Customized Goods, Especially In Apparel, Become Financially Successful, And Begin To Spread To Many Sites Beyond Specialty Retailers

Copyright © 2006 Pearson Education, Inc. Slide 10-1

E-commerce

Kenneth C. Laudon

Carol Guercio Traver

business. technology. society.Third Edition


Chapter 10

Retailing on the Web


Blue Nile Sparkles For Your CleopatraClass Discussion

Why is selling (or buying) diamonds over the Internet so difficult?

How has BlueNile built its supply chain to keep costs low?

How has BlueNile reduced consumer anxiety over online diamond purchases?

What are some vulnerabilities facing BlueNile? Would you buy a $5,000 engagement ring at

BlueNile?


Major Trends in Online Retail, 2006

Online retail increasingly profitable Buying online becomes normal, mainstream experience Selection of goods online increases, including customized goods Average annual amount of purchases increases Specialty retail sites show most rapid growth Increased emphasis on improved shopping experience Increased use of interactive multimedia marketing Retail intermediaries strengthen in many areas Retailers increasingly efficient at integrating multiple channels Customized goods, especially in apparel, become financially successful,

and begin to spread to many sites beyond specialty retailers. Online shopping becomes more multi-seasonal Most online shopping occurs at work, evenings at home

See also Table 10.1, Page 575.


The Retail Sector Most important theme in online retailing is effort to

integrate online and offline operations U.S. retail market accounts for over $7.7 trillion of total

GDP (2/3rds of all economic activity) Retail industry can be divided in segments, each of

which offers opportunities for online retail Biggest opportunities for online retail sales: Those

segments that sell small ticket items (specialty stores, general merchandisers, mail-order catalogs, groceries)

Mail order/telephone order (MOTO) sector most similar to online retail sector


Composition of the U.S. Retail IndustryFigure 10.1, Page 576

SOURCE: Based on data from U.S. Census Bureau, 2005.


Online Retailing: The Vision Greatly reduced search costs on the Internet would

encourage consumers to abandon traditional marketplaces in order to find lower prices for goods

Market entry costs would be much lower than those for physical storefronts, and online merchants would be more efficient than offline competitors

Traditional offline physical store merchants would be forced out of business

Some industries would become disintermediated as manufacturers built direct relationship with consumer

Ultimately, few of the above assumptions proved to be correct, and structure of retail marketplace in the U.S. has not be revolutionized


The Online Retail Sector Today

Online retailing segment, although smallest segment of retail industry, is growing at exceptionally fast rate

Online retail revenues: $85 billion, 115 million consumers estimated for 2005

Primary beneficiaries of growing consumer support: Established offline retailers with an online presence


Online Retail and B2C E-commerce is Alive and WellFigure 10.3, Page 581

SOURCE: Based on data from U.S Department of Commerce, 2005; eMarketer, Inc, 2005a; Shop.org and Forrester Research, 2005, authors’ estimates.


Insight on Business: Merlot by MailClass Discussion

Why is eVineyard one of the few online surviving wine retailers?

What was the key to eVineyard’s success? How will changes in state laws open up online

wine sales? How did the Supreme Court decision effect

wine retailing and wineries in the United States?


Analyzing the Viability of Online Firms: Strategic Analysis

Strategic analysis of economic viability of a firm focuses on both industry as a whole and firm

Key industry strategic factors: Barriers to entry Power of suppliers Power of customers Existence of substitute products Industry value chain Nature of intra-industry competition


Analyzing the Viability of Online Firms: Strategic Analysis (cont’d)

Strategic factors that pertain to firm include: Firm value chain Core competencies Synergies Technology Social and legal challenges


Analyzing the Viability of Online Firms: Financial Analysis

Financial analysis helps us understand how a firm is performing

Includes two main parts: Statement of Operations and Balance Sheet Statement of Operations: Tells us how much

income or loss a firm is achieving based on current sales and costs

Balance sheet: Provides a financial snapshot of a company’s assets and liabilities


Analyzing the Viability of Online Firms: Financial Analysis (cont’d) Factors to look for when assessing Statements of Operations

Revenues: growing and at what rate? Cost of sales: compared to revenues Gross margin (gross profit divided by net sales): increasing or

decreasing? Operating expenses: What are they; increasing or

decreasing? Operating margin: Indication of company’s ability to turn sales

into pre-tax profit after operating expenses are deducted Net margin (net income or loss divided by net sales or

revenue): increasing or decreasing?


Analyzing the Viability of Online Firms: Financial Analysis (cont’d)

Factors to look for when assessing a Balance Sheet: Current assets Current liabilities Ratio of current assets to liabilities

(working capital) Long-term debt


E-tailing Business Models

Four main types of online retail business models: Virtual merchant Bricks-and-clicks Catalog merchant Manufacturer direct


Virtual Merchants

Single channel Web firms that generate almost all revenues from online sales

Example: Amazon.com


E-commerce in Action: Amazon.com

Vision: Earth’s biggest selection, most customer-centric

Business Model: Virtual merchant that sells merchandise owned by Amazon, online storefronts for other merchants, merchandise owned by individuals; e-commerce services

Financial Analysis: Greatly improved overall operational position, but not yet consistently profitable


E-commerce in Action: Amazon.com Strategic Analysis: Business strategy: Maximize

revenue while cutting costs Strategic Analysis: Competition: General

merchandisers who are both offline and/or online Strategic Analysis: Technology: Largest, most

sophisticated collection of online retailing technologies available

Strategic Analysis: Social, Legal: Securities, anti-trust lawsuits

Future Prospects: Long-term profitability still uncertain


Multi-channel Merchants: Bricks and Clicks

Companies that have a network of physical stores as primary retail channel, but also online offerings

Examples: Wal-Mart, J.C. Penney, Sears


Catalog Merchants

Established companies that have a national offline catalog operation as largest retail channel, but also have online capabilities

Examples: Lands’ End, L.L. Bean, Eddie Bauer, Victoria’s Secret, Lillian Vernon


Manufacturer-Direct

Single or multi-channel manufacturers who sell directly online to consumers without intervention of retailers

Example: Dell


Insight on Society: Internet Taxation: The Tax Man is Coming

Class Discussion

Why should online retailers collect state sales taxes?

What is the Streamlined Sales Tax Project and how will it potentially effect the collection of online sales taxes?

Why do some major online stores like Wal-Mart collect sales taxes?


Distribution of Online Retail Sales by Type of MerchantFigure 10.3, Page 603

SOURCE: Based on data from Internet Retailer, 2005.


Common Themes in Online Retailing

Online retail fastest growing channel, has fastest growing consumer base, growing penetration rate across many categories of goods

Many online retail firms have begun to raise prices Disintermediation has not occurred, and most

manufacturers use Web primarily as an informational resource

Most significant online growth has been that of offline giants who are focusing on extending brand to online channel

Second area of rapid growth: specialty merchants


Insight on Technology: Using the Web to Shop ‘Till You DropClass Discussion

What do shopping bots and comparison sites offer consumers?

Why are shopping bots more successful with hard goods than soft goods?

What is the strategy of Become.com? How can shopping bots compare luxury

goods? How will adding content to comparison sites

help consumers?