Last Updated: October 22, 1998
The worldwide value of electronic commerce revenues is expected to hit $208 billion US by 2001, of which 88% will be business-to-business, according to a forecast by Forrester Research. Leading the business-to-business sector will be wholesale and retail revenues, which are expected to climb to $89 billion by 2001. Consumer on-line revenues are expected to contribute $25 billion US. This is a marked jump from the situation in 1997, in which the total worldwide electronic commerce revenues was estimated by Forrester to be $10 billion US.
With its relatively healthy economy, low inflation rate, moderate consumer confidence, excellent telecommunications infrastructure, and growing information technology base, Canada is an environment conducive to e-business and is certain to capture the momentum of the worldwide expansion in electronic commerce. This bodes well for the distribution industry in Canada (which encompasses retail, wholesale, and distribution businesses), which has been subject to numerous changes in recent years, including:
The Internet will have an enormous impact throughout the distribution supply chain, affecting not only the way that consumers shop, but also the way businesses acquire and distribute goods.
However, there are numerous obstacles that may hinder the roll-out of e-business distribution initiatives. In addition to the threats of an impending economic slowdown in the Canadian economy, there are consumer concerns (such as security and privacy), the hurdles that businesses must overcome (such as the high cost of acquiring customers and channel conflict), and larger issues that will have implications on the proliferation of e-business worldwide (such as taxation and encryption). Fortunately, there are a number of 'best practices' being used by successful Internet businesses which are helping to overcome these e-business roadblocks.
This article will provide an overview of the Canadian distribution industry and the potential application of e-business initiatives. In addition to providing background information on the Canadian economic and communications environment, this article will identify the current state and trends of the distribution industry. The impact of e-business on the distribution supply chain will then be described, as well as the potential roadblocks businesses may encounter. Finally, a series of e-business recommendations will be made, based on best practices that are currently in use.
Overview of Canada
The Canadian economy has seen moderate growth in recent years. In 1997, economic growth surged ahead with real GDP growth of 3.8%, which was one of the highest among all the industrialized countries. This strong momentum is anticipated to carry on through 1998, with anticipated GDP growth coming in at 3.4%. However, this optimism has recently been dampened by the global economic turmoil resulting from the persistence of the "Asian flu" and the fiscal problems in Russia. As a result, the robust growth is expected to slow down somewhat in 1999, with GDP gains coming in between 2.0 and 2.5%.
The service sector, which includes both distribution and retail trade as components, dominates the Canadian economy, with three out of four employees employed in the rendering of some form of services. Within the broad services sector, the subcategory of business and personal services has shown the fastest rate of growth during the 1990s, and now provides 39.2% of total employment. Despite the overwhelming contribution to employment in the country, the business and personal service sector contributes only 25.2% to GDP.
Consumer spending has been volatile in recent years, subject to the fluctuations in disposable income. After a brief period of positive growth between mid-1994 and the first quarter of 1996, per capita disposable income actually shrank, showing a 0.2% decrease in 1997. This shrinkage in disposable incomes was attributed to increased income tax collections and a virtual freeze on average wages that barely kept ahead of inflation. These factors also led to a dramatic drop in the per capita savings rate, which dropped from 5.8% in 1996 to a record low of 1.7% in 1997, as consumers financed their purchases through their savings and credit.
On the other hand, inflation has remained low or almost non-existent for the past six years, with the consumer price index up averaging just 1.5% on an annual basis. This low inflationary environment has also been helped by downward price pressure arising from technology-induced cost reductions, increased global competition, and a virtual freeze on average wages.
Despite the shrinking per capita disposable incomes, domestic demand grew 4.5% in 1997, a leap over the 2.0% growth rate for the prior year. This paradoxical surge in domestic demand was attributed to an increase in consumer confidence to its highest level in eight years. This, in turn translated into heightened consumer spending on durable goods (automobiles, furniture, electronic goods, and appliances) which grew by 12% in 1997. Reasons for the renewed consumer optimism included strong job growth, low financing rates, below-average price hikes, and a federal government posting budgetary surpluses for the first time in two decades. In 1998, this heightened domestic demand is expected to continue, albeit at a more restrained pace over the next two years, fueled by consumers benefiting from increases in disposable incomes (the result of job gains, rising wages, and cuts in income tax rates) and tempered by worldwide economic upheavals.
The continued growth of the Canadian economy is overshadowed by two threats. At the forefront is the turmoil in global markets, which has had a significant effect on Canada's resource-based economy. The weakened economies abroad have not only softened demand for Canadian exports, but have convinced nervous investors to dump their money into the US dollar, which is seen as a haven against market volatility. These two effects in turn have contributed to a weakened Canadian dollar, which recently fell to a historical low of $0.63 US. In August of 1998, the Bank of Canada raised interest rates in an effort to stop the downward slide of the dollar, which may further reduce the momentum of the Canadian economy. Signs of a domestic slowdown have also been seen, with real GDP year-over-year growth falling to a paltry 1.1%, and the TSE 300 having lost 30% of its value since April 1998. However, due to its high linkage to the economy of the United States, it is expected that the Canadian economy should weather the storm, as American consumers continue to demand Canadian exports and American tourists take advantage of the extremely favourable exchange rate. Canadian economic growth is predicted to be moderate, propped up by the stronger American economy, with maximum GDP growth estimates at 1.7%.
The other threat to the outlook on the Canadian economy is the uncertainty arising from national unity issues. Quebec's 7.1 million residents make up approximately one-quarter of Canada's population and its economy is vital to the overall economic health of the country. Though a secession bid failed to gain electorate approval in 1995, the Parti Quebecois provincial government is still pressing on the sovereignty issue, and has vowed to introduce another referendum in the near future.
Table 1: Canadian Major Economic Indicators (Statistics Canada)
Real GDP (% change)
Real Consumer Expenditures (% change)
Real Final Domestic Demand (% change)
Personal Disposable Income (% change)
Personal Savings Rate
Consumer Price Index
* TD Economics Forecast, July 1998
Canada is blessed with an excellent telecommunications infrastructure and growing information technology base, both of which are fostering an environment conducive to the future expansion of Internet use and e-business. PC penetration figures are markedly different between businesses and households. Whereas IDC estimates that 86 to 94% of all Canadian businesses have PCs, a recent study conducted by the Canadian Internet Marketplace found that 4.3 million households in Canada have PCs, which equates to a household penetration rate of only 37%. Of those 4.3 million households, 2.8 million have modems connected to their PCs, of which 2.0 million have an Internet connection. Therefore, the current household Internet penetration is estimated to be at 17%, but it is predicted to surge to 28% by the year 2000. With respect to the actual number of individuals that are actually on-line, a CommerceNet/Neilsen study released at the end of August 1998 estimated the number to be 8.5 million.
Fortunately, the Canadian environment has characteristics that are conducive to the proliferation of e-business, including:
Overview of the Distribution Industry
After achieving average annual growth rates of 3.0% between 1994 and 1996, retail trade in Canada grew by 7.6% to $237.3 billion CDN. The majority of this consumer spending was on durable goods, such as automobiles, electronic goods, furniture, and appliances. On the other hand, other consumer spending was muted, rising only 2.8% in 1997. Consumer confidence was strong going into 1998, which was confirmed by the Consumer PulseCheck Survey conducted by American Express and the Retail Council of Canada in late 1997. The survey, which spoke with 800 retail consumers across Canada, found that 44% of the respondents stated that they were spending more in stores than in the prior year. The reasons given for the buoyant spending included increased income (46%), increased job security (42%), decreased debt load (32%), and increased confidence in the general state of the economy (36%).
In addition to renewed consumer optimism, this growth has been helped by consolidation in the retail environment, which saw the elimination of several weaker competitors following an influx of US retailers into the Canadian market during the early 1990s. This influx of American retailers also forced existing Canadian-based retailers into developing newer, more efficient distribution systems and introducing new retail formats. This has been followed by a further influx of international retailers looking to capitalize on Canada's recent economic growth, which is expected to lead to a retail glut in the near future.
However, retailers are optimistic on their outlook for their industry. The Future of Retailing study, conducted by IBM Canada Ltd. and the Retail Council of Canada, found that 80% of the 742 retail CEOs and business owners surveyed planned to emphasize revenue growth over cost reduction. Drivers for the revenue growth would include new store openings, the addition of credit services, the use of the Internet as a primary non-store channel, and the addition of new product offerings, such as in-store banking, and travel services.
The Evolving Consumer
Meanwhile, retail consumers have been evolving throughout the Nineties, and are increasingly demanding more from the retailers they deal with. One finding of the Consumer PulseCheck Survey was that 33% of consumers usually have a specific store in mind when shopping for a specific item, but 90% of the time they end up leaving the store empty-handed. The top two reasons cited by customers for leaving stores empty-handed were poor selection/service (56%) and price (33%). In other words, customers had loyalties to particular stores, but retailers were failing to both fulfill their needs and deliver the service they wanted. Instead, the consumers surveyed were putting up with items not in stock, staff who were not familiar with the products and could not offer helpful advice, slow check-out lines, and inadequately staffed stores. On a love-hate scale, consumers gave the overall shopping experience at Canadian retailers a dismal 5.24 on a scale of 1 to 10.
Impulse vs. Precision Shopping
Almost 75% of the consumers that responded to the survey could be characterized as the 'get in and get out' type of shopper. These types of consumers are driven by a shortage of time, and seek out convenience. A boom in two-income families, shift work, and an expanding work week that has cut leisure time from 26 hours a week to 19-- these have all contributed to the growth in the number of 'get in and get out' shoppers. Consumers, on average, are spending less time on each mall visit, which has fallen from 90 minutes during the height of the retail boom in the Eighties, to less than 60 minutes today. In fact, mall visits have declined at least 15% in all age brackets since 1989, including teens and seniors, the most frequent mall visitors.
Furthermore, having survived the lengthy economic downturn of the early Nineties, they have shifted their shopping paradigm from impulse buying to precision shopping. A Coopers & Lybrand study conducted in 1995 found that consumers were cutting impulse spending and were more likely to postpone a purchase rather than buy on credit. This finding was supported by a Stillerman & Jones study conducted in 1994 showed 50% of a typical shopping mall's customers were there to visit specific stores or to make a specific purchase, up from 41% in 1991.
The Crossover Shopper
There has also been the growth of what has been labeled as the 'crossover shopper'. The 'crossover shopper', while being in the middle class, upper middle class, or higher, are buying discount merchandise, in search of both bargains and value. Approximately 85% of shoppers now consider themselves to be sale shoppers, buying merchandise on sale or at everyday-low-price stores and discount outlets. These consumers have helped the strong growth of discount department stores (led by Wal-Mart, Sears, and Zellers), which now possess 55% of the general merchandise market, up from 35% in the early Eighties. However, in order to woo the crossover shoppers, retailers have had to increase their value proposition, offering better value in a trendier environment, such as the metamorphosis that Zellers undertook in 1998.
Increased Demands on Retailers
What this all means is that the average retail consumer today is spending less time shopping, shopping less frequently, but is spending more on each shopping trip. In order to capture the increasingly fickle shopper, Canadian retailers must not only offer a greater value proposition, but must also be able to deliver it in a timely and convenient manner. Successful Canadian retailers are meeting these challenges via a number of different initiatives.
Having high in-stock rates, meeting or beating the industry standard of 98% (which refers to the likelihood that a given product will be on the shelves when a customer looks for it), is a function of how well the retailer's inventory replenishment functions are managed. Information technology is not only allowing retailers to reduce cycle times and improve service levels, but is also helping them manage their acquisition costs better by streamlining the formerly labour-intensive ordering and receiving processes.
Customer relationship marketing aims to foster customer loyalty and to develop an ongoing dialogue with a retailer's customers. Taking cues from the airline and hospitality industries, retailers have developed loyalty programs that identify and reward its best customers. For example, Harry Rosen uses a proactive database marketing program that monitors both frequency and recency of visits, and then talks to its customers with follow-up calls, personalized notes, and invitations to shop.
Wholesale and Distribution
On the other end of the retail distribution supply chain, wholesale sales also saw spectacular growth in 1997, surging ahead by 14.7% to $325.5 billion CDN, a trickle-down effect from increased consumer confidence.
Despite the good news, Canadian distributors and wholesalers are facing challenges resulting from the numerous trends and technological innovations have shaped the industry in the past ten years. There has been rapid growth in the areas of business services, high-tech manufacturing, and international trade. This, in turn, has resulted in an increased use of outsourcing for the distribution function, more geographically dispersed production, and a greater need for timely delivery. Thus, wholesalers and distributors are finding that they must increasingly compete on the basis of cost, quality, and time.
Managing the Supply Chain
Retailers, attempting to juggle the divergent goals of higher in-stock rates and lower carrying costs, are demanding smaller and more frequent store deliveries. Thus, the burden is then placed on the distributor or wholesaler to better manage transportation costs and logistics information. At the same time, retailers are demanding increased shipping accuracy to reduce retailer-level costs of detailed checking and receiving. As a result, pressure is being placed on distributors and wholesalers to reduce order cycle time and improve the flow of material along the supply chain.
The demands for reduced cycle times and increased coordination of material flows have given rise to an increased need for optimizing information flows along the supply chain. This has led to the growing use of information technology within distribution, including the application of warehouse management systems (WMS) and enterprise resource planning (ERP). With the increasing ability to closer match inventory requirements with actual consumer demand, supply chain management (SCM) has helped companies achieve reductions in both the amount of inventory flowing between manufacturers and the consumer, and the time taken to traverse the entire supply chain.
With lower inventory requirements and shorter holding times, this has had numerous effects on the economics of distribution, such as a reduced amount of warehouse space required by firms, and changes in the roles and relationships of distributors and wholesalers. More manufacturers and retailers are contracting out logistics services, and are also demanding a wider range of services from their logistics suppliers. On-time performance, service quality, speed, reliability, willingness to customize service, order cycle time, and computer system capabilities have all become key success factors in distribution. Successful distributors and wholesalers are responding to this paradigm shift by evolving.
Many distributors and wholesalers are using lean practices to drive cost out of the supply chain. The Consumer Markets Global Supply Chain survey, conducted by KPMG Peat Marwick LLP, found that the following principles were helping to achieve significant improvements in cost, cycle time, and inventory turns:
For example, retailers were able to replenish in as little as six days for domestic durables and 14 days for non-durables. Higher inventory turn rates, reflecting lower inventory levels, were also reported as the result of lean practices.
There is also an increased amount of collaboration between distributors and retailers to improve supply chain performance. The same KPMG study found that 96% of retailers regularly share information with their suppliers, some on a daily basis, in order to have tighter control of supply chain structures and minimize the costly effects of coordination failures. The most common means for this information sharing is electronic data interchange (EDI), though there are still about half that rely on manual order management processes, such as mail or fax.
Other distributors, particularly in the computer hardware industry, are creating customer loyalty by differentiating themselves through increased service offerings. For example, top tier hardware distributors, such as Tech Data Corp. and MicroAge Inc., are now offering more value-added services to their resellers, such as channel assembly programs (where orders are configured to customer specifications at the distributor level), help desk, technical support, and network management. This, in turn, is allowing the value-added resellers (VARs) to reinvest the saved time and costs into higher-level consultative activities.
Use of the Internet in Distribution
The worldwide value of electronic commerce revenues is expected to hit $208 billion US by 2001, of which 88% will be business-to-business, according to a forecast by Forrester Research. Leading the business-to-business sector will be wholesale and retail revenues, which are expected to climb to $89 billion by 2001. Consumer on-line revenues are expected to contribute $25 billion US. This is in marked contrast to the situation in 1997, in which the total worldwide electronic commerce revenues was estimated by Forrester to be $10 billion US. However, these figures do not include purchases that were conducted' off-line'-- that is, purchases that were initiated on the Internet, but completed in the real world. Current estimates by CyberDialogue place the dollar value of these off-line purchases at par with on-line purchases.
Factors that are contributing to the optimistic outlook for on-line selling include:
In order to exploit this new channel effectively, retailers, wholesalers, and distributors must understand how the Internet will affect their respective businesses, the evolving Internet consumer, and the impact of the Internet on shopping habits.
The Internet Consumer
According to a CommerceNet/Nielsen Media Research survey conducted in August of 1998, although 8.5 million Canadians are on the Internet, only 1 million had actually made a purchase in the last six months. However, the same study found that the number of Internet shoppers is actually growing faster than the number of Internet users in North America. Between the beginning of 1997 and the middle of 1998, the study found that the number of Internet users grew at a rate of 2.5% per month. During the same period, the number of Internet buyers increased 3.5% per month between January and September 1997, before jumping to 8% per month between September 1997 and June 1998. This phenomenal growth, according to CommerceNet, can be attributed to advances in easy-to-use shopping technology and an increasing sense among consumers that buying on-line is safer than once thought. This optimism is further supported by a recent telephone survey conducted by Ekos Research Associates in October 1998, which found that more than 1 in 3 Canadians expected to buy something over the Internet within the next couple of years.
As the number of these Internet consumers continues to grow in the coming years, it is important for retailers to understand who they are, why they shop on-line, how they shop on-line, and what they are buying.
Who They Are
The latest Jupiter communications survey finds that the typical on-line shopper (as opposed to Internet user) has a median age of 33 and an average household income of $59,000 US. 59% of on-line shoppers are single, 57% have a university degree, 30% are professionals, and 34% have children under the age of 18 in their households. However, under this broad categorization, there are several growing segments.
Women comprise 40% of Internet consumers, and their numbers are growing, as over half of the new users signing onto the Internet are women. According to the eMarketer Group, women are expected to comprise 51% of the on-line population by 2002. 75% of these women are working full-time and have an average annual household income of $63,000. 80% of these women surveyed by the e-tailing Group stated that they believed it to be more convenient to shop on-line and appreciate the 24x7 availability of on-line shopping services. Jupiter Communications predicts that female consumers will spend $3.5 billion on-line for groceries, apparel, and books by the year 2000. As a result, this demographic group is being increasingly targeted by marketing organizations.
A second significant target group of Internet consumers are children and youth under the age of 18, also known as the Baby Boom Echo (all children born between January 1977 and December 1997), who currently make up almost a third of the population. Despite their limited disposable income, they do exert enormous purchasing clout by having an influence on many family purchasing decisions, which is purported to be 20 cents on every dollar that is spent. Furthermore, their numbers are expected to increase significantly in the coming years. For the first time since 1978, the number of teenagers is expected to rise in 1998 and grow 25% by the year 2010. This demographic shift should be of note to retailers, whether on-line or off-line, as these teen consumers have disposable income with few responsibilities. Another boon to on-line retailers is the fact that this demographic group has the greatest access to interactive digital technologies, primarily via the Internet, which is why author Don Tapscott has coined them the 'Net Generation'. Because of their unprecedented access to information, the Net Generation is more analytical, media-savvy, and informed than previous generations. Furthermore, today's under-26 computer users, who are already twice as likely as most baby boomers to buy on-line, are moving in to their prime shopping years. So not only are their numbers growing, but they will be buying more in the years to come.
Baby Boomers, the parents of the Net Generation, are currently an untapped market. These Internet users, between the ages of 35 and 50, comprise 15% of all Internet users, and also control a disproportionately large share of disposable income in the country. However, as a whole, they tend to spend less of their income on retail goods and services, and more on family purchases, such as vacations, college funds, move-up homes, cars, and investments.
Seniors, those over the age of 50, tend to be late adopters of technology, and their exposure to the Internet is primarily through the use of e-mail and on-line chat. A survey conducted in 1998 by @plan in conjunction with the Gallup Organization, found that there are more than 4.3 million active Internet users aged 55 and older worldwide. Furthermore, this group tends to have the greatest net worth, and have generally have made most of their big-ticket purchases. 40% of those surveyed reported a household income of $75,000 US per year, while 26% reported an annual income in excess of $100,000 US. With higher-than-average disposable incomes, this group has shown a higher-than-average propensity to shop on-line. They are 39% more likely to purchase books on-line, 85% more likely to buy business equipment on-line, and 27% more likely to buy investments on-line than the average Internet user.
Why They Shop
Internet shopping is being driven by a number of factors. A PointCast survey, conducted in 1998, uncovered the reasons for on-line shopping to be convenience (66%), avoidance of crowds (44%), prices (42%), the ability to purchase items not available locally (39%), selection (26%), speed, and delivery (19%). An Ernst & Young survey found that Internet consumers find buying on-line a satisfying experience, citing the ease of comparison shopping (56%), on-line merchandising (52%), and ease of navigation and speed (50%). Furthermore, the improvement of overnight and second-day delivery services is also spurring the growth of Internet shopping in a similar fashion to how it aided the growth of catalog shopping in the Eighties.
This increased on-line shopping activity also seems to be cannibalizing existing shopping habits, according to the "Consumer On-line Shopping Report" from CyberDialogue Inc. Among those surveyed who had purchased on-line, 23% said that the Internet decreased the time they spent shopping, 19% said they shopped less at stores, and 14% reported using mail-order catalogs less.
Some retailers are even discovering that the increased convenience of an on-line sales channel is attracting customers that they normally would not. Dell (http://www.dell.ca) is finding that 80% of consumers and half of small businesses that purchased from their web site had never purchased from Dell before, and 25% of these consumers said that if not for the web site, they would not have made the purchase. In a similar fashion, AOL reports that 40% of member shopping takes place after real-world stores are closed, between the hours of 10pm and 10am.
How They Shop
Research is showing that the Internet is having a profound influence on how consumers make their purchasing decisions, and that it is indirectly driving a significant amount of off-line sales. In a survey conducted by Ernst & Young in early 1998, 32% of consumers with on-line access surveyed stated that they had purchased products or services on the Internet, and only 4% of consumers made more than 10 purchases per year. However, 64% of those surveyed stated that they researched products on-line and then purchased them through traditional retail channels. Furthermore, 90% of those surveyed stated that on-line research is key to making purchase decisions, and is in fact accelerating the purchase decision process. This finding was supported by an ActivMedia study in 1998 which found that when consumers were on-line, 91% were checking competing prices, while 89% were researching products or services.
When consumers actually do buy on-line, the real-world behaviour of precision buying seems to be carrying over. A 1998 Jupiter/NFO survey of on-line consumers found that 77% of Internet buyers were going on-line with a specific purchase in mind, and 79% of those shoppers visited several sites before making a purchase. This finding raises the possibility for the use of shopping 'bots' in the future as a tool by which retailers can attract on-line shoppers by streamlining their comparison shopping.
What They Buy
According to Forrester Research, the top-selling product categories on the Internet in 1997 were (in order of decreasing revenues): computer hardware and software, travel, entertainment (books, music, movies, games), gifts and flowers, and apparel. By the year 2001, the rankings of these product categories are predicted to remain more or less the same, with the exception of travel overtaking the lead position from computer hardware and software. Within these broad categories, Forrester estimates that PCs, pornography, CDs, and gift items (flowers) make up just over half of all on-line consumer revenues. But what determines which product categories do well, and which ones do not?
The success for on-line sales of a particular product seems to be governed primarily by three factors:
The list of the top-selling product categories seems to support these observations. The demographic make-up of Internet users, according to the 1998 GVU World Wide Web survey, is predominantly male (by a small margin), university-educated, with an above-average household income, and an average age of 35 years. Many of the top product categories are well suited for this audience, such as computer-related products, travel, and entertainment.
Items that make efficient use of the Internet as a sales channel include computer products (for example, software can be downloaded instead of shipped, and computers are of sufficient high value that the shipping expense becomes almost inconsequential), entertainment, apparel, and travel.
Finally, the more difficult and time-consuming it is to purchase a particular product, the better a fit it is with on-line selling, since the Internet can add tremendous value to the decision-making process. In addition to providing the consumer with product information and support services, an on-line retailer can act as a filtering mechanism to help consumers wade through the numerous offerings. Travel purchases are an example of where the Internet can add value by helping consumers sort through the numerous routes, air fares, and travel packages available. Gift items, such as flowers, is another area where the Internet excels in supporting customer decision-making-- for example, GiftOne (http://www.giftone.com) makes recommendations to its customers for gift-giving occasions.
Effects on Retailers
With the explosion of Internet retailing, a number of Internet retailing business models have emerged: dynamic catalogs, dynamic auctions, and more recently, the dynamic bid.
A retailer's real-world storefront can be conceptualized as a catalog. Like the traditional bound-paper catalog, the physical store is expensive, limited in selection by the amount of physical space available, offers the same experience for every customer, and is difficult to change at a moment's notice. However, on the Internet, all these physical constraints are removed, and the storefront becomes a dynamic catalog, which can be made more customized, interactive, and scaleable for each visitor. For example, each identified customer can be given a custom catalog which will offer product selection and pricing tailored to their interests and purchasing history. For example, CDNow's (http://www.cdnow.com) 'My CDNow' program allows customers to set up their own personalized page on the site, tailored to their own preferences.
The Internet is making the auction process more open, giving everyone equal visibility to descriptions, asking price, last offer, and time remaining. Sellers are better able to capture the momentum of the participants, as bidders are able to react instantly to each other's actions. Taking advantage of the added interactivity are two emerging auction models: third-party and proprietary/in-house auctions.
In the third-party auction, an auctioning company takes a business' surplus merchandise on consignment and sells them to the highest bidder. This type of auction is typically open to more buyers because of the greater emphasis placed on site promotion, bringing in more potential buyers, which in turn can lead to higher selling prices. On the other hand, the auctioning company charges a fee for the service, and the business ultimately loses control over the auctioning process. The majority of auction sites on the Internet target retail consumers, such as eBay (http://www.ebay.com), though there are some examples of business-to-business third-party auction sites. FastParts (http://www.fastparts.com) allows OEMs, contract assemblers, parts manufacturers, and distributors trade electronic components on-line via an auction process.
The proprietary/in-house auction is designed to cement the relationship between a business and its traditional customers. Because of the absence of any third-party fees, customers can realize deeper discounts than in a third-party auction. However, for the business, there are extra costs associated with the establishment and maintenance of the site. Furthermore, the business must place effort in the tasks of attracting the audience and keeping the auctions supplied. Computer reseller Ingram Micro's (http://www.ingram.com) auction site, which is only open to its existing customers, would be a business-to-business example of this type of auction site, whereas Egghead's Surplus Auction site (http://www.surplusauction.com) would be one that targets the retail consumer.
This more recent retailing model, also referred to as a 'reverse auction' has been patented by Priceline.com (http://www.priceline.com). This 'buyer-driven' electronic commerce model is a unique approach to on-line business in which consumers submit a bid to buy goods or services from unknown sellers at a certain price, and guarantee the bid with their credit card. Priceline then presents the offer to sellers, who can then fulfill, reject, or counteroffer the consumer's bid. Once a matching seller is found, the transaction is processed automatically and irreversibly.
Effects on Wholesalers and Distributors
The use of the Internet by wholesalers and distributors in the future will vary depending on the industry sector. For example, it is predicted by Forrester Research that in 2002, 30% of large-sized and 15% of medium-sized wholesalers and business retailers in electronics, office supplies, and scientific equipment will have 20% of their sales via the Internet, up from a current dollar value of $2 billion to $168 billion US. In contrast, because EDI is so prevalent in the transportation industry, no more than 6% of firms in that industry will conduct business-to-business transactions over the Internet, amounting to little over $300 million US in revenues.
However, the greatest impact that the Internet will have on the wholesaling and distribution industries is the emergence of new intermediaries that will act as 'information warehouses'. In addition to distributing goods across the supply chain, these information warehouses will also manage the information flow between manufacturers and retailers. By aggregating information from the manufacturers, these new intermediaries will allow retailers to search, create, and compare various offerings all in one place. Furthermore, these information warehouses will form deeper service-oriented relationships with retailers, working with them to ensure the right mix of products and services, as well as helping to manage the order and logistics activities of the retailer.
Collaboration and Supply Chain Management
The Internet is serving as a tool for assisting wholesalers, distributors, and retailers as a new means by which to coordinate the movement of products along the supply chain. The adoption of this business-to-business electronic commerce is being driven by the lower purchasing costs, reductions in inventories, lower cycle times, more efficient/effective customer service, lower sales/marketing costs, and new sale opportunities afforded by this new channel. While this type of coordination has traditionally been done with manual order management processes, and more recently with EDI, the Internet is providing a more cost-effective and more easily adaptable vehicle for collaboration. The key communications technology criteria needed for electronic supply chain management to work are a common physical communications infrastructure, common data representation, guaranteed data integrity, fault-tolerant communication systems, secure message transport, predictable performance, and guaranteed user authentication. Unfortunately, while the Internet meets the first two criteria, there is still much work to be done in order to meet the last five.
Businesses began sending and receiving purchase orders, invoices, and shipping notifications electronically by EDI in the late Seventies, and it gained significant market acceptance, especially among the larger companies with established supplier networks. Today, businesses trade over $150 billion in goods and services using EDI over value-added networks (VANs), and typically save themselves 5-10% in procurement costs. Furthermore, according to a survey conducted by Computer Economics, 59% of companies report a positive return on their EDI investment, and only 19% report a negative return. For example, RJR Nabisco estimates that processing a paper purchase order costs the firm about $70 US, whereas an EDI order costs only 93 cents.
However, traditional EDI required the use of VANs, which were expensive to set-up and maintain, depending on the amount of data transmitted. This high cost acted as a barrier to its roll-out among smaller companies. However, the Internet's extensive industry support, low cost, and easy internationalization make it an ideal and cost-effective alternative for supply chain management. The use of the Internet for EDI opens the door for companies to do business with new suppliers and with small or medium-sized businesses who formerly could only communicate via fax or phone.
Furthermore, the usability and accessibility of EDI channels can be vastly improved through the addition of Web interfaces. Letting users access sophisticated supply chain management systems using Web interfaces requires minimal up-front investment, is inexpensive to maintain, and is far more trouble-free than complex client/server approaches.
Many companies are now hopping onto the Internet EDI bandwagon, such as the Harbinger Corporation (http://www.harbinger.com), which offers any company EDI services via a browser interface. Recently, American grocery chain Albertsons' began using a web-based supply-chain management product from InterTrade Systems. This system is allowing many of Albertsons' 1700 suppliers, regardless of size, to send invoices and purchase orders over the Internet with very low set-up and transaction costs. It is hoped that this new system will help reduce Albertsons' network service expenses by as much as 20%.
Procurement is another business activity that is rapidly-evolving due to the Internet, taking advantage of the reduced costs and cycle times made possible from with the ease of access to supplier information, and the ability to automate the procurement process. One example of how the Internet has influenced procurement is the development of the dynamic bid, mentioned earlier.
In the past, if a company were interested in finding a new supplier, they would post a request for quote (RFQ). Prospective suppliers would then submit bids to the company to try and win the business. However, this process was time-consuming and was limited in reach. By placing the bidding process on-line, request packages are now better able to reach more bidders, and the entire process can be automated, thereby reducing procurement times.
For example, several years ago, General Electric established its Trading Partners Network (TPN) (http://www.tpnregister.com) which used the Internet to create close alliances with its business partners. Through the use of TPN, several GE divisions have, on average:
Furthermore, by being able to reach a wider base of suppliers on-line, this led to greater competition among suppliers for GE's business, which resulted in lower acquisition costs (up to 20%). Since then, GE has now offered its TPN as a service for other companies who are interested in automating their procurement processes.
Increased Global Reach
The reach of the Internet is providing businesses increased global visibility and the ability to service customers internationally. In the past, such globalization was usually an advanced stage of development, requiring extensive capital, personnel, and strategic alliances with in-country partners. Now, once a business has established a web presence, they are accessible to anyone in the world with an Internet connection and a browser. Factors that are increasing the ease by which businesses can become global businesses include:
However, the increased global reach of businesses via the Internet raises new issues, for both retailers and wholesalers/distributors. Many businesses, particularly in North America, are finding it difficult to fulfill the international orders they receive, and are turning away orders because they do not have the processes in place to fill them. How do businesses globalize their distribution or retailing practices? There currently are three distribution models for globalization: single source, independent distributors, and global network.
Forrester Research has proposed an Instant Global Acid Test for evaluating a company's international sales prospects. This test poses the following questions:
If a product passes the Instant Global Acid Test, it is recommended to keep the selling process as simple as possible, use existing list prices plus shipping and handling, internationalize the web site for target countries, and use logistics companies, such as FedEx or DHL Worldwide, for shipping. If the product does not pass the Instant Global Acid Test, it is recommended that the company politely decline orders, and provide a reason why. However, this decision should be re-evaluated every six months and there should be a mechanism in place to capture expressed interest in the product from foreign markets.
A more complex method of increasing global reach is through the use of independent distributors. Most companies will find it necessary to form alliances in foreign markets to sell their product, unless the company possesses strong international branding (such as Coca Cola), or the product requires little service or localized marketing.
In this distribution model, the company would still internationalize their web site such that potential customers are given full product information, but for the purposes of completing a sales transaction, they are referred to an in-country distributor. Of course, integrating independent distributors into a company's operations can be complex. These distributors must be screened for the ability to process orders on-line, commit to disclosing sales figures on a timely basis, and the ability to devote adequate resources to the product. Furthermore, it is recommended to provide these partners with an electronic commerce platform to ensure system-wide compatibilities and uniform worldwide quality.
Only the largest multi-nationals can justify a global on-line network and distribution centres in all major markets. However, the formation of such a global network can help a company aggregate their purchasing to reduce their procurement costs and take advantage of regional differences in pricing.
Barriers to e-business
The barriers to the further roll out of e-business in retail distribution affect both consumers and businesses equally, albeit from differing perspectives. The reasons given by consumers for not fully embracing Internet commerce transactions, uncovered by numerous studies, include concerns over security, purchase risks, privacy, lack of convenience, and the persistence of old habits. On the other hand, businesses are concerned about the risk of fraud and theft, the increasing complexity of e-business transactions, the high cost of acquiring customers, and possible sales channel conflict.
Barriers to e-business: Consumers
According to a study conducted by Ernst & Young in 1998, 70% of web purchasers felt uncomfortable with sending their credit card number over the Internet. Another study, conducted by E-Valuations, found that 94% of web buyers with either a medium-high or low-medium propensity to buy would purchase more on-line if protection from credit card fraud was guaranteed. Despite the protection afforded by SSL encryption and the SET credit card protocol, it is the consumers' perception of on-line security that Internet retailers will have the most difficult time overcoming.
Though it has been reported that the encryption system on the Netscape browser was 'cracked' with 100 linked computers within a span of eight days, the use of the Netscape browser to transmit a credit card number is probably still much safer than using a credit card in a crowded restaurant, where anyone could easily make note of the card number. Some companies have made initiatives to alleviate consumer fears of credit card fraud, such as the Yahoo! Visa card, which offers an explicit protection program for cardholders against fraudulent charges, or Dell Computer's (http://www.dell.ca) On-line Secure Shopping Guarantee, which pledges to protect its shoppers from fraud. However, over time, consumer acceptance of using credit cards over the Internet should gradually increase, much like how credit card payments for telephone orders have now become more acceptable.
Another barrier to the acceptance of Internet transactions is the fact that consumers cannot 'see' the merchandise, and therefore are unable to judge product quality. A 1997 survey conducted by America's Research Group asked several consumers about the degree of trust they had for shopping at a store versus shopping at a web site, and the consumers responded with almost a 10:1 preference of shopping in a 'real' store. Furthermore, the same survey found that 26.9% of consumers did not want to buy anything they could not see or touch.
Privacy is another concern of potential Internet consumers. the GVU World Wide Survey conducted in 1998 found that 26.9% of consumers were reluctant to make on-line purchases because they did not believe that the information that they provided would be kept private.
Convenience is another barrier to on-line shopping, as 22.6% of those questioned in the 1998 GVU World Wide Web survey said that they could find what they wanted more easily or quickly at a local retail outlet, sidestepping the lag time between order placement and the delivery of the merchandise. Convenience also has implications into other e-business applications, such as electronic payment systems. For example, the SET payment system, which is touted as a more secure means for purchasing on-line with their credit cards, may be difficult for consumers to implement. The software installation process has been labeled as 'not very intuitive' and consumers must also register with a financial institution before they can conduct on-line transactions.
Finally, companies conducting e-business with consumers will have to overcome entrenched shopping habits. The America's Research Group survey found that 14.9% of consumers always buy in stores, 11.6% like to pay cash, and 11.1% simply enjoy shopping too much. As bandwidth increases and on-line buying becomes less of a hassle, these percentages should go down, however, much like the experience of banks with the roll-out of automatic tellers, there will always be a small minority who will insist on face-to-face shopping experiences.
Barriers to e-business: Businesses
Like their consumer counterparts, businesses see inadequate security and protection against fraud as the greatest barrier to the conduct of e-business transactions. For example, Software.net was deluged with orders placed with stolen or fraudulent credit card numbers after setting up shop on the Web-- at times, these fraudulent orders outnumbered legitimate ones. In Denmark, Danish retailers missed out on an opportunity to participate in the European e-Christmas initiative in 1997 because Danish banks did not believe that the Internet was secure enough. Retailers are also finding it difficult to accept credit card payments from international customers due to the amount of fraud and the inability to prosecute offenders overseas. In wholesaling and distribution, many firms prefer to conduct EDI transactions using expensive value-added networks rather than the Internet because of security and difficulty in creating an audit trail.
Increasing Complexity of e-business Transactions
Another barrier for e-business is the increasing complexity of e-business transactions. Though it is now much easier to set up an e-business presence today with the numerous off-the-shelf e-commerce applications available, the bar for interactivity and functionality of web storefronts is constantly being raised. Integrating front-end customer systems with back-end order entry often requires a major investment in time, energy, and money.
Affiliate programs, banner ads, loyalty programs, one-to-one marketing, business-to-business bidding applications, and web-based EDI are all increasing the complexity of the technology infrastructure that web-based retailers and distributors need to have in place. Security requirements are also proving to be more complex and expensive to implement. For example, for the SET security protocol, retailers and their banks must install software that will accept SET-based payments. However, the vendors of these software products are all interpreting the SET standard in different ways. If the consumer and retailer happen to use different banks and they each happen to install different software packages, the two banks may not be able to 'talk' to each other, and the credit card payment may not be accepted. In order to implement a web commerce solution today, the minimum investment needed is $10,000 with annual maintenance and support costs amounting to 20% of web costs. For all retailers, the average investment is $250,000 US.
In addition to the technical barriers of e-business, there are the organizational challenges that companies face. e-business initiatives have impacts throughout the supply chain, and so customers, suppliers, partners, and other stakeholders must all be brought on board.
High Cost of Acquiring Customers
Initial set-up costs aside, the high cost of acquiring customers is another hurdle that retailers must overcome. With over 75,000 web storefronts vying for the attention of the consumer, driving traffic to a retailer's site is a challenge. Over the past year, on-line retailers are spending an increasing amount of money on advertising and distribution deals. Retailers are aligning themselves with the top search engines (such as Yahoo! and Hotbot) and portals (such as Netscape and E-Trade) which are being used by both Web newcomers and experienced users as launching points for their web navigation. However, this 'real estate' is not cheap-- retailers who want to be listed on AOL's Shopping Channel (http://www.aol.com/shopping/home.html) must pay $125,000 US per year plus commissions. With maintaining visibility becoming an increasingly expensive proposition, it is not surprising that barely a third of all on-line retailers make a profit through on-line sales, and even the well-financed and highly-respected upstarts, such as Amazon (http://www.amazon.com), are still losing money.
Finally, some businesses will find it difficult to conduct e-business because of possible channel conflict. Computer hardware manufacturers Compaq and IBM both had to venture forward cautiously with development of their on-line sales channels in order to avoid the ire of their retail distribution channels. Even in international markets, some businesses may find that their on-line orders may fall into the territories of their existing distributors in other countries. Pioneer Electronics in the United States managed to avoid alienating its retail network by only selling products on-line that were not available through retail channels. Some retailers have by-passed the issue of channel conflict completely by using their web presence to point prospective customers to real-world retail outlets, like how the GM Buypower web site (http://www.gmbuypower.com) moves customers along the sales cycle by referring them to local dealers.
In addition to consumer and business concerns on the conduct of e-business, there are larger issues that may have implications on the proliferation of e-business: taxation, encryption, and privacy. Because of the overwhelming amount of e-business being conducted in the United States or with residents of the United States, government regulations with respect to these two issues will have a spillover effect on the conduct of e-business in Canada.
Concerns over the taxation of Internet transactions may have an impact on the growth of e-business. Currently, all electronic commerce forecasts implicitly assume the absence of any form of Internet taxation, and it is unknown the extent to which such taxation would alter growth projections.
In June of 1998, the Internet Tax Freedom Act was passed in the United States, placing a moratorium on taxing Internet sales and services for three years, and creating a temporary commission to study state and local electronic commerce issues. Certain state Governors oppose this moratorium, citing loss of state tax revenues, and seek uniform taxes on both electronic and mail order retailers. Other states have passed laws, such as the California Internet Freedom Act, banning the levying of new on-line taxes, including fees for access, Internet services, and goods sold over the Internet. However, the limitations of these new laws is that they ban the levying of 'new' taxes on Internet transactions-- existing taxes can still be applied. Currently, there are ten states tax Internet retailers like mail-order companies, with retailers required to collect taxes in states where they have a physical presence, such as offices, warehouses, or servers. Other states rely on consumers to report the sales tax on their purchase, though there is currently no way of enforcing this.
With respect to Canadian regulations, in May 1998, Revenue Canada's Advisory Committee on Electronic Commerce (http://www.rc.gc.ca/ecomm/) released a report that made 72 recommendations on tax policy for the tax treatment of electronic transactions. The committee, which included representatives from government, business, Internet service providers, and computer experts, recommended that the government should not impose any new taxes on electronic transactions and avoid unduly regulating or restricting electronic commerce. They further recommended that governments change the traditional collection responsibility for sales tax from retailers to third parties, such as financial or transactional intermediaries. However, since the release of this report, no further statements on the future of Internet taxation have been issued by Revenue Canada.
Encryption is another political 'hot potato'. On the one hand, security is a huge concern among consumers and retailers alike, and it is believed that electronic commerce will never take off until consumers feel that they can safely provide personal details over the Internet. On the other hand, the best means by which to protect the integrity of e-business transactions is through encryption. However, the United States government is against the proliferation of computer encryption technology on the basis of national security, as it could be used to aid criminals and terrorists. Though there are currently no restrictions on the use of encryption technology in the United States, the FBI is pushing to restrict the domestic use of encryption, much to the dismay of privacy advocates and US software manufacturers.
Furthermore, there are restrictions on the export of encryption software from the United States, as they are considered munitions. Since 1996, the export regulations have relaxed, allowing the export of 56-bit encryption. However, restrictions still remain on software featuring 128-bit encryption, which is the current digital standard. These restrictions have implications for both Netscape and Microsoft, whose latest browsers feature 128-bit encryption. Because of export rules, the browsers they sell outside of the United States and Canada use a lower encryption standard. The latest moves to ease export restrictions further have hit a snag following heavy resistance from law enforcement officials.
Thus, not only is the encryption and national security debate hindering the roll-out of better encryption technologies within North America, it also has global implications. A number of European firms have come out with their own competing 128-bit encryption algorithms and are free to sell them globally. However, the US government may exert pressure on European governments to either have the 'keys' to the security algorithms handed over, or have the sale of these encryption technologies restricted.
Though Canadian policy on encryption has followed the US policy both in principle and intent in recent years, it has recently taken an about-face. On October 1st 1998, Industry Minister John Manley announced that the federal government would be tabling legislation that would put forth measures to protect personal information. Furthermore, it was announced that the government would take a hands-off approach towards encryption. Not surprisingly, this initiative has come under fire from privacy advocates and software manufacturers.
The EU has passed the European Data Directive, a privacy directive stating that consumers must give unambiguous consent for their private data to be used by web sites. This directive, which is scheduled to begin on October 25th 1998, requires that non-European companies meet the same privacy standards for data processing under European laws or else they would be barred from doing business with Europe. Unfortunately, this privacy directive is at odds with the way many web sites based in the United States handle the personal data of its visitors. Furthermore, Privacy International has warned that it will target American on-line businesses in the fall of 1998 if their confidentiality contracts do not meet the directive's requirements for guaranteeing the confidentiality of any European's personal data that is shipped stateside for processing. If any privacy complaints are lodged against any American businesses, millions of on-line transactions between the United States and Europe could be blocked, from travel reservation systems, to credit-card processing centres.
Over the past few years, with the evolution of the Internet as a new distribution channel linking suppliers with consumers, a number of e-business best practices have come to light. Through the use of these best practices, companies have been able to achieve one or more of the following:
Finding a Niche to Exploit
An Internet retailer, despite superior competition, can capture the mindshare of consumers simply by being the first. The first on-line retailers into a new market have the advantage of being able to introduce switching costs that lock in customers, through a combination of consumer profile databases, loyalty programs, and distributed points of sales. There are numerous examples of companies that have succeeded in very focused niches-- Powells books (http://www.powells.com) has found a niche selling used, rare, and out-of-print books; the recently-launched VarsityBooks.com is establishing a niche for selling university textbooks on-line at a 15-40% discount off typical bookstore prices.
Branding a retail concept in the real world is all about creating an image, feeling, or attitude within a consumer's mind that helps create a powerful bond between the retailer and the consumer, favourably influencing purchase behaviour.
On the Internet, with consumers unable to 'see' or 'touch' the merchandise they are buying, consumers tend to purchase items that are standardized so that they know what to expect. For example, on-line clothing retailers are finding that the best-selling clothing items on the Internet are recognizable basics such as jeans, khakis, and T-shirts. A brand is one of the few means by which a consumer can judge the consistency and quality of an on-line offering-- a Compaq computer is a Compaq computer, whereas a computer from XYZ Corporation would be a more nebulous entity. Several surveys conducted recently support this assertion.
A 1997 E-Valuations found that 32% of Internet consumers would be inclined to buy more if they were able to purchase from name brand retailers, while 76.1% of consumers surveyed by the GVU 1998 World Wide Web survey stated that vendor reputation was a key purchasing influencer. Not surprisingly, the recent arrival of more well-known retailers and other branded merchants, such as The Gap (http://www.gap.com) or Wal-Mart (http://www.Wal-Mart.com), have helped to increase the interest in Internet shopping.
Affiliation with an Established High-Traffic Site
Internet retailers are ensuring high visibility for their offerings by quickly snapping up prime real estate on the shopping channels of popular on-line services (such as AOL and Compuserve), search engines (such as Yahoo! and Lycos), and on-line communities (such as Netscape or Microsoft Network). These established high-traffic sites, also referred to as portals, serve as the entry points for many Internet consumers and are used by the majority of both new and experienced users as navigational aids. For example, over 10 million consumers use AOL as their entry point onto the Internet, which is more than the combined total of subscribers on all the other dial-up Internet service providers combined. Second in consumer popularity is Yahoo!, where 41% of the Internet population check into on a regular basis. Not only do these high-profile sites aggregate Internet traffic for retailers, thereby providing a higher concentration of 'eyeballs', but from the consumer's perspective, they serve as a form of qualification, a reassurance of the retailer's legitimacy. According to an e-tailing Group study, this trend is expected to continue, with 25% of annual on-line revenues in the year 2000 being contributed by purchase transactions initiated at these affiliate sites.
Some enterprising retailers have taken this one stop further by actually owning the customer's Internet connection. In the United Kingdom, grocery retailers Tesco and Nationwide are selling branded Internet connections from British Telecom. By owning the entry point on to the Internet, these grocery retailers are able to place their content in front of consumer's every time they log-on, and open up the possibilities for future commercial opportunities, such as on-line shopping or banking.
Real World Promotional Programs
In 1997, the IBM World Avenue Mall, which housed many on-line storefronts, closed its doors due to lower-than-anticipated traffic. One of the reasons offered for the cybermall's failure was inadequate promotion of the service in IBM's print and television ads. Likewise, in order for an Internet retailer to stand out from the millions of web sites, and reach potential customers who may not use the Internet on a regular basis, they must use real world promotional programs to increase their visibility. Becoming 'real wired' involves placing the web address on:
Reducing the Cost of Acquiring Customers
Several demand generation models have emerged on the World Wide Web, with the most popular being banner ads, portal affiliations, and syndicated selling.
Banner ads are clickable graphic links that take the Internet user to another web site, and this ad space is sold at a fixed monthly fee. The click-through rates are typically low for banner ads, ranging from between 1% to 13%. This means that for every 100 visitors who view a page containing a banner ad, on average, between 1 to 13 people actually click on the ad, depending on how well the web site's audience matches the advertiser's target audience. Because the banner ad advertising rate is fixed, regardless of how many visitors actually click-through to the advertiser's web site, the acquisition cost per customer can be high.
Portal affiliations would involve an Internet retailer 'renting' space on high-traffic web sites, such as popular on-line subscription services (such as AOL or Prodigy), search engines (such as Yahoo! or Lycos), and Internet communities (such as Netscape or Microsoft Network). These established high-traffic sites, also referred to as portals, serve as the entry points for many Internet consumers and are used by the majority of both new and experienced users as navigational aids. For example, over 10 million consumers use AOL as their entry point onto the Internet, which is more than the combined total of subscribers on all the other dial-up Internet service providers combined. Second in consumer popularity is Yahoo!, where 41% of the Internet population check into on a regular basis. Not only do these high-profile sites aggregate Internet traffic for retailers, thereby providing a higher concentration of 'eyeballs', but from the consumer's perspective, they serve as a form of qualification, a reassurance of the legitimacy of the retailer. Unfortunately, the rents for prominent placement on these high-traffic portal sites is expensive-- for example, prime real estate on AOL's Shopping Channel (http://www.aol.com/shopping/home.html) must pay $125,000 US of rent each year, as well as a percentage of sales.
Syndicated selling would involve an Internet retailer signing on 'affiliate' web sites that would refer its visitors to the retailer's web site. In exchange, the affiliate receives a commission for referring the customer, usually 5-15% of gross referred sales. These affiliates tend to be small, revenue-hungry, and niche-oriented sites that are willing to place an ad more prominently or next to related material, which makes these sites ideal vehicles for targeted marketing and spurring more impulse sales. Several on-line retailers practice this form of customer acquisition, the most notable being video seller Reel.com (http://www.reel.com) and Amazon (http://www.amazon.com), which signed its 100,000th affiliate partner in August of 1998.
However, retailers are finding that it takes a lot of effort to administer a syndicated selling program, especially if a retailer is providing customized services beyond the traditional customer tracking and accounting functions. For example, Barnes and Noble's differentiates its syndicated selling program from Amazon's affiliate program by offering several types of sales tracking and analytical reports, and making available an account executive to assist affiliates with setting up URLs and fine-tuning ad placements. Even without the provision of account executives, the information technology architecture requirements alone can be expensive. To counter this, some retailers are turning to service bureaus, such as BeFree (http://www.befree.com) and LinkShare (http://www.linkshare.com), who take responsibility for administering the syndicated selling programs and tracking sales on behalf of the retailer.
Among all the demand generation models in current use, syndicated selling has been found to be the most inexpensive way of acquiring new customers, since advertisers are only paying for click-throughs that result in actual sales. An analysis conducted by eToys (http://www.etoys.com) found that a $40 sale on their web site cost only $10 under their syndicated selling program, whereas the same sale triggered by a banner ad would cost $20 or more. This finding has been confirmed by other research, such as a Forrester Research survey finding that banner advertising cost the top 51 commercial web sites $67 per sale, compared to only $4.60 per syndicated selling sale. Furthermore, some retailers have found that by increasing the amount of the commission, they are able to attract more affiliates and the affiliates tend to promote the retailer's site more prominently, while still keeping the program cost effective-- eToys discovered this when they increased their commission from 12% to 25%. Not surprisingly, syndicated selling programs have grown in popularity, with many retailers introducing these programs during the summer of 1998, in preparation for the Christmas season.
Easier Site Navigation
In a recent usability study of the nine most highly regarded web sites (including those of Fidelity, Disney, and Travelocity), most of the 70 test users could not find specific information they were instructed to find a majority of the time. Unfortunately, companies tend to design their web sites with their marketing and business objectives in mind, and they often do not take into account the needs of their consumers when making design decisions. The best retailing web sites make the selection and ordering processes more intuitive by mirroring the customer's 'purchasing logic'. Barnes and Noble's web site (http://www.barnesandnoble.com) allows customers to browse for books by subject matter or gift-giving occasion, successfully replicating the real world book shopping experience, only without the difficulty of navigating rows of shelves. Similarly, Wal-Mart (http://www.Wal-Mart.com) feels like a store by organizing its product selection into distinct product categories.
In a world where consumers suffer from computer glitches, browser crashes, and slow modem speeds, it is important to make the on-line shopping experience as hassle-free as possible. Some strategies that have assisted retailers in making their web sites more user-friendly include:
Creating a Community
'Sticking' is what retail analysts call the creation of a community around a product. In creating such a community, visitors are encouraged to linger longer in a store and are provided with an incentive to return. In essence, creating a community makes a store a 'fun place to shop'. In the real world, the Disney Store is a perfect example-- a brightly decorated store with themed merchandise that offers in-store activities for kids and attractive offerings for their parents. Another good example would be the Chapters chain of bookstores, where customers can peruse the store's offerings in comfortable chairs, look for hard-to-find books, or meet friends over coffee. Home improvement stores have also gotten into the creation of communities, by offering demonstrations and professional advice for would-be home renovators.
The key to creating a community around a product is to augment the customers' experience with the product, thereby encouraging them to return, which would hopefully drive further sales. For example, community-building activities can include:
The value in a community lies not in the product itself-- it lies in what the retailer can do to create new value for the customer by enriching the experiential aspects of the purchasing process. This new value could be through the provision of worthy content on the products, or offering a forum where customers can speak with other like-minded individuals.
There are numerous examples of on-line communities:
Some web retailers are taking advantage of the dynamic nature of the Internet by updating their product listings and pricing on a minute-by-minute basis, following the lead of airlines (such as American Airline's NetSAAver Fares program) and computer mail-order companies who use real-time technology to hold on-line close-out sales. This then allows the retailer to liquidate their overstock and obsolete inventory without sacrificing margin to a third-party liquidator, and to sell limited-run merchandise. Another benefit of real-time merchandising is that it also encourages of the retailer's customers to drop in on the site frequently for new updates.
This method of liquidation has been found to be most useful for apparel and gift merchants, whose customers are accustomed to overnight markdowns on seasonal merchandise. Eddie Bauer (http://www.eddiebauer.com), JC Penney (http://www.jcpenney.com), and Reel.com (http://www.reel.com) have all established such clearance sections on their web sites. On Impulse! (http://www.onimpulse.com) has introduced the Impulse! Buy Network, which places sale items on 'impulse racks' and then announces their availability with banner ads on sites such as Yahoo! or fashionmall.com. Two suppliers of scientific products, Fisher Scientific Co. and VWR Scientific Products Corp. are updating their web sties to provide real-time pricing for their products based on purchase volume, contracts, and shipping logistics, as a means of better serving their customers and squeezing costs out of the purchasing process.
Reduce First-time Purchase Risk
Many first-time buyers 'test the waters' by submitting a small initial order, which they believe to be 'safer'. The size of this initial order will typically range from 10 to 30% of the average order size, depending on the brand strength of the product being purchased. For example, Forrester Research has found that JC Penney shoppers are often willing to place larger first orders than shoppers at less well-known on-line retailers. It is often not until the fourth order that the customer usually reaches the 'average' order size.
By building up consumer trust quickly, a retailer can convince more browsers to make purchases, and increase the average order sizes for its newest customers. Strategies for building up this trust and lowering the customer's perception of risk in the ordering process include:
Reducing the Cost of Servicing Customers
Internet retailers have lower costs associated with maintaining a physical infrastructure, labour, and carrying inventory than their real-world counterparts. For example, rent and depreciation represent less than 4% of Amazon's sales, compared to 13% for the traditional bookstore. Instead, the majority of on-line retailing costs, besides the cost of acquiring customers, come from servicing customer orders.
Because these on-line retailers are shipping to individual customers, they are not able to fully benefit from scale economies for reducing costs. For example, in the past, Amazon relied on small shipments from publishers and wholesalers as a means of keeping their inventories low. However, the on-line bookseller was penalized with additional markups for these small orders. To counter this additional expense, Amazon (http://www.amazon.com) has begun to increase its inventory of popular titles on hand, which is also allowing it to meet its corporate goal of shipping 95% of its orders on the same day.
On the other side of the value chain, some retailers have found innovative ways of infusing scale economies into the delivery process. Grocers in the United Kingdom experimented with selling groceries on-line to people at work: Waitrose to ICL employees, Sainsbury's to HP employees, and Safeway to IBM employees. Orders placed over the Internet by the employees would be dropped off at the end of the working day in the office car park. Not only did these programs target the affluent and short-of-time customers, but it made the delivery process more efficient for the supermarkets who were able to reach a large number of customers with a single delivery.
Offer Valuable Ordering Applications
Some on-line retailers are increasing the ease by which customers can purchase products from their web sites by offering time saving on-line applications. Though some of these on-line shopping applications are of dubious value, such as the 'virtual dressing room' at The Gap's web site (http://www.gap.com), there are several useful ones.
The Spree.com (http://www.spree.com) offers a gift-giving assistance tool where customers can enter the specifications of the gift recipient (sex, age, occasion, price range, etc.) and are then provided with several alternatives. Cisco Systems configuration agent (http://www.cisco.com/pcgi-bin/front.x/config_root.pl) allows customers to custom configure connectors on-line, without requiring any human intervention. The GM Buypower web site (http://www.gmbuypower.com) allows customers to select the model of car they want and then search the inventories of their local dealers. NetGrocer (http://www.netgrocer.com) invites corporate customers to register at the Corporate Cupboard for regular delivery of recurring orders, and also offers the option of pre-processing items for corporate functions. 1-800 Flowers (http://www.1800flowers.com) offers an automatic gift registry in which a customer can specify the people they will be sending flowers or gifts to, what will be sent, what the card will read, and when it is to be delivered, up to two years in advance.
Quick Order Processing
In addition to site navigation, another area that many web sites perform poorly in is the efficiency by which customers can pay for their purchases. In the real world, if customers spend too long lining up to pay for their purchases, they will either abandon their purchases or make a conscious decision to shop somewhere else in the future. A survey conducted by Forrester Research found that Internet customers currently abandon up to two-thirds of 'virtual shopping baskets', and they suggest that the number of abandoned baskets should be no more than 5-10%.
Several Internet retailers have implemented procedures that streamline the ordering process. Customers of the on-line bookstore Amazon (http://www.amazon.com) enter their information only once on their first order, and all subsequent orders can be made with one mouse-click. In Britain, FoodFerry's on-line grocery shopping service (http://www.foodferry.co.uk) allows customers to save baskets of the groceries they buy regularly, making repeat purchasing of staples more convenient.
Providing Order Status Information
An administrative task that many on-line retailers must deal with are queries from customers regarding the status of their order-- answering questions such as 'has it been shipped?', 'where is it?', and 'when is it due to arrive?' For a retailer processing hundreds of orders per day, this can become a time-consuming burden. By having a self-service feature that allows customers to check on the status of their order, or an automated process by which e-mail reminders are sent to customers apprising them of order status, not only are customer concerns allayed, but retailers are able to reduce the amount of administrative overhead.
Some e-commerce applications, such as Lotus Domino.Merchant, allow customers to track their UPS-delivered orders with an embedded utility in the retailer's web storefront. In the very least, it is recommended to confirm the purchase and thank the customer via e-mail within twelve hours of placing the order. One retailer that offers its customers a self-service feature for checking order status is CDNow (http://www.cdnow.com).
Develop Incentives for Repeat Purchases
In the real world, it is far less expensive to convince existing customers to buy more, than it is to attract new customers. This same rule applies to the domain of Internet retailing. Currently, Amazon finds that 58% of their orders come from existing customers. In addition to being less time-consuming to service these customers (i.e. they know what to expect, they need less assistance, they can be processed via 'one-click' ordering), research has also found that repeat customers browsing a retailer's storefront are five times more likely to make a purchase than a visitor who has never purchased anything before. By converting more first-time purchasers into repeat buyers, the on-line retailer can achieve higher growth rates at less expense than retailers who only focus on getting new customers to their web site.
Forrester Research recommends that the ratio of repeat to total visitors should be between 15-25%, and that this number should approach 40-60% as overall Internet traffic grows. A number of incentive systems have been developed to convert first-time buyers into repeat purchasers, many of them mimicking real-world initiatives: excellent customer service, loyalty programs, one-to-one marketing, and outbound marketing programs.
Excellent Customer Service
In a recent survey conducted by Forrester Research, the primary method by which on-line retailers created loyalty and repeat purchases was through excellent customer service. Simply by making the site navigation and order processing hassle-free experiences, properly managing the customer service function, and delivering the customer's order in a timely manner, retailers encourage their customers to make repeat purchases.
Some retailers are taking advantage of the dynamic nature of the Web by using Internet technologies to enhance the provision of customer service. SoundStone (http://www.soundstone.com), an on-line music retailer that specifically caters to Baby Boomers, is using SiteBridge CustomerNow call centre software to provide LiveHelp! service. LiveHelp! offers real-time communication between a customer and a live customer service representative. After the software detects the customer's browser and software platform, an interface is created on the customer's computer, allowing text-based communication. The customer service representative also has the ability to conduct 'guided browsing', in which they can 'push' specific web pages to the customer.
Good examples of loyalty programs in the real world are frequent-flier miles or coffee-club cards. They reward repeat customers with extra value, whether it be with free goods or extra discounts. The numerous loyalty programs in on-line retailing mimic these real-world programs. The most prevalent loyalty program model would be a points program, similar to frequent-flier miles. For example, Netcentives is making an appeal to the 30 million Internet users who collect frequent-flier miles with Clickrewards (http://www.clickrewards.com), which allows retailers to award one frequent-flier mile to customers for every dollar spent. Another loyalty program, CyberGold (http://www.cybergold.com), allows retailers to award consumers with cash for a variety of on-line transactions, such as purchases, playing a game, signing up for a subscription service, or viewing an ad. Another recently introduced loyalty program involves the Yahoo! Visa card, which offers a rewards program for shopping at selected on-line merchants.
Another means of generating customer loyalty is to create a switching cost-- something that will 'lock' the customer in, such as a membership fee. One of the more profitable 'cybermalls' is NetMarket (http://www.netmarket.com). Unlike the other less profitable cybermalls in existence, NetMarket locks its customers in by having them pay an up-front membership fee of $69 US. This membership fee, which entitles the customer to receive bigger discounts on all subsequent purchases, acts as a switching cost, thereby ensuring that the customer will make maximum use out of the NetMarket site. In addition, NetMarket customers can also accumulate frequent-shopper discounts on their purchases, creating yet another switching cost. It is NetMarket's goal to provide a single point of purchase for 95% of a typical family's retail needs-- currently, its product selection can supply about 20%.
Although customer relationship marketing, also known as one-to-one marketing, has been a growing trend in real-world retailing, there are very few such marketing applications on retailer web sites. Regardless, Forrester Research see big growth in the application of one-to-one marketing to on-line retailing, with the introduction of Internet technologies that are able to identify individual visitors at a retailer's web site and then push content onto the visitor based on some pre-determined preferences.
The two technologies that underlie Internet-based one-to-one marketing are rules-based matching, where user profiles are created based on established preferences and information requests, and collaborative filtering, which sorts previously-created profiles into 'affinity groups' from which retailers can infer what types of products they might be inclined to buy. For example, the Infoseek search engine (http://www.infoseek.com) uses Aptex's neural net technology to create users profiles based on the relationships of key words. These user profiles are created whenever a user searches on the Infoseek search engine, and the profile is stored in the 'cookie' files of the web browser. On subsequent visits to Infoseek, the cookie file is retrieved and ads targeting the profile are shown to the user, based rules-based matching. According to Infoseek, they are finding that this profiling is yielding click-through rates that exceed the industry standards by 50%.
The Open Personalization Standard is expected to be widely used by 1999 in the next generation of web browsers. OPS is anticipated to vastly increase the ability of Internet retailers to understand the interests of their visitors, though there is still much industry disagreement over its roll-out. Under this scheme, consumers can choose to store personal information, hobbies, and other interests onto their hard drives. Retailers would then be able to access these profiles when the consumer visits their web site, allowing the retailer the opportunity to better target their offerings to the consumer.
One on-line retailer that is using the Dynamo 3.0 Web Server to its full capabilities as a vehicle for handling one-to-one marketing is BMG Music Service (http://www.bmgmusicservice.com). One this site, in addition to viewing the catalog of CDs and making purchases, customers can listen to music samples, shop in clearance sales, check their accounts, check order status, and manipulate their personal profile. The structure of the on-line catalog is not only dynamic, but is tailored to each customer-- each customer is offered access to special deals depending on how long they have been loyal customers. At busy times, the site has been known to handle up to 2000 concurrent and customized customer sessions.
Outbound Marketing Programs
Outbound marketing refers to follow-on marketing initiatives aimed at strengthening the relationship between the Internet retailer and the customer. Though a retailer's web site may be visited by a prospective customer at least once, there is no guarantee that the customer will ever return. The objective of outbound marketing is to develop a relationship with the customer as soon as possible, and then periodically broadcast messages to the customer to build 'Internet Mindshare'. This way, instead of waiting for the customer to return to the retailer's web site, which may never occur, the customer is kept apprised of the retailer's offerings. Outbound marketing programs that are employed by retailers include newsletters and e-mail reminders.
Savvy Internet retailers are establishing relationships with their customers by sending them tailored content aimed at building top-of-mind awareness, and moving the customer further along the sales cycle by stimulating demand. For example, Lobster Direct (http://www.novaweb.com/lobster/newsl.html) offers a monthly newsletter with lobster jokes, lobster recipes, lobster surveys, and a monthly draw for two free lobsters. Amazon (http://www.amazon.com) offers an e-mail subscription in which sends reviews, articles, and news tailored to the customer's specified interests. CDNow (http://www.cdnow.com) sends out a newsletter, outlining the latest CD releases, to its registered customers.
Another tactic for stimulating demand is by an e-mail reminder. This is an even more powerful outbound marketing strategy because it catches the customer's attention immediately before a pre-determined buying occasion. GiftOne (http://www.giftone.com) is an Internet service that helps customers manage gift-giving by sending e-mail reminders of birthdays and anniversaries, along with gift suggestions based on profiles of the people they shop for. Greet Street (http://www.greetst.com) has a similar reminder service, only for electronic greeting cards, and so does Godiva (http://www2.godiva.com/services/reminder-godiva), for chocolates.
Collaborating with Supply Chain Partners
Collaboration with supply chain partners via the Internet is allowing distributors, wholesalers, and retailers to maintain higher in-stock rates, reduce cycle times, reduce inventories, and lower inventory carrying costs through enhanced coordination of supply and demand activities. There are several examples of businesses involved in collaboration activities over the Internet.
The Collaborative Planning, Forecasting, and Replenishment Program (CPFR), which is in pilot in 1998 with an expectation of full roll-out by 1999, refers to standards and guidelines for better forecasting and restocking. This system allows companies to collaborate in determining future demand for products, by sharing information with respect to the availability of products in stock, promotion schedules, POS sales history, and store-level sales expectations. In this collaboration process, the retailer and supplier electronically post their latest sets of sales and production forecasts on the Internet. A server-based application then compares the two forecasts and flags differences between them that exceed a pre-determined safety margin. The end result of this collaborative process is that the right amount of product reaches the right retail location at the right time. For retailers, this results in increased sales from higher in-stock rates and lower on-hand inventories. For distributors and wholesalers, this means lower warehouse storage requirements and reduced on-hand inventories.
According to Ernst & Young, it is believed that the implementation of CPFR could yield an inventory reduction of $250-350 billion US across the entire economy. One company that made excellent use of CPFR was Warner-Lambert, which began sharing strategic plans, performance data, and market insight with Wal-Mart Stores Inc. over the Internet. Through this collaboration, Warner-Lambert was able to increase its products' shelf-fill rate from 87% to 98%, which earned the company an additional $8 million in sales, which is equivalent to the revenues of a new product launch. Not surprisingly, Warner-Lambert is hoping to use the Internet to expand the use of CPFR to all its suppliers and retail partners in the future.
Other Internet-based collaboration tools include SyncraCt from Syncra Software Inc. (http://www.syncra.com) and QCS Collaboration Solutions from IBM. SyncraCt is a Java-based application that alerts a business' supply chain partners to unexpected variations in supply-chain processes, such as out-of-stock items, excess inventory, and changes in delivery schedules, and is currently being tested by Nabisco to manage its relationship with Wegmans Food Markets, a regional chain. QCS Collaboration Solutions is being as a web-based product-sourcing tool for US-based PetSmart's Asian suppliers.
Reducing Acquisition Costs
With the Internet's global reach, accessibility, and low cost, there are numerous opportunities for wholesalers, distributors, and retailers to make a positive impact on their procurement processes and costs. On the simplest level, the Internet can be used as an information resource for researching potential suppliers. However, many businesses are taking part in bidding processes or establishing buying groups over the Internet. Business Gateway serves businesses in South Carolina, matching up buyers' request for quotes and sellers' bids on-line for a monthly fee. Vipar Heavy Duty Inc. (http://www.vipar.com) is a buying group of 75 United States and Canadian companies that has launched a web-based electronic commerce network that tracks its collective buying power in real time. This buying network consolidates the purchase orders electronically for all members of the buying group, thereby gaining better volume discounts and rebates from suppliers.
e-business offers tremendous opportunity for companies within the Canadian distribution industry to introduce new sales channels, reduce costs, streamline product flows, and ultimately improve profitability. However, there are a number of obstacles that may hinder the growth of e-business, arising from consumer concerns, business concerns, and global issues. By implementing established best practices that are being used by the Internet's most successful businesses, Canadian firms can overcome these hurdles and take advantage of the tremendous growth that is anticipated for electronic commerce.