The Future of Online Retailing

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How times change. Yesterday all retail business was moving online. Today no retail business is moving online.

What is the future of online retailing?

It depends on what categories you are talking about. Ask yourself the following five questions before you decide whether your category is likely to move to the Web or is likely to stay in a bricks-and-mortar state.

Is the brand tangible or intangible? Intangible products or services are more likely to move to the Web than tangible products.

Examples include banks, financial institutions, stock brokerage firms, travel agencies, etc. The advantages of the Internet are overwhelming when it comes to dealing with intangible services of all types.

Take bill paying.

Look at the chain of events that has to happen in order to pay a bill the conventional way.

A typical supplier (a telephone company, for example) runs a computer to print out your bill, then automatically inserts the bill in an envelope and adds the First-Class postage (34 cents minus the discount for presorted mail).

You open the envelope, write a check for the amount requested, put the check in an envelope and add another 34 cents postage, and then take the envelope to a post office or mailbox.

The phone company receives the envelope, checks the check to ensure it is correct, then deposits the check into its bank. A clerk at the bank keyboards the amount of the check, after which the bank's computers take over to switch the money from your account to the phone company's account.

That is a lot of work to switch electronic digits from one account to another, especially when the same thing can be done on your computer with a few keyboard clicks.

How soon will this happen?

It might be decades, but there is no question that banking and similar intangible services will ultimately move to the Web.

New technologies, especially those that involve the adoption of standards, sometimes take a long time to be generally accepted. It was decades after the invention of facsimile before this technology was universally accepted by businesses.

Is the brand fashionable? Fashionable products, on the other hand, are not likely to move to the Internet.

We do not predict much success for, even though the site was launched with a $17 million advertising campaign. The commercials were amusing, but the prospect is unlikely to do much shoe buying on the Internet.

There are three major questions a shoe site cannot answer. Will the shoes fit? Will they look good on your feet? Will the shoes be comfortable?

The failure of is just the tip of the iceberg. Sites that try to sell clothing and other fashion-oriented products will have a tough time on the Net. When you spend serious money on an outfit, you want to try it on first.

Is the product available in thousands of variations? Products that are available in thousands (or millions) of variations are likely to move to the Web.

Why was successful in selling books? Choice. Even the largest real-world bookstore carries no more than 150,000 different titles. carries some 4 million titles.

It is not just the number of variations either. Walk into a Barnes & Noble bookstore and try to find a book you have read about. Unless it is one of the best sellers displayed upfront, it will not be easy.

On the Internet, however, you can use Amazon's search function to find almost any book you are interested in (by subject, by title or by author) almost instantly. Try asking a clerk at Borders to bring out all the books written by Barbara Cartland and see what he says. ("Get out of here, I'm busy.")

Some surprising categories will move to the Web based on the variation concept. Take home delivery of pizza, for example. A typical pizza store might have three types of pizza in four different sizes with 14 different toppings. That's a lot of variations and a lot of chances for error.

One large pizza chain said that 12 percent of its deliveries have errors (counting only those reported by customers.)

Ordering a pizza via the Internet has many advantages. In addition to being inherently more accurate, there is no waiting on hold, there is the ability to view your previous orders and there is also the possibility of getting a computer-generated estimate of the actual delivery time.

Is low price a significant factor in the brand's purchase? Products that are sold with a low-price appeal are likely to move to the Web.

From a retailing point of view, what is the basic benefit of selling products or services on the Internet? It has the potential to greatly reduce your costs of distribution.

Most products have a three-step distribution pattern: from manufacturer to retailer to consumer. Some products even have four-step distribution, with a distributor or wholesaler inserted between the manufacturer and the retailer.

The Internet is inherently a two-step distribution system: from manufacturer to consumer. Removing a step can mean substantial savings. (Average margins of 50 percent or more are not uncommon among many retailers, for example.)

Ask yourself, "How little could I sell my product for if I sold it direct over the Internet? Would this lower price be perceived as a real benefit by consumers?" (For some products like watches, perfume, cosmetics and wine, a lower price is not necessarily a benefit to many consumers.)

Are delivery costs a significant factor in the purchase of the brand? If so, the Internet might not prove to be a good distribution channel.

What is wrong with Webvan? Delivery costs. It is just too expensive to deliver relatively low value, large volume, perishable products in an urban environment.

All things are relative. What won't work for groceries will work for flowers.

Flowers are just as expensive as groceries, yet there is a big market for flower delivery on the Internet. The difference is the gross margin available to pay for delivery. An average supermarket operates on a gross margin of 27 percent. The average flower shop operates on a gross margin more like 72 percent.

While there might be no margin to pay for grocery deliveries, there is plenty of margin to pay for flower deliveries.

What is the future of retailing online? Promising, very promising. But you first have to pick the right product or service to distribute on the Internet.


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