Copyright © 2010 Pearson Education, Inc.Copyright © 2009 Pearson Education, Inc. Slide 9-1 Chapter 9 Online Retail and Services

Copyright © 2006 Pearson Education, Inc. Slide 10-2 BlueNile.com Class Discussion (page 571) Q. What are the challenges to selling jewelry online vs. at a store? Q. What are the advantages of selling jewelry online vs. at a store? Q. What are the key elements of BlueNile’s business model? Q. Do you think BlueNile should expand its operations offline?

Copyright © 2006 Pearson Education, Inc. Slide 10-3 The Retail Industry U.S. retail market accounts for over $9.7 trillion (70%) of total GDP 60% services, 29% nondurable goods, 11% durable goods Retail industry can be divided in segments, each of which offers opportunities for online retail…and each of which can benefit from E-Commerce differently Ex: Cars (“durable” segment) – no direct new vehicle online sales, but 82% of all consumers go online first Wal-Mart (“general merchandiser”) is 5 times bigger than #2! “Mail order/telephone order” (MOTO) sector most similar to online retail sector due to reliance on technology and fulfillment activities

Copyright © 2010 Pearson Education, Inc. Composition of the U.S. Retail Industry Slide 9-4 SOURCE: U.S. Census Bureau, 2009.Figure 9.1, Page 577

Copyright © 2006 Pearson Education, Inc. Slide 10-5 Online Retail For the purpose of this chapter, “online retail” refers to the sale of goods (tangible products) over the internet The terms “online retail” and “E-tailing” are synonymous

Copyright © 2010 Pearson Education, Inc. E-commerce Retail: The Predictions 1. Greatly reduced search and transaction costs would result in customers using Web to find lowest prices – this came true 2. Market entry costs would be lower than those for physical storefronts, and online merchants would be more efficient than offline competitors, putting many of them out of business 3. Traditional offline physical store merchants would be forced out of business 4. Retailers and wholesalers would be forced out of business, as manufacturers built direct relationship with consumer  Few of these assumptions were correct—structure of retail marketplace has not been revolutionized  Internet has created new venues for multichannel firms and supported a few pure-play merchants Slide 9-6

Copyright © 2010 Pearson Education, Inc. The Online Retail Sector Today Smallest segment of retail industry (5%) Growing at faster rate than offline segments Revenues flat during recession, expected to continue growth between 2010– % Internet users bought online in 2009 Primary beneficiaries:  Established offline retailers with online presence (e.g., Staples)  First mover dot-com companies (e.g., Amazon) Slide 9-7

Copyright © 2006 Pearson Education, Inc. Slide 10-8 Major Trends in Online Retail Today Buying online has become normal, mainstream experience – 70% of people online are now online shoppers Increased use of interactive multimedia marketing Retailers increasingly efficient at integrating multiple channels Online shopping becomes more consistent year-round rather than gift-oriented or seasonal More than 1/3 of all online purchases are made at work Many online retail firms have begun to raise prices Most significant online growth has been that of offline giants who are focusing on extending brand to online channel Price has proven to be less important than originally thought. Brand equity, trust, reliability, web experience, customer service, and delivery speed are all important

Copyright © 2010 Pearson Education, Inc. Online Retail and B2C E-commerce Is Alive and Well Slide 9-9 SOURCES: eMarketer, 2009a; U.S. Department of Commerce, 2009; Forrester Research, 2008; authors’ estimates. Figure 9.2, Page 580

Copyright © 2006 Pearson Education, Inc. Slide Online Retail Pro’s and Con’s Pro’s  Lower distribution costs  Greater geography covered  Ability to change prices nearly instantly  Ability to rapidly change visual presentation of goods  More info and better info delivered to customers  Potential for lower prices and less hassle for customers

Copyright © 2006 Pearson Education, Inc. Slide Online Retail Pro’s and Con’s Con’s  Consumer concerns over security of transactions  Consumer concerns over privacy of data  No instant gratification like buying at a store  Inconvenient to return or exchange goods

Copyright © 2006 Pearson Education, Inc. Slide Multi-Channel Integration Different ways customers use multiple channels:  Order online, pick up in store  When not available online, go to store to buy  Order online, return or exchange at store  Shop online, shop via catalog, shop at store. Repeat. (There are many more!)

Copyright © 2006 Pearson Education, Inc. Slide Multi-Channel Integration Big disparity in business models:  Amazon – 100% online purchases  Staples – 20.76%  Target – 1.61%  Wal-Mart – 0.27%

Copyright © 2010 Pearson Education, Inc. E-tailing Business Models Four main online retail business models: 1. Virtual merchant Amazon 2. Bricks-and-clicks Wal-Mart, J.C. Penney, Sears 3. Catalog merchant Lands’ End, L.L. Bean, Victoria’s Secret 4. Manufacturer-direct Dell Slide 9-14

Copyright © 2006 Pearson Education, Inc. Slide Virtual Merchants (“click only” Virtual Merchant - Single channel Web firms that generate all or almost all revenues from online sales Challenges Build brand equity from scratch Compete against many other virtual merchants & offline stores Web site build/maintenance & fulfillment operations costs Advantages No physical stores = less rent, less staff, less overhead Centralized inventory = less inventory carrying costs

Copyright © 2006 Pearson Education, Inc. Slide Virtual Merchants Let’s check out some of your favorite Virtual Merchants

Copyright © 2006 Pearson Education, Inc. Slide Multi-channel Merchants: Bricks & Clicks Bricks & Clicks - Companies that have a network of physical stores as their primary retail channel, but also have online offerings  Examples: Wal-Mart, Target, Radio Shack Goal – integrate online and offline marketing, coordinating branding, promotion, distribution, selling, etc.

Copyright © 2006 Pearson Education, Inc. Slide Bricks & Clicks Challenges Costs for buildings and web-site building/maintenance Large staffs to manage operations Inventory management Coordinating pricing across locations & channels Advantages Brand equity to build upon Large customer base Years of experience – business model, cost-cutting, distribution, promotion, customer service, know the customer

Copyright © 2006 Pearson Education, Inc. Slide Bricks and Clicks Let’s check out some of your favorite Bricks and Clicks

Copyright © 2006 Pearson Education, Inc. Slide Catalog Merchants Catalog Merchants - Established companies that have a national offline catalog operation as largest retail channel, but also have online capabilities  Examples: Lands’ End, L.L. Bean, Eddie Bauer, Victoria’s Secret, Lillian Vernon

Copyright © 2006 Pearson Education, Inc. Slide Catalog Merchants Challenges Sales have been impacted by E-Commerce and marketing Must build new technological capabilities May have the challenges of 3 channels Advantages Have learned how to be efficient in fulfillment Have learned how to provide excellent customer service Low overhead as minimal (or no) physical presence May have the advantages of 3 channels

Copyright © 2006 Pearson Education, Inc. Slide Catalog Merchants Let’s check out some of your favorite Catalog Merchants with online presence

Copyright © 2006 Pearson Education, Inc. Slide Manufacturer-Direct Manufacturer-Direct: Single or multi-channel manufacturers who sell directly online to consumers without intervention of retailers  Example: Dell

Copyright © 2006 Pearson Education, Inc. Slide Manufacturer-Direct Challenges Channel conflict if products are also sold via retail channel If no retail channel, only 1 company marketing products Fulfillment is not a core competency Advantages Established Brand Name Existing large customer base Low cost structure due to direct distribution channel Faster inventory turn rates = less inventory on hand Control over customer interaction

Copyright © 2006 Pearson Education, Inc. Slide Manufacturer-Direct Let’s check out some of your favorite Manufacturer- Direct companies with online presence

Copyright © 2006 Pearson Education, Inc. Slide Distribution of Online Retail Sales by Type of Merchant Figure 10.3, Page 603 SOURCE: Based on data from Internet Retailer, 2005.

Copyright © 2010 Pearson Education, Inc. The Service Sector: Offline and Online Service sector:  Largest and most rapidly expanding part of economies of advanced industrial nations  Concerned with performing tasks in and around households, business firms, and institutions Includes doctors, lawyers, accountants, business consultants, etc.  76% of U.S. labor force—108 million workers  58% of GDP—$7.7 trillion Slide 9-27

Copyright © 2010 Pearson Education, Inc. Service Industries Major service industry groups:  Finance  Insurance  Real estate  Travel  Professional services—legal, accounting  Business services—consulting, advertising, marketing, etc.  Health services  Educational services Slide 9-28

Copyright © 2007 Pearson Education, Inc. Slide Online Services Covered Today 1. Banking 2. Brokerage (stocks) 3. Financial Portals 4. Financial Aggregators 5. Mortgage 6. Insurance 7. Real Estate 8. Travel 9. Career Services

Copyright © 2007 Pearson Education, Inc. Slide Online Financial Services (#1-#7) Includes banking, brokerage, real estate and insurance Consumers attracted to online financial sites because of desire to save time and access information rather than save money Most online consumers use financial services firms for mundane financial management Greatest deterrents are fears about security & confidentiality Multi-channel established financial services firms are showing fastest growth and strongest prospects

Copyright © 2007 Pearson Education, Inc. Slide Multi-channel vs. Pure Online Financial Service Firms Online consumers have made it known that they prefer multi-channel firms with physical presence Multi-channel firms have advantages:  Easier to acquire customers via brand equity  Cheaper to convert existing customers to online users than a pure-play who must market their website

Copyright © 2007 Pearson Education, Inc. Slide Online Banking About 105 million people in the U.S. use online banking Established brand name national banks have taken a substantial lead in market share Firms realizing the most success have both an online and a physical presence (different transaction types = different channel) More so than other E-Commerce, security and privacy concerns have limited growth

Copyright © 2010 Pearson Education, Inc. The Growth of Online Banking Slide 9-33 Figure 9.4, Page 610 SOURCE: eMarketer, Inc., 2008a; authors’ estimates.

Copyright © 2007 Pearson Education, Inc. Slide Online Brokerage Early online brokerage leaders, such as Ameritrade have been displaced at top by established firms like and Schwab Physical presence not as important as outstanding telephone assistance and support Pure-play firms have changed the industry via self- service and low transaction fees

Copyright © 2007 Pearson Education, Inc. Slide E-commerce in Action: E*Trade E*Trade has 4.3 million online customers and $160B in managed assets. How do you build a business this large with no bricks?! 1. Offer transaction costs WAY below traditional brokers 2. Acquire other companies like wild 3. Build brand equity via unique marketing

E*Trade Commercials M Copyright © 2007 Pearson Education, Inc. Slide 11-36

Copyright © 2007 Pearson Education, Inc. Slide Financial Portals Websites which provide comparison shopping services, independent financial advice and financial planning  Examples: Yahoo! Finance, Quicken.com, MSN Money, AOL’s Money and Finance channel  Generally don’t offer financial services  Revenue mostly via advertising

Copyright © 2007 Pearson Education, Inc. Slide Account Aggregators Web sites that pull together all of a customer’s financial (and even non-financial) data at a single personalized Web site  Yodlee is the leading provider of account aggregation technology; used by Merrill Lynch, Citigroup, Chase, and others  Raises issues about privacy and control of personal data, security, etc.

Copyright © 2007 Pearson Education, Inc. Slide Online Mortgage Services Consumer benefits include: Reduced application time Info about mortgage rates nationally Process simplification Lower rates? Mortgage company benefits Lower overhead Why hasn’t it exploded? – Process complexity, hard-copy paperwork, and apples/oranges cost comparison

Copyright © 2007 Pearson Education, Inc. Slide Online Mortgage Originations as Percentage of Total Mortgages Figure 11.4, Page 642 SOURCE: Based on data from E-Loan, 2005; Gatti, 2004: eMarketer, Inc., 2003; authors’ estimates.

Copyright © 2007 Pearson Education, Inc. Slide Online Insurance Services Insurance segments: Auto, Life, Health, & Property/ Casualty (fire, homeowners, renters, hurricane, vacation) Challenges to online usage:  In-person inspection often required  Complexity in product offerings and situations  Regulation is by-state and licenses to operate required Segment Specifics:  Term life insurance - has succeeded (less complex), resulting in lower prices to consumers  Auto – web used for research extensively + quotes  Homeowners – can get quotes (shop around easily)

Copyright © 2007 Pearson Education, Inc. Slide Online Real Estate Services At the peak, there were around 100,000 real estate sites on the internet Primary function is to provide consumers access to home listings (MLS) It is impossible to complete a real estate transaction online due to hard copy (contract & document) requirements Major impact is influencing of purchases offline – research on prices, neighborhoods, schools, and related services such as mortgages and moving Ex:

Copyright © 2007 Pearson Education, Inc. Slide Online Travel Services Includes Air, Hotel, Car Rental, Cruises, and Tours Includes both leisure and business travel 2007: first year online bookings greater than offline 2009: online travel bookings declined slightly due to recession but expected to grow to $118 billion by 2013 Benefits to consumers: Information!!, price- comparison, one-stop shopping on certain sites, quicker transactions, objective viewpoints Benefits to suppliers: Access to millions of consumers for communication and marketing

Copyright © 2010 Pearson Education, Inc. Online Travel Services Revenues Slide 9-44 SOURCE: eMarketer, 2009, 2007, 2005b.Figure 9.5, Page 622

Copyright © 2007 Pearson Education, Inc. Slide Online Travel Services The IDEAL E-Commerce Service: An information-intensive product An electronic product in the sense that travel arrangements can be accomplished for the most part online Does not require inventory Suppliers are always looking for customers to fill excess capacity of a “perishable” product Do not require an expensive multi-channel presence

Copyright © 2007 Pearson Education, Inc. Slide Online Travel Industry Dynamics Competition among online providers is intense and pricing is transparent, so the battle must be won in other areas:  Technology – such as searching ability  Ease of use  Array of offerings remains the biggest online service Travel Aggregators have emerged such as which search through other sites and compare offerings and which provides robust information as wellwww.Kayak.com The Airlines themselves, such as are going after the online customer, trying to sell the same seat as the travel sites such as Expedia, Orbitz, and Travelocitywww.USAir.com

Copyright © 2007 Pearson Education, Inc. Slide Online Career Services After travel services, the Internet’s most successful online service. Online recruiting provides a more efficient and cost-effective method of linking employers and potential employees, while reducing total time-to-hire Enables job hunters to more easily (and cheaply!) build, update, and distribute resumes while gathering information about prospective employers and conducting job searches Ideally suited for Web due to information-intense nature of process Company’s own websites are the 1 st place to start a targeted job search. Ex:

Copyright © 2010 Pearson Education, Inc. Online Career Services Top sites generate over $1 billion annually Three main players: CareerBuilder, Monster, HotJobs Traditional recruitment:  Classified, print ads, career expos, on-campus recruitment, staffing firms, internal referral programs Online recruiting  More efficient, cost-effective, reduces total time-to-hire  Enables job hunters to more easily distribute resumes while conducting job searches  Ideally suited for Web due to information-intense nature of process Slide 9-48

Copyright © 2007 Pearson Education, Inc. Slide Why are Job Sites So Popular? Saves time and money for both job hunters & employers For employers: Expand geographic reach of search, lower cost, and result in faster hiring decisions For job seekers: Make resumes more widely seen, and provides a variety of related job-hunting services such as skills assessment, personality assessment, resume writing, interview tips, and notification of potential positions For all parties, enables establishment of market prices and terms (online national marketplace)

Copyright © 2007 Pearson Education, Inc. Slide Online Recruitment Industry Dynamics Four major trends: 1. Consolidation: CareerBuilder, and HotJobs together constitute 90% of marketwww.Monster.com 2. The growth of niche sites in nearly all industries such as Localization: Competition between local papers, national sites with local searching and even Craigslist 4. The emergence of Job search engines which “scrape” listings such as