Chapter 9 (Sections 9.1 and 9.3) Online Retail Chapter 9 (Sections 9.1 and 9.3)

Learning Objectives Understand the environment in which the online retail sector operates today Describe the evolution of retailing and how it led to Internet retailing Identify the challenges faced by the different types of online retailers

The Retail Industry By any measure, the size of the U.S. retail market is huge In a $16 trillion economy, personal consumption of retail goods and services accounts for over $11.4 trillion (about 71%) of total GDP This is divided into services (65%), durable goods (10%), and nondurable goods (25%) Durable goods are those that are consumed over a longer period of time such as automobiles, appliances, building supplies and furniture

The Evolution of Retailing Town Square Markets Previous centuries Catalog Retailing late 1800s to early 1900s Chain Stores 1920s and 1930s Grocery Supermarkets 1940s and 1950s Mass Merchandise Discount Chains 1970s and 1980s Internet Retailing 1990s and 2000s

Forces Affecting the Evolution of Retailing The growth of mail order catalogs, supermarkets, and mass merchandise chains was driven in each case by three 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)

Question 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 larger market Provide lower prices Improve convenience

E-Commerce Retail: The Vision The early vision for e-commerce included the following predictions: Consumers would use the Web to find the lowest-cost products Entry costs to the online retail market would be much less than those needed to establish physical storefronts Traditional offline physical store merchants would be forced out of business Widespread disintermediation Few of these assumptions and visions were correct The structure of the retail marketplace in the U.S., with some notable exceptions, has not be revolutionized However, the Internet has created an entirely new venue for multi-channel firms that have a strong offline brand

E-Commerce in Action: E-Tailing Business Models There are four main types of online retail business models: Virtual merchants Multi-channel merchandisers Catalog merchants Manufacturer-direct

Virtual Merchants Single-channel Web firms that generate almost all their revenue from online sales (Amazon, etc.) Face extraordinary strategic challenges Must build a business and brand name from scratch, quickly, in an entirely new channel with many competitors Do not bear the costs associated with building and maintaining physical stores Do have large costs for building and maintaining their website, order fulfillment infrastructure, and developing a brand name

Multi-Channel Merchants: Bricks-and-Clicks Numerous examples including Wal-Mart, Costco, etc. Have a network of physical stores as their primary retail channel, but also have online offerings Typically have advantages such as a brand name, a national customer base, warehouses, large scale, and a trained staff Challenges include coordinating prices across channels and handling returns of Web purchases in their retail outlets Need to leverage 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

Catalog Merchants Established companies that have a national offline catalog operation, but who have developed online offerings (Lands’ End, L.L. Bean, etc.) Face very high costs for printing and mailing millions of catalogs each year Have developed centralized fulfillment and call centers, extraordinary service, and excellent fulfillment in partnership with package delivery firms Why was it easier for catalog merchants to begin selling their products online when compared with other forms of retail?

Manufacturer-Direct Either single or multi-channel manufacturers that sell directly online to consumers without the intervention of retailers (Dell) Predicted to play a very large role in e-commerce, but this has generally not happened Must develop a fast-response online order and fulfillment system, acquire customers, and coordinate their supply chains with market demand It has been difficult for existing manufacturers to switch from a supply-push model to a demand-pull model for managing their production operations

Common Themes in Online Retailing Need to attract a large number of shoppers, charge high enough prices to cover the costs of goods as well as marketing, and develop highly efficient inventory and fulfillment systems Consumers look to online purchasing for convenience and time saving Disintermediation did not occur Established merchants need to create an integrated shopping environment Growth in online specialty merchants selling high-end, fashionable and luxury goods Continued extraordinary growth in social commerce