New economy pundits have done a turnaround regarding the relative strengths of pure-play Internet companies vs. bricks-and-mortar brands entering the e-commerce arena.
As pure-play strands of the Web unravel, the online prospects of the bricks-and-mortar firms look more solid.
A year’s worth of hype about the obsolescence of such old-economy values as profitability, frugality and hierarchy has collapsed as suddenly as the market cap of the average dot-com.
Suddenly, conventional wisdom is oozing with contempt for companies with negative margins, huge marketing budgets and zero experience with real-world fulfillment or customer service. Indeed, for months before the market correction, awareness was building about the advantages of bricks-and-mortar companies that commit to a dynamic online business.
These advantages include brand equity, an existing customer base with comprehensive purchasing data, integrated marketing, economies of scale and
longtime experience with order fulfillment and customer service.
Despite their inherent edge, bricks-and-mortar retailers’ collective efforts to develop Internet sales have been tentative at best. According to a study conducted for RIS News, Randolph, NJ, only 29 percent of retailers are currently selling anything online; 24 percent have no Web presence whatsoever.
Another recent survey of 80 global businesses conducted by PricewaterhouseCoopers, Columbus, OH, and The Conference Board, New York, reported that only 28 percent of companies surveyed were able to process transactions online, and only 40 percent handle orders electronically.
One can imagine retailers and other companies late to the party breathing a collective sigh of relief, as the market valuations would seem to have validated their caution. The Internet, skeptics argue, promises nothing but laser-thin margins and massive investment in areas beyond a company’s core expertise. Stick with your store strategy and the rest will follow apace.
This comforting mind-set is a disastrous error. Retailers that use the current dot-com correction as an excuse to remain in first gear, will miss the opportunity to play a leading role in the reinvention of their businesses. They will lose business as the Web reshapes their customers’ expectations for convenience, product information and customer service.
Recent research by Jupiter Communications, New York, highlights the extent to which the Internet will affect sales across all channels. By 2005, Jupiter predicts consumers will not only spend $199 billion on Internet purchases, they will spend more than three times that amount, or $632 billion, in offline channels as a direct result of research they conduct on the Internet. Within a few years, failure to open an effective Web channel will likely restrict a company’s existing sales arteries.
No one is suggesting that e-commerce will replace in-the-flesh shopping anytime soon. But it’s already reshaped buyers’ expectations and experiences in revolutionary ways. Traditional retailers that fail to successfully harness online sales, or to offer compelling consumer benefits on their Web sites, will be out of tune with customers who already have been trained by the Web to demand the following:
o Convenience. The Internet radically cuts down time spent traveling, searching out items and paying for them.
o Reach. A well-organized commerce Web site offers more products more easily located than any brick-and-mortar business can hope to match. Affiliate marketing and other forms of online referral make the potential reach all but infinite.
o Information. The Internet has vastly expanded buyers’ access to decision-support information via comparison shopping, online product reviews, advice columns, newsletters, chat; even return policies and complaints are often better served on the Web.
o Flexibility. The Internet has opened up new forms (and reinvigorated dormant forms) of negotiation and exchange — auction, reverse auction, buyer aggregation, barter, incentive credit.
o Co-opetition. Just as Macy’s made friends by sending shoppers to Gimbel’s in Miracle on 34th Street, the Web teaches businesses that it pays to refer buyers to other sellers when they can’t meet a need.
These genies cannot be stuffed back in their bottles. The new economy is unalterably changing the world economy, and the economic pressure on companies to mount full-scale e-commerce ventures is as relentless. If anything, the shakeouts will continue to accelerate sector-by-sector consolidation, making it more crucial than ever to be an early mover.
Bricks-and-mortar businesses can learn from the mistakes of the pure-play pioneers, leveraging their inherent advantages in the process.
According to research conducted by Shop.org, Silver Spring, MD, and The Boston Consulting Group, Boston, the average pure-play spent $82 to acquire each customer in 1999, vs. just $12 for offline-based companies. The difference is partly a matter of culture, partly a leveraging of existing customer bases and brand equity.
While it’s currently fashionable to ridicule the excesses of e-tailers, bricks-and-mortar companies should selectively adapt elements of the dot-com mind-set, culture and skill-set. The Internet does demand speed, tech smarts, healthy capital investment, willingness to experiment constantly and change direction, and an openness to a wide variety of partnerships and cooperation.
The transition to clicks and mortar is long a road that has to be traveled fast. The challenges include:
o Access to capital.
o Consolidation of losses on the company income statement.
o Recruitment of Internet talent — often dependent on offering incentive equity.
o Creation of Internet culture.
o Negotiating channel conflicts.
o Adapting existing customer service and fulfillment operations to Internet operations.
o Deploying state-of-the-art technology.
o Moving to market at warp speed.
Cultural adaptation is the subtlest of these challenges; its results permeate all other decisions and operations. For instance, it is crucial to create a Web site with design fundamentals dictated by the needs and propensities of online shoppers. Bricks-and-mortar sites too often look and feel like store aisles transposed into two dimensions. Cyberspace is multidimensional: Customers should be able to structure a search according to multiple criteria.
Logistics aside, the defining decision for retailers is to move full throttle with no regrets. The coming dot-com shakeout may be gory. But over the longer term, it will be nothing compared to the carnage among companies that refuse to leap a digital divide of their own creation.
The best retailers have always been open to new channels of branded distribution The e-business revolution is likewise a revolution in branding. Merchants that make the most of integrating online and offline sales will have done the most for their core franchise and in the process, have put themselves on track for profitability.