The Strategic Edge is a retail, real estate, and planning consulting firm that assists firms and municipalities in exploring their potential as it relates to individual projects or enterprise-wide strategies. Consistently, we have had the need to quantify the unknown, (whether it be sales potential, demographics, competition, or some other measure integral to performance), often times within a given geography.
The prominence of Internet retailing has made us question the role of physical space in the e-business plan, just as mail-order and catalog retail companies did in the past. As the e-commerce channel becomes even more acceptable to the buying public, the implications to retailers in the physical world will have to be watched closely.
In this update, The Strategic Edge has reviewed the hard numbers and projections related to e-commerce volume and outlined what we believe to be key issues and trends influencing growth of the channel.
E-Commerce Update.
It can be a daunting task to keep up with e-commerce sales, research, and trends; it seems there are updates and press releases daily tracking some characteristic of web-based performance. One thing is clear, the Internet is becoming an established channel for retailers. Jupiter Communications estimates the 1999 holiday season brought retailers $7 Billion in web-based sales. The 1999 online holiday season doubled 1998 holiday sales of $3.5 Billion according to Forrester Research. The 1999 Internet retail holiday sales mark was ten times the holiday volume in 1997, estimated at $500 to $800 million.
The following table shows annual reporting/forecasting attempts from various companies charting the Internet economy.
U.S. Online Sales (Billions)
Company 1998 1999 2000 2001 2002 2003 Comments Bizrate.com 4.4 10.9 Boston Consulting Group 13.0 36.0 Includes brokerage fees eMarketer 8.0 18.6 30.6 44.7 65.6 80.5 Includes travel, event tickets, video Forrester Research 7.8 20.3 38.8 64.2 101.1 143.8 Includes travel, event tickets, video, auto sales Jupiter Communications 7.8 14.9 23.1 34.6 53.0 78.0 Includes travel, event tickets, video International Data Corp. 12.4 24.2 35.8 48.1 60.6 75.0 Includes travel, event tickets, video Yankee Group 11.5 24.2 36.6 57.2 86.6 125.6 Includes travel, event tickets, video Source:ICSC Research Quarterly V. 6, No. 4 – Winter 1999-2000
The table illustrates that the use of Internet sales estimations can be a complicated matter. The estimates and projections provide a good estimate of volume and growth but thorough investigation of the statistics is required before the numbers can be put to use. Part of the reason for the large discrepancy in the estimates is the wide array of methodologies used to produce the statistics; some include online stock brokers, auto sales, travel, and much more in retail sales and others do not.
The U.S. Commerce Department tracked retail sales for the first time during the fourth quarter of 1999. The Commerce Department will release the online index quarterly for now but hopes to make it a monthly assessment. The government will provide free, reliable statistics with an accessible methodology allowing the internet community to benchmark and measure their performance against the overall market.
Growth in the sector is much more impressive than volumetric measures. All companies in the table above estimated roughly 100% growth in sales (or more) from 1998 to 1999. Shop.org and the Boston Consulting Group estimated 1999 annual online retail sales at $36 billion, or approximately 1% of the roughly $3 trillion U.S. retail sales market. A sales volume reaching nearly 1% of retail sales does not necessarily establish e-commerce as a tried and true channel for shopping and doing business, but the rate at which consumers have experimented with the Internet as a viable shopping alternative is impressive.
Projections from the research community concerning the future sales potential of the e-commerce channel remain positive. Most analysts predict the wild growth to continue for the next several years. Several firms have predicted the natural plateau for e-retail to be 5% to 7% of total retail sales. Forrester Research predicts that e-commerce revenue will reach 7% of retail sales by 2004.
Hurdles To Growth.
E-commerce, with all its growth and momentum, is transforming the Internet into an established distribution channel for retail goods. The early stage of development that the Internet’s sub-industries are in is a period demonstrating explosive change. Because the industry is in such a dynamic state, it can be extremely difficult to quantify the future potential of the e-retail industry. There are many issues affecting the future of e-commerce to monitor closely in the coming years.
The Internet Universe. The universe of users is generally accepted as the number of people that have access to computers with online accessibility. The universe of users can be very difficult to predict and the influences are many, including: personal computer prices, work accessibility, and the price of home Internet access to name a few. In 1999, we saw that some computer manufacturers teamed up with Internet service providers (ISPs) to provide "free" computers to consumers signing extended online service contracts. Last year, a number of Internet service providers offered free, unlimited access to the Internet, formulating business plans that reject traditional supply and demand principles. Current estimates suggest PC ownership is up to roughly one-half of the households in the United States. Revenue generated by web-based retailers will increase as more Americans obtain Internet access. The following table provides some insight on the issue of Internet access. For a frame of reference, it is estimated that the United States is made up of roughly 274 million people and 103 million households in 2000.
Internet Usage (Millions of Users)
Company 1998 1999 2000 2001 2002 2003 Comments Cyber Dialogue (Conservative) 61.0 74.5 83.0 90.5 99.1 109.4 Age 18+, online once in past 30 days Cyber Dialogue (Aggressive) 61.0 77.9 90.2 103.0 115.9 130.2 Age 18+, online once in past 30 days eMarketer 55.3 66.9 76.0 89.4 100.3 Age 14+, online at least 1 hour per week HarrisInteractive 98.0 Age 18+, online once in past 30 days Intelliquest/Zona Research 73.0 90.0 Age 16+, online once in past 90 days International Data Corp. 82.0 109.0 131.0 154.0 179.0 Any age, online once in past 30 days Jupiter Communications 81.7 100.1 115.6 129.8 144.2 156.7 Any age, online once in past 30 days Media Metrix 66.4 Any age, online once in past 30 days Mediamark Research 74.8 Age 18+, online once in past 30 days Strategis Group 101.0 Age 18+, online anytime in life Source:ICSC Research Quarterly V. 6, No. 4 – Winter 1999-2000
Internet Buyer Penetration. For the Internet to gain more momentum, the gap between the universe of users and PC owners buying goods online needs to be tightened. Nielsen Net Ratings estimated the Internet universe of users at roughly 119 million people while users buying goods online were estimated at 27 million people in 1999. In numerous studies, the number one reason given by persons online choosing not to shop via the web is skepticism about security. The technology used to secure transactions over the net such as encryption software, e-cash, and smartcards, is readily available today but the typical user remains skeptical. Internet retailers need to make sure that potential customers have immediate and easy access to information assuring the security of their transaction.
Security Hurdles. The week beginning February 7, 2000 focused the country’s attention on the issue of electronic terrorism. Internet companies like Yahoo, Amazon.com, eBay, and Buy.com were the victims of cyber-vandalism. "Denial of service" attacks were to blame for "locking up" the sites for hours. Large e-commerce retailers will need to make sure their sites are secured against hacker attacks. Large e-retailers can suffer losses in the millions of dollars if their sites are down for even small amounts of time.
On a much smaller scale, technology companies will have to continually improve their security products in order to assure and boost consumer confidence regarding the privacy of their online transactions.
Government Involvement. There is currently an Internet tax moratorium set in place by the Internet Tax Freedom Act that will last until October of 2001. The law prohibits state and local governments from imposing taxes on Internet access charges and protects consumers and vendors from new tax liability in commercial transactions over the Internet. Until now, U.S., state, and local governments have avoided heavy regulation and taxation of the Internet. However, the Internet Tax Commission and other groups are studying the situation and will make recommendations to Congress as the end of the tax moratorium approaches. There is a strong lobby of brick n’ mortar retailers that are fighting for a "level playing field" with their Internet competitors. The implications of government intervention are hard to predict.
Speed. The majority of users connecting to the Internet from home use dial-up modems to gain access. During the Christmas season of 1999, The Industry Standard noted that approximately 80% of Internet consumers accessed retail sites from home. The majority of these users experienced only moderate performance downloading sites – Keynote Systems reported an average site download time of 21 seconds over the 1999 holiday season by users accessing sites from home.
High-speed lines must become more accessible in order for online retailers to provide consumers with quality experiences. The two common types of high-speed access are cable and Digital Subscriber Line (DSL). Costs range from start up fees of $100 to $300 and subscription fees of $40 to $50 per month. The recent AOL merger with Time Warner hints at things to come; new internet service and content providers merging with companies with cable infrastructure already in place. Over time, high-speed access should become more mainstream and affordable.
Anatomy of an Internet Sale – Before & After.
Before. Driving traffic to Internet sites is now more expensive than ever. Marketing dollars spent by pure play or Internet-only retailers is greater than that for already established retailers with brick n’ mortar locations. Established retailers presumably have brand awareness, whereas pure play Internet retailers need to continually saturate different media with advertising to build that kind of awareness. One of the reasons many e-commerce sites are not profitable is the high cost of marketing. Anything that lowers the cost of marketing for pure play or "brick n’ click" companies will improve bottom lines and foster growth in the channel.
After. The act of buying something online sets in motion a chain-reaction of real-world events designed to deliver an online request in a timely manner. During the 1999 holiday season, online retailers were hit with more orders than ever before. BizRate.com estimated that of the 34 million online orders made from November 26 to December 26, 8.8 million or 26% of orders were delivered late. Fulfillment systems need to become more reliable. Watch for improvements in shipping and handling, inventory management, warehousing, and other back-end systems.
Commitment to the E-Business Plan.
Central to the issue of e-commerce growth is the concept of commitment to the Internet. Many brick n’ mortar retail companies are rightfully skeptical of how the Internet will change the way they do business. Why mess with success? As a result, there are many retail companies that have not truly embraced the Internet as part of their business plan. As more retailers start to experience success through e-commerce endeavors, more companies will consider the Internet’s possibilities in their operations. Traditional retailers should beware though, just having an Internet site will not guarantee success – a true commitment and integration of "brick and click" strategies are necessary for success.
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