BOOK RETAILING INDUSTRY
GROUP PROJECT
(SPRING 2003)
HAU-YAUNG KUO
JESSICA SISON
SREE VIETLA
NA WANG
TABLE OF CONTENTS
EXECUTIVE SUMMARY
3
INDUSTRY BACKGROUND
5
CURRENT E-COMMERCE ENVIRONMENT
8
MARKET PARTICIPANTS
9
BUYER/SUPPLIER RELATIONSHIPS
14
BUSINESS MODELS
15
PARTNERSHIPS
18
COMPETITIVE ADVANTAGE
20
ETHICAL, SOCIAL AND POLITICAL ISSUES
22
CONCLUSION
24
REFERENCES
25
2
Executive Summary :
Book retailing is traditionally dominated by independent local bookstores, but large chain
stores have substantially increased their share of the market since the 1970’s. Chains
mostly grew through the 1980’s by adding mall based bookstores, but shifted their focus
in the 1990’s to adding “superstores,” large stores with more titles and space. The
traditional distribution model includes publishers, wholesalers and retailers. Most books
began with authors, who sold the rights to their works to publishers in return for a flat
royalty rate. Publishers have traditionally sold books to wholesalers and retailers on a
consignment business. The wholesalers sold the books to the retailers who in turn sold
the books to the end customer.
The retail bookstore industry is dominated by the four large chains - Barnes & Noble,
Borders Group, Books-A-Million, and Crown Books. Between 1991 and 1996 the
number of superstores operated by these four chains increased from 97 to 788 and the
sales of their superstores increased from $280 million to $3.3 billion. The big four
accounted for $14.9 billion—24 percent—of the industry’s sales in fiscal 2000. Though
there are still about 12000 independent bookstores, their share has been shrinking as these
stores generally lacked the leverage with publishers and the other economies of scale
enjoyed by the chain stores and had a somewhat less commercial approach to
merchandising books.
The possibility of online commerce offered by the Internet and World Wide Web,
fostered the growth of an upstart competitor, Amazon.com. The initial success of
Amazon.com and the fear of losing sales to Amazon , made the chain stores (particularly
Barnes and Noble which has been the largest book seller in the United States) to quickly
establish their online presence. In 1997, Barnes & Noble opened its online bookstore to
join the battle against Amazon. Books-A-million also launched its e-commerce website in
1998. Independent booksellers are also fighting the encroachment of superstore chains
and online services. Books ranked behind computer products and travel services as the
third largest category in online retailing. The reason being the technology itself, the
Internet, which enabled online retailers to offer a host of customer conveniences and
3
services such as collaborative filtering, searchable databases, and customer reviews and
because of the large number of stock keeping units, the standardization of products, and
the limited importance of physical superstore interactions. E-commerce also reduced the
procurement costs for the retailers, removed the information asymmetries, improved
market accessibility and reach and increased buyer power derived from the price
comparison capability of the Internet. The retailers were able to virtually eliminate costly
mass advertising, zero on potential customer and build a 'one-to-one' bond with the
customer. The revenue for these E–tailers being through sales of goods, differentiating
their business, attracting and retaining the customers is very critical for their profits.
Though the major impact of E-commerce has been felt in the supply chain relationships,
radical disintermediation has not occurred in the book retailing industry; instead new
intermediaries are created, for example, Amazon.com has newly positioned itself
between suppliers and the public as an alternative to the traditional retailer.
The traditional book retailing industry may be characterized by differentiated
competition. But the Internet intensified the cost competition making the retailers to find
ways to reduce inventory and fulfillment costs and this prompted partnerships with the
publishers and/or wholesalers (backward integration), alliances with the traditional brick
and mortar stores and affiliations portals and sites like Yahoo !, AltaVista, AOL, Lycos,
MSN . Competitive advantage in the online book retailing can be achieved by better
supply chain management, being the first to introduce the substitute products if any and
making better use of the technologies to provide superior service .
Privacy and security issues have become more important recently in the online industry
and book retailing is not an exception. Buyer protection is critical especially to Ecommerce where buyers do not see the sellers. Since most electronic payment systems
know who the buyers are, it is necessary to protect the identities of the buyers. Tokens
and protocols such as SSL and SET must be used to safeguard the privacy and security of
the customers. But the best way to ensure privacy is for the consumers to protect
themselves by practicing caution when divulging personal information.
4
INDUSTRY BACKGROUND
The first bookstore appeared as early as 1640 in Boston. In addition to importing
books from England, most early booksellers were also publishers. In fact, book selling as
a profession independent of publishing did not begin to emerge until about 1800. The
first post-Revolutionary War advancement in book selling came in the 1840s, when the
invention of rotary press technology made possible a mass market for books. Bookstores
flourished between 1845 and the beginning of the Civil War. In the late 1860s, most large
publishers operated their own bookstores and began offering volume discounts in
competition with independent booksellers. Volume discounts would remain an issue of
contention between publishers and bookstores up until the present time, especially with
the development of chain stores and discount stores in the 1970s. In the mid 1990s,
superstores continued to dominate the market, with Borders Group, Inc. The market is
changing, however, with a new form of competitor rapidly gaining market share-the
online bookstore.
Current environment
The traditional distribution model can be illustrated by the following graphic
(figure 1). A variety of distribution channels are currently used in book retailing
marketplace. These include independent/small chains, large chain book stores, discount
stores, food/drug store, used book stores, book clubs, mail order/catalog, multimedia
stores, virtual/Internet bookstores, and price clubs. (Due to the limited space, we will just
discuss several main outlets in this paper.)
Book clubs
The first book clubs were formed in the 1920s. Today, there are nearly 300 book
clubs in the United States alone. Book clubs offer their members a tailored selection,
significant discounts, and convenient delivery. There are general book clubs (e.g., Book
of the Month Club), more particular clubs (e.g., the History Book Club), and narrowfocus clubs (e.g., The detective Book Club).
5
Figure 1. Traditional Distribution Model of Books
Publisher
Direct Mail
Mass
Distribution
Book
Clubs
Wholesalers
Institutional
purchasers:
schools,
libraries, etc.
Retail Booksellers
Foreign
Market
Individual Users of Books
Chain Stores /Super Stores
Waldenbooks and B. Dalton Bookseller were the first and the largest bookstores.
Prior to their appearances, bookstores tended to be small, crowded, and situated in out-ofthe-way locations. Waldenbooks and B. Dalton Bookseller bookstores positioned
themselves in high-traffic malls and created colorful displays that invited the general
public to browse.
In the 1990s, chain store operators began opening dozens of "superstores". These
large freestanding bookstores carried more titles, offered substantial discounts, and
provided a variety of customer amenities such as reading rooms and coffee bars.
Mass-Market Outlets
Included in this category are mass-merchandisers such as Kmart and Target,
warehouse/price clubs such as Sam’s, discount stores such as Dollar Store, and food and
drugstores. These outlets were responsible for 19.2 percent of retail sales in the U.S. in
1998. They tend to stock titles with popular appeal and offer large discounts.
Virtual/online Bookstores
Virtual bookstores gained popularity in the mid -1990s, thanks to the possibility of
online commerce offered by the Internet and World Wide Web. Of these, Amazon.com
6
claims to be not only the largest online bookstore, but the “Earth’s biggest bookstore.”
The company offers more than 3 million titles in its Web-based store currently. The
exceptional success of Amazon.com has led other large players, such as Barnes & Noble
and Borders, to enter this market.
Market size
The retail bookstore industry is dominated by several large chains, including
Barnes & Noble, Borders Group, Books-A-Million, and Crown Books. Barnes & Noble
is the largest bookseller in the United States. It controls 15 percent to 20 percent of the
U.S. bookselling market. Borders has been second to Barnes & Noble since 1992(French,
2002). Borders Group operates more than 1,100 retail stores across the country under the
names Waldenbooks, Borders, and Planet Music (CDs). The big four accounted for $14.9
billion—24 percent—of the industry’s sales in fiscal 2000. The rest of the market is
shared by about 10,000 independent bookstores.
Market growth
Bookstores’ share of all units purchased rose to 33.1 percent in 2001 from 32.8
percent in 2000, while market share of book clubs/mail order increased to 24.9 percent
from 23.8 percent (Milliot, 2002). Domestic consumer expenditures on all books show a
steady growth about 5 percent in recent years.
Trend
The book retailing book market is changing. A new form of competitor-online
bookstore rapidly gained market share. Of these, Amazon.com, founded in 1995, was by
far the most popular and most successful online bookstore. The surge in online sales
forced drastic changes in the industry. In 1997, Barnes & Noble opened its online
bookstore to join the battle against Amazon. In the following year, Barnes & Noble
acquired Ingram Book Group, a major book distributor, to better serve its online
customers. Books-A-million also launched its e-commerce website in 1998. Independent
booksellers are also fighting the encroachment of superstore chains and online services.
Online sales accounted for only 3 percent of book sales in 1998, but it is expected to
7
increase to $3 billion in 2003. Some smaller bookstores, especially those specializing in a
narrow field, are getting out of storefront operations altogether and opening up on the
Internet.
CURRENT E-COMMERCE ENVIRONMENT
The worldwide Internet population was 605.6 million in 2002 (www.nua.ie) and
was projected to grow to 709.1 million by 2004 (Kung, 2002). It has been predicted that
online sales will reach $1.8 trillion by 2003 (Kung, 2002). Online shopping made up 1.5
percent to 3 percent of all retail sales in 2001. However, in markets like books, music,
videos, electronics, and computers, online shopping now accounts for as much as 23
percent of sales in 2002. In addition, online sales in the U.S. are growing 30 percent-40
percent a year, while offline retail has been growing at about 4 percent (Milliot, 2002).
Key technologies
Online technology allows for book excerpts, sample pages, author biographies,
reviews, discussion forums, and other valuable information and services to be one click
away. Sophisticated databases and advanced search capabilities help customers to locate
book titles of interest more quickly and efficiently. For instance, Barnes and Noble
enhance the online shopping experience by providing Internet users with real-time access
to in-store inventory. By enabling online shoppers to browse the aisles of their local
bookstore on the Internet, Barnes and Noble will increase traffic to the store and provide
the kind of multi-channel shopping experience that consumer’s desire. Another example
of advanced technology is Amazon’s “collaborative Filtering.” Amazon.com uses this
computer system for readers to find books that fit their tastes. That is, the software
“educates” a computerized database to memorize what titles a reader has liked in the past,
match that list with those of other readers, and recommend new books on the principle
that if two people agree about ten books, they are likely to agree on the eleventh. This is,
essentially, what like-mined readers do when they talk to each other about books.
Computerizing the process makes it easier for readers to find a “community” that shares
their tastes and interests and makes for a powerful selling tool for online booksellers. It is
clear that the host of customer conveniences and services offered by online book retailers,
8
such as collaborative filtering, searchable databases, and customer reviews, are extremely
popular.
Market size, growth, trend
The rise of Amazon.com and its online rival Barnes & Noble have made books
one of the most hotly contested retail categories on the Internet. Although Amazon as
consistently failed to achieve profitability, it remains a well-know e-tailer and a top brand
name.
According
to
eMarket,
for
the
next
five
years,
Amazon.com
and
Barnesandnoble.com will continue rank among the most frequently visited sites for
online bookstore category.
Greenfield Online projects that consumers are just as likely to make purchases
online (49 percent) as at the mall or other outlets (51 percent). Some 63 percent still go to
a local bookstore to make a purchase, but they do an equal amount of browsing for
availability and price online (64 percent) as they do at their local bookstore. Meanwhile,
Forrester Research projects that by 2004, 16 percent of all books will be purchased online
(Elkin, 2002). According to the Publishers Weekly, the largest online bookseller was
Amazon.com, with total sales of $1.87 billion in 2002. The second one was
Barnesandnoble.com with sales of 422.8 million. The third fastest-growing online
bookseller was Borders.com. There is no doubt that online booksellers will continue to
take more and more business away from traditional booksellers for the foreseeable future.
MARKET PARTICIPANTS
The traditional book retailing industry is dominated by its four largest chainsBarnes & Noble, Borders, Crown and Books-A-Million. Between 1991 and 1996, the
number of superstores operated in the United States by these four chains increased from
97 to 788 and the sales of their superstores grew from $280 million to $3.3 billion, or
from 16 percent of the chain’s total revenues to 66 percent.
9
Traditional Brick and Mortar Participants
Books-A-Million, Inc.:
Books-A-Million, Inc., incorporated in 1964 and reincorporated in September
1992, is a book retailer in the southeastern United States. The company's store formats
are superstores, which are operated under the names Books-A-Million and Books and
Co., and smaller bookstores, which are operated under the name Bookland. The Company
also operates newsstands under the name Joe Muggs Newsstands. In addition to the retail
store formats, the company offers its products over the Internet at Booksamillion.com and
Joemuggs.com. The company, through Wholesale Book Company, Inc., is also a
wholesaler of books to, among others, bookstores, wholesale clubs, supermarkets,
department stores and mass merchandisers.
Books-A-Million is principally engaged in the sale of books, magazines and
related items through a chain of 197 retail bookstores (as of February, 2002), and also
serves as a wholesale book distributor. For the 39 weeks ended November 2, 2002, net
sales increased 1 percent to $303 million.
Borders :
Borders is an operator of book and music superstores. A key element of the
company's strategy is to continue its growth and increase its profitability through the
ongoing expansion and refinement of its Borders book and music superstore operations.
In 2001, the company opened 29 new Borders book and music superstores. Each Borders
superstore offers customers a wide assortment of books, across numerous categories,
including many hard-to-find titles. As of January 27, 2002, 349 of the 363 domestic
Borders superstores were in a book and music format, which also feature an extensive
selection of pre-recorded music, with an emphasis on hard-to-find recordings. For the
fiscal year ended January 26, 2003, sales increased 3 percent to $3.51 billion. Net income
rose 28 percent to $111.7 million.
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Crown Books Corp:
Crown Books is a discount bookstore chain with 168 stores across the country.
The company is 51 percent owned by Dart Group Corp., the retail holding company
founded by the Haft family. Crown's profits have been declining for several years
because of increasing competition from the growing Borders Books & Music and Barnes
& Noble chains. During fiscal 2002, Books-A-Million acquired lease rights and inventory
of 18 stores from Crown Books Corporation when the largest discount book retailer in the
United States, filed for Chapter 11 bankruptcy protection in February. Crown Books has
90 stores located in five major metropolitan areas: Washington, D.C., Chicago, San
Francisco, Los Angeles and San Diego.
Barnes & Noble :
Barnes & Noble, Inc. operates the largest chain of bookstores in the United States.
The company revolutionized bookselling by introducing giant, supermarket-style stores
with deeply discounted books in the 1970s, and by the late 1990s it operated more than
520 such superstores across the country. Barnes & Noble is also a leading operator of
mall bookstores, running the well-known B. Dalton chain, Scribner's and Doubleday
Book Shops. Barnes & Noble is a leading supplier of books through mail-order catalogs
as well. The company sells discounted publishers' remainders and imported books
through its catalog, as well as books under its own "Barnes & Noble Books" imprint.
Barnes & Noble's typical bookstore offers a comprehensive title base, a café, a
children's section, a music department, a magazine section and a calendar of ongoing
events, including author appearances and children's activities, that make each Barnes &
Noble bookstore an active part of its community.
Fiscal 2001 sales from Barnes & Noble bookstores contributed 89.6 percent of the
Company's total bookstore sales. Most Barnes & Noble bookstores are located in hightraffic areas with convenient access to major commercial thoroughfares and ample
parking. Most stores offer extended shopping hours, generally 9:00 a.m. to 11:00 p.m.,
seven days a week. Each Barnes & Noble store features an authoritative selection of
11
books, ranging between 60,000 to 200,000 titles, and has access to one million titles for
immediate delivery.
Online Book Retailers
While Barnes & Noble and other chains were busy expanding their networks of
superstores, interest began to build in online book retailing. Book Stacks Unlimited
(www.books.com or www.bookstacks.com) was a pioneer in the online book retailing
industry. It began selling books online through a bulletin board service (BBS) in 1992
and in October 1994 launched a Web site that offered a selection of more than 500,000
titles mostly to members. Although, Book Stacks was considered a significant player in
online book retailing, it had clearly been overtaken by Amazon.com.
Amazon.com :
Amazon.com, Inc., incorporated in 1994, is a Website where customers can find
and discover anything they may want to buy online. While the Company started out as
the biggest bookstore, it now lists millions of new, used and collectible items in
categories such as apparel, accessories, electronics, computers, kitchen housewares,
music, DVDs, videos, cameras and photo items, office products, toys, baby items and
baby registry, software, computer and video games, cell phones and service, tools and
hardware, travel services, magazine subscriptions and outdoor living items. Through its
Merchants@ and Amazon Marketplace programs, zShops and Auctions, any business or
individual can sell almost anything to Amazon.com's customers. The Company operates
six
global
Websites:
www.amazon.com,
www.amazon.co.uk,
www.amazon.de,
www.amazon.fr, www.amazon.co.jp and www.amazon.ca. Key features of Amazon.com
Websites include product reviews and other information, Web pages tailored to
individual customers' preferences, including recommendations and notifications, 1-Click
technology, secure payment systems, browsing, searching and the ability to view selected
interior pages of over 250,000 books with its "Look Inside the Book" feature. The
Company's community of online users creates feature-rich content, including product
reviews and online lists, such as wish lists, wedding registries and baby registries of
12
desired products and services that others can reference for gift-giving purposes and
Listmania lists with accompanying commentary regarding favorite products.
The success of Amazon and the advantages posed by online book retailing
prompted the traditional book retailers to begin an online offensive.
Barnesandnoble.com Inc:
Barnesandnoble.com, one of the top online book selling companies is operated by
Barnes and Noble in partnership with Germany's Bertelsmann AG. Barnesandnoble.com
is an online retailer of books, music, DVD/video and magazine subscriptions. Since
opening its online store (www.bn.com) in March 1997, Barnesandnoble.com has attracted
more than 11.2 million customers in 228 countries. Barnesandnoble.com's online
bookstore includes an in-stock selection of in-print book titles with access to one million
titles for immediate delivery, supplemented by more than 20 million listings from its
nationwide network of out-of-print, rare and used book dealers. Barnesandnoble.com
offers its customers fast delivery, easy and secure ordering and rich editorial content.
Borders.com and Waldenbooks.com
Borders Group, through its subsidiary Borders Online, Inc., is also an online
retailer of books, music and videos. From May 1998 to August 2001, the Company
operated an Internet commerce site, Borders.com. In August 2001, the Company relaunched Borders.com as a co-branded Website powered by Amazon.com's e-commerce
platform. Amazon.com became the seller of record, providing inventory, fulfillment, site
content and customer service for the co-branded site. Waldenbooks has entered into a
similar arrangement with an affiliate of Amazon.com relating to the operation of the
Waldenbooks Website. The Company also competes with online retailers, including
Amazon.com and barnesandnoble.com.
Substitute Products
A firm's ability to set prices and sustain profits is constrained when there is an
abundance of substitute goods--buyers will satisfy their needs with a lower priced
alternative. (The notion of substitute products should not be confused with "switching
13
costs,” where buyers choose a similar product or service provided by a competitor within
the same industry.) Substitute products for books include music, movies, television, live
entertainment, and recreational computer use. Despite the popularity of these substitutes,
book sales continue to increase modestly (ABA, 1999). Electronic media is replacing
traditional printed and bound books (BarnesandNoble.com, 2000; Peterson, 2000).
BUYER/SUPPLIER RELATIONSHIPS
Relationship with Customers
The value creating potential of a business is enhanced by the extent to which
customers are motivated to engage in repeat transactions. It is also increased by the extent
to which they give incentives to maintain and improve their relationships with customers.
In the online world businesses has the opportunity to develop deep relationships with the
customers. For example Barnes and Noble has adopted loyalty programs rewarding
repeat customers with special bonuses. Barnesandnoble.com’s rewards program in
collaboration with Master card is one such instance. Ecommerce enables the businesses
to offer bundles of complementary products and services to their customers. These
services add to the value of its core services. For example, the complementarity between
online and offline businesses is the essence of “click-and-mortar” offering. It is provided
by barnesandnoble.com and its bricks-and-mortar counterpart Barnes and Noble that
creates value by offering its customers the opportunity to browse and order online and to
receive books in its brick-and-mortar stores.
E-commerce has allowed the businesses to reduce the cost of carrying the
inventory. The online retailers carry only about 15 days worth of inventory compared to
160 days of inventory by the physical bookstores (Krishnamurthy, 2002). These cost
savings are passed on to the customers in the form of price reductions. E-commerce has
also allowed the businesses to introduce new ways to enhance the shopping experience.
Most online book retailers now have features like one-click shopping, which was
pioneered
by
Amazon.com,
product
review
information,
purchase
circles,
recommendations and wish lists to name a few. E-commerce is endearing both for the
customers and the sellers. The retailers can virtually eliminate costly mass advertising,
zero on potential customer and build a 'one-to-one' bond with the customer.
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Relationship with suppliers
The role of any firm in the value chain is to take inputs from its suppliers,
transform them, and resell them at a profit to consumers or industry. The distribution of
profit throughout the value chain and market power of suppliers is a function of several
variables, such as the concentration of suppliers relative to firms in the industry, the
availability of substitute inputs, and the threats of forward or backward integration by the
suppliers and firms. In the book selling industry, the traditional supply chain consists of
authors, publishers, wholesalers, and retailers. The greater concentration of booksellers
relative to their suppliers serves to decrease the bargaining power of suppliers. Supplier
power is also limited by the threat of backward integration by retailers like in-house
publishing. The major impact of E-Commerce has been felt in the supply-chain
relationship. It has increasingly made the ‘middle-layer’ redundant and brought the
businesses close to the customer. Disintermediation literally refers to a cutting out of
middlemen. Some scholars have suggested the low-cost, universal reach made possible
by the Internet will result in widespread, radical disintermediation (Laudon & Traver,
2002). (In the book selling industry, an example of radical disintermediation would be an
author or publisher selling directly to the public.)
However, this type of radical
disintermediation does not seem likely to occur in the book retailing industry. In fact, the
role assumed by Amazon.com is just the opposite. Amazon.com could be characterized
as a re-intermediary, because it has newly positioned itself between suppliers and the
public as an alternative to the traditional retailer.
BUSINESS MODELS
The business model of an online bookstore is e-tailing, and most of the online
bookstores are virtual merchants. That is, single-channel web firms that generate almost
all their revenue from online sales.
Revenue
Online book retailers depend on string catalog operations, and most of their business
models are the same as traditional book retailers. Online book retailers mainly gain
revenue by product sales, with a small amount of advertising revenue. Like traditional
15
retailers, online retailers sell the books to online buyers, and as a result, gain revenue.
The primary difference between online and offline bookstores is the method that they sell
items to customers.
While physical bookstores sell books in their stores, online
bookstores directly ship the book to buyer’s home. This can be beneficial for someone
who may want to save time by not having to physically purchase the book at the store.
Interestingly, the prices of books purchased online are comparable to the books bought
offline. Although the price of the book online appears to be cheaper, the final price ends
up being about the same after adding on the shipping fee.
Market Strategy
Lower the cost
The most important strategy for online book retailers is lowering the book price.
Lowering costs will help the online book retailer attain competitive advantage. This can
be done by better managing the purchasing, inventory and distribution plans.
First Mover advantage
Amazon.com pioneered the concept of selling books online in 1994, and has since
expanded to selling other items such as electronics and CDs. Amazon was successful in
being the first mover in the online book retailing industry by determining the needs and
requirements of a satisfied customer and developing technology to meet these needs. It is
not surprising that Amazon.com has almost 8.4 million registered customers, with almost
60 percent of their business from repeat customers. But most of all, Amazon.com has
achieved all this success by establishing its foothold in the online retailing market much
before its competitors have; and that is one of the biggest reasons for the company’s
success. Amazon.com is one of the first few online retailers that have a continuously
growing customer base and brand equity. Not only is Amazon.com the leading online
bookseller, it is also the leading online shopping site. There is no doubt that the first
mover advantage played a great role in making Amazon.com a leading online bookseller.
Even more interesting is that despite its large sales numbers, Amazon.com has yet to
make a considerable amount of profit. According to Johnson (2000), the first mover can
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only take advantage when speed, continuous innovations, and patenting stay ahead of late
movers.
Book-A-Million, as the new competitor of the online bookstore battle field, is
trying to focus more on selling books to organizations like schools and libraries, instead
of individual customers by offering big discount to large purchases. However, it does not
appear to be a successful strategy thus far.
Branding
The criteria for successful advertising on the Internet are different from those in
traditional advertising. It is important for the web page to be rich in information, pleasing
to the eye and fluid in click paths. One of the primary goals of the online retailer should
be to successfully advertise their web page on the Internet. Advertising includes having
the consumer stay and “surf” on the company’s web site as long as possible to having
banner ads placed on other web sites throughout the Internet. The reasons for wanting
customers to stay on the company’s web site are two fold. First, the longer the consumer
reviews information on the web site, the more informed, comfortable and interested they
should become with the information. Second, the longer a person stays on the web site,
the more information is available on the web logs to generate clickstreams on users.
Logs on the path that a customer has traveled on the web page tells the online retailer
much about the customer in regards to their interests and browsing behavior. This also
tells the retailer how the web site is being perceived and utilized by people. Additionally,
increase in visibility of the retailer’s advertising through banner advertising helps to
achieve a sense of branding.
Customer Focus
One of the features of e-commerce is interaction with the customer. Amazon.com
has been a customer-centric company since its inception. They have developed
innovative ways of defining value to the customer and have focused on getting the
customer experience right.
Barnes & Noble’s customer focus is reflected in its strategy of customizing stores
to local conditions, hiring knowledgeable salespeople, and offering in-store services. A
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pleasant atmosphere, availability of Starbucks coffee, and book reading clubs create an
environment conducive to book buying.
PARTNERSHIPS
Partnerships of online book retailing store are divided into two sections: Supply and
Demand.
Supply Side
Supply channels of books are the same as any offline bookstore. The online
bookseller purchases a substantial majority of its books from Ingram Book Group
("Ingram"). Ingram is the company's single largest supplier and has accounted for 58%
and 59% of the Company's inventory purchases in 1997 and 1996, respectively.
However, there is a cost - online book vendors, as well as regular bookstores, must pay
Ingram Book a wholesale mark-up of about 2% per book over the publisher's direct sale
price. To save costs, Amazon.com and other online book vendors are trying to
disintermediate Ingram Book and distribute their own books.
One of the biggest news in the book retail industry is the merger of Ingram and
Barnes & Noble. After the vertical merger was complete, a number of strategies were
implemented to compete with its competitors:
1.
Sell to competing bookstores at higher prices
2.
Slow down book shipment rivals
3.
Restrict access to hot titles
4.
Restrict access Ingram’s extended inventory or back list
5.
Price services higher or simply discontinue or reduce these services.
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Demand Side
The battlefield of the demand section has moved from a physical channel to a
virtual one. In the past, bookstores have attracted customers through traditional
advertisement in physical stores. Today, online bookstores attract consumers through
portal websites. Amazon.com has advertising banners at their partners’ sites like Yahoo
and Altavista. When the potential customer searches for a topic and clicks on the
Amazon.com advertisement, Amazon.com provides the customer books related to his/her
search in addition to the actual search results. The customer is offered a valuable
experience and information at the web site, at no extra cost. The objective here is to
induce the customer to make a purchase by holding his/her attention to the site for an
extended period of time.
As discussed in the previous section, Amazon.com’s business strategy revolves
around creating brand equity for the company through excellent customer-convenience
ideas. The company has tried to provide a valuable experience to their customer from
offering value-added features like reviews and recommendations about the book, excerpts
from the book, to benefits such as ease of ordering. Gradually, Amazon.com has
extended their product line, in an attempt to offer a one-stop shopping site where
customers could choose from a variety of products like CDs, Videos, DVDs, toys, gift
articles and even services such as auctions. Besides this convenience, it is also very easy
to locate Amazon.com on the Internet. Their increased visibility through advertisements
on high-profile web sites such as Yahoo, Altavista and Geocities make it easy for
consumer to access Amazon.com. Both product expansion and better visibility are
possible only through Amazon.com’s alliances and partnerships with acquisitions of
strategic product and service providers on the Internet. These partnerships not only help
Amazon.com broaden the range of products and services that the company can sell on the
Internet, but they also increase the scope of the company’s business and amplify the
customer base. This increased visibility helps Amazon.com succeed in one of their
primary strategic goals, which is creation of brand awareness.
Amazon.com has a very good associates program. This program focuses on
attracting customers and then maintaining their business relationship with Amazon for
the long run. This flows from the strategy of the company to not just attract customers but
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to maintain the relationship so that they will keep visiting Amazon.com. Once enrolled as
an associate, a customer refers Amazon to other customers though their website. The
Amazon.com associate then earns a commission for any purchase that occurs through
their referral. Amazon.com associates now number more than 140,000; and according to
internal Amazon.com records, web site operators continue to prefer Amazon.com for the
powerful benefits they receive from Amazon.com’s leading traffic, content, customer
experience, brand, service and cross product capabilities. “The idea is incredibly simple:
when visitors click from the affiliate’s site through to Amazon.com and purchase an item,
the affiliate receives a commission” (Masland 2001), and this simple idea helps Amazon
expend its market through its affiliates.
Barnes & Noble became the exclusive bookseller on America Online’s (AOL’s)
Marketplace, which at this time has over 8 million subscribers. Barnes & Noble worked
closely with Firefly, a software company based out of Massachusetts, to set up a
personalized book recommendation service on its own website. Barnes & Noble is also
involved
in
affiliations
with
sites
such
as
Lycos.
In
September
2000,
BarnesandNoble.com opened a new chapter with online portal Yahoo Inc., which was till
then a partner of Amazon.com.
COMPETITVE ADVANTAGE
Retailers are able to achieve competitive advantage by producing a more superior
product or offering the product at a lower price compared to competition. In addition to
attaining competitive advantage via asymmetry and first mover advantage as discussed
above, online retailers use technology and other methods to enhance their online presence
and as a result, create competitive advantage in a very non-traditional way.
Search Engines
An online bookstore with a better search engine can attract more viewers on the
Internet. For example, Amazon has a very good search engine for books, and online users
can often find the book that they need Amazon.com. Therefore a good search engine can
help an online bookstore build an technical barrier for its competitors.
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Supply Chain Management
Online bookstores can create competitive advantage by a good supply chain
management system. For example, Amazon often asks distributors to directly ship books
to the buyer to save on shipping costs.
Today, information technology enables a
company to achieve zero inventories. Through operations management, a company can
perfectly arrange its inventories in different warehouses to result in cost savings.
Role of E-Commerce Technology
Technology is everchanging, as are the changes in user requirements and
preferences, therefore it requires the organizations to continually search for ways to
improve their business. Failure to do so will eventually hurt or kill the business. For
example, Enyclopedia Britannica was once an icon for its information as well as for its
brand, having been first published in 1768. In 1989, Microsoft approached them to
publish their encyclopedia on CD-ROM. Unable to make a deal, Microsoft moved on to
Funk and Wagnalls to produce the Encarta Encyclopedia on CD. Feeling the pressure,
Britannica created their own CD’s in 1992, selling it for $1200. Two years later they
changed the flat fee to a yearly web fee. Still under pressure, Britannica was forced to
lay off their sales people and offer the encyclopedia on the Internet for free, relying solely
on advertisements for income. This is a classic example of a highly successful company
that declined when they lost their competitive edge because they refused to change.
E-Books
Paperless e-books are gradually becoming the norm, thanks to information
technology. E-books is the concept of displaying articles and articles on computer
monitors, PDAs, or even cell phones. Today, consumers are able to access e-books
offered on the BN.com website.
Data Warehousing and Data Mining
Information technology not only eliminates inventory of books, but it can predict
the future requirements of new books. Data warehouses are non-transactional database
that house analytical data, such as historical sales data. Through data mining
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methodologies, a bookstore can predict the demand of new books as well as determine
certain patterns in buyer behavior. Through datawarehousing/datamining systems, a
company could potentially reduce the cost by better understanding customer behavior.
CRS-Customization
One of the benefits of information technology is the interaction interface. Through
the Internet, online bookstores can determine consumer behavior and increase the
chances of a sale. Today, both BN.com and Amazon.com offer customized interfaces on
their websites.
Main Players
The main players that will most likely dominate the online book retailing industry
include Amazon, Barnes and Noble and Borders. Although they are all in the business of
selling books, they strive to differentiate themselves among the rest. This battle consists
of delivering merchandise in an above average way and differentiating themselves by
obtaining a brand image. Amazon has first achieved dominance in the online book retail
industry by the first mover advantage, while Barnes and Noble has achieved some
competitive advantage by its asymmetry. This asymmetry is evident as Barnes and Noble
comes from an established brick and mortar company with sufficient brand name,
marketing and financial backing. Additionally, Barnes and Noble has an established
clientele from its brick and mortar stores. Thus when Amazon cites its ability to provide
superior selection and online know-how, Barnes and Noble plays up its authority as the
No. 1 Bookseller in the United States with an established clientele for their physical book
stores.
ETHICAL, SOCIAL AND POLITICAL ISSUES
Industry Challenges
Ethical, political and social issues are often are at the heart of debate in any online
business, including book retailing. These issues are commonly discussed in the online
retailing industry, relating to consumer privacy and security, and most importantly, how
22
it is best handled. Consumers hope for privacy when they are securing transactions via
the Internet. They hope that any personal information that they divulge on the web site is
kept private. Additionally, consumers expect their credit card transactions that occur
over the Internet to be secure. The fact that the Internet can be accessed in the privacy of
one’s home or office often causes the illusion of privacy. However, the user’s Internet
activity is often quietly tracked and information on consumer behavior is can be easily
gathered without the consumer’s permission. Collection of individual Internet
behaviors/paths, also known as clickstream data, is one of the most common methods to
track individual Internet activity. Web sites frequently utilize cookies to track the online
behavior of web surfers. Additionally, web sites are turning to advanced applications
such as DoubleClick to track Internet usage through cookies. The use of cookies to
monitor usage has increasingly become a controversial topic because while advertisers
see cookies as a means to research advertising, consumers see it as a threat to their
privacy. Martin Roth addresses an important issue in his article titled “Customization
and Privacy” taken from Marketing Management. He states “using technology to capture
consumer demographic information, integrate it with marketing behavior, and leverage
the results for marketing purposes can be the foundation for value-added customized
programs. It can also become the source of unhappy customers, upset that marketers
know so much about their lifestyles, attitudes and behaviors.
How Challenges Are Being Addressed
There is currently no federal law requiring a Web site to maintain a privacy policy.
However, several pieces of federal legislation are being considered that would establish
privacy rights that require some sort of privacy disclosures on all Web sites.
Additionally, much debate has been over the subject of privacy disclosure, from a do
nothing approach to industry self-regulation to government regulation. For now, the best
way to ensure privacy is for the consumer to protect themselves. They can protect
themselves from the Internet through “privacy” applications, “Cookie Cruncher” type
applications and practicing caution when divulging personal information.
In addition to privacy, security is also being addressed in the online retailing
industry. Technology offers ways to secure credit card or communications transactions.
23
Use of today’s technology may include Secure Sockets Layer (SSL), Identification
through tokens, Authentication through SET and Digital Certificates or Authorization.
Secure Sockets Layer, also known as SSL is designed to reduce the chances of
interception while transferring information on the Internet. Additionally, tokens are
small devices that users carry with them to securely identify themselves. SET allows
parties of a transaction to verify each side’s identity for authentication.
CONCLUSION
The online book retailing industry has come a long way from the rise of local
bookstores to online book retailing. Through the increasing growth of the Internet, the
online book retailing industry has had to adjust their strategies to attain and maintain
presence online. The rise of Amazon.com forced major retailers such as Barnes and
Noble and Books-A-Million to quickly launch their own websites and develop new
partnerships and buyer/supplier relationships in the new online environment. Methods to
attain and maintain competitive advantages in the online industry are also different, as are
the new issues that come with the online retail industry regarding privacy and security.
The components to success in e-commerce are different from traditional brick and mortar
business practices, and the online book industry is making an effort to identify these
differences to enjoy success in the online book retailing industry.
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