Lecture E-commerce: Business, technology, society (3/e): Chapter 10 - Kenneth C. Laudon, Carol Guercio Traver

Chapter 10: Retailing on the Web. After reading this chapter, you will be able to: Identify the major features of the retail sector, describe the vision of online retailing in the E-commerce I period, understand the environment in which the online retail sector operates today, explain how to analyze the economic viability of an online firm, identify the challenges faced by the different types of online retailers.

Kenneth C Laudon Carol Guercio Traver

business technology society.

Third Edition

Chapter 10

Retailing on the Web

Blue Nile Sparkles For Your Cleopatra

„ 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

See also Table 10.1, Page 575.

„ 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

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 Industry

Figure 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 Well

Figure 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 Mail

Class 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:

ƒ Barriers to entry

ƒ Power of suppliers

ƒ Power of customers

ƒ Existence of substitute products

ƒ Industry value chain

ƒ Nature of intra-industry competition

Analyzing the Viability of Online Firms:

Strategic Analysis (cont’d)

„ Strategic factors that pertain to firm include:

ƒ Firm value chain

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

ƒ Revenues: growing and at what rate?

ƒ Cost of sales: compared to revenues

ƒ Gross margin (gross profit divided by net sales):

ƒ 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

E-tailing Business Models

„ Four main types of online retail business

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 centric

customer-„ 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

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

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

Catalog Merchants

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

capabilities

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

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 Merchant

Figure 10.3, Page 603

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 Drop Class 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?