Talk to anyone in the Internet industry and they'll witter on about shopping online and electronic commerce as if it's about to hit the high street like a juggernaut without brakes. It's not surprising that online shopping is something of a new religion - the benefits to retail are enormous when you consider that the whole sales process, apart from packing and distribution, could become automated and operate round the clock.
But most people have yet to shop online or even know anyone who has done. Why? The simple answer is that shopping on the Internet is in its infancy and, despite showing plenty of promise, is facing significant hurdles technologically, politically and socially.
But lets deal with the figures. According to research firm NOP, which studied online shopping during the latter half of 1996, the market is small but significant. It found that in the UK a sizeable 250,000 people shop online each month and that the numbers doubled during the June to December survey. Most purchases were for IT hardware and software, with 60 per cent spending less than (UKP)50, and one in seven spending over (UKP)500. Other than IT kit people are buying books, CDs, food/drink and tickets for travel.
Ask anyone who has ventured into the world of Net shopping and you're likely to hear a tale of frustration and confusion. But despite the difficulties of finding your way around retail sites, the NOP survey found that 36 per cent would consider buying banking and financial services this year - good news for the likes of the Royal Bank of Scotland and Barclays, both about to launch Internet services.
In the UK, which is about a year behind the US in developing customer-friendly shopping sites, much of the attention has focused on the likes of Tesco, The Internet Bookshop, BarclaySquare, Interflora and British Midland - the first airline to sell tickets online. More recent entrants to the fray include Boots, The Conran Shop, Waterstones Bookshop, Freemans and Debenhams. Despite a lacklustre performance, others have followed Barclays into the online mall business: UK Shopping City, Marble Halls and Consumer World. Of all the shop-specific sites, Freemans is arguably the largest with 15,000 products available. If you want to save yourself keying in the URLs for these sites, search via the shopping index on the UKplus search site (www.ukplus.co.uk).
So how does the retail industry see this growth in a totally new sales and distribution medium? Datapro analyst Alicia Aitken, currently completing an Internet shopping report, says the benefits are indirect: "Firms like Tesco aren't making any money; delivering orders for (UKP)5 doesn't pay for picking, packing and fulfilment. They hope to learn enough about their customers to make it possible for them to shift their buying patterns away from shopping at weekends when it's very busy, enabling the store to spread the load."
Tesco, meanwhile, stresses the benefits to humble shoppers: "Having our Internet Superstore means being open 24-hours a day, seven days a week. Sales figures now show that customers have adapted with ease. The Internet will be the everyday shopping of the future," says Jon Higgins, Tesco network planner.
Tesco is something of a trailblazer among the supermarkets and is showing all the signs of learning stage by stage how to make the most of the Internet. It launched in November 1996, selling flowers, champagne and wine with next-day delivery. It then moved on to offering 20,000 products to selected areas, mainly in West London. Despite being bullish it doesn't reveal figures on volumes sold so far.
This secrecy over volumes of sales is not surprising considering the insignificant level when compared to overall business for a company like Tesco. It's also borne out by recent research from Pira International which found that European retailers are taking a back seat when it comes to developing a Web presence. "Sowing the seeds of future growth will require a radical change in a supermarket's philosophy as product choice, order fulfilment and door-to-door distribution are all of equal importance to the success of an online shopping venture," the research states.
Moreover, the research found that, in general, Web sites already created by the supermarkets are failing because of lack of focus and lack of commitment from senior management. Most sites were found to be isolated from core business activity and not integrated with telesales already in operation.
Joanna Brace, BT retail market manager who has been involved in exploratory talks with most of the leading retailers, says attitudes vary greatly: "It's very mixed and there are still a lot of reservations. Some realise that online sales are not going to affect the whole UK population but still see an opportunity to grow market share. The thing is, companies like clothing retailers spend vast amounts printing and distributing catalogues, but with the Internet they can get involved in what we call 'data mining' to track customers and personalise shopping to them."
Not surprisingly, BT is hoping to capitalise on retailers' lack of confidence by managing their sites and traffic. BT chief executive officer Peter Bonfield recently stated that he expects BT to handle 50 per cent of the UK's Net traffic by the year 2000. But with supermarkets getting ever closer to becoming banks and issuers of credit cards, and with banks making their first uncertain steps into online banking, the boundaries are becoming increasingly blurred.
The travel industry has been online for almost 20 years with links to airlines and, most notably, through teletext terminals to all manner of reservation and availability systems. The Internet makes it possible to reach millions more customers, while at the same time threatens to take agents out of the buying chain. In the US it's called disintermediation, and there are few who doubt it will be an essential part of the shift towards Net-based sales. Take, for example, British Midland (BM). It's possible to book flights from the UK to Dublin from BM's Web site, and other airlines are slowly coming online to compete with BM.
The trickle of activity we see today is likely to become a torrent by the next decade, according to New Technologies in Travel and Tourism, a report from Datamonitor. It predicts that electronic commerce will be responsible for (UKP)1 billion of travel industry bookings by 2002, 18 per cent of which will be taken directly by technology suppliers like Microsoft. So far Microsoft has invested $200 million in its online travel site and claims to have a turnover of $1 million a week from business relating to air flights, hotel bookings and car hire.
With such predictions, some UK players are desperate to catch up. Thomas Cook plans to launch online booking by "year end", while at the same time downplaying the impact on high street retailers, saying it will grow the market as a whole. Datamonitor analyst Lee Buchanan is sceptical: "It's possible we'll see a reduction in the numbers of high street agents as more business moves over to the new medium. Targeting the upper income bracket, Thomas Cook has already installed electronic kiosks at David Lloyd centres around the UK to help sell activity holidays.
There is little doubt the UK industry will be driven by US examples that are currently giving waverers increasing concern. One of the most recent announcements comes from the Internet Travel Network (ITN) - not to be confused with the UK ITN TV news company - which has teamed up with TravelWeb. This brings together the former's strength in airline bookings, with the latter's leadership in hotel booking. ITN hosts 125 booking systems as a third-party provider, while TravelWeb boasts 27,000 visitors a day and claims to have booked $6 million worth of hotel reservations last year - more than the total business of many UK travel agents. Meanwhile, a whacking 30 per cent of its users don't even live in the US, and with major shareholders including 15 large hotel and travel companies it has the backing of many long-standing industry players.
IS IT SAFE?
Not surprisingly, safety of transactions is the old chestnut that continues to vex the industry and consumers alike, and despite computer companies with little to lose pushing everyone toward their vision of online shopping heaven, there are plenty of horror stories. One such is that of a company called CD Imports which, perhaps wisely, has stayed off the Net itself, but lets third parties take orders over the Net at a site known as the UK Shopping City (www.ukshops.co.uk). It has found that out of the handful of orders it receives each week, between 40 and 60 per cent are fraudulent. Chris Ashurst on the technical helpdesk at CD Imports concludes: "The Net is for leisure, not for buying. It's hardly worth it for us because we have to check the orders very carefully." Ashurst says fraudsters are not pursued because "it's their concern if they want to do that sort of thing", suggesting the Internet is one of the few areas of retail where it is seen as merely an inconvenience when someone tries to make a fraudulent application.
Independent Internet consultant Malcolm Greenaway, who specialises in fraud issues, says that increasingly fraudsters will be tracked down by banks and the police: "It's possible to track back to the service provider and from there to the address of the fraudster, but the problem is it's more a case of looking at patterns of fraud to track down organised crime." Greenaway admits it's not going to be in a retailer's interest to try to track down individuals. Fine in theory, but there will remain no deterrent to reduce this nuisance factor in online sales for some time - leading to continued reservations from retailers afraid of the Net.
A company which has no such fears when it comes to using the Internet as a new opportunity is Internet Music Shop (www.musicshop.co.uk), an Internet-only retail opportunity that benefits from not having to protect an existing retail environment or distribution chain. Marketing director Chris Codrington gives the impression that the only problem is one of not upsetting the industry too much: "We had problems at first. There was pressure put on the record companies not to do business with us and now we don't make a really big thing of the fact that we sell cheaper than retail outlets even though we could."
Savings on the Music Shop site are slight if you are only buying one or two CDs, but rise with the volume being ordered. With the UK often being the cheapest location in Europe for CDs, Internet Music Shop is attracting considerable interest from overseas and says that 60 per cent of its business is export, with 14 per cent of that to the US. The site, which was launched in May 1996, gets an average of 1,000 visitors a day of which about five per cent follow through to make a purchase, a statistic that Codrington is very proud of because the accepted industry standard in mail-order is two per cent.
Internet Music Shop, which incidentally is seeking a stock market listing, contradicts the common view that people don't like to order by credit card, with the finding that 99 per cent of their orders are received this way. The remainder fax in their details for (perceived) extra security. Music Shop also found there is more loyalty to online shopping than some would predict, with 40 per cent of orders being placed by existing customers. A healthy "repeat business", as they say in the trade. So much so that the company is seeking a flotation on the small business OFEX and hoping to raise #670,000, with a valuation of #2.2 million and sales of #16,000 a month across its music and video sites.
In the US, online sales of books and CDs seem to have been most successful so far, and in the UK Music Shop seems to be exploiting the same profitable niche. So what has Codrington learned so far? Keep it simple; have enormous depth; have good search facilities; and offer good customer service throughout the site.
Other retailers venturing into the Net would be well advised to learn from his experience rather than waste large sums learning the hard way. Much like hole-in-the-wall banking, it seems many companies will be dragged kicking and screaming into the online shopping age rather than take the plunge voluntarily.
Ken Young is Group Editor of Internet World ([email protected]).
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