Introduction to e-Retailing

You are an e-retailer....

You have to do everything required to run an e-commerce operation and simultaneously integrate sound retail concepts.

You have to compete in a quicksilver Internet environment in a quicksilver retail industry.

You are up against some of the strongest established brand names in commercial history—Sears, J.C. Penney, and Wal-Mart. These are traditional retailers that know their markets and have the funds to hire the people who can initiate them into the secrets of e-commerce.

You are also up against some energetic adolescent companies that are on their way to becoming household names, such as Amazon.com, CDNow, eBay, and Fogdog Sports.

Oh, yeah... one more thing—the angels who threw obscene amounts of capital at e-retailers throughout the late 1990s have decided to sit on their hands for a while and see if anyone can actually make money selling consumer goods over the Internet.

In a sense, you are in a position much like that of Ginger Rogers, doing a difficult dance backward and in high heels.

Other books and resources can guide you through the fireswamp of setting up an effective e-commerce operation. Clearly, the choices you make and the infrastructure you devise will be critical—from the software you choose to the customer service policies you elect, to the fulfillment logistics you employ. You can follow every piece of advice you get through those resources, but will they make you a better retailer?

The concept of retail is based on a four-pronged mission: the right product in the right place at the right price at the right time.

With this essential mission in place, issues like customer service, technology, and fulfillment are tangential. True, they are absolutely vital to successful business operations, but at the same time, they are not, in the tired language of our day, your core business. They are not the essence of what it means to conduct retail operations successfully, online or off.

Thus, the focus of this book is on basic, sound retail principles, as they can be adapted to the peculiar medium we know as the World Wide Web. Issues like customer service, fulfillment, and technology are considered only as they directly relate to retail principles.

What has not been covered in other resources is your core business, retail, or more, specifically, e-retail. Don't let the "e" distract you. The key to success and profitability lies in the understanding and application of the elements of retail: strategy, assortment planning, merchandising, inventory management, vendor negotiations, and so on.

So what about the "e"? There is no doubt that the Web has changed the landscape of the retail industry. The Web is what Harvard Business School professors Christopher M. Christensen and Richard S. Tedlow call a "disruptive innovation."¹ As such, we must pay special attention to the way retail concepts apply to the medium. The retail industry has adapted to disruptive innovations before. The upscale department store, the mail-order catalog, and the discount department store were earlier disruptive innovations that forced retailers to rethink how they did business and for whom. The full impact the Web will have on retail will not be completely clear for several hyped-up holiday shopping seasons—in other words, for several years. However, even at this stage, we can begin to think of the Web like the telephone, a tool that soon no business can afford to be without, that makes every step of business more efficient, and which enhances rather than replaces existing retail prospects.

How all this will unfold is far from clear. New technologies enabling better online customer experiences appear regularly, and, just as regularly, they disappear. Connectivity itself is changing, with high-speed access and broadband capabilities becoming more common. Interactive television, which today is still something of a novelty, may become as commonplace as the remote control. Meanwhile, the online consumer population changes rapidly. Every Web demographic report shows more women, more young and older people, and more mass-market users accessing the Web to accomplish more tasks; that means more communication, more research, and, of course, more shopping.

As consumers, we are still getting used to the Web, in much the same way consumers had to learn to shop from a catalog or understand the nature of a discount department store. These earlier disruptive innovations are now so much a part of our shopping experience that we hardly notice how we are selecting a particular sales channel over another, making those choices based on convenience and value. Web-based shopping is moving in the same direction. The real challenge facing the online retail industry today is not the development and deployment of technology to make e-retail possible. It is to change consumer behavior, to get consumers to consider Web stores equally with their other options.

Next to all this uncertainty, one thing is very clear: There are distinct competitive advantages to launching a Web-based retail operation. This book will help you discover and maximize them, while minimizing the inherent disadvantages of the medium.

No Internet-focused book can get beyond its first few pages without launching into a breathless citation of statistics on the quadrillions of dollars soon to be spent online, the hordes of middle-class families making their first tentative online purchases, the dramatic rise of online spending and retail-focused Web sites, and so on. Odds are, you already know the news, or you wouldn't be reading this book.

Instead of the laundry list, we have decided to focus on one industry forecast that is simple and relatively conservative: By 2010, close to 20 percent of retail spending in the United States may be conducted via the Internet.² That is an estimated $660 billion chunk of an overall $3.3 trillion retail marketplace. The United States is expected to continue to dominate Web-based retailing throughout the first decade of the twenty-first century, but growing international markets also exist in Germany, Japan, Scandinavia, France, Great Britain, and South Korea.³

Who's in the Game?

Anyone with a modem can set up shop in Cyberspace, but as the shakeouts of early 2000 made plain, the gold rush is slowing down. Clearly, there is more to e-retail than coining a catchy dot-com name and creating some sassy, ironic advertising. Web-based retail may have altered the superficial appearance of the industry and may have broadened the options for the way shoppers and retailers can interact, but the underlying structure of successful retail has not shifted one iota. A careful mix of know-how in technology, marketing, consumer behavior, merchandising, and logistics will support a successful e-retail organization

So what has changed? There is no doubt that shopping online is a different psychological experience than shopping at a mall, in a Main Street shop, or from a catalog. e-Retail creates hybrid forms of the consumer/merchant relationship, forms that offer different kinds of sales opportunities than existing media offer. Table 1 compares the three most common retail sales channels brick-and-mortar, catalog, and the Web—across the elements that characterize the shopping and business ownership experience.

Table 1 Channel Comparison

e-Retail + Traditional Retail Operations ("Clicks-and-Mortar")

Sites like macys.com and gap.com, as well as relative latecomers walmart.com and jcpenney.com, are evolving into online branches of brick-and-mortar operations. This kind of site is not limited to the rich, famous, and nationally well-branded. Many smaller stores have used the Web to broaden their market by opening online branches, which make available to Web shoppers goods that were once accessible only to people near the store.

The inverse image of this model is also evident: businesses that started out as Web e-retailers but have since added brick-and-mortar operations to their sales channels. Gazoontite.com launched its Web site selling hypoallergenic products before opening its flagship store in San Francisco. Additional stores have opened on both coasts and in the Chicago area. Originally intended to reinforce the site's branding and credibility, the brick-and-mortar operations have proven to be a huge success, even as the e-retail site has stopped selling.

The concepts outlined in this book apply to traditional retail stores and e-retail sites. If your site would benefit from a storefront, the same skills and metrics should guide your decisions. For the purposes of this book, however, we focus on the e-retail component of the business.

e-Retail + Catalog Operations

In this category are well-known catalog merchants like Lands' End, which has expanded its popular direct merchant business through landsend.com. For catalog retailers, expansion to the Web is a relatively easy development. They already conduct most of their sales through remote media and are already equipped to handle customer service and order fulfillment.

This model also has an inverse, in the form of dot-coms that have added print catalogs or other print sales tools to their online site offerings. Print sales tools can serve as a tangible reiteration of an e-retail brand and its product offerings. Garden.com, for example, added a print catalog to the many merchandising techniques the company uses to drive sales at its Web site.

The consistent, physical reminder of your name and brand can be an important aspect of your marketing, regardless of whether you intend to achieve sales through both a print catalog and your retail site.

e-Retail + Web Site Content

Selling goods is a complementary component of business for these sites, which may rely on other sources of revenue for some portion of their business. Other components may include community building, editorial and informational content, product reviews, and recommendations or other features to draw users to the site.

The combination of targeted information and retail is a powerful one that cannot be easily replicated offline. To be sure, many traditional retailers of all kinds offer their customers print newsletters, loyalty programs, educational opportunities, and more. However, the Web uniquely enables customization of that content, allowing customers to pull from the site exactly the content they want and need, when they want it, and, many times, in the form they want it. From the e-retailer's perspective, this customization is automated; the company need not employ envelope stuffers to select and mail the appropriate materials to a customer on a regular basis. From the customer's perspective, this feature creates the experience of becoming a "market of one," with a direct relationship to the retailer.

Content and e-retail sites may mix their revenue streams in a variety of ways with any number of tools such as membership programs, advertising, sponsorships, retail, subscriptions, and syndication of content. Affiliate programs, which credit a referring Web site for sales made through the site, can make almost any site a de facto e-commerce site. For the purposes of this book, we considered sites that rely on product sales of 50 percent or more of their revenues.

FashionDish.com and BabyCenter are both content-driven e-retail sites. Both sites rely on targeted content (celebrity gossip, parenting information) to bring customers to the site and keep them coming back.

What format best suits your business? What sales channels will prove successful for you? The balance between Web sites, brick-and-mortar stores, and catalogs depends on your retail strategy, goals, and budget. Although our focus throughout the book will be on the Web-based retail operation, take some time to consider whether additional sales channels make sense for your product, market, and unique selling proposition.