WalMart quietly closes its doors on its online site while it remodels, Priceline's founder admits defeat in the grocery and gasoline markets, Toys"R"Us abandons its website to ally itself with Amazon, and Nasdaq investors appear very cautious around once hot Internet stocks. What does it all add up to?
1999 saw huge investments in many Internet startups trying to tap into the 'potential' represented by the Internet consumer. The same year also saw the awakening of traditional retailers to the threat of these new startups as potential competitors.
The number of net consumers in the total retail market did not really change with the advent of the Internet. The Internet added another channel through which to reach the consumer. The result is consumers have more choices than ever about where and when to shop.
With more retailers (offline and online) chasing the same customers (and remember, retailing had been going through an era of consolidation due to poor performance in the late nineties), the market became oversupplied.
Not every company can be a market leader on the Internet. Successful companies have been carving out their niche. Many of the most successful eRetailers have previous experience in the direct-to-consumer channel.
With the pool of investment money drying up for online retailers, many companies are having to focus on how to achieve profitability before their lack of cash flow forces the company out of business. Unfortunately, many fresh dotcoms have built out their operational overheads, using venture money, to the point where they are unsustainable based on current sales volumes.
An early myth of the eRetailer was that they would achieve economies of scale, and avoid the overheads associated with carrying inventories, by having products shipped direct from vendors to the consumer. Several disastrous holiday seasons have convinced most eRetailers that they must be in control of their own inventories if they are to satisfy their customer's expectations. (There are some great exceptions, such as Garden.com, but generally, direct shipment from manufacturers is no longer a sustainable model for sizeable eRetail traffic).
Why companies struggle online
Channel mismatch: Traditional retailers built efficient retailing operations to support distribution and sales through brick and mortar stores. These companies are suddenly faced with learning how to operate in a new distribution channel. Internet retailing is closer to catalog marketing than any other retail channel. For years, catalog retailing has been viewed as a niche market requiring very different operating structures to traditional retailing. Now traditional retailers are struggling to develop a catalog-like operation within their existing structures. The result; fulfillment disasters and inadequate customer service.
Lack of customer service: Catalog retailers have learned how critical outstanding customer service is in building a strong relationship with a customer that never sets foot in a store. Online retailers are finding out, often too late, that customer service wins customers and lack of service loses customers. For catalog retailers, demand for customer service resources is a function of how many catalogs are circulated. It can be anticipated and planned. In the online world, surges in demand are often difficult to predict accurately, resulting in poor customer experiences.
Retail inexperience: Many pure-online retailers focus on technology as a means of providing the right customer experience. This works to a point if it is backed with traditional retail merchandising skills. Online retailers need to leverage merchandising experience to be successful in attracting and keeping customers.
Brand identity: The Internet makes it very easy for shoppers to find the same product in many places. Services like dealtime.com make the process of price shopping painless; try shopping for a book with dealtime.com and it will tell you where you can buy the book online at the best delivered price, based upon where you want it delivered. Unless the retailer owns the brand it is easy to find the same product in any number of stores. Companies that own their own brands can avoid price competition online. (e.g. Sears with its Craftsman and Kenmore brands, and Sharper Image with its uniquely designed gadgets).
Branding also plays a role in bringing a customer back to a specific store. Pure-play eRetailers are trying to build an online brand image for their customers to identify with. The more successful click and mortar retailers are developing online brand images that strongly reinforce their offline branding. This makes it harder for companies such as WalMart, whose brand identity is strongly associated with everyday low prices. To be successful online, WalMart has to be the lowest price eRetailer, otherwise its online appearance negatively affects its offline brand image. (WalMart could potentially buy a leading online discounter such as Buy.Com and quickly reinforce its brand image).
The key to successful online branding is to avoid chasing the entire online population. That would be equivalent to setting up a retail store and trying to appeal to every person walking by the store. The most successful online retailers know their target customers intimately, and they are building their brands in ways that identify the company to their customers.
Consumer Confusion: Give a person the choice between two things and the chances are they can make a selection quickly, but give them the same choice with 200 options and they find it much harder to come to a decision. As more and more retailers go live on the Web, the online customer is faced with an overwhelming choice. Faced with such a diversity of offerings, consumers tend to gravitate to familiar companies and brands with which they are comfortable. As a result, people who are new to the Internet experiment less with unknown brands, preferring instead to shop at the online versions of retailers they already know.
Confusion can also be created in merchandising; presenting the consumer with an overwhelming choice of merchandise can deter people from shopping. Successful eRetailers are figuring out how to present a more limited and customized assortment of products geared to each shoppers needs.
Over capacity: The flood of investment capital into the online retail market in 1998 and 1999 enabled many companies to establish a presence on the Web before the market was big enough to support the presence of so many companies. The logic behind the rush was to establish the companies early and win a dominant position in the market, thereby enabling the company to grow with the increase in the number of online consumers. Optimistic growth targets probably failed to take into account the effects of increasing competition; with so many companies competing for the same online consumers, the market size is effectively reduced, requiring companies to wait even longer before they can see a return on investment. The good news: For those companies able to hang-in through the market consolidation, they will be operating in an expanding market with fewer competitors.
Cottage industry syndrome: The Internet retailing market is now one of the largest cottage industries in the world thanks to the ease with which small, independent retailers and artisans can create an online presence. Many of these smaller retailers are able to offer unique merchandise not available anywhere else. The ability to easily purchase products from these vendors further dilutes the market for larger companies.
However, smaller retailers selling commodity products to a very localized market face increased competition from online goliaths able to penetrate local markets using the Internet. (This is where some of the new customer base must come from for large retailers if they are to avoid cannibalizing their offline sales).
Time saver or price saver: Hypothesis: consumers shop online to either save time or money. If you subscribe to this hypothesis, then retailers that satisfy one or both of these basic needs will be more successful. Retailers that fail to satisfy one or other of these needs are more likely to fail. Amazon.com is not the cheapest bookseller on the Web; instead, they have focused on providing their customers with a range of services designed to save time finding and buying books and other merchandise.
Consumers looking to save time are much less tolerant of eRetailers that fail to deliver merchandise, or that incorrectly deliver goods damaged or missing. Any follow-up that is required after the purchase is considered an unnecessary waste of time by the consumer and is likely to deter them from using that eRetailer for the next purchase. Making the follow-up process easy and quick mitigates the negative impact on the customer.
2000 Situation Assessment
During the Holiday 2000 season, new online shoppers will gravitate to trusted well-known brands, whereas experienced online shoppers will return to brands that have provided them with good service in the past.
In 2001, the market will continue to consolidate, with online brands tightening their brand image to identify with their target consumers in an attempt to compete less with click and mortar retailers for the same customers.
Globalization will increase competition in many markets around the world, further increasing pressure on local pure-play eRetailers unable to reinforce their brands with an offline presence.
New online consumers will increasingly use shopping portal services to help find new retailers offering products they need. Experienced online shoppers will expand their use of bookmarks and favorite places to quickly access their preferred vendors, without needing to navigate through directory services and portals.
Pure-play eRetailers not able to offer distinct competitive advantages in terms of unique products, faster service or lower prices will find it increasingly difficult to compete with click and mortar companies in the same market space. As valuations drop, many traditional retailers may look to acquire these companies in order to give a boost to their own online efforts, but only if they can catch them before their employees leave for greener pastures.
Retailers able to build synergies between online and offline activities will be more successful in developing loyal customers. Driving traffic to offline stores will be critical for many retailers in order to maximize existing investments in infrastructure and stores.
Recommendations for holiday 2000
If technology changes aren't in place now, or very soon, it's too late for this season, so the focus should be on customer facing activities:
Focus on delivering outstanding customer service to existing customers more than on attracting new customers.
Make sure your customer service is scaleable to support peak surges - consider outsourcing for peak demand.
Under-promise and over-deliver, never the other way around.
Don't display out-of-stock merchandise on the website without being able to show an expected delivery date to the consumer that you can be sure about.
Delight unhappy customers; do whatever it takes.
Encourage customers to do all their shopping in your store by offering discounts for frequent shoppers or volume discounts based upon the value of the total purchases over the holiday season. (This saves them time and money, a winning combination).
Take care to ensure products arrive in good condition. A little extra care in packing saves money by reducing returns and avoiding customer dissatisfaction.
Recommendations for 2001
Click and Mortar
Consider buying and integrating a catalog retail operation instead of trying to learn how to operate in a new channel from scratch.
Don't try to fulfill online orders from the same warehousing operation as is used to replenish retail stores. Outsource fulfillment to one or more established fulfillment service providers and consider developing your own direct to consumer fulfillment center(s).
Investigate customer service technology that helps maximize the effectiveness and utilization of skilled customer service staff. Look to implement Customer Relationship Management (CRM) solutions that view the customer as the same individual across all the available shopping channels and contact points.
Integrate systems between offline and online stores. You are one company to the customer, so make sure your systems don't force you to act like two or more companies when customers interact with you.
Tie offline and online merchandising together to generate synergies that reinforce your brand image to the customer and deliver a consistent message.
Make sure your online brand identity mirrors your offline branding. Target the same consumer online as offline to avoid confusion around the brand image.
Acquire struggling eRetail pure-play companies as a way to boost online expertise.
Identify and target a market niche that is distinct from those of traditional retailers. Work with focus groups to refine the brand messages needed to attract this group of consumers.
Avoid competing head-on with brick and mortar retailers for the same consumer niche unless you can consistently deliver a better merchandise assortment, coupled with better customer service, at comparable or lower price points.
Build added value content on your site to enhance your brand image. (See commerce-cubed).
Develop marketing strategies to bring your brand to the consumer in the physical world. Consider 'grass-roots event' sponsorships in local communities that correlate to your brand and what it stands for. Create a tangible presence for the brand and all that it represents through such events.
Reinforce merchandising teams with experienced retail merchandisers.
Develop own-brand products targeted to your consumer's needs.
Be a time-saver and focus on how to help shoppers get what they need faster than the competition.
Avoid competing on price; there can only be one supplier at the lowest price at any point in time. Unless you can consistently be that supplier, this strategy cannot be used to sustain a competitive advantage.
Present the consumer with simple choices. Avoid overwhelming them by narrowing the displayed merchandise assortment based upon preferences and search options. Build out collections of products based on how they are used together by the customer. Use lifestyle events to develop collections of products. Make it easy for a customer to find a product if they know what they are looking for (two clicks at most).
Implement frequent shopper reward programs to encourage brand loyalty.
Figure out how to delight your customers. (The WOW Factor!)
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by Nigel Fenwick
Tags: E - commerce Computers