E-Commerce – The Next Chapter

A new industry report contends that traditional brick-and-mortar retailers
are best positioned to master the economics of online retailing as e-commerce
enters a new phase.

And there appears to be plenty of empirical evidence to support that claim,
as witness the spectacular growth of operations such as Kmart’s
BlueLight.com, and the spectacular failure of operations like the bankrupt
pure-play eToys.

In a study entitled “The Next Chapter in Business-to-Consumer E-Commerce:
Advantage Incumbent,” the Boston Consulting Group posits that
brick-and-mortar retailers have a golden opportunity to use their inherent
advantages to grow customer share dramatically.

“Online retailing is entering a new phase in its evolution,” said Michael
Silverstein, a senior vice president and head of BCG’s Consumer practice.
“What was once an industry characterized by entrepreneurial dot-coms,
targeting the discretionary spending of the Internet-savvy consumer, is fast
becoming the domain of traditional retailers, selling both necessities and
discretionary items to the broader population.”

Amazon.com to the contrary, the empirical evidence is everywhere, and perhaps
is nowhere more apparent than at BlueLight.com, which was founded in
December of 1999 and grew like crazy via a free ISP offer.

In fact, Kmart has a big press conference scheduled for next Monday in New
York City, and the invite for the launch of a retail initiative mentions its
Jaclyn Smith and Kathy Ireland clothing lines. The Web site, which already
sells everything from electronics to flowers, has a teaser saying that
clothing sales are coming soon and “We’re adding a larger selection of new
looks and big-name brands – keep checking back over the next few weeks.”

Clearly these guys “get it,” and BlueLight’s ability to let customers make
returns at their local real-world Kmart store is a distinct advantage.

The BCG study says that sales in the nine leading online categories have the
potential to grow from $34 billion in 2000 to $168 billion by 2005. Most of
the growth will take place in the leisure travel, grocery and clothing
categories, the report says.

“Consumers are now migrating to the big brands with an online capability,”
Silverstein said. “While they want the convenience of ‘always available’
shopping, they are also demanding higher levels of performance from retailers
in all aspects of the online shopping experience. The next chapter in online
retailing will be about the revenge of the sophisticated incumbent.”

Interestingly, the study goes on to say that by and large, the economics of
online retailing “are not working well.” In most categories, margins are
simply insufficient to cover high fulfillment and marketing costs.
Collectively only catalogers have been able to generate positive
contribution margins after marketing costs are factored in, the study says.

Catalog marketers “enjoy the advantages of established brands, existing
infrastructure, and extensive experience in selling to customers at a
distance,” said Peter Stanger, vice president and head of BCG’s B-to-C topic
area in North America. “They know they will succeed if they focus on the best
customers, rather than allocate huge sums to attract customers whose
purchases won’t justify their acquisition costs.”

What about pure-plays? The study says that only pure-play retailers that have
achieved the scale needed to reduce their total systems costs and build
competitive advantages in key areas such as brand strength, procurement,
fulfillment, customer acquisition, and service will be success stories.
Amazon is currently the only such company to have crossed this threshold in
the book category. And “it has yet to demonstrate long term success

The report was based primarily on a quantitative survey of 2,876 U.S.
Internet purchasers conducted during the fourth quarter of 2000.

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