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Thursday, February 3, 2011

Online retailers are draining business from traditional, “brick & mortar” companies, but some things never change (published in July of 2010 in the SB News Press)

Today, more and more people are finding that shopping over the Internet is the preferred alternative to shopping at a “brick and mortar” store.  The reasons are many, and include convenience, cost savings (in many cases), selection, and efficiency—the shopper can view many more items from multiple suppliers in a fraction of the time.  But there are still some products and businesses that are not easily translated to an online format. 

In this week’s column, I will discuss some of the positives and negatives of this growing trend towards online retailing, or “e-tailing”, and review some of the products that are sold locally by brick and mortar stores, that still offer some advantages to local retailers, over e-tailers.  

B2C (Business to Consumer) e-commerce went through some tough times, particularly after the technology-heavy NASDAQ index crumbled in 2000, when the tech bubble burst. In the ensuing dotcom carnage, hundreds of e-commerce sites shut their virtual doors and some experts predicted years of struggle for online retailers.  Since then, however, shoppers have continued to flock to the web in increasing numbers.

Online retail sales continue to grow steadily. Forrester Research has a five-year forecast which predicts that e-commerce sales in the U.S. will keep growing at a 10 percent compounded annual rate through 2014. It forecasts online retail sales in the U.S. of nearly $250 billion; up from $155 billion in 2009. Last year, online retail sales were up 11 percent, compared to 2.5 percent for all retail sales.  (Forrester’s estimates exclude online sales of autos, travel, and prescription drugs.)

Some other stats from the Forrester forecast:

  • e-commerce sales will represent 8 percent of all retail sales in the U.S. by 2014, up from 6 percent in 2009
  • In 2009, 154 million people in the U.S. bought something online, or 67 percent of the online population (4 percent more than in 2008)
  • Three product categories (computers, apparel, and consumer electronics) represented more than 44 percent of online sales ($67.6 billion) in 2009

While $155 billion worth of consumer goods were bought online last year, a far larger portion of offline sales were influenced by online research. Forrester estimates that $917 billion worth of retail sales last year were “Web-influenced.” It also estimates that online and Web-influenced offline sales combined accounted for 42 percent of total retail sales and that percentage will grow to 53 percent by 2014, when the Web will be influencing $1.4 billion worth of in-store sales.

In the US, companies spend about $25 billion per year on online advertising.  According to some experts, the online shopping influence will soon shift from advertisements to friends and social media. Websites such as ShopSocially are enabling users to make shopping decisions based on friend recommendations rather than simply relying on online advertisements. 

Books are one of the things bought most online. However, clothes, shoes, and accessories are all very popular things bought online. Cosmetics, nutrition products, and groceries are increasingly being purchased online. About one fourth of travelers buy their plane tickets online because it is a quick and easy way to compare airline travel and make a purchase. Online shopping provides more freedom and control than shopping in a store. 


Online shopping has become extremely routine and predictable, which is one of its great appeals to the consumer.  Online stores are usually available 24 hours a day, and many consumers have Internet access both at work and at home. Other establishments such as Internet cafes and schools provide access as well. A visit to a conventional retail store requires travel and must take place during business hours.  Searching or browsing an online catalog can be faster than browsing the aisles of a physical store. One can avoid crowded malls resulting in long lines, and no parking.

Consumers can quickly search for deals for items or services with many different vendors (though some local search engines do exist to help consumers locate products for sale in nearby stores). Search engines, online price comparison services and discovery shopping engines can be used to look up sellers of a particular product or service.

Yet another advantage, and probably the most important, is price.  Most of the time, it is fairly easy to beat the prices of brick and mortar stores online.  Shipping costs can diminish the cost savings somewhat, although many online stores offer free shipping.

If the online company is not based in the home state of the purchaser, there may not be any sales tax charged, which can allow the consumer to save, or can at least offset shipping charges.


Some consumers prefer interacting with people rather than computers because they find computers hard to use, or because they value the advice and opinion of the sales person. In most cases, merchandise must be shipped to the consumer, introducing a significant delay and potentially uncertainty about whether or not the item was actually in stock at the time of purchase. Most successful sites will say whether or not a product is in supply.  “Bricks and clicks” stores (those with a website and one or more physical locations) offer the ability to buy online but pick up in a nearby store.

For efficiency reasons, online stores generally do not ship products immediately upon receiving an order. Orders are only filled during warehouse operating hours, and there may be a delay of anywhere from a few minutes to a few days to a few weeks before in-stock items are actually packaged and shipped.

When shopping in a retail store, customers can handle and inspect the actual product before they purchase it.  In the event of a problem with the item—it is not what the consumer ordered, or it is not what they expected—consumers are concerned with the hassle of returning the item, or with getting a refund.

Shipping costs can be a serious drawback to shopping online.  These costs can be especially discouraging when the item is large or heavy (or both).  Some things just cost a lot to ship, especially individually, so companies that sell those kinds of items in a brick and mortar setting should enjoy an advantage.  Damage during shipping (unless the consumer buys shipping insurance, and this costs money) is also a potential drawback of online shopping.

Given the lack of ability to inspect merchandise before purchase, consumers are at higher risk of fraud on the part of the merchant than in a physical store.  Secure Sockets Layer (SSL) encryption has generally solved the problem of credit card numbers being intercepted in transit between the consumer and the merchant. Identity theft is still a concern for consumers when hackers break into a merchant's website and steal names, addresses and credit card numbers.

Phishing is another danger, where consumers are fooled into thinking they are dealing with a reputable retailer, when they have actually been manipulated into feeding private information to a system operated by a malicious party.  The accumulation of spyware on the consumer’s computer is another downside when shopping online.  Privacy of personal information is a significant issue for some consumers.

Profitable items for online retailers often have a high value-to-weight ratio, they may involve embarrassing purchases, they may typically go to people in remote locations, and they may have shut-ins as their typical purchasers.  Items which can fit through a standard letterbox — such as music CDs, DVDs and books — are particularly suitable for a virtual marketer.

Products such as spare parts, both for consumer items like washing machines and for industrial equipment like centrifugal pumps, also seem good candidates for selling online. Retailers often need to order spare parts specially, since they typically do not stock them at consumer outlets—in such cases, e-commerce solutions in spares do not compete with retail stores, only with other ordering systems.

Products less suitable for e-commerce include products that have a low value-to-weight ratio, products that have a smell, taste, or touch component, products that need trial fittings—most notably clothing—and products where color integrity appears important.

Local businesses that sell high-end fashions, furniture—especially pieces that are for sitting or sleeping, foods, wines, beers, large difficult to ship items at lower price-points, such as building materials, and anything that is for immediate use, where the consumer can’t (or doesn’t want to) wait for it, are in the best position to protect themselves from losing business to online-only firms.  The best strategy for local businesses would appear to be operating as a bricks and clicks company—offering a physical location as well as a website where products can be ordered and shipped either to the consumer or to the store for pickup.  Delivery services are another possibility to improve competitiveness. 

In today’s weak economic environment, competition is tougher than ever.  Local businesses must find new, innovative ways to appeal to as many customers as possible.  Understanding where, how and why their customers buy and then altering their business strategy to match these customer characteristics, can improve financial performance.

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