Chapter 10 Retailing on the Web Copyright

Learning Objectives Identify the major features of the retail sector 2. Describe the vision of online retailing in the E-commerce I period 3. Explain how to analyze the economic viability of an online firm 4. Identify the challenges faced by the different types of online retailers 1. Copyright © 2006 Pearson Education, Inc. 2

Blue Nile Sparkles For Your Cleopatra Class Discussion n n Why is selling (or buying) diamonds over the Internet so difficult? How has Blue. Nile built its supply chain to keep costs low? How has Blue. Nile reduced consumer anxiety over online diamond purchases? What are some vulnerabilities facing Blue. Nile? Would you buy a $5, 000 engagement ring at Blue. Nile? Copyright © 2006 Pearson Education, Inc. 3

Major Trends in Online Retail, 2006 See also Table 10. 1, Page 575. n n n 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 Copyright © 2006 Pearson Education, Inc. 4

The Retail Sector n n n 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 (2/3 rds 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 Copyright © 2006 Pearson Education, Inc. 5

Composition of the U. S. Retail Industry Figure 10. 1, Page 576 SOURCE: Based on data from U. S. Census Bureau, 2005. 6

Online Retailing: The Vision n n 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 Copyright © 2006 Pearson Education, Inc. 7

The Online Retail Sector Today Online retailing segment, although smallest segment of retail industry, is growing at exceptionally fast rate n Online retail revenues: $85 billion, 115 million consumers estimated for 2005 n Primary beneficiaries of growing consumer support: Established offline retailers with an online presence n Copyright © 2006 Pearson Education, Inc. 8

Online Retail and B 2 C E-commerce is Alive and Well Figure 10. 3, Page 581 SOURCE: Based on data from U. S Department of Commerce, 2005; e. Marketer, Inc, 2005 a; Shop. org and Forrester Research, 2005, authors’ estimates. 9

Insight on Business: Merlot by Mail Class Discussion Why is e. Vineyard one of the few online surviving wine retailers? n What was the key to e. Vineyard’s success? n How will changes in state laws open up online wine sales? n How did the Supreme Court decision effect wine retailing and wineries in the United States? n Copyright © 2006 Pearson Education, Inc. 10

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 n 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 n Copyright © 2006 Pearson Education, Inc. 11

Analyzing the Viability of Online Firms: Strategic Analysis (cont’d) n Strategic factors that pertain to firm include: § Firm value chain § Core competencies § Synergies § Technology § Social and legal challenges Copyright © 2006 Pearson Education, Inc. 12

Analyzing the Viability of Online Firms: Financial Analysis Financial analysis helps us understand how a firm is performing n Includes two main parts: Statement of Operations and Balance Sheet n Statement of Operations: Tells us how much income or loss a firm is achieving based on current sales and costs n Balance sheet: Provides a financial snapshot of a company’s assets and liabilities n Copyright © 2006 Pearson Education, Inc. 13

Analyzing the Viability of Online Firms: Financial Analysis (cont’d) n 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? Copyright © 2006 Pearson Education, Inc. 14

Analyzing the Viability of Online Firms: Financial Analysis (cont’d) n Factors to look for when assessing a Balance Sheet: § Current assets § Current liabilities § Ratio of current assets to liabilities (working capital) § Long-term debt Copyright © 2006 Pearson Education, Inc. 15

E-tailing Business Models n Four main types of online retail business models: § Virtual merchant § Bricks-and-clicks § Catalog merchant § Manufacturer direct Copyright © 2006 Pearson Education, Inc. 16

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

E-commerce in Action: Amazon. com Vision: Earth’s biggest selection, most customercentric n Business Model: Virtual merchant that sells merchandise owned by Amazon, online storefronts for other merchants, merchandise owned by individuals; e-commerce services n Financial Analysis: Greatly improved overall operational position, but not yet consistently profitable n Copyright © 2006 Pearson Education, Inc. 18

E-commerce in Action: Amazon. com n n n 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 Copyright © 2006 Pearson Education, Inc. 19

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 Copyright © 2006 Pearson Education, Inc. 20

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 Copyright © 2006 Pearson Education, Inc. 21

Manufacturer-Direct § Single or multi-channel manufacturers who sell directly online to consumers without intervention

Insight on Society: Internet Taxation: The Tax Man is Coming Class Discussion Why should online retailers collect state sales taxes? n What is the Streamlined Sales Tax Project and how will it potentially effect the collection of online sales taxes? n Why do some major online stores like Wal. Mart collect sales taxes? n Copyright © 2006 Pearson Education, Inc. 23

Distribution of Online Retail Sales by Type of Merchant Figure 10. 3, Page 603 SOURCE: Based on data from Internet Retailer, 2005. 24

Common Themes in Online Retailing n n n 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 Copyright © 2006 Pearson Education, Inc. 25

Insight on Technology: Using the Web to Shop ‘Till You Drop Class Discussion n n 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? Copyright © 2006 Pearson Education, Inc. 26