online retail is perhaps the most high profile sector of e-
commerce on the web. Over the past seven years this sector
has experienced both explosive growth and spectacular
failures.
Many of the new firms that pioneered the retail market place
have failed and many others are struggling to stay afloat.
Entrepreneurs and their investors seriously misjudged the
factors needed to succeed in this market place. Despite
EC Chapter 5: Retailing on the Web
those failures online retail remains and important part of the
e- commerce story.
Online retail sector Today
Although online retailing is the smallest segment of the retail
industry, constituting about 2 % of the total retail market
today, it is continuing to grow at an exceptionally fast rate
with new functionality and product lines being added every
day. Despite the high failure rate of online retailers more
consumers than ever before are shopping online.
The primary beneficiaries of this growing consumer support
are not the first mover [Link] companies, but rather the
established offline retailers who have the brand name
recognition, supportive infrastructure and financial resources
to fill the gaps left by failed online retailers. Gone are the
innovative, brash, young entrepreneurs and their upstart
niche companies backed by much older venture capitalist
and pension fund managers. In are the offline giants who are
reaping the financial value from methods pioneered by the
now departed innovators.
As the latest e-commerce period begins established offline
retailers are rapidly gaining market share. The new
challengers in E- commerce are the awakening general
merchandising giants such as the Wal-Mart, Target, JC Penny
and the catalog based retailers such as L.L. Bean, Columbia
House ( retailer of music).
JC Penny for instance has rocketed from no online presence
two years ago to a ranking in the top ten retail sites today.
Increasingly consumers are attracted to stable, well known
retail brands and retailers. The online audience is very
sensitive to brand names and is not primarily cost driven.
Other factors such as reliability, trust, fulfillment and
EC Chapter 5: Retailing on the Web
customer service are equally important. Rather than
demonstrative disintermediation, online retailing provides an
example of the powerful role that intermediaries continue to
play in retail trade.
Analyzing the viability of online firms
Economic viability refers to the ability of firms to survive
during the specified period as profitable business forms. To
answer the question of economic viability, we take two
business analysis approaches: Strategic Analysis and
Financial Analysis
Strategic Analysis
Strategic Approaches to economic viability focus on both the
industry in which a form operates and the firm itself. The key
industry strategic factors are
- Barriers to entry: can new entrants be barred from
entering the industry through high capital costs or
intellectual property barriers such as patents and
copyrights
- Power of suppliers: Can suppliers dictate high prices to
the industry or can vendors choose from among many
suppliers? Have firms achieved sufficient scale to
bargain effectively for lower prices from suppliers?
- Power of customers: Can customers choose from many
competing suppliers and hence challenge high prices
and high margins?
- Existence of substitute products: Can the functionality
of a product or service be obtained from alternative
channels or competing products in different industries?
EC Chapter 5: Retailing on the Web
Are substitute products and services likely to emerge in
the near future?
- Industry value chain: Is the chain of production and
distribution in the industry changing in ways that
benefit or harm the firm?
- Nature of Intra-Industry competition: Is the basis of
competition with in the industry based on differentiated
products and services, price, scope or offerings, or
focus or offerings? How is the nature if competition
changing? Will these changes benefit the firm?
The strategic factors that pertain specifically to the firm
and its related businesses include:
1. Firm Value Chain: Has the firm adopted business
processes and methods of operation that allow it to
achieve the most efficient operations on its industry?
Will changes in technology force the firm to realign its
business processes?
2. Core competencies: Does the firm have unique
competencies and skills that cannot be easily
duplicated by other firms? Will changes in technology
invalidate the forms competencies, or strengthens
them?
3. Synergies: Does the firm have access to the
competencies and assets of related firms either owned
outright or through strategic partnerships and
alliances?
4. Technology: Has the firm developed proprietary
technologies that allow it to scale with demand? Has
the form developed the operational technologies (e.g.
Customer relationship management, supply chain
EC Chapter 5: Retailing on the Web
management, inventory control and human resource
systems) to survive?
5. Social and Legal Challenges: Has the firm put in place
policies to address the consumer trust issues( privacy
and security of personnel information)? Is the firm the
subject of lawsuits challenging its business model, such
as intellectual property ownership issues? Will the firm
be liable to changes in internet taxation laws or other
foreseeable statutory developments
Financial Analysis
Strategic Analysis allows us to comprehend the competitive
situation of the firm. Financial Analysis helps us understand
how in fact the firm is performing and is best
Some of the key factors to be considered in the financial
statement analysis are
a) Revenues – Are revenues growing and at what rate?
b) Cost of Sales – What is the cost of sales as compared to
the revenue? Cost of sales typically includes the cost of
the products sold and related costs. The lower the cost
of sales compared to the revenue the higher the gross
profits.
c) Gross margin – what is the firms gross margin ( gross
profit divided by net sales) and is it increasing or
decreasing?
d) Operating Expenses – What are the firms operating
expenses and are they increasing or decreasing?
e) Net Margin – What is the firms net margin and it is
increasing or decreasing. Net margin (net income or
loss divided by net sales/revenue) sums up in one
EC Chapter 5: Retailing on the Web
number. How successful a company has been at the
business of making a profit on each dollar of sales?
E-Tailing Business Models
There are five major types of online retail business models:
Virtual Merchant, Clicks and Mortar, Catalog Merchants,
Online Mail and Manufacturer Direct. Each of these different
types of online retailers daces a different strategic
environment as well as different industry and form
economics
Perhaps the best way to understand the challenges facing
online retailers is to examine both the strategies now with
online commerce to move beyond speculation and look at
the real world performance.
Virtual Merchants:
Virtual merchants are single channel web firms that
generate almost all their revenue from online sales. Virtual
merchants face extraordinary strategic challenges. They
must build a business and brand name from scratch, quickly
in an entirely new channel and confront many virtual
merchant competitors (especially in smaller niche
areas).these firms typically do not have to bear the costs
associated with building and maintaining physical stores but
they face larger costs in building and maintaining a web site
and for marketing Customer acquisition costs are also high
and the learning curve is steep.
Like all retail firms their margins (the difference between the
retail price of the goods and the costs of the goods to the
retailer) are very low, therefore virtual merchants must
achieve highly efficient operations in order to preserve a
profit while building a brand name as quickly as possible in
order to attract sufficient customers to cover their cots of
operations
EC Chapter 5: Retailing on the Web
Example of Virtual Marketers are [Link] and [Link].
[Link] is a general merchandiser whereas [Link] is
a focused niche player.
Click and Mortar:
These are also called store based retailers. Click and Mortar
companies have a network of physical stores as their
primary retail channel but also have introduced online
offerings. These are multi channel firms such as Wal-Mart, JC
Penny, Sears and other brand name variety merchants.
While clicks and mortar merchants face high costs or
physical buildings and large sales staffs, they also have
many advantages such as a brand name, a national
customer base, ware houses, large scale (giving them
leverage with suppliers) and a trained staff. Acquiring
customers is less expensive because of their brand names,
but these firms face challenges in coordinating prices across
channels and handling returns of web purchases at their
retail outlets.
However these retail players are used to operating on very
thin margins and have invested heavily in purchasing and
inventory control systems to control costs and in
coordinating returns from multiple locations. Clicks and
mortar companies face the challenges of leveraging their
strengths and assets to the web, building a credible web site,
hiring new skilled staff and building rapid response order
entry and fulfillment systems. JC [Link] is a prime
example of a clicks and mortar company on the web.
Catalogue Merchants:
Catalog merchants such as L.L Bean, Eddie Bauer and
Victoria’s Secret are established companies that have a
EC Chapter 5: Retailing on the Web
national offline catalog operations that is their largest retail
channel but who have recently developed online capabilities.
JC Penny could also be included here given the large scale of
its catalogue operation. Catalogue merchants face very high
costs for printing and mailing millions of catalogs each year-
many of which have a half life of 30 seconds after the
consumer receives them.
Nevertheless catalog merchants have the highest margins in
the retail sector because they have achieved very efficient
operations. They generally have few if any physical stores.
They also typically have developed centralized fulfillment
and call centers, extra ordinary service, and excellent
fulfillment in partnership with package delivery forms such
as FedEx and UPS.
Catalog merchants face many of the same challenges as the
brick and mortar stores – they must leverage their existing
assets and competencies to a new technology environment,
build a credible web presence and hire new staff. Catalog
firms are uniquely advantaged however because they
already posses very efficient fast response order entry
fulfillment systems.
A good example of catalog merchants is [Link]
Online Malls:
Online malls are a variation on the virtual merchant’s
business model. Like offline shopping malls, these online
companies generate revenue from rents and services paid
by retailers who sell under the Malls umbrella. Firms such as
[Link], [Link], [Link] and
[Link] exemplify the concept. Online malls also
face difficult strategic challenges; they must build a centrally
located category website from the scratch, quickly in an
entirely new channel. Essentially online malls face all the
challenges of online virtual merchants plus some additional
EC Chapter 5: Retailing on the Web
ones. These online malls benefit from not having to spend
millions on physical malls, but they face large underlying
costs in building a web site and marketing.
Online malls are also dependent on the underlying success
of the retail merchants who have a presence at the mall.
These online merchants may vary in quality. The malls may
offer the participating merchants a number of order entry,
fulfillment and inventory services as an additional source of
revenue for the mall. Online malls are uniquely advantaged,
however because they can offer consumers a wide array of
products – more than physical catalog merchants – and they
do not face the direct costs of inventory, order entry and
fulfillment that are handled and paid for by participating
retailers.
Examples of online malls are [Link] and [Link]
Manufacturer Direct:
Manufacturers direct firms are either single or multi channel
manufacturers who sell directly online to consumers with out
the intervention of retailers. Manufacturers direct firms are
predicted to play a very large role in e-commerce, but this
has generally not happened. The primary exception is
computer hardware where firms such as Dell, Hewlett
Packard, Gateway and IBM account for about 67% of
computer retail sales online. Some of these firms had retail
experience prior to the web whereas others such as Compaq
had no prior direct sales experience.
Manufacturers direct firms face channel conflict challenges.
Channel conflict occurs when physical retailers of products
must compete on price and currency of inventory directly
against the manufacturer, who does not face the cost of
maintaining inventory, physical stores or sales staffs. Firms
with no prior direct marketing experience face the additional
EC Chapter 5: Retailing on the Web
challenges of developing a fast response online order and
fulfillment system, acquiring customers and coordinating
their supply chains with market demand.
Dell has avoided many of these challenges because it never
had a retail channel and long before the web, dell had
developed a ‘produce on demand’ custom computer
business model with supporting supply chain management,
call center and manufacturing capabilities. Switching from a
supply push model (where the products are made prior to
orders received based on estimated demand) to a demand
pull model (where the products are not built until and order
is received) has proved extremely difficult for traditional
manufacturers.
Yet for many products manufacturers direct firms have the
advantage of an established national brand name, an
existing large customer base and a lower cost structure than
even catalog merchants because they are the manufacturers
of the goods and thus do not may profits to anyone else.
Thus the manufacturers- direct firms have the higher
margins.
Example of manufacturers- direct business model is
[Link]
Advantages and disadvantages of E-tailing:
E-tailing has certain advantages over catalogue retailing:
1. Customers have a much wider choice at their fingertips
(many e-tail sites etc.) Thus the web creates a global
bazaar style marketplace that brings together many
consumers and many retailers.
EC Chapter 5: Retailing on the Web
2. With web search capabilities (which need further
development) it is easier to find the types of
goods a customer is searching for, catalogs are received
passively, at the behest of the retailer.
3. Customers can execute transactions via the same
medium the information is provided, so there is no
disconnect between the desire to purchase and the
ability to purchase. (Payment schemes are still evolving
and therefore this advantage is likely to become more
apparent in the future.)
4. E-tailers can use price discrimination more efficiently
than catalog retailers (which may use coupons to lower
certain "fixed" prices). E-tailers can use previous
transactions to identify the likelihood of products being
purchased at certain price points.
5. E-tailers can change the product placement (user
display) based on previous transactions, to increase the
visibility of goods that the user is more likely to
purchase based on their close relationship with previous
purchases. Thus placement can be designed based on
the context of the previous purchases.
Disadvantages of E-tailing
1. Not all customers have access to the web, as they do to
the postal system. This is a temporary issue as the
evolution of the web continues.
2. Ease of use is a problem, as the web design is still
complex, or at least somewhat chaotic. E-tail stores are
not standardized in design in the way catalogs and retail
stores have become. Therefore different user behaviors
(navigation schemes) need to be learned for each e-tail
EC Chapter 5: Retailing on the Web
store. This is a temporary issue as the evolution of the
web continues.
3. Trust, security and privacy concerns prevail. Consumers
are concerned with the use of the data they provide
during transactions.
4. Graphic presentation is not as compelling for the web
as it can be for catalogs. This is a temporary issue as
the evolution of the web continues.
E-tailing includes some advantages to the consumer that no
other form of retailing can provide. The nature of the
medium allows for more flexible forms of transactions . It
allows for ease of comparison across broad product
categories with the evolution of shopping bots and allows for
more flexible pricing mechanisms. These evolutions can
create less friction in marketplaces, and therefore increase
the use of the web as a retail environment. This will benefit
marketers who provide products with real (perceived) value,
and consumers in general. This will penalize marketers who
have thrived in marketplaces that had "information" barriers
to entry, where lack of information for customers restricted
their choices and led to inefficient pricing and localized
monopolies.
