Brick-and-Mortar Retailers and the Internet

Retailers with physical outlets have been slow to adopt e-commerce: the medium is new and unfamiliar to them, and their hesitation is often based on uncertainty that this new channel will support the brand they have established through the customer experience of a physical store.

Even today (2007), it is a minor effort, with less than 3% of total retail sales occurring online, largely concentrated in manufacturer direct-sales or pure-play online realtors - though there's some speculation as to whether this miniscule a percentage is a justification of their stance, or the result of it.

"Retail" is considered to be the final transaction in the sale of goods to the consumer. The author presents several of the NAIC retailing codes, which classify retailers by the merchandise they sell, and states that there are more than one million brick-and-mortar retail establishments in the United States. He provides various statistics that point to one thing: it's a huge business.

There are also a wide array of non-store retailers, including direct marketers (telephone and mail), catalogs, door-to-door solicitation, kiosk and cart retailing, home delivery sales, party-plan sales, electronic shopping, and vending machine operations. These together account for less than 7% of the total retail revenues.

Online retail is low in general, but in certain industries, it can be fairly significant": online purchasing of computer hardware and software is estimated at 34%, event ticketing is 20%, books is 15%, and travel 11%.

Presently, the Internet is not perceived to be as big as threat to retailers as big-box retailers (such as Wal-Mart) entering their physical territory, as it is difficult fro independent and small-chain retailers to be competitive on unit price. To some degree, retailers face the same fight online: in a medium in which the next vendor is a few mouse-clicks away, retailers must compete on price, except in the case where a retailer offers unique goods (but even then, substitute goods are available at lower price points).

Neither is online retailing particularly attractive to catalog-based retailers, whose business is most similar to Internet-based retail (fundamentally, it's transitioning from a print catalog to an electronic one). A study of 130 catalog retails, contrasting the cost of online sales to catalog, indicates that their profit margin is actually 6% lower for online sales than for catalog sales, the difference being the increased costs of customer service, marketing, and website-related expenses. (EN: beware of ratios - I don't doubt that these may in some cases be higher, but ratios hide details that could pertain more to the allocation of costs or poor resource management.)

The author speaks to five functional needs that are inherent to the retail buying transaction:

There's a side note on eBay, considered to be the eleventh-largest retailer in the world - though the company itself is not a retailer in that the company merely provides a market in which goods are bought and sold by others. However, the company is also a launching point for small retailers who are slowly getting into online operations, whether by auctioning off remainders or opening an eBay "store" - and maintaining it until the point where the commissions paid to eBay exceed the cost of operating an independent retail site. (Though when they go independent, they face the additional task of building awareness of their online presence apart from eBay.)

Traditional retailers also face the issue of integrating their multichannel retailing - ensuring that their in-store and online experiences support their brand, that they are not merely cannibalizing their own sales, and that the combination of media ultimately lead to greater share-of-wallet.

There is an assertion that the large national chains are beginning to leverage the Internet as an additional outlet, and will often work on cross-channel promotion (buy online, take delivery at a physical store). As sales from this medium are very low, and the connection between online promotion and in-store activity difficult to track, this is largely a defensive maneuver: t is not that retailers see the Internet as the future of retail (they remain focused on they physical store), but as a defense against encroachment by this new medium.

Also web-only retailers are in a position of weakness, in terms of the strength of their brand with consumers and their ability to negotiate pricing with vendors. They also face significant overhead expenses that will book as losses until the volume of sales can be ramped up over time. The widespread failure of many pure-play online realtors (peapod, pets.com, etc.) provides evidence of the difficulty facing an online retailer.

Also, the period of rapid growth among online retailers is attributable to phenomena that are not expected to repeat. The number of online retailers swelled in the late 1990's due to the easy availability of capital, which dried up after the dot-com bust. Also, the rapid growth in the total amount fo sales online coincided with the rapid growth of the medium - it wasn't that more people were flocking to online sales, just that more people were coming online during that period.

The author concludes that online retailing is still weak, and while some factors point toward moderate growth over time, it remains unlikely that there will be a dramatic shift in the nature of retail.