E-Retailing: The virtual channel

This section looks at how the internet is been used as a channel to the market,
examining the activities retailers are engaging with costumers. Retail Channel is a
term introduced by Doherty et al. (1996) to describe companies’ multipurpose
adoption of the internet, using it both as a communicational and transactional
channel concurrently in business-to-consumer market. Traditionally the word
channel describes the flow of product from source to end user.

This definition implies a passive unidirectional system whereby the manufacturers

or producer market through a wholesaler or retailer to the consumer. Recent
development in information technology and changing this orientation by enabling
retailers to focus their marketing efforts on managing costumers more effectively.

Therefore, the internet brings the customer even closer to the retailers via a new
combined marketing and distribution channel, in effect an interactive retail
channel. This move may also suggest a shift towards a bidirectional retail-customer
relationship, in which more power accrues to the customer. As a result of the
technological capacity e-retailers are becoming increasingly creative with how they
use the internet and associated digital technologies to serve the needs of their
online customers.

E-Retail Activities

As we have seen, business trading in customer markets can choose to serve their
costumer via different combination of physical and digital channels. Whatever
online formats a business chooses, decisions will also be taken about the actual
functions of any internet and web based activities. These will primarily fall into one
of two categories: information functions or interactive functions.

Information functions

Websites provide retailers with an important opportunity to give customer important

information. Many companies see web as a means of expanding customer service
through offering their customer wide range of information than is possible in-
stores.

One of the greatest advantages of the web according to UK retailers is its ability to
facilitate the dispersion of low-cost information. Retailers have been proactive
about providing information on their websites, and offer a wider range of different
type of information:
  Product information includes product description and prices, promotional
information and web advertisements, colour swatches and graphical images.

 Financial information includes company reports, annual statements and

investor information. The depth of coverage can vary considerably as can
the extent of accessibility.
 Company information includes such items as the history of the company,
store location information, details of the employees, and company incentive
schemes.

 Press releases appear in various forms. Some companies use press releases
as a part of their customer promotion whereas others include such
information in their corporate website aimed at enhancing the overall
profile of the brand.

 Recruitment Information- companies have recruitment features providing

potential applicants with job details.

Interactive Functions

Interactive use of the internet involves more than simply the provision of
promotional information. It includes activities such as ordering of catalogues,
promotional literature and ‘free gifts’ and encouraging customers to provide
market research data as well as sales ordering and payment transactions.
Interactive way of using the internet and web include:

 Marketing communicational tool – the internet is frequently used as an

advertising channel. Traditional advertising channel such as advertising
and print media enable a one-to-many dialogue based on communication
theory between senders and receivers. The communication process is
normally constrained by time, namely the speed of the response of the
participants, but communications can become ‘conversations at electronic
speeds’ if conducted via interactive services such as internet.

 Direct communication – as an interactive channel for direct communication

and data exchanging the internet enables focused targeting and
segmentation opportunities for more closely monitoring consumer
behaviour. E-mail provides a direct non-intrusive means of communication
between firm and costumer.

 Online communities – are also developing on the web and facilitating

interaction between individuals and companies. Car manufacturers such as
citroen and Volkswagen support many enthusiasts’ sites in order to reinforce
the emotional bonds between the product and the customer via the web.
  Marketing research tool – the internet’s interactivity facilitates the collection
of consumer data, providing the opportunity to gather personal information
from online consumers while they browse through web sites, complete
online questionnaires and responds to e-mails.

 Sales channel – the selling of goods and services online can take several
different forms: the order is placed online while the delivery and payment
and made through real-world channels; online ordering while the delivering
of goods is required in the real world and the payment facility has options
online or offline; the total process, namely the order, payment and delivery
of the product occurs via the Internet.

In summary, businesses may choose to utilise the internet and the web in a number
of different ways to communicate and interact with their online customers. The
particular methods that they adopt to build an online brand may vary, from just
providing information to online transactions including ordering and payment of
goods and services. Issues relating to how e-retailers are using information and
interactive content to build online brands is discussed in more details in case study

10.

Who are E-Retailers and what are they selling?

According to Doherty et al. (1999,2003), there are number of characteristics of a

business that are likely to determine the extent to which retailers have adopted the
internet, the online format they might choose and the products they sell. The
characteristics include the following.

Size

Small and medium sized retailers are increasingly adopting the internet as a
channel to market. The advantages include asses to wider market previously
inaccessible and low-cost advertising, but the disadvantages include medium term
financial risk and scalability. Small scale operations may be able to handle the
picking and logistic due to small numbers involved but problems will arise when
expansion is considered and the need to sustain a larger operation becomes
apparent.
Indeed, it is large retailers that have been quick to incorporate the internet into
their retail offer. Examples are France, Carrefour (www.carrefour.fr) in Italy,
Benetton (www.Benetton.com), and in Austria, Magnet online (www.magnet.at).
However, the web offer varies considerably increasingly some retailers offer their
entire range of goods and services via the internet while others present selected
range of information content only.

Activity category

The particular product or service offered to consumers can affect a business’s

usage of the internet. Products or service may be in tangible or intangible form,
each of which has associated advantages and disadvantages. Delivery is an issue
for sellers of physical goods as is the internet’s inability to let consumer experience
the tactile qualities of the product prior to make a purchase decision. Indeed,
product category has a profound effect on success rate of certain business. For
instance, in Europe, the top product categories account for over 75% of the sales
and these categories includes Books, Music, DVD, Groceries, Clothing, Games and
software.

Whilst some of these products do not require extensive product descriptions, high
fashion items present difficulties and often there is a high return rate for clothing
sold online. Digital products do not encounter the logistical difficulties associated
with physical goods but encounter problems with pricing and control of copyright
as a digitised product can be copied, as can music products. Tickets and online
booking service (e.g. e-bookers.com, expedia.com) are enjoying comparative
success online as they offer secure online transaction facilities.

Logistics

Accommodating demand for new level of service in global electronic market places
could reinforce the critical significance of logistical infrastructures in determining
online service. Logistical infrastructure might even determine the nest generation
of market leaders as its effective management provides an opportunity to create
competitive advantage (ferni and spaks, 1998). From a retail perspective it is
important to consider how the internet is incorporated into retail activities in order
to determine the importance of logistics.
If the internet’s primary role is as a promotional tool rather than a retail channel to
market there is obviously less emphasis on the logistical infrastructure.
Establishing a new logistical infrastructure to service the need of internet
customers is providing to be a barrier to its immediate development as a retail
channel. Established mail-order and direct market operators are taking advantage
of the internet channel, due to their not being stored-based and having established
direct distribution systems.

Outsourcing

If companies lack internal capacity they could decide to employ a third party to
mange their online access, outsourcing some or all of their internet operations
(abdel-malek et al, 2005). From an operational perspective, fixed location retailers
might involve a third-party distribution company to bridge the gap between the
customer order and delivery to the customer.

Activity 10.3 The last mile problem

Customers are becoming increasingly aware of the internet as a channel to market.

As established brand names move part or all of there offer online. Coustemers are
regularly turning to the web to make there purchasing decisions. They are not ony
reviewing product information and reviews but also are now ready to buy online as
a mainstream way of shopping rather than as just as novelty experience. As a result
the home delivery market is growing. Paradoxically, this success is causing
logistical problems, which threatens the future success of online business to
customer trade.

The problem is how to get the goods the last mile. A UK government foresight
(2001) report gives estimates that by 2005 home delivery will be worth £34.5 billion.
However, they also predict: ‘as customer demand [for remote purchasing]
increases, the likelihood of there being at home to recive their purchases decreases’
(forsight,2001).

There have been a number of possible solutions to the delivery problem, including
unattended delivery points in the form of secure purpose-build boxes or collection
points at the local store via customers could collect their goods when convenient,
but none have been particularly well received by the consumers.

Whatever the solution at the customer end there are wider implications; at the
company level they must resolve warehousing and distribution and the
implications; at the company level they must resolve warehousing and distribution
and the cost associated with providing a service which involves many deliveries of
small quantities; at a societal level any increase in the number of small vans
required to deliver online order as in the case of online grocery retailer Tesco.com
is likely to cause further local traffic congestion.

Task

1. List five physical products that you or none of your neigbours might
purchase via the internet and requires delivering to your home. Try to
choose products from different categories, e.g. an item of clothing, fresh
food, furniture, drink and computer equipment.

2. State the time of day you were available at home receive deliveries of these
goals.

3. Describe the difficulties that an online retailer attempting to deliver the

goods to you might encounter.

4. Suggest a solution for the last mile problem that will encourage consumers
to increase the amount of goods they purchase via the internet.

This section has discussed the choices a retailer wishing to operate online might
consider and how some established characteristics of a business might affect
decisions of which format to adopt for current and future online operations.

Mini Case Study 10.4- Online goods for sale in the UK

According to verdict (2005) almost 10 % of books sold in the UK are now bought
over the internet, with close to 11% of CDs and DVDs now bought online.
Furthermore, white goods are becoming increasingly popular to buy online, with
internet sales now accounting for 6.6% of the market and online shopping
continues to grow. UK retailers are expecting online shopping to rise by between
23% and 40% for Christmas 2005.

Independent Media in Retail group, a body that represents online stores, estimates
that this will be overall 9 % of retail sales at Christmas , as consumers increasingly
order from home to avoid trudging around the shops. The winners in the online
product categories are electrical goods. IMRG estimates that 20 % of electrical
goods will be sold online at Christmas compared to zero five years ago.
 The reason is thought to be that electrical goods are bought by
there brand name and model number, with little differentiation between stores other
than price. Major high-street chains such as dixons, argos and comet, which
operate e-retail sites, are forced to keep prices low if they want to compete online
with e-retail specialists such as Dabs, empire direct and dell, which have no shops
to support and therefore can often undercut their high-street rivals.

However, online specialists, whilst developing their market share are struggling to
sustain levels of profitability because although the volume of sales continues to
rise, prices of new technologies such as digital cameras and flat-screen televisions
are falling. At this point high-street retailers are able to fight back by offering
greater levels of customer service, peace of mind through being well-known brand
names and greater levels of after-sales support.

Implications for e-retail marketing strategy

The impact of an increasing number of consumers and businesses accepting the

internet and other forms of digital media as a stable channel to market is an
increase in customer expectations, which creates competitive pressures and
challenges for e-retailers. In part, this has been caused by new market entrants that
have established their market position by, say, offering very wide and deep product
choice, dynamic demand-driven pricing or instantaneous real-time purchase and
delivery.

As a result, due to advances such as speed and interactivity brought about

by digital technologies and the extension of trading time, customer expectations of
levels of service have risen significantly. Therefore organisations are required to
adopt a more dynamic and flexible approach to dealing with these raised
expectations.

Allerga strategies (2005) identified a number of performance gaps and table 10.6
presents some of the most significant gaps and the managerial implications.

For the e-retailers it is important to identify any performance gaps and develop
strategies which help to close the gaps. For example, in the case of logistics,
research has found that utilising carriers that have higher levels of positive
consumer awareness with appropriate online strategies can contribute to the
consumers willingness to buy and overall satisfaction with the online buying
experience.
Therefore, development of strong awareness and brand image among consumers
can prove to be a beneficial strategy for both the e-retailer and the carrier, since
consumers have traditionally carried out the home delivery function themselves. Of
course, this in itself raises the expectations of the care taken by the delivery agent,
which has the implication of having to introduce better handling of goods as well as
the speed with which the goods need to be delivered. A further consideration is that
the retailer and the chosen carrier need to be able jointly to satisfy the consumer so
that they may benefit from co-branding.

How the online consumer accesses the retailer’s goods has given rise to various
formats and distribution strategies but this only forms part of the retailers e-
strategy. Nicholls and Watson (2005) discuss the importance of creating e-value in
order to develop profitable and long-term strategies and agree that logistics and
fulfilment is a core element of online value creation but at two other important
platforms: firm structure, and marketing and sales.

Firms structure can be used strategically depending on organisational capabilities

and technology infrastructure. Porter described the emergence of integration and
the potential impact on e-value chains. Integration can ensure faster decision
making, more flexibility and attract suitable e-management specialists and capital
investment. In the case of the UK grocery sector, larger retails have adopted
different approaches towards structuring their online operations: Tesco serves 95%
of the UK population by using a store-based model whereas ASDA, which offer less
product lines, has based its model on the classical warehouse model. However, it is
equally important to remember that the lack of a suitable infrastructure can be
limiting in how the technology can be used.

Marketing and sales can be used in customer-centric value creation strategies in

the form of interactive marketing communications strategies and revenue streams.
Indeed according to dennis, there are four revenue stream business models, which
in turn are based on advertising, merchandising and sales, transaction fees and
subscriptions.

Strategic implications for retailers wishing to be successful online are far reaching
and require a retailer to develop a carefully informed strategy, which is guided by a
business model that can satisfy corporate objectives through the deriving value
from corporate capabilities whilst effectively meeting the expectations of the online
consumer. The target market and the product category can have a significant
influence on success. Now read Mini case study 10.5 and consider the offline
impact of online marketing.

The offline impact of online marketing

Increasingly, companies are keen to understand the effect and impact of their
promotional spend and particularly how different marketing communication tools
perform. As with broadcast media advertising, it can be difficult to assess the
impact of internet marketing initiatives on offline sales. Traditionally, in the retail
sector, it is not common practice to track the reasons why consumers arrive in a
particular store to make their purchase. However according to Hewitt (2004) the
Internet is ‘not just a great promotion vehicle, it’s also the tracking source that
enables us to close the loop and see what happened after the visitor left the Web site
and went shopping’. He suggests several ways in which retailers might use the
internet to follow their customers’ offline purchasing behaviour. Tactics to gather
information include the following.

Pre-purchase Internet surveys

Certain products and services are ideal for selling online; books, travel and
entertainment tickets, and financial services whereas other products such as cars,
consumer electronics and clothing are researched but not often purchased online.
AOL conducted a series of surveys of 1,004 people who had purchased TVs within
the last six months and 521 people who intended to buy a TV within the six months
to find the differing types of media such consumers employed to find information to
inform their purchasing decision (see figure 10.5). The surveys revealed that in-
store displays (58%) and past experience/previous ownership (48%) are the most
important sources of TV purchases as the most important media sources for new

TV information.

This kind of survey is useful as it provides an indication of effectiveness of online

promotion. It also suggests that is necessary to link online promotion with in-store
promotion, especially if retailers are solely using the Internet as a marketing
communication channel.

Online coupon redemption

This technique is often used in the early adoption stages of the Internet as a
marketing communication. The online advertiser incorporates/promotes a discount
coupon via e-mail (or web site) and requests the customer print out a voucher and
then take it to a participating store in order to redeem the discount (e.g. see figure
10.6 concerning McArthur Glen Designer Outlets). On redemption of the printed
voucher the retailer is able to analyses the impact of the online promotion on the
offline purchasing behaviour and in doing so develops an understanding of their
return on investment in online advertising.
Online rebate/gift with purchase

In this instance the retailer tracks the online customer’s information through the
use of cookies and offers some form of discount or gift offer with purchase.
Generally, the customer will be required to register online.
Just as consumer use of the Internet has been growing rapidly during the last
decade so too has the use of internet as a medium to communicate a company’s
marketing messages. Research has shown the Internet as having an increasing
share of voice when compared with other media. Furthermore, a survey conducted
by PricewaterhouseCooper (2005) found that consumer advertisers are leading the
online advertising spend.

The strategic implications of such findings are that retailers should be developing
measurement techniques to determine the retailers should be developing
measurement techniques to determine the effectiveness of the online media on the
offline spend.

Question

To what extent is the Internet a ubiquitous marketing communication channel? In

other words, is it possible for all types of companies operating in all sectors to
communicate with all consumer target markets to an equal level of effectiveness? If
not, how could retailers determine how to allocate online promotional spend?

Consumer advertiser spend surges in 2005

 Consumer advertisers represented the largest category of internet and

spending, accounting for 51 per cent of 2005 second-quarter revenues, up
from 49 per cent reported for the same period in 2004.
 Computing advertisers represented the second-largest category of spending
at 15 per cent of 2005 second quarter revenues, down from the 18 per cent
reported in the second largest quarter of 2004.
 Financial services advertisers represented the third-largest category of
spending at 13 per cent of 2005 second-quarter revenues, down from 17 per
cent reported in the same period in 2004.
 Telecom companies accounted for 7 per cent of 2005 second-quarter
revenues, up sharply from the 1 per cent reported in the same period in
2004, while pharmaceutical and healthcare accounted for 5 per cent of
2005 second-quarter revenues, consistent with the second quarter of 2004.
In conclusion, it is now widely acknowledged that there is a need for a company to
have a coherent e-strategy underpinned by a clear vision of how it may take
advantage of the internet. An online retailer’s strategy is likely to be affected by the
type of online format it adopts, the type of products and services it sells and the
market segments it chooses to serve.

Retailers will defend their existing market share through consideration of strategic
and competitive forces. It is the actions of retailers and their on- and offline
behaviour in response to peer actions and new entrants behaviour and success rate
that are likely to shape the future of the internet as a retail environment. Retailers
need to ensure that the value created by e-retailing is additional rather than a
redistribution of profitability.

It has been suggested that by removing the physical aspects of the retail offer the
internet may also provide the opportunity for increased competition. Pureplays can
easily combine e-commerce software with scheduling and distribution to bypass
traditional retail distributors. These virtual merchants could therefore threaten
existing distribution channels for consumer products.

The internet is thus likely to appeal to new entrants who have not already invested
in a fixed location network.

However the boom and bust of the dot-com era has demonstrated that this
opportunity must be supported with a sound business plan aimed at generating
profits and not media attention per se.

Retailing online renders one of the established mantras of the fixed location
retailer location location location redundant. So how are the new e-retailers
establishing and maintaining a competitive position in the internet’s marketspace?

Strategy and business model

The valuation achieved by the company at its float was seen by many at best as very
unrealistic- its paper value exceeded the value of longstanding established travel
agents like Thomas cook pvt ltd. Many dismissed last minute .com valuation as
being an indicator of the absurdity of the dot-com phenomenon and dismissed
excessive investment as irrational.
One of the problems with most of the commentary about lastminute.com in
particular and e-commerce in general was that it focused too much on the front-
end business idea behind the models and too little on the model’s place within its
sector. Over time the company has proved to be an established online brand.

Sales and marketing

Lastminute.com built its market share by focusing on making innovative use of

internet technologies to deliver services to the end consumer that were close to the
end of their shelf-life, i.e. late booking of holidays and hotel rooms. One of the core
advantages is that there were few logistical issues to deal with when the purchaser
takes themselves to the point of consumption. In this way the company is able to
supply both niche and increasingly mass market needs.

Lastminute.com use advanced personalisation tools to deliver a highly customized

online experience, sending different tailored messages to online customers who
have opted in to receive online marketing, promotions and newsletters. The
messages are varied according to the profile of the target customers and
personalized e-mails markets and accommodate the integration of a large number
of businesses on the supply side into the group. An additional advantage is that
having developed the expertise the team at lastminute.com is able to sell their
knowledge to others thereby routing more trade and information through the portal
in a similar way to other major online operators.

Competition

This has become a highly competitive sector and both online players like
expedia.com and laterooms.Com and long-established high-street brands, are
compeling with lastminute.com for market share. In addition, supply and demand
patterns can change quickly as external events in the trading environment have an
impact.

Lastminute.com has become a very well-known and established online

brand and has developed the technological know-how which has allowed the
company to create significant competitive advantage. Furthermore, it provides its
customers with a user-friendly interface, with many interactive and informative
features that enable the customer to preview a hotel prior to booking. The company
has used each of the key dimensions of e-strategy to create a very robust business
model, which continues to attract both customer and suppliers.
Infrastructure

Externally, lastminute.com is very effective in what it offers to its target markets;

internally, its back-office systems and supply chain side of the business functions
very efficiently. The key to success in this case is company-wide highly-integrated
systems, which can easily be scaled up or down and deliver a high level of
flexibility. As a result, the business can easily expand to meet the needs of the
customers.

Summary

1. This chapter has focused on online consumers and e-retailers and is doing
introduced some of the key issues that might eventually affect the overall
success of e-retail markets.

2. Online customer expectations are being raised as they become more familiar
with internet and other digital technologies and as a result companies are
being forced to adopt a more planned approach towards e-retailing.
Additionally, in doing e-retail managers are considering who their
customers are, how and where they access the internet and the benefits they
are seeking.

3. Web sites that do not deliver value to the online customer are unlikely to
succeed. E-retailers need to deliver a sound understanding of who their
customers are and how best to deliver satisfaction via the internet. Over
time, retailers may begin to develop more strategically focused web sites.

4. Given current levels of growth in adoption from both consumers and

retailers it is reasonable to suggest the internet is now a well-established
retail channel that provides an innovative and interactive medium for
communications and transactions between e-retail businesses and online
consumers.