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
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.
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
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
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’.
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
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.
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
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.
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
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,’
’Processes are improving and we’re already seeing a lot more investment.
People are learning from their experiments over the past six to 18
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
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.
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
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.
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
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,
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
Amazon’s UK and German subsidiaries, Amazon.co.uk and Amazon.de,
recorded combined sales of dollars 25m (pounds 15.6m) in first quarter
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.