Internet: E-commerce: an era of confusion - A transformation of online trading is looming, but retailers still have much to learn

More than 10,000 adults in the UK sign up as new internet users every day, according to the NOP Research Group, and using the internet is becoming a mass-market activity, drawing people from across the socio-economic spectrum. As internet usage escalates, driven partly by the appeal of free ISP models, the conditions for an explosion in e-commerce in the UK may be in place, but it remains to be seen whether this will be the case.

More than 10,000 adults in the UK sign up as new internet users

every day, according to the NOP Research Group, and using the internet

is becoming a mass-market activity, drawing people from across the

socio-economic spectrum. As internet usage escalates, driven partly by

the appeal of free ISP models, the conditions for an explosion in

e-commerce in the UK may be in place, but it remains to be seen whether

this will be the case.



The success of online trading depends on several factors: whether

established retailers will integrate the internet with other channels;

whether a new generation of internet-based retail formats - particularly

those developed in the US - will displace traditional retailers; and

whether the changes under way are so profound that, in three or four

years’ time, a whole range of new business concepts - such as trading

through online communities - will have evolved.



The figures certainly suggest that a transformation of some kind is

looming.



Almost 1.3 million people in the UK shopped online in the second half of

1998, says NOP, making 4.8 million purchases and spending a total of

pounds 470m. While it puts the value of UK online sales, excluding

financial services, at just pounds 230m in 1998, Fletcher Research, the

UK internet research house, predicts that the UK online shopping market

will be worth pounds 3.1bn in 2003.



’E-commerce only accounts for 0.2% of UK retail sales,’ says Mike

Godliman, director at retail analyst Verdict Research. ’But by 2003 that

will be 2.5%.’



The Interactive Media in Retail Group (IMRG) expects UK internet

shoppers to make 12 million purchases in 1999, spending close to pounds

2bn. Several IMRG members reported that their Christmas 1998 sales were

up by 400%, while many US retailers reported that 20% of their seasonal

sales were online. In the US, research company Forrester forecasts that

online sales will be worth dollars 108bn (pounds 67.5bn) in 2003,

accounting for 6% of US consumer spending.



Online suitability



Of course, certain products and services may lend themselves to

e-commerce more than others. Travel, for one, is suited to e-commerce

because it is an information-based product. And as internet users become

more familiar with the medium, the range of items they buy online is

likely to change.



’It’s to do with transaction threshold,’ says James Roper, chief

executive of the IMRG. ’As they have discovered in the US, it takes at

least a year before people will spend large sums online.’



Consumers who are new to online shopping tend to make low-cost

discretionary purchases such as books or CDs. More complex and more

expensive purchases, such as travel, PCs, shares and cars, follow when

the consumer is more familiar with the medium. In Europe, online

shoppers mostly buy items in the travel sector and entertainment

tickets.



Many companies, however, have run the risk of compromising their brands

with flawed initial attempts to get to grips with e-commerce. A recent

report by the IMRG, ’Supporting Consumers Online’, found that even

well-known, mainstream brands have treated online shoppers badly. The

IMRG discovered Swatch omitted to tell UK customers about hidden tax and

handling costs incurred by online orders fulfiled from Switzerland.

Great Universal Stores charged customers’ credit cards the day after

orders were placed, although goods were not dispatched until weeks

later.



Anecdotal evidence suggests that many people who have shopped or tried

to shop online have had some disappointing experiences, coming up

against confusing sites and ordering processes, poor customer service

and unsatisfactory fulfilment.



The IMRG maintains that many problems with online shopping are caused by

poorly thought-out and under-resourced propositions. According to the

group, many of these novice web traders are ’using fudges they would not

dream of getting away with in the high street’.



Establishing loyalty



As Fletcher Research’s report ’Window Shopping?’ highlights, this type

of performance is particularly damaging because online brands take some

time to get established and a significant amount of money has to be

spent on acquiring new customers.



But once acquired, and if the relationship is well managed, these

customers are likely to remain loyal.



It is important to note that while high street stores are likely to see

operating margins and revenues as their key performance measures, the

biggest profit driver for online retailers is often customer service and

retention. It can be a virtuous circle: sites that achieve high customer

retention are in a position to spend more than their rivals on acquiring

additional customers, securing their position on the virtual high

street.



But e-commerce is not just about getting the basics right. A

well-designed web site, efficient and secure ordering systems, a high

standard of customer service, the effective fulfilment of orders and an

’offer’, such as a discount for buying online, are the prerequisites for

an online presence.



Taking orders



Many online operators, such as Virgin Net and Amazon.co.uk, the UK arm

of US online book and music retailer, offer guarantees against credit

card misuse. Amazon also offers 1-Click Ordering, which simplifies the

ordering process by asking customers to enter their details only when

they make their first purchase. And EasyJet offers a pounds 1 discount

on each one-way flight booked online.



Many people argue that e-commerce is cannibalising sales from stores,

but this approach is short-sighted. ’We think we’re actually growing the

books market, because people can get hold of books they couldn’t find

easily before,’ says Judith Catton, spokeswoman at Amazon.co.uk. ’And a

substantial part of the business is selling books to customers who live

overseas.’



Rather, e-commerce is an opportunity to realign around the new channels

and processes represented by the internet and, perhaps, interactive TV.

If existing retailers don’t embrace the internet, they may be eclipsed

by rivals that do, or by web-based start-ups. One-third of the 49 UK

sites surveyed by Fletcher Research in ’Window Shopping?’ are owned by

specialist or start-up online retailers.



Both Fletcher Research and the IMRG warn that UK retailers are leaving

the field wide open to foreign online operators. Amazon has ensured its

presence in the UK with Amazon.co.uk, Swedish CD retailer Boxman

launched in the UK earlier this year and online shares retailer Charles

Schwab has a European operation.



New concepts



Beyond the Amazon and CDnow-type operations, which are using the

internet to offer a large product range, convenience and lower prices,

are a host of new, web-based e-commerce concepts. Priceline, eBay and

E*TRADE are, along with Amazon, the most-recognised e-commerce brands in

the US, according to The Brand Institute.



Priceline (www.priceline.com) has patented the business methods

underlying its ’demand collection system’, which allows consumers to

name the price they are prepared to pay for travel, automotive and

personal finance products and services. Priceline then finds a seller

prepared to supply the product at that price.



Ebay (www.ebay.com) is an online trading community, where users can meet

people with similar interests and buy and sell by auction items from

more than 1000 categories.



E*TRADE (www.etrade.com) is an online shares retailer.



Technology aside, the factor that businesses really need to consider is

the way consumer expectations are changing. ’Don’t just think about the

technology - it’s about the new, empowered consumer,’ IMRG’s Roper says.

’The opportunity lies in the inadequacy of the high street. Any consumer

can recognise that there are huge, glaring gaps in the market.’ He says

these gaps offer many opportunities and challenges.



’There’s a lack of understanding of how online channels need to

integrate with retailing,’ Roper adds. Increasingly, people will use the

internet to compare information about products, to aid purchasing

decisions, and to obtain customer service. ’Therefore the role of the

shop changes,’ Roper says. ’It becomes more of a warehouse, as people

draw information from the web.’



The UK consumer electronics sector is one area that is ripe for such a

revolution, says Roper, who sees huge opportunities to consolidate on

the high street and, via the internet, communicate more effectively with

consumers.



Shopping channels



But there are signs that mainstream UK retailers are beginning to take

e-commerce very seriously. Marks & Spencer is reported to be running an

online shopping trial, with BT staff as the test market. ’Retailers are

experimenting with home delivery, with whether the internet is a selling

channel or a shop window and with how to use the medium profitably,’

says Godliman.



’Processes are improving and we’re already seeing a lot more investment.

People are learning from their experiments over the past six to 18

months.’



Last month, Sainsbury’s and Asda announced major home shopping

programmes, targeted at the London market. But Roper asks why it has

taken so long.



’There’s a lot of people who will pay the premium,’ he says. Tesco also

runs an internet home delivery service, which is available in certain

areas of London.



For the major grocery retailers, Godliman observes, ’the problem is that

they’ve invested huge amounts in stores’. But as e-commerce grows, it

could be the quality of their online presence that determines success or

failure.



For many retailers, adding quality to their online offering means

targeting information and offers to customers. Air Miles relaunched its

web site (www.airmiles.co.uk) in May with sophisticated interactive

capabilities. Through the web site, Air Miles can channel highly

targeted offers to customers, who can pay with miles only, part-miles

and part-cash or cash only.



’There were a lot of offers which were difficult to communicate to

customers before the site was set up,’ says Judith Thorne, head of group

marketing and strategy at Air Miles.



Musical revolution



New products also threaten to transform the trading landscape. In

entertainment and leisure, MP3 - a technology format that allows

CD-quality audio files to be downloaded over the internet - is poised to

revolutionise the music industry. And online communities, whether they

comprise football fans or senior citizens, may begin to have a

significant economic impact.



Perhaps the only safe prediction is that major changes are inevitable in

the way people shop and the way in which companies relate to their

customers. ’The internet represents a tsunami wave of change because

it’s emerging and rapidly moving; it’s changing all the time and you

can’t work out a business model or regulate it,’ Roper says.



’Rather than thinking about how to make money out of these standards

(that the internet represents) right now, businesses need to look at

what their customers want. The landscape in three or four years will be

very different. In the interim, it’s somewhere between the Wild West and

a card game.’



SUCCESSFUL ONLINE SECTORS



At the beginning of 1999, the Interactive Media in Retail Group

published its e-commerce predictions for the year ahead. It forecast

that travel will be one of the fastest-growing e-commerce areas in

Europe, acting as a catalyst for the growth of online shopping as a

whole.



Jupiter Communications expects the US online market for travel to be

worth dollars 16.6bn (pounds 10.4bn) by 2003 - Forrester suggests it

will be worth almost dollars 30bn (pounds 18.8bn).



The IMRG predicts that computers and software, financial services,

books, music, clothes, toys, new and used cars and real estate will lead

online sales in Europe during 1999. In the UK Fletcher Research

identifies PCs, travel, shares, insurance policies and books as having

the greatest potential for sales.



In the US, Forrester forecasts that online sales of convenience items -

including books, music and clothing - will be worth dollars 32bn (pounds

20bn) by 2003.



KEY SITES



Travel retail sites:



Expedia.co.uk, bargainholidays.com, 1ski.com, a2btravel.com,

a2bairports.com, cheapflights.com, deckchair.com, easyjet.co.uk,

british-airways.com, lastminute.com, flightbookers.com



Computing retail sites:



Dell.com, gateway.com, uk.euro.apple.com, compaq.com



Financial services retail



sites include:



Screentrade.co.uk (insurance), eaglestardirect.co.uk (insurance),

barclays-stockbrokers.co.uk (shares), schwab-worldwide.com/europe

(shares), share.co.uk (shares)



Music retail sites include:



Imvs.com, hmv.co.uk, towereurope.com, boxman.co.uk, cdparadise.com,

amazon.com, cdnow.com, cductive.com, mp3.com



Books retail sites include:



Amazon.com, amazon.co.uk, bol.com, thebookpeople.com, bookshop.co.uk,

fireandwater.com, waterstone’s.co.uk, barnesandnoble.com,

borders.com



BOOKS ONLINE



E-commerce has had a major impact on the book market and competition

between rival sites is intense. This month, an online book price war

erupted with Amazon discounting 40 bestsellers on its UK site by 50%.

BOL quickly announced that it would match Amazon’s discounts. With no

store-based operation to fund, the online retailer is in a strong

position to discount heavily. Added value features, such as interviews

and reviews, can be incorporated into web sites.



Specialist internet start-ups seized the initiative in this market but

store-based book retailers, as well as publishing groups, are building

up their online presence. Amazon.com launched in 1995 and is the

most-recognised e-commerce brand and the world’s biggest online book

retailer, with sales worth dollars 610m (pounds 381m) in 1998. Its

product range includes 4.7 million book, CD, video, DVD and computer

game titles.



Amazon’s UK and German subsidiaries, Amazon.co.uk and Amazon.de,

recorded combined sales of dollars 25m (pounds 15.6m) in first quarter

1999.



BOL (www.bol.com) run by German media giant, Bertelsmann, is an online

book retailer targeting the UK, Germany, France and the Netherlands. The

Internet Bookshop (www.bookshop.co.uk) was set up in 1993, taken over in

1998 by WH Smith and now offers more than 1.4 million book titles.



Bookstore Waterstone’s sells books online through its web site

(www.waterstone’s.co.uk) and recently joined with HMV and Yahoo! UK and

Ireland to launch the free internet access service, Yahoo! Online. The

US book chains Borders and Barnes and Noble also have online operations,

while Virgin is reported to be poised to offer a range of 500,000 titles

online in plans to build Virgin.com into an e-commerce brand.



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