EBusiness in the Services Sectors

1
E-Business in the Services Sectors

• Week 9 Internet Retail Business Models and
  Sector Analysis

2
Learning Outcomes

• By the end of the lecture, and having studied the
  recommended reading, students should be able to
• Identify key characteristics of the retail
  industry
• Identify the main e-tailing business models
• Analyse the key strengths and weaknesses of these
  models
• Compare and contrast activities and performance
  across various retail sectors

3
Changing Retail Industry Dynamics

• Demise of the small retailer
• Shift in consumer demand
• Greater need for services
• Environmental and health issues
• Government policy - food labelling, planning
  permission etc.
• Vertical integration

4
Changing Retail Industry Dynamics (cont.)

• Overbuilding and excess supply
• Demographic changes
• Changes in consumer behaviour
• Emphasis on variety, price and value for money
• Technology improvements

5
Competition within Retail Sectors

• Food Retailing
• Largest sector of retailing
• Large multiples hold 50 market share
• Ability to buy in large quantities
• Smaller companies concentrating on convenience
  stores

6
Competition within Retail Sectors (cont.)

• Clothing Sector
• Dominated by major multiples but many small
  businesses
• Clothes sold through various formats, e.g. dept.
  stores, variety stores etc.

7
Traditional Retail Formats

• Shopping malls and department stores
• Factory outlet shops
• Warehouse clubs
• Discount stores
• The shop in a box
• Mail order
• Category killers

8
Global Overview

• Traditional retailers initially slow to adopt the
  Internet
• Slow pace of decision making in large
  organisations
• Lack of understanding of how big the Internet
  would become
• Fears that the Internet would cannibalize
  existing sales
• Late entrant advantages

9
Internet A New Retail Channel

• Advantages
• Accessibility
• Direct communications
• Cost savings
• New markets

10
Internet A New Retail Channel

• Limitations
• Technical problems
• Planned rather than impulse purchasing
• Product differentiation and positioning

11
Internet A New Retail Channel

• Major Issues
• Logistics
• Disintermediation
• Virtual merchants

12
Which Products/Services Are Most Affected?

• Product characteristics does the product need
  to be physically touched or tried before buying?
• Consumer attributes the consumers underlying
  motivations and attitudes towards shopping
• Familiarity and confidence the degree the
  consumer recognises and trusts the product (De
  Kare-Silver, 2001)

13
Product Characteristics and the Five Senses

• Sight e.g. books, computer hardware, white
  goods
• Sound e.g. music
• Touch e.g. clothing, footwear
• Taste e.g. grocery, confectionery, bakery
• Smell e.g. perfume, bakery

14
Product Categories Suited to E-Tailing

• Information rich products
• Large selection
• Products not requiring hands on service
• High value to weight ratio
• Easily customisable products
• Rapid changes in stock availability, demand
  and/or price
• Replenishment driven

15
The Online Retailers

• Established retailers using the Internet
  strategically or tactically as a marketing tool
• Virtual merchants designing their operating
  format to accommodate the demands of online
  trading
• Intermediaries who link Internet technology and
  the retail supplier with the consumer
• Manufacturers using the Internet to take their
  goods direct to the consumer

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The Online Retailers

• Established retailers operating from a fixed
  location
• Small and medium-sized retailers (e.g the butcher
  Jack Scaife Ltd.www.jackscaife.co.uk)
• High flexibility
• Access to a wider audience
• Low cost advertising
• Ability to handle picking and logistics - small
  numbers involved
• But medium-term financial risk
• Lack of resources to sustain large scale operation

17
The Online Retailers

• Established retailers operating from a fixed
  location
• Large retailers
• Incorporating the Internet into the retail offer
  (e.g. Tesco, Wal-Mart)
• Considerable variation in the web offer

18
The Online Retailers

• Established retailers operating from a non-store
  base
• Catalogue and direct marketers
• Existing infrastructures

19
The Internet Retail Channel

• Informational Functions
• Product information
• Financial information
• Company information
• Educational information
• Press releases
• Recruitment information

20
The Internet Retail Channel

• Interactive Functions
• Marketing communications tool
• Direct communications
• Marketing research tool
• Sales channel

21
Offline Retailers

• Incumbants Advantages
• branding and customer relationships
• supplier relationships
• fulfillment and customer service operations
• cross channel delivery and returns
• Incumbants Disadvantages
• threat of cannibalisation
• financial and organisational hurdles

22
The Online Retailers

• New entrants operating from a non-store base
• Virtual merchants
• New online retail formats
• Intermediaries
• Reintermediation, e.g. Respond.com - connecting
  buyers and sellers by email
• Disintermediation - manufacturers excluding
  retailers

23
Online Retailer Economics

• Operating costs
• lower rent/property costs
• lower employee/services costs
• higher advertising costs
• credit card processing costs
• Working capital
• low stock levels
• Fixed capital
• no need to invest capital in stores
• Gross margin
• revenue from product sales - the cost of goods
  sold
• gross margins improve with growth
• pricing levels

24
Online Retailer Economics

• Expenses
• Distribution and customer service expenses
• Website development
• Sales and marketing
• General and administrative

25
Sector Analysis Books

• Low margins
• Must be sold on a huge scale
• Can only sustain few players
• Amazon increasing its scale by moving into other
  low margin categories

26
Sector Analysis Groceries

• High order size
• Repeat orders
• Relatively easy to reach sufficient scale
• Minimal margin advantages for the established
  players
• Huge investment needed for the distribution
  infrastructure
• Delivery logistics

27
Sector Analysis Clothing

• Large orders and gross margins especially for
  established players with private label
  merchandise
• Breakeven point much lower for niche players,
  direct mail
• Online sales provide a more efficient channel for
  vertically integrated clothing companies than do
  offline sales

28
Sector Analysis Clothing

• Pure plays typically lack private label goods,
  strong brand names, good gross margins and access
  to product
• Multichannel retailers have huge advantages in
  gross margins and can attract customers for as
  little as one-fourth the cost
• Pure play e-tailers will struggle to compete

29
Online Retailing Success Stories Peapod

• How Does it Work?
• Customers can request a list of items by
  category, item or brand
• Within categories can choose to have the items
  arranged alphabetically by brand or sorted by
  various factors, e.g. nutritional content
• Peapods back office linked with the mainframe
  databases of the supermarkets at which it shops

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Online Retailing Success Stories Peapod

• How Does it Work?
• Once a selection is made, specific shopping
  instructions may be given
• Choose a delivery time within a 90 minute slot
• Orders taken centrally and then sent to stores
  with delivery details
• Each order filled by a Peapod employee
• Membership services - customer support
• Cost savings for consumers

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Online Retailing Success Stories Peapod

• What is the Business Model?
• Using interactive technology to change the
  shopping experience
• Catering for a busy lifestyle
• Well managed logistics
• Making money from customers rather than supply

32
Online Retailing Success Stories Peapod

• What is the Business Model?
• Partner rather than competitor to the retail
  industry
• Every customer interaction is a learning
  opportunity
• Customer retention rate of 80

33
Wine on the Web Virtual Vineyards

• How Does it Work?
• Lists the different wines and prices from each
  participating winery as well as a summary of
  information and tasting charts
• Users offered a 10 discount when they order by
  the case
• Once a selection is made customers input the
  selection with their credit card details
• On payment, Virtual Vineyards fulfils the orders
  from its warehouses
• An integrated marketing programme

34
Wine on the Web Virtual Vineyards

• What is the Business Model?
• Transactions depend on impulse purchasing
• Perfect niche market - most people know nothing
  about wines but would like to
• Once online, customers can learn about wines and
  tastes
• Virtual Vineyards receives a percentage of each
  wine sale
• Serves a special need for small wineries

35
Online Retailing Strategies for Success

• Measure performance against traditional retail
  metrics, e.g. gross margins
• Use experienced personnel (retailers, marketers,
  operations etc.)
• Monitor marketing investments
• Reduce fixed costs and evaluate new site features
  and functions
• Manage e-tailing as an integrated channel
• Seek revenue from high-margin referral and
  advertising commissions

36
Internet Retailing Developments

• Maturation of online retailing - demographics
• Web Synergies. Online retailing becoming
  profitable and can boost offline performance
• in-store pick up
• researching the product online first - large
  sized products
• high street shops may find new opportunities from
  e-commerce, e.g. enhanced services, such as
  delivering higher levels of customisation and new
  functions such as community facilities and play
  areas
• online only businesses moving towards
  partnerships with store based businesses