Online Retail

1. Online Retail Chapter 9 (Sections 9.1 and 9.3)

2. 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

3. 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

5. 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

6. 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

7. 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)

8. 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

9. 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

12. 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

13. Virtual Merchants • Single-channel Web firms that generate almost all their 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

14. 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

15. 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?

16. 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

17. Common Themes in Online Retailing • Need to attract a large number of shoppers, charge high 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 no 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