As we enter the new millennium the face of traditional retailing is on the verge of a radical overhaul, with e-commerce set to dramatically change the way many consumers do their shopping. UK consumers are predicted to spend £3bn online this year with this figure set to rise to more than £50bn by the year 2010, whilst worldwide e-business could be worth a staggering £1 trillion within 4 years.

Up until a few years ago many regarded online shopping as a niche market restricted by costly Internet access. However, the recent explosion of free Internet service providers such as Freeserve in the UK, along with falling PC prices, has meant that Internet access is within reach of the average consumer and 121m people in Europe are predicted to be online within 5 years. In reaction to this major growth, retailers and investment companies are pouring money into developing e-tailers.

One of the main motivators behind this growth is that shopping on the Internet can save both time and money. With Christmas approaching it is predicted that one third of the UK’s Internet users – up to 4 million people – will do some or all of their Christmas shopping via e-tailers, with cheaper prices and home delivery making it an attractive option compared to dealing with hassled shop assistants and busy high streets. If this trend continues it is predicted that high street stores, already battered by out-of-town developments, could lose as much as 10 per cent of their sales within 10 years. Retailers that continue to focus only on their traditional competitors will clearly not be the winners in the new millennium.

Working in an Electronic Environment

The biggest challenge faced by retailers and manufacturers is how they communicate with their customers in an electronic environment compared with the 3-D environment of the traditional store. One of the main problems facing these companies is how to create customer loyalty when store locality is no longer a factor for customers surfing a world wide web and the old adage "if you build it they will come" does not ring true on the Internet. Recent studies have shown that online shoppers can be a fickle and lazy breed with 80 per cent of users failing to return to a site and 35 per cent of all surfing spent on just 50 sites. Existing e-tailers are currently investing heavily in traditional above-the-line advertising eager to create brand image, although with advertising web products the most you can do is get people interested in visiting the site – after that it’s up to the site to sell itself!

Customer service online can, like traditional stores, play an important part in encouraging visitors to come back to a website with the driver of the delivery van being the only person the shopper meets face-to-face throughout the entire process of purchasing online. Internet shopping is far from the finished article and many people are put off by hidden charges, delivery problems, refund quibbles and the lack of product range.

Fears of security of credit transactions over the Internet is also a problem, although with major credit card companies having invested heavily in payment security it is probably more risky to hand over your credit card in a restaurant. When it comes to instilling trust in website service, traditional store-based retailers have advantage as customers will already know and trust their brand.

One of the key developments behind the boom in e-commerce is the transformation of the supply chain to a demand chain. This is epitomised by the build-to-order operations of Dell Computers, whose products do not exist until the customer places an order online. Companies across the world are converting from pushing inventory across their supply chain networks to pulling materials across dynamic networks to meet increasingly short order cycle times. Many website owners do not own any distribution facilities, simply look after the site design, and set up all the links to the warehouses of suppliers whose goods they sell.

Internet shopping also breaks down the international borders that protect many retailers from foreign competition, with many sites offering worldwide delivery. Recently launched sports and fashion e-tailer ‘boo.com’ is being billed as the first truly global e-commerce site with multi-lingual text, multi-currency facilities and local deliveries throughout Europe and the US. This globalisation of e-commerce is creating price transparency. Websites are now appearing that are specifically designed to search across the web and find the best price on specific products, removing the need to surf from site to site.

Current UK Grocery Online Shopping Development

With the high street no longer a necessity but becoming an option, many traditional store-based retailers are developing significant home shopping services. The UK’s major grocers are looking to the Christmas trading season as a crucial test of the extent to which shoppers are willing to embrace home shopping via the Internet.

UK market leader Tesco is keen to develop its home shopping strategy as key weapon in the growing battle between the multiples, with its Tesco Direct Internet grocery service being rolled out to a further 100 stores by the end of next year. Sales in the 30 trial supermarkets already account for 7 per cent of these stores’ turnover – making the chain the UK’s most successful online shopping outlet. Tesco is also building a dedicated warehouse to service online sales of non-food ranges such as books, CDs and even major household appliances in what is being seen as a counter move against Walmasda.

Iceland was probably the first of the grocery chains to realise the potential of home shopping 2 years ago. With a delivery infrastructure already in-place the group recently launched its Internet shopping site that can now deliver to 97 per cent of the UK population. Despite not having the huge range of the larger multiples, Iceland’s delivery services has driven its strong growth in the last year.

Meanwhile, Sainsbury’s is investing £30m in developing 2 portals – one for food and drink, the other for home and garden. However, the group has been criticised after revealing that it plans to charge customers 50p for the disc providing access to the website. Following the announcement of its recent restructuring plans (see p3) Somerfield has big plans for its new 24-7 home shopping Internet service which is currently focused on London, although the group hopes to be able to serve all major cities and towns within 2 years.

Asda arrived relatively late to home shopping but has chosen it as a means of expanding its presence in the south of England. The Asda@home service places great emphasis on service whilst its ‘Valuemad’ Internet site helps shoppers find the best deals online with comparative prices given for products from online retailers of books, videos, electrical goods and gifts.

The world’s largest retailer Wal-Mart is also keen to develop its web-based shopping service and the group has recently formed a strategic alliance with US on-line grocery operator Peapod, which would catapult it to the top of the developing Internet food market in the US. Wal-Mart recently announced that it planned to relaunch its own website by early 2000 to include more than 600,000 items but it is believed the company does not have the delivery infrastructure that a merger with Peapod could provide.

Future Development

In light of this rapid e-commerce development, retailers and manufacturers should already be exploring the implications it will have on the sector in the future. Despite the fact that setting up a serious e-commerce site costs tens of millions, it is still far cheaper that setting up a chain of bricks and mortar, and the potential for profits are correspondingly large. Operating costs of websites are far smaller than those of shops. However, if operating costs are low, marketing costs are high. With shopping reduced to its bare essentials all the online retailers have to push is their brand.

Manufacturers should also ensure that their promotions can be translated onto a retailer’s website whilst thinking of

innovative ways that they can use the Internet’s potential. The space available on the web may provide alternative ways of delivering product information such as nutritional content or uses/recipes, whilst competitions online could allow instant interaction with consumers via email – far cheaper than traditional direct marketing.

Only a strong brand will keep people coming back to a site, and this explains some of the strange names chosen by the online retailers. It’s easier to build identity around ‘Amazon’ than ‘Internet Bookshop’. Good service will also help allay fears some consumer have on purchasing products online. However, simply having an online retail outlet is no guarantee of e-success. Retailers need to think through the transaction they have with the customer. They need to spend time asking the type of questions consumers will ask about products. For example, how they will pay and how and when they will be delivered. Retailers must adopt a ‘what-if’ approach rather than ‘what next’ strategy when developing customer interface systems.

Despite undeniably being convenient and sometimes cheaper, Internet shopping is still a very limited experience when compared with the 3-D environment of a store. The challenge for retailers who have invested billions in building their store infrastructure is to strive to design retail environments that give consumers a reason to come to there stores. Added value services will play an important part in ensuring stores maintain their position in the market. Boots, for example, has launched health and beauty services, which extend its brand beyond basic retail.

In the long run it is certain that e-commerce will complement rather than replace the shopping trip. One possibility is that core branded or bulky items will increasingly be sold over the Internet, leaving supermarkets to concentrate on value added goods such as prepared foods. However, the rapid development of e-commerce technologies such digital TV, mobile phones that connect to the Internet and faster Internet access will continue to make the Internet a more attractive place to shop. Companies that turn a blind eye to the Internet marketplace do so at their own peril!

Date article published: 2001

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