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
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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
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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