Dot.com Shopping – Down But Not Out
by Mark Craft, NAMNEWS

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The recent collapse of a large number of Internet start-ups has led to many analysts and investors questioning the future of online retailing.  However, like many other new markets that have come before it, the shake-up of the B2C Internet sector was bound to happen with many valuable lessons learned in a short period of time. Ironically, at the same time as the pure e-tailers were collapsing, many of the traditional bricks-and-mortar retailers recognised that online retailing is no longer an option – it is a business requirement!

For food retailers expanding across different channels and formats, many issues connected with online development (coordinating a multichannel operation, adopting to specific local markets, ensuring supply chain efficiency and customer service) are already familiar.   The key for development is to draw on both the existing knowledge of retail practices and the experience of the winners and losers from the first wave of B2C Internet ventures.

One of the main reasons so many Internet retailers failed was because they overestimated demand and most food retailers are now adjusting their forecasts.  The second largest online operator in the world, Ahold, has scaled down its ten-year target for online turnover from 10 to 5 per cent of its total business with an objective of E1bn sales, or around 2 per cent, by 2002.    The difficulties of the original pure e-tail grocers seems to lie in the relatively slow growth of food e-commerce compared to leisure categories such as books and music, and also the inherent costs of running a home-delivery service.  The challenge for the next wave of multichannel retailers is firstly to interpret these market factors and secondly to emulate the leading e-tailers in terms of service and added value.

The Consumer Online

A recent survey by Ernst & Young of consumers and retail companies in 12 countries highlights how consumers are beginning to embrace the medium and what expectations they have.  Here are some of the more significant findings:

• More people are buying online than ever before with the study showing that almost two-thirds of consumers worldwide have purchased something online in the last 12 months.  In Germany, the US and the UK over three-quarters of respondents bought online in 2000.

• Consumers are spending more online with some 96 per cent of those questioned spending the same or more compared with a year ago.

• CDs, books and computer equipment remain the top selling products online, although consumers are starting to move into new categories with ‘high touch’ items like clothing, food, health and beauty, toys and even flowers beginning to show noticeably increased consumer shopping penetration.

• Online traffic is beginning to affect store traffic with more than half of all shoppers in the survey  saying they visit the store less often because they shop online.

• Demographic profiles of shoppers is changing.  Whilst young males still account for the majority of online shopping outside the US, women in the US now represent 60 per cent of shoppers.

• Whilst consumer acceptance is growing, the survey highlighted that it is clear that multi-channel retailing is still in an early stage of development.  When asked about shopping online for high cost, fragile, coloured, perishable, personal-sized, and low-cost commodity items, no more than 38 per cent of consumers said they were likely to buy online.  Retailers have not yet learned to drive customers to different channels and online shopping has yet to reach its cross-channel potential.

• Retailers are also not meeting customer expectations.  Consumers expect the same range online and in the store, yet only 44 per cent of the companies questioned offer the same SKUs online and on-land.

• When it comes to price, the majority of consumers expect to find lower prices online, yet often do not.  This problem is heightened by the fact that more than a third of companies questioned have different pricing structures for their online and off-line operations.

• The biggest problem causing concern for shoppers online are shipping costs, which ranks as the number one factor discouraging online buying.  However, 89 per cent of companies interviewed charge for delivery, and despite the economic issues that retailers face, a creative solution to this problem needs to be

The UK Online Market

Like other markets around the world e-tailing in the UK has suffered from the dot.com crash.  However, there are also many success stories, along with a growing acknowledgment that the future lies in click-and-mortar partnerships and alliances – either between pure e-tailers and traditional retailers, or traditional retailers combining online offering with high street stores.

Research by Ernst & Young highlights that the UK is the global category leader in online grocery sales.  In terms of turnover Tesco.com is the world’s leader, receiving 60,000 orders a week with average value of around £100.  The group has managed to successfully transfer its in-store values to online consumers, backed by an excellent delivery system that covers almost all of the UK.  Sainsbury’s, Asda, Waitrose and the others are now playing catch-up.

One lesson that can be learned from Tesco is that it is critical to deliver products reliably and at the time consumers require.  A variety of ideas are currently being trialed by a number of companies, from out-of-hours delivery (important for same-day delivery of perishable goods) to ‘drop bins,’ purpose built collection points, or arrangements with the local post offices or corner shops.   At the moment, satisfactory delivery remains something of a  barrier to online purchasing.  The debate over whether to use a store or warehouse- based picking system for online orders is also set to continue, although Tesco’s success at store-picking has proved that it is the way to go for many until the need for specialised warehouses arises.  Meanwhile, other issues are driving growth of online retailing.  

During 2000, PC penetration in the UK passed the 40 per cent mark, due to intense competition between retailers like Tiny, Time and Dixons, which led to dramatic price reductions.  Competition amongst ISPs and deregulation has also driven down the costs of actually being on the Internet.

So what of the future in the UK?  The number of alliances between traditional and pure e-tailers is rising with tie-ups between companies like Boots and handbag.com helping to deliver business synergies.  However, alliances raise the issue of brand awareness and, as has been proven, it’s very expensive to create brand awareness with traditional brands standing a better chance of succeeding. 

Meanwhile, other technologies could pose a threat to the Internet-only retailers.  WAP phones have so far proved a disappointment, although the new 3G phones will be both faster and have greater functionality.  Interactive TV is only really beginning to be rolled out but the simple fact that nearly every UK household has at least one television, added to the power of companies such as Sky, means the Internet needs to consolidate its position generally in the minds of the purchasing public while extending its multi-channel presence.  

The Future of Online Retailing

Whilst online retailing is not expected to dominate the food sector, it is likely to form a significant part of total sales with consultants Roland Berger estimating that in Europe it will account for  E100bn, or 10 per cent, of the food market by 2010.  The key to its success is that retailers focus more closely on the consumer and meeting their needs.  

This means providing the shopper with easy-to-use sites and a full range of products, something Tesco has managed to achieve with around 40,000 items online.  Wal-Mart meanwhile remodeled its Internet service in October last year with a vast product range of around 500,000, but notably it has dispensed with food items in favour of more toys, sports goods and electronics.  Consumer demand for low-cost shopping on the Internet is a difficult issue for operators struggling to make a profit, although the success of Amazon in delivering a varied and responsive service to its customers has made it less dependent on price.  In other words, once loyalty has been created, companies do not need to resort to discounting.

The one thing the Internet lacks is the ability to communicate with customers on a one-to-one basis.  Loyalty cards and their associated products provide an obvious existing model for developing a personalised Internet operation.  For example, Peapod in the US is planning to  integrate data from loyalty cards of supermarket chains run by parent Ahold, with the aim of rewarding existing customers with a quick and personalised service from their very first visit on the website.  In a different move, Tesco is developing a replacement suggestion system to cover shortages in its most popular lines.

NAMTIP: The World's Leading Online Food Retailers

Source: Datamonitor

Date article published: 31/07/2001