Development of eretailing

In the early 1990s commercial development of the Internet was considered by many traditional retailers to be an arcane 'geekish' environment used by computer experts and scientists. As commercial use of computer networks began to grow retail companies began to consider how the Internet might impact on trade in the future and the challenges they might face (Rowley, 1996). However, not all companies were optimistic about the retail potential of the Internet, whilst some perceived it to be an opportunity for market development and expansion (Doherty et al., 1999), others saw it as an unstable and insecure trading environment. In terms of how retailers adopted the Internet they could broadly be divided into two groups:

1 Inactive: companies that for various reasons perceived the Internet to be a potentially dangerous environment, with limited commercial potential: for instance, lack of security, as it gave 'crackers' a means of entry to a company's most valuable knowledge-based assets. For such companies the approach towards Internet adoption was to watch development and do nothing (perhaps with the hope that the Internet, like citizen band radio, would fade into obscurity) until such a time that it became clear that there would be tangible business benefits from making the investment required to develop an online presence.

2 Active: companies that saw the Internet as a tremendous opportunity to access and develop new markets on a global scale. For these companies the approach towards Internet adoption was more complex as they had to determine how to trade successfully in this new virtual environment. Many companies adopted an incremental approach, testing out the feasibility of technological solutions.

A cracker is a malicious meddler who tries to discover sensitive information by poking around computer networks. This term is sometimes confused with 'hacker'. According to The New Hacker's Dictionary (Raymond, 1996), a hacker (originally, someone who makes furniture with an axe) is a person who enjoys exploring the details of programmable systems and how to stretch their capabilities, as opposed to most users, who prefer to learn only the minimum necessary.

During the last five years the inactive retailers have increasingly come under pressure to accept the Internet as a durable trading environment, whereas the active retailers have been dealing with many difficulties associated with their early investment into e-retail-ing. Operationally, e-retailers have had to organise their companies to cope with a range of issues, for example logistics, distribution and increased financial demands, and standards of online customer service. From a more strategic standpoint, retailers have spent time developing their online offer and determining how to deliver value.

A five-year study examining the extent of Internet adoption in the UK by Ellis-Chadwick et al. (2002) has found that traditional retailers are increasingly likely to have a web site and offer online trading facilities. Retailers as a whole are seen as being highly advanced in their use of computer-based technologies, so it comes as no surprise that some retail companies were quick to explore the commercial potential of the Internet. Typically, a newly established retail web site aims to cover a range of business objectives and show limited evidence of targeting of content towards specific online consumers; corporate information for investors is presented alongside details of consumer promotions and graduate recruitment features. However, over time the focus and strategic contribution of the online channels has changed and e-retailing is rapidly expanding. Figure 10.3 suggests how the strategic focus might change over time.

Discussion point

Tesco.com, has established a position of being the world's leading online grocer with an estimated sales turnover of £401m and profits up 37% to £21m (as at 21 September 2005). However, Iceland was the first UK retailer to offer nationwide delivery of a range of groceries ordered via the web and yet they have ceased to offer this service. Why has Tesco.com been able to establish such a dominant market position?

From 1995 onwards, retailers continued to develop their own web presence in the form of destination web sites in a similar way to the development of a fixed-location destination store in the real world. Web solution companies have aimed to provide solutions to drive traffic to a growing number of e-retailers' online offers. However, this is not the only approach being taken; many online goods and services are sold through portals or e-malls (see Mini Case Study 10.3). Currently e-retailers are focusing on producing sustainable and profitable business strategies for their Internet-based operations. Established retailers using physical channels to market as well as the Internet are now demonstrating

Destination store

A retail store in which the merchandise, selection, presentation, pricing or other unique features act as a magnet for the customer (Levy and Weitz, 1995).

Market focus of online content: Strategic contribution:

Market focus of online content: Strategic contribution:

Figure 10.3 E-retaiLing and strategic focus

that they can compete and in many instances surpass dot-com start-ups (pureplays), which only use the Internet as a route to market. According to Dennis et al. (2004) online shoppers prefer shopping at web sites operated by established high-street retailers.

As adoption of the web has expanded a number of different formats have been adopted by companies wishing to serve online consumers. According to Levy and Weitz (1995) retailers survive and prosper by satisfying customer needs more effectively than the competition, addressing customer needs through type of merchandise, variety and assortment of merchandise, and levels of customer service. Traditionally, there are two main types of established retail companies: those operating from fixed-location stores, such as department and convenience stores; and non-store-based operations such as catalogue retailing and direct selling. The fine detail of these various operating styles has gradually evolved to accommodate current customer needs. E-retailing has rapidly emerged, emulating non-store-based operations and new entrants like Amazon demonstrate how the Internet can potentially completely redefine customer needs using the Internet and the web to create a virtual retail environment with extensive global coverage. Currently there are several different formats that have been adopted by companies operating in B2C markets, including:

• Bricks and clicks - established retailers operating from bricks-and-mortar stores integrate the Internet into their businesses either strategically or tactically as a marketing tool or channel to market. Currently, the most successful online retailer in the world is Tesco.com, where personal shoppers select the customers' goods in local stores. This is not the only approach a business might choose to fulfil customer orders - networks of strategically placed warehouses provide another option.

• Clicks and mortar - virtual merchants designing their operating format to accommodate consumer demands by trading online supported by a physical distribution infrastructure. Virtual channels have distinct advantages over traditional marketing channels in that they potentially reduce barriers to entry. The location issue, considered to be the key determinant of retail patronage (Finn and Louviere, 1990), is in the physical sense reduced, along with the need for sizeable capital investment in stores. The best-known virtual merchant using this format is Amazon.com, the world's largest online bookstore.

• Pureplays - 'clicks-only' or virtual retailers are organisations that operate entirely online. In reality it is almost impossible for a business to operate online without a point of access to the Internet. Therefore, generally speaking, the term 'pureplay' refers to retailers that do not have fixed-location stores (e.g. www.figleaves.com). (The broader definition creates confusion with the term 'clicks and mortar'. Perhaps the most feasible explanation for the lack of commonly understood e-terminology is the immaturity of Internet business in general.) A variation of this category are digital retailers that sell products in digitised form (Dennis et al., 2004).

• Intermediaries - who link Internet technology and the retail supplier with the consumer. Such organisations perform the mediating task in the world of e-commerce between producers, suppliers and consumers by using consumer data, which is carefully analysed and used to target marketing campaigns. Some firms function as infomediaries (information intermediaries) assisting buyers and/or sellers to understand a given market. Established businesses might lack the resources, in terms of both staff and technological infrastructure, to operate their web activities internally. This creates an opportunity for the intermediary to step in and provide web solutions and they could eventually replace established retail businesses. The growth in importance of intermediaries has led to the use of the term 'reintermediation' (see Chapter 1).

A good example of an online retail format intermediary is Respond.com (www.respond.com). This company uses the Internet and the web to connect buyers and sellers by e-mail. The buyer fills in an online form giving details of the product he or she wants, together with its price. This form is then sent as an e-mail to the supplier who may be able to service the enquiry. Respond.com then sends e-mails to the consumer, providing him or her with the offer.

• Manufacturers of consumer goods - also see the Internet as an opportunity to regain some of their power lost to the retailers in the past by the shortening of distribution channels. The process of disintermediation works by the manufacturer excluding the retailer altogether and marketing directly to the customer, thus shortening the value chain and/or the supply chain by trading electronically and shifting the balance of power closer to the end-consumer. Early examples of disintermediation originated within the banking industry, when it was noticed that information technology and industry regulation had reduced the need for retail banks as intermediaries.

Any one of these formats could become the archetypal e-retailer and could thus affect the future growth of the online retail market as a retail environment. Potentially, if virtual merchants (brick and clicks, pureplays, intermediaries) prove to be highly successful, established retailers operating from a fixed-location store could find themselves increasingly being replaced by new Internet-based retail formats (Van Tassel and Weitz, 1997). The implications are considerable, as Internet shopping is beginning to fundamentally alter the way that consumers shop and thus revolutionise the retail environment, transforming the local high street into a global virtual high street. New entrants may benefit from financial freedom to develop an organisation suited to supporting the logistical demands of the new format (thus addressing the 'last mile' problems faced by established retailers). Established retailers can create competitive advantages from brand equity and high levels of customer service - effectively preventing new entrants from establishing a foothold in highly competitive retail markets. However, if established retailers continue to dominate retail supply and develop their current integrated approach to retailing through the use of technologies such as EPOS (electronic point of sale), EFTPOS (electronic funds transfer at point of sale) and loyalty cards, bringing them closer to the customer, then the Internet could be used to support these operations. In this scenario, revolution is less likely to occur. The next section considers which retail channel and the types of activities offered by e-retailers.

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