E-commerce business. technology. society. Kenneth C. Laudon Second Edition Kenneth C. Laudon Carol Guercio Traver Copyright © 2004 Pearson Education, Inc.

Chapter 10 Retailing on the Web Copyright © 2004 Pearson Education, Inc.

Learning Objectives Identify the major features of the retail sector Describe the vision of online retailing in the E-commerce I period Explain how to analyze the economic viability of an online firm Identify the challenges faced by the different types of online retailers Copyright © 2004 Pearson Education, Inc.

Wal-Mart Moves Online Wal-Mart the world’s largest retailer, but its performance on Web does not yet match its offline results Wal-Mart story mirrors much of the overall online retail picture – learning from trial and error Web site originally launched 1995; redesigned several times since them Today, operations much more deeply integrated with stores Online merchandise compliments rather than duplicates what is in stores Wal-Mart’s advantages include strong brand name, efficient retailing distribution system, loyal customer base Competition includes JCPenney, Target, Sears, Amazon Copyright © 2004 Pearson Education, Inc.

Wal-Mart Moves Online Page 571 Copyright © 2004 Pearson Education, Inc.

The Retail Sector Most important theme in online retailing is effort to integrate online and offline operations U.S. retail market accounts for about $7 trillion of total GDP (2/3rds of all economic activity) Retail industry can be divided in segments, each of which offers opportunities for online retail Biggest opportunities for online retail sales: Those segments that sell small ticket items (specialty stores, general merchandisers, mail-order catalogs, groceries) Mail order/telephone order (MOTO) sector most similar to online retail sector Copyright © 2004 Pearson Education, Inc.

Seven Major Trends in Online Retail 2003-2004 Table 10.1, Page 575 Copyright © 2004 Pearson Education, Inc.

Sources of Gross Domestic Product in the United States Figure 10.1, Page 575 Copyright © 2004 Pearson Education, Inc.

Composition of the U.S. Retail Industry Figure 10.2, Page 576 Copyright © 2004 Pearson Education, Inc.

The Top 10 General Merchandisers Table 10.2, Page 577 Copyright © 2004 Pearson Education, Inc.

The Top 10 MOTO Retailers Table 10.3, Page 578 Copyright © 2004 Pearson Education, Inc.

Online Retailing: The E-commerce I Vision Greatly reduced search costs on the Internet would encourage consumers to abandon traditional marketplaces in order to find lower prices for goods Market entry costs would be much lower than those for physical storefronts, and online merchants would be more efficient than offline competitors Traditional offline physical store merchants would be forced out of business Some industries would become disintermediated as manufacturers built direct relationship with consumer Ultimately, few of the above assumptions proved to be correct, and structure of retail marketplace in the U.S. has not be revolutionized Copyright © 2004 Pearson Education, Inc.

E-commerce II: The Online Retail Sector Today Online retailing segment, although smallest segment of retail industry, is growing at exceptionally fast rate Market size: $95-$100 billion, 75 million consumers estimated for 2003 Primary beneficiaries of growing consumer support: Established offline retailers with an online presence Copyright © 2004 Pearson Education, Inc.

Online Retail is Alive and Well Figure 10.3, Page 580 Copyright © 2004 Pearson Education, Inc.

Top 15 Shopping Designations, Week Ending Dec. 12, 2002 Table 10.4, Page 581 Copyright © 2004 Pearson Education, Inc.

Online Retail Market Product Penetration Rate (%) Table 10.5, Page 582 Copyright © 2004 Pearson Education, Inc.

Insight on Business: eVineyard Insight on Business: eVineyard.com Is a Survivor: Merlot by Mail Anyone? eVineyard one of surviving wine retailers; acquired Wine.com/Virtual Vineyard in 2001 Now known as Wine.com Successful in part because it went got state retail liquor licenses that allowed it to sell directly to consumers (most other competitors had not, and had to sell through intermediaries) However, changes in laws may open up national wine marketplace to more competitors Copyright © 2004 Pearson Education, Inc.

Analyzing the Viability of Online Firms Strategic analysis of economic viability of a firm focuses on both industry as a whole and firm Key industry strategic factors: Barriers to entry Power of suppliers Power of customers Existence of substitute products Industry value chain Nature of intra-industry competition Strategic factors that pertain to firm include: Firm value chain Core competencies Synergies Technology Social and legal challenges Copyright © 2004 Pearson Education, Inc.

Analyzing the Viability of Online Firms (cont’d) Financial analysis helps us understand how a firm is performing Includes two main parts: Statement of Operations and Balance Sheet Statement of Operations: Tells us how much income or loss a firm is achieving based on current sales and costs Balance sheet: Provides a financial snapshot of a company’s assets and liabilities Copyright © 2004 Pearson Education, Inc.

Analyzing the Viability of Online Firms (cont’d) Factors to look for when assessing Statements of Operations Revenues: growing and at what rate? Cost of sales: compared to revenues Gross margin (gross profit divided by net sales): increasing or decreasing? Operating expenses: What are they; increasing or decreasing? Net margin (net income or loss divided by net sales or revenue): increasing or decreasing? Factors to look for when assessing a Balance Sheet: Current assets Current liabilities Ratio of current assets to liabilities Long-term debt Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: E-tailing Business Models Four main types of online retail business models: Virtual merchant (Amazon, etc): Single channel Web firm that generates almost all its revenue from online sales Clicks and bricks (JCPenney, etc): Company that has a network of physical stores as primary retail channel, but also online offerings Catalog merchant (Lillian Vernon, etc): Established company that has a national offline catalog operation as its largest retail channel, but also has online capability Manufacturer direct (Dell, etc): Single or multi-channel manufacturers who sell directly online to consumers without intervention of retailers Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: Amazon.com Vision: Earth’s biggest selection,most customer-centric Business Model: Virtual merchant that sells merchandise owned by Amazon, online storefronts for other merchants, merchandise owned by individuals; e-commerce services, Financial Analysis: Greatly improved overall operational position, but not yet consistently profitable Copyright © 2004 Pearson Education, Inc.

Amazon’s Consolidated Statements of Operations and Summary Balance Sheet Data 1998-2002 Table 10.6, Page 591 Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: Amazon.com Strategic Analysis – Business strategy: Maximize revenue while cutting costs Strategic Analysis – Competition: General merchandisers who are both offline and/or online Strategic Analysis – Technology: Largest,most sophisticated collection of online retailing technologies available Strategic Analysis – Social, Legal: Securities, anti-trust lawsuits Future Prospects: Long-term profitability still uncertain Copyright © 2004 Pearson Education, Inc.

Insight on Society: Internet Taxation: The Tax Man is Coming Internet Tax Freedom Act placed moratorium on e-commerce sales taxes until November 2003 State and local government, local businesses think this is unfair Online retailers feel it is unreasonable for them to have to determine appropriate tax rate, and who should receive tax dollars Movement to simplify and rationalize sales tax collection underway (National Governors Association Streamlined Sales Tax Project), but moving slowly Some major online stores that also have physical stores have begun collecting taxes Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: JCPenney.com Vision: nationwide department stores and mail-order catalog Business Model: Clicks and bricks multi-channel general merchandiser Financial Analysis: Flat revenue growth,operating costs, 2003 net margin of 1.3%, ample current assets Copyright © 2004 Pearson Education, Inc.

JCPenney’s Consolidated Statements of Operations and Summary Balance Sheet Data 1999-2003 Table 10.7, Page 598 Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: JCPenney.com Strategic Analysis – Business Strategy: Move to online retail a major strategy to shore up poorly performing catalog and store operations Strategic Analysis – Competition: Traditional retail department stores; Amazon and Buy.com Strategic Analysis – Technology: Leveraging existing systems to Web Strategic Analysis – Social and Legal Challenges: Nothing material Future Prospects: Experiencing rejuvenation of sorts from rapid growth of Web operation Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: Lillian Vernon Vision: Reasonably priced products offered by direct mail Business model: Catalog merchant with online capability Financial Analysis: Financial performance has been stagnant Copyright © 2004 Pearson Education, Inc.

Lillian Vernon’s Consolidated Statements of Operations and Summary Balance Sheet Data 1999-2003 Table 10.8, Page 603 Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: Lillian Vernon Strategic Analysis – Business Strategy: Launch of additional catalogs, new owners intend to focus on continued development of online channel Strategic Analysis – Competition: Catalog retailers and companies such as Williams Sonoma, Crate and Barrel Strategic Analysis – Technology: Newly redesigned and upgraded Web site Strategic Analysis – Social and Legal Challenges: Class action lawsuit related to sale of company Future Prospects: Return to profitability depends on redefining brand image toward younger audiences without losing loyal repeat customers Copyright © 2004 Pearson Education, Inc.

Distribution of Retail Sales by Type of Seller (or Company) Figure 10.4, Page 606 Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: Dell.com Vision: Custom-build computers to eliminate middleman and more effectively meet needs of customers Business Model: Manufacturer-direct, “produce on demand” (demand-pull) Financial Analysis: Impressive revenue growth, high net margins Copyright © 2004 Pearson Education, Inc.

Dell Computer’s Consolidated Statement of Income and Summary Balance Sheet Data 1999-2003 Table 10.9, Page 609 Copyright © 2004 Pearson Education, Inc.

E-commerce in Action: Dell.com Strategic Analysis – Business Strategy: Attempting to broaden offering beyond pure product sales, search for ways to diversify revenue streams Strategic Analysis – Competition: Traditional computer retailers, corporate systems integrators and computer dealers Strategic Analysis – Technology: Sophisticated management information systems Strategic Analysis – Social and Legal Challenges: Nothing material Future Prospects: Continued reliance on PC computing a long-term risk factor Copyright © 2004 Pearson Education, Inc.

Common Themes in E-commerce II Online Retailing Online retail fastest growing channel, has fastest growing consumer base, growing penetration rate across many categories of goods Since 2002, many online retail firms have begun to raise prices Disintermediation has not occurred, and most manufacturers use Web primarily as an informational resource Most significant online growth has been that of offline giants who are focusing on extending brand to online channel Copyright © 2004 Pearson Education, Inc.

Insight on Technology: Predictive Modeling Builds on CRM Predictive modeling software: Can be used to study and recognize patterns and trends in data, to help forecast sales, identify market opportunities and manage retail inventory levels Example: CVS.com Copyright © 2004 Pearson Education, Inc.

Case Study: L.L. Bean Webward Bound L.L. Bean: catalog retailer that is beginning to focus more intently on Web channel Biggest challenge: Integrating its catalog, Internet and physical store channels Web site introduced in 1995, revamped in 1996, gets high marks for usability Copyright © 2004 Pearson Education, Inc.

L.L. Bean: Webward Bound Page 615 Copyright © 2004 Pearson Education, Inc.