Online Retailing and E-commerce Trends

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e-commerce
Kenneth C. Laudon
Carol Guercio Traver
business. technology. society.
eighth edition
Copyright © 2012 Pearson Education
Chapter 11
E-commerce Online Retailing and
Services

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Class Discussion
Copyright © 2012 Pearson Education Slide 11-3
Blue Nile Sparkles for Your Cleopatra
Why is selling (or buying) diamonds over the
Internet difficult?
How has Blue Nile built its supply chain to keep
costs low?
How has Blue Nile reduced consumer anxiety over
online diamond purchases?
Average high price tags of diamonds, different shopping experience with offline, trust
Ordering and paying for diamond after customer ordered it, deals directly with wholesale
diamond owners and jewelry manufacturers, eliminated expensive stores, sales clerks,
expensive glass cases
By creating trust and knowledge-based environment, providing quality ratings of each
Diamond by GIA, 30-day money-back, no-questions-asked guarantee
Class Discussion

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Learning objectives
Understand the environment in which the online retail
sector operates today
Explain how to analyze the economic viability of an online
firm
Identify the challenges faced by the different types of
online retailers
Describe the major features of the online service sector
Discuss the trends taking place in the online financial
services industry
Describe the major trends in the online travel services
industry today
Identify current trends in the online career services
industry
Major Trends in Online Retail,
2011–2012
Growth in social shopping
Online retail still fastest growing retail channel
Buying online a normal, mainstream experience
Selection of goods increases, includes luxury goods
Informational shopping for big-ticket items expands
Specialty retail sites show most rapid growth
Increased use of interactive, Web 2.0 marketing

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The Retail Sector
Most important theme in online retailing is effort to
integrate online and offline operations
U.S. retail market accounts for $10.7 trillion (70%) of
total GDP
Personal consumption:
Services (e.g., educational, financial, food, medical) : 65%
Nondurable goods (e.g., general merchandise, clothing,
music, drugs, groceries) : 25%
Durable goods (e.g., automobiles, appliances, furniture) :
10%
Distinction between “goods” and “services” becoming
more ambiguous
The Retail Industry
7 segments (clothing, durable goods, etc.)
For each, uses of Internet may differ
Informational vs. direct purchasing opportunities
General merchandisers vs. specialty retailers
Mail order/telephone order (MOTO) sector
most similar to online retail sector
Sophisticated order entry, delivery, inventory control
systems

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Composition of the U.S. Retail Industry
SOURCE: Based on data from U.S. Census Bureau, 2011.Figure 11.1, Page 731
E-commerce Retail: The Vision
1. Reduced search and transaction costs; customers able
to find lowest prices
2. Lowered market entry costs, lower operating costs,
higher efficiency
3. Traditional physical store merchants forced out of
business
4. Some traditional offline industries would be
disintermediated
Few of these assumptions were correct—structure
of retail marketplace has not been revolutionized
Internet has created new venues for multi-channel
firms and supported a few pure-play merchants

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The Online Retail Sector Today
Smallest segment of total retail industry (5%–
6%)
Growing at faster rate than offline segments
Revenues have resumed growth after recession
2009 (see next Fig.)
Around 73% of Internet users bought online in
2011, generated around $188 billion in online
retail sales
Primary beneficiaries:
Established offline retailers with online presence
(e.g., Staples. Office Depot, Walmart, Sears)
First mover dot-com companies (e.g., Amazon,
Newegg)
Online Retail and B2C E-commerce Is Alive and Well
Figure 11.2, page 734 SOURCES: Based on data from eMarketer, Inc., 2011a; authors’ estimates.
(incl. travel, other services, digital downloads)

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Multi-channel Integration
Integrating Web operations with traditional physical store
operations
Provide integrated shopping experience
Leverage value of physical store
Examples: Wal-Mart, Target , JCPenney, Staples
Types of integration (see next Fig.)
Online order, in-store pickup
In-store kiosk or clerk Web order, home delivery
Web promotions to drive customers to stores
Gift cards usable in any channel
Increasing importance of mobile devices
Amazon generated $2 billion in sales via mobile smartphones
Smartphones are used to check prices in stores, search for products,
and receive mobile coupons
Tablets are used to buy online: 20% of mobile e-commerce sales

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Analyzing the Viability of
Online Firms
Economic viability:
Ability of firms to survive as profitable business
firms during specified period (i.e., 1–3 years)
Two business analysis approaches:
Strategic analysis
Focuses on both industry as a whole and firm itself
Financial analysis
How firm is performing

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Strategic Analysis Factors
Key industry strategic factors
Barriers to entry – Can new entrants be barred from entering industry
through high capital costs?
Power of suppliers – Can suppliers dictate high prices to the industry
or can vendors bargain effectively for lower prices? Have firms
achieved enough scale to bargain for lower prices from suppliers?
Power of customers – Can customers choose from many competing
suppliers and thus challenge high prices and high margins?
Existence of substitute products – Can functionality of product or
service be obtained from alternative channels or competing products
in different industries?
Industry value chain – Is chain of production and distribution in
industry changing in ways that benefit or harm the firm?
Nature of intra-industry competition – Is basis of competition within
industry based on differentiated products and services price scope of
offerings or focus
Strategic Analysis Factors
Firm-specific factors
Firm value chain – Has the firm adopted business processes and
methods of operation that allow it to achieve the most efficient
operations in its industry?
Core competencies – Does the firm have unique competencies and
skills that can’t be easily duplicated by other firms?
Synergies – Does the firm have access to competencies and assets of
related firms either owned outright or through strategic partnerships
and alliances?
Technology – Has the firm developed proprietary technologies that
allow it to scale with demand? Has the firm developed the operational
technologies (CRM, fulfillment, SCM, inventory control) to survive?
Social and legal challenges – Has the firm put in place policies to
address consumer trust issues (privacy and security of personal info)?
Is the firm the subject of lawsuits challenging its business model?

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Analyzing the Viability of Online Firms:
Financial Analysis
Strategic analysis helps us understand
the competitive situation of the firm
Financial analysis helps us understand
how a firm is performing
Includes two main parts:
Statement of Operations: Tells us how much income
or loss a firm is achieving based on current sales and
costs
Balance sheet: Provides a financial snapshot of a
company’s assets and liabilities
Financial Analysis Factors
Statements of Operations
Revenues : Growing and at what rate?
Cost of sales (product costs + related costs): Compared to
revenues; the lower the cost of sales, the higher the gross
profit
Gross margin: tells if the firm is gaining or losing market
power; (Gross profit)/(net sales revenue)
Operating expenses (cost of marketing, technology, admin
overhead, and intangibles like stock compensation &
amortization)
Operating margin: tells if firm’s current operations are
covering its operating expenses, not incl interest expenses
and other non-operating expenses; (operating income or
loss)/(net sales revenue)
Net margin: tells % of its gross sales revenue firm is able to
retain after all expenses are deducted; (Net income or
loss)/(net sales revenue)

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Financial Analysis Factors
Balance sheet
Assets, current assets – cash, securities, accounts
receivable, inventory, other investments able to be
converted to cash within 1 year
Liabilities – outstanding obligations of the firm
Current liabilities – debts due within 1 year
Long-term debt – debts not due until after 1 year or
more
Working capital – provides short-term financial health;
(current assets – current liabilities)
E-tailing Business Models
1. Virtual merchant
Amazon
2. Bricks and clicks
Walmart, J.C. Penney, Sears
3. Catalog merchant
Lands’ End, L.L. Bean, Victoria’s Secret
4. Manufacturer-direct
Dell

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Virtual merchant
Single channel Web firms that generate almost all revenues
from online sales
e.g. Amazon, Buy.com, Newegg.com, Drugstore.com
Face extraordinary strategic challenges
Must build business and brand name from scratch quickly in an entirely
new channel
Confronts many virtual merchant competitions
No costs in building and maintaining physical stores, but large
costs in building and maintaining a Web site, order fulfillment
infrastructure, and developing brand name
High customer acquisition costs and steep learning curve
Gross margins (retail price of goods – cost of goods) are low
Hence, must achieve highly effective operations to preserve a
profit
E-commerce in Action: Amazon.com
Vision:
Earth’s biggest selection, most customer-centric
Business model:
Retail, Third Party Merchants, and Amazon Web Services (merchant and developer
services)
Financial analysis: (see next Fig.)
Continued explosive revenue growth, profitable – revenue increasing from $600 million
in 1998 to $34.2 billion in 2010
Strategic analysis/business strategy:
Maximize sales volume, cut prices, acquisitions, mobile shopping, Kindle
Strategic analysis/competition:
Online (eBay)
Multi-channel retailers, e.g., WalMart, Sears, JCPenny
Catalog merchants, e.g., L.L.Bean, Lands’ End
Online bookseller, e.g., Barnsandnoble.com
Portals, e.g., MSN, Yahoo
Audio/Video downloads, e.g., iTunes, Netflix, Blockbuster
Web services (web hosting, shopping cart, fulfillment services)

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7643/34204
1406/34204
1152/34204
9797-7364
E-commerce in Action: Amazon.com
Strategic analysis/technology:
Largest, most sophisticated collection of online retailing
technologies available (transaction-processing systems
handling millions of items, status inquiries, gift-
wrapping requests, multiple shipment methods)
Strategic analysis/social, legal:
Sales tax, patent lawsuits involving Kindle
Future prospects:
In 2010, net sales grew 40% to $34.2 billion, and
significant gains thus far in 2011
Ranks among top five in customer service, speed,
accuracy

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Multi-channel Merchants: Bricks-and-
clicks
Companies with physical stores as primary retail channel,
but also online offerings
e.g. Wal-Mart, J.C. Penney, Sears
Face high costs of physical buildings and large sales staffs
Advantages: brand name, national customer base,
warehouses, large-scale, trained staff
Low customer acquisition costs
Challenges: coordinating prices across channels and
handling returns of Web purchases at retail outlets,
leveraging their strengths and assets to the Web, building
a credible Web site, hiring new skilled staff, building rapid
response order entry and fulfillment systems
Catalog Merchants
Established companies that have national offline catalog
operation as largest retail channel, but also have online
capabilities
e.g. Lands’ End, L.L. Bean, Victoria’s Secret
Face very high costs for printing and mailing millions of
catalogs each year with 30-second half-life after customer
received them
Highest margins in retail sector due to very efficient
operations with centralized fulfillment and call centers,
extraordinary service, excellent partnership with package
delivery firms (FedEx and UPS)

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Manufacturer-direct
Single or multi-channel manufacturers who sell directly
online to consumers without intervention of retailers
e.g. Dell, HP, Gateway, IBM, Apple
Face channel conflict challenges when physical retailers of
products must compete on price and currency of
inventory directly against the manufacturer
Advantages: established national brand name, existing
large customer base, lower cost structure than catalog
merchants since they are manufacturer of goods and
don’t pay profit to anyone else, therefore, have higher
margins
Common Themes in Online Retailing
Online retail fastest growing channel on revenue basis
However, profits for startup ventures have been difficult to
achieve due to:
Lowered prices below cost of goods and operations,
Failed to develop efficient business processes,
Spent too much on customer acquisitionand marketing
Disintermediation has not occurred since first-mover, online
merchants failed to achieve profitability and depleted venture
capital funds. Also traditional retailers are fast followers.
Established merchants need to create integrated shopping
experience to succeed online
Growth of online specialty merchants selling high-end,
fashionable and luxury goods, e.g. Blue Nile, Tiffany, Armani,
BestBuy.com, Gap.com, OfficeDepot.com.
Extraordinary growth of social, local, and mobile e-commerce

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The Service Sector: Offline and Online
Service sector:
Largest and most rapidly expanding part of
economies of advanced industrial nations
Concerned with performing tasks in and around
households, business firms, and institutions
Includes doctors, lawyers, accountants, business
consultants, etc.
Employs 4 out of 5 U.S. workers
75% of all economic activity
Service Industries
Major service industry groups:
Finance
Insurance
Real estate
Travel
Professional services—legal, accounting
Business services—consulting, advertising,
marketing, etc.
Health services
Educational services

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Service Industries
Two categories
Transaction brokers – ones who act as intermediary to
facilitate a transaction, e.g., stockbrokers, employment
agencies
Hands-on service providers – ones who interact directly
and personally with the “client”, e.g., lawyers,
physicians, accountants
Features:
Knowledge- and information-intense
Makes them uniquely suited to e-commerce applications
Amount of personalization (legal, medical, accounting
services) and customization (financial services)
required differs depending on type of service
Online Financial Services
Financial services (finance, insurance, real estate) an
example of e-commerce success story, but success is
somewhat different from what had been predicted
Brokerage industry transformed with innovative,
pure-online firms, e.g., E*Trade
However, e-commerce impacts are less powerful in
large, powerful banking, insurance, real estate due to
consumer resistance and lack of industry innovations
In 2010 survey, 44% of ages 18–54 prefer online
banking
Multi-channel, established financial services firms
continue to show strong growth

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Four generic kinds of financial services
Storage of and access to funds
banking, lending
Protection of assets insurance
Means to grow assets investment
and brokerage firms
Movement of funds banks, credit
card firms

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Financial Service Industry Trends
Two important global trends
Industry consolidation
Financial Reform Act of 1998 amended Glass-
Steagall Act of 1934 and allows banks, brokerages,
and insurance firms to merge, and allows large
banks to own smaller banks in other states
Movement toward integrated financial services
Financial supermarket model: consumers can find
any financial product/service at a single physical
center or branch bank
Industry Consolidation and Integrated Financial
Services
Figure 11.3, Page 761

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Online Financial Consumer Behavior
Consumers attracted to online financial sites
because of desire to save time and access
information rather than save money
Most online consumers use financial services
firms for mundane financial management
Check balances
Pay bills
Number of people using mobile devices for
financial services is surging
Online Banking and Brokerage
Online banking pioneered by NetBank and Wingspan;
no longer in existence
Established brand-name national banks have taken
substantial lead in market share
In 2011, 103 million US consumers use online
banking; expected to rise to 116 million by 2014
Movement toward online banking is global
Early innovators in online brokerage (E*Trade) have
been displaced by established brokerages (Fidelity,
Charles Schwab)
Top trading web site among US users in 2011 is
Fidelity Investments with 6 million monthly unique
visitors

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The Growth of Online Banking
Figure 11.4, Page 764
SOURCE: Based on data from comScore, 2010a,
eMarketer, Inc., 2010; authors estimates.

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Multi-channel vs.
Pure Online Financial Service Firms
Online consumers prefer multi-channel firms
with physical presence
Multi-channel firms
Growing faster than pure online firms
Lower online customer acquisition costs
Pure online firms
Rely on Web sites, advertising to acquire customers
Users utilize services more intensively
Users shop more, are more price-driven and less loyal

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Financial Portals and
Account Aggregators
Financial portals
Comparison shopping services, independent financial advice,
financial planning
Revenues from advertising, referrals, subscriptions
e.g., Yahoo! Finance, Quicken.com, MSN Money
Account aggregation
Pulls together all of a customer’s financial data at a single
personalized Web site, incl. brokerage, banking, insurance,
loans, frequent flyer miles, news, and more
e.g., Yodlee: leader to provide account aggregation
technology with 30 million users worldwide and 200
financial institutions
Privacy concerns; control of personal data, security, etc.

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Online Mortgage and Lending Services
Early entrants hoped to simplify and speed up
mortgage value chain
Difficulties in branding and simplifying mortgage generation process
Three kinds of online mortgage vendor today
Established online banks, brokerages, and lending organizations, e.g.,
Chase, Wells Fargo, Ameriquest Mortgage
Pure online mortgage bankers, e.g., E-loan, Quicken Loans, E*Trade
Mortgage; aiming to speed up mortgage shopping and initiation
process, but still requiring extensive paperwork
Mortgage brokers (e.g., LendingTree.com) offering access to hundreds
of mortgage vendors who bid for their business
Online mortgage industry has not transformed process
of obtaining mortgage
Complexity of process requiring physical signatures and documents
Online Insurance Services
Online term life insurance:
One of few online insurance with lowered search costs, increased price
comparison, lower prices
Commodity product but web offers insurance companies new
opportunities for product and service differentiation and price
discrimination
Online use is more for discovering prices and terms of
policies than purchasing policies online
Online industry geared more toward
Product information, search
Price discovery
Online quotes
Influencing the offline purchasing decision
Leading online insurance companies are InsWeb,
Insure.com, Insurance.com, QuickQuote, NetQuote

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Online Real Estate Services
Early vision: Local, complex, and agent-driven real
estate industry would transform into disintermediated
marketplace where buyers and sellers would transact
directly
However, major impact is influencing of purchases
offline
Impossible to complete property transaction online
Main services are online property listings, loan calculators, research
and reference material, with mobile apps increasing
Despite revolution in available information, there has
not been a revolution in the industry value chain
E.g., Realtor.com, HomeGain, RealEstate.com,
ZipReality, Move.com, Craiglist.com, Zillow

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Online Travel Services
One of the most successful B2C e-commerce segments
Online travel bookings declined slightly due to
recession but expected to grow to $107.5 billion in 2011
For consumers: More convenience than traditional
travel agents
Popular because they offer more convenience (one-
stop content, commerce, community, customer service)
than traditional travel agents
For suppliers: A singular, focused customer pool that
can be efficiently reached through onsite advertising
Online Travel Services (cont.)
Travel an ideal service/product for Internet
Information-intensive product requiring significant
consumer research
Electronic product—travel arrangements (planning,
researching, comparison shopping, reserving and payment)
can be accomplished for the most part online
Does not require inventory (no physical assets)
Does not require physical offices with multiple employees
Suppliers are always looking for customers to fill excess
capacity
Does not require an expensive multi-channel physical
presence as required by financial services

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Online Travel Services Revenues
Figure 11.5, Page 770 SOURCE: Based on data from eMarketer, 2011c.
The Online Travel Market
Four major sectors:
Airline tickets
Source of greatest revenues
Tickets as a commodity
Hotel reservations
Car rentals
Cruises/tours
57% purchase airline tickets from airline’s Web
site, 22% from travel booking Web site (e.g.,
Expedia or Orbitz)
Corporate online-booking solutions (COBS)
Integrated travel services providing airline, hotel, conference
center, auto rental services at a single site

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Online Travel Industry Dynamics
Intense competition among online providers
Price competition difficult
Industry consolidation stronger, offline established firms
purchasing weaker online firms to create multi-channel travel
sites
Industry impacted by meta-search engines searching Web for best
prices and collect affiliate fees for providing consumer lowest
price sites, e.g., TripAdvisor, Kayak.com
Commoditize online travel causing excessive price competition and divert
revenues from leading, branded firms investing heavily in inventory and
systems
Mobile applications are also transforming industry; used for
planning, booking, check-in, and context and location-based
destination information
Social media content, reviews have an increasing influence on
travel purchases

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Online Career Services
Next to travel services Top sites generate over $1
billion annually
Two main players: CareerBuilder, Monster
Traditional recruitment:
Classified, print ads, career expos, on-campus recruitment,
staffing firms, internal referral programs
Online recruiting
More efficient, cost-effective, reduces total time-to-hire
Enables job hunters to more easily distribute resumes while
conducting job searches
Ideally suited for Web due to information-intense nature of
process

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It’s Just Information:
The Ideal Web Business?
Recruitment ideally suited for the Web
Information-intense process
Initial match-up doesn’t require much personalization
Saves time and money for both job hunters and employers
For employers:
Expand geographic reach of search, lower cost, and result in faster
hiring decisions
For job seekers:
Make resumes more widely available, and provides a variety of
related job-hunting services
One of most important functions:
Ability to establish market prices and terms (online national
marketplace)

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Online Recruitment Industry Trends
Consolidation: CareerBuilder and Monster together dominate the
market
Diversification
Explosion in specialty niche employment sites focusing on specific occupations
Localization:
Local boards developed by national sites compete with local newspapers,
Craigslist (local job listings)
Job search engines/aggregators:
“Scraping” listings from thousands of online job sites, specialty recruiting
services, and employer sites, to provide free, searchable job listings in one spot
E.g., Indeed.com, SimplyHired, and JobCentral
Social networking:
LinkedIn; Facebook apps used by members to establish business contacts and
networks, while employers use the sites to find potential job candidates or
“check up” their background for screening
Mobile apps
Using mobile devices by job seekers to search for jobs, researched companies,
create and upload resumes, and apply

Online Retailing and E-commerce Trends

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