Online Retail

Retailing Present, Past, and Future

Learning Objectives

Understand the environment in which the online retail sector operates today Discuss the early vision, and todays reality, for online retailing Describe the advantages and disadvantages associated with online retailing Identify the challenges faced by the different types of online retailers Recognize the factors that impact the evolution of retailing and how this led to Internet retailing

The Retail Industry

By any measure, the size of the US retail market is huge In a $14.2 trillion economy, personal consumption of retail goods and services accounts for $10 trillion (about 70%) of the total GDP Examination of personal consumption shows that 61% is for services, 10% for durable goods, and 29% is for nondurable goods Durable goods are those that are consumed over a longer period of time, such as automobiles, appliances, and furniture

Composition of the US Retail Industry

The retail industry is composed of many types of firms that each fit into one of the following eight segments:

Consumer durables General merchandise Gasoline and fuel Specialty stores Food and beverage Eating and drinking Online retail MOTO

29% 16% 12%

12% 10% 10% 6% 5%

Which of these segments has been most impacted by e-commerce?

E-Commerce Retail: The Vision

In the early days of e-commerce, literally thousands of entrepreneurial Web-based retailers were drawn to the marketplace for retail goods The was primarily because it offered the largest market opportunities in the US economy Many entrepreneurs initially believed it was easy to enter the retail market Predictions were that the existing retail industry would be revolutionized and blown to bits

E-Commerce Retail: The Vision (cont.)

The basis for this revolution was fourfold:

Because the Internet greatly reduced both search costs and transaction costs, consumers would use the Web to find the lowest cost products It was assumed that the entry costs to the online retail market were much less than those needed to establish physical storefronts As prices fell, traditional offline store merchants would be forced out of business In some industries such as electronics, apparel, and digital content the market would be disintermediated as manufacturers and distributors sold directly to consumers

As it turned out, few of these assumptions were correct

The Online Retail Sector Today

The Internet has created an entirely new venue for multi-channel firms that have strong offline brands And in some situations the Internet has supported pure-play online-only merchants The new online channel can conflict with a merchants other channels, such as direct sales forces, physical stores, and mail order, but this multichannel conflict can be managed and turned into a strength Consumers like channel choices Online intermediaries continue to play a powerful role in online retail

The Online Retail Sector Today (cont.)

Although online retailing is one of the smallest segments of the retail industry, constituting about 6% of the total retail market today, it is growing at a faster rate than its offline counterparts Despite the high failure rate of online retailers in the early years, more consumers than ever are shopping online Online retail revenue is expected to be about $189 billion in 2012, $207 billion in 2013, and $223 billion in 2014

Online Retail Advantages

Lower supply chain costs Lower cost of distribution Ability to reach and serve a larger geographic market Ability to react quickly to changes in customers tastes and demand Ability to change prices nearly instantly Ability to rapidly change visual presentation for goods Avoidance of direct marketing costs for catalogs and physical mail Increased opportunities for personalization Ability to gather information about consumers

Online Retail Disadvantages

Consumer concerns about the security of transactions Consumer concerns about privacy of personal information given to websites Delays in delivery of goods when compared to store shopping Inconvenience associated with returning damaged goods or exchanging goods Overcoming lack of consumer trust in online brand names Added cost for website multimedia Added complexity for product offerings and customer service Higher price competition and lower profits

E-Tailing Business Models

Virtual merchants

Single-channel Web firms that generate almost all their revenue from online sales (Amazon) A network of physical stores as the primary retail channel, but also have introduced online offerings (Wal-Mart, JC Penney) Have a national offline catalog operation that is the largest retail channel, but also have developed online capabilities (Lands End, L.L. Bean) Sell directly to consumers without intervention by retailers (Dell)

Multi-channel merchants: bricks and clicks

Catalog merchants

Manufacturer-direct

The Evolution of Retailing

The next question is: how did we get from the earliest forms of retailing to today? What is the earliest example of retailing? What societal changes provided the basis for creation of these early retail markets? What phases in the evolution of retailing have occurred following the development of these earliest retail markets?

Phases in the Evolution of Retailing

Catalog retailing Chain stores Grocery supermarkets Mass merchandise discount chains Internet retailing

Forces Affecting the Evolution of Retailing

The growth of mail order catalogs, supermarkets, and mass merchandise chains was driven in each case by three distinct forces:

declining costs of accessing a larger market that had prior retail formats, providing customers with lower prices to achieve higher sales volumes in the new retailing format, and providing customers with convenience in shopping by offering a wide range of products at a single location

Internet Retailing

The same basic forces that drove the growth in previous revolutions in retailing are also driving the growth of this new Internet retailing format

declining importance of distance and larger potential market, increasing focus on providing attractive prices, and offering added convenience by offering more goods in one location (your home)

The Future?

What is next? How could a new retail format improve on one or more of the three forces related to the evolution of retailing?

Efficiently reach a larger market Provide lower prices Improve convenience