Major Industry Trends
Electronic commerce, or e-commerce, involves the sale of goods and services via electronic means—principally over the internet, although sales via television (terrestrial, cable, and satellite) are also included. E-commerce can be further divided into the following sectors: business-to-business (B2B), business-to-government (B2G), consumer-to-consumer (C2C), government-to-business (G2B), government-to-citizen (G2C), and business-to-consumer (B2C). Retailers that rely primarily on e-commerce to sell goods or services are often referred to as e-tailers.
Retailing over the internet generally takes one of two forms:
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Cybermalls—the most famous cybermall is eBay, which offers access to products from a variety of independent retailers.
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Individual websites—most major retailers now have their own websites, which complement their traditional “bricks-and-mortar” outlets. Some retailers operate solely over the internet.
In terms of television sales, programs on dedicated shopping channels generally feature a presenter who demonstrates products on air. Viewers can buy these products by telephoning an order line with their credit card details or, in the case of interactive television services, by using their remote controls. Recent years have seen the development of a variety of selling techniques, including on-air auctions.
E-commerce is most closely associated with the internet, and has developed in tandem with the growth of the medium. Indeed, e-commerce initially became possible with the opening up of the internet to commercial users in the early 1990s. However, it wasn’t until the latter half of the decade that companies really began to exploit the internet’s commercial potential.
A number of start-up companies, such as Amazon and eBay, have exploited the power of the internet to emerge as retailing behemoths in their own right. However, e-commerce has largely been developed by established large retailers, which regard it as simply another sales channel. The gigantic grocery retailers that have expanded away from food and into a wide variety of other areas, such as clothing and electronic goods, have been particularly quick to appreciate its potential. The medium has also created opportunities for very small businesses. It is now possible to buy over the internet a wide range of specialized products that are not available in shopping malls. Thus, the internet has provided a lifeline for many small producers, and has allowed entrepreneurs to enter the retailing sector without the need to invest heavily in physical retail outlets.
E-commerce has proven so successful because it offers significant advantages to both consumers and retailers. Consumers can compare a vast array of retailers in a few minutes—something that it would be impossible to do physically. Online retailers often sell products and services at a significant discount to those offered by traditional outlets, and buying online is convenient: consumers can make their purchases from the comfort of their own home, and have them delivered to their door. Furthermore, online shopping appeals to the environmentally conscious. In March 2009, researchers at Heriot-Watt University in the UK revealed that online shopping is 24 times “greener” than taking the car to the shops, and seven times “greener” than taking the bus. The researchers compared the carbon footprint of a typical delivery from a local depot with average carbon footprints for shopping trips by car and bus, and found that home deliveries involved much lower levels of carbon emissions. For businesses, the advantages of e-commerce lie mainly in the low cost of setting up and maintaining a business. Firms do not need to invest heavily in a physical presence, or in sales staff. However, they do have to organize payment systems, distribution, and returns.
Industry Suitability
Undoubtedly, some industries are more suited to e-commerce than others. This type of retailing is most applicable to goods that are fairly simple, commoditized, and do not require on-the-spot input from knowledgeable sales staff. Thus, grocery retailing is ideally suited to e-commerce, whereas consumers generally need to try on clothing before they make a purchase. Equally, the penetration of e-commerce may be high in some sectors of a given market, but low in others. In financial services, for example, purchasing of insurance or a loan, both highly commoditized products, is ideally suited to the internet. However, many people prefer to buy a sophisticated financial product, such as a pension, on a face-to-face basis, as they will almost certainly require advice before making their choice. Generally, it is difficult to make online sales of sophisticated goods and services that require a large amount of advice or input from the retailer.
Technological Advances
The growth of broadband internet connections around the globe has undoubtedly boosted online shopping, simply by dramatically speeding up the process of accessing websites, and buying goods. Broadband is at least ten times as fast as dial-up. Having access to broadband means that consumers are more likely to use the internet to purchase everyday items such as groceries. However, faster connection speeds also allow users to download music files, video clips, and movies, or to compete in online gaming, further boosting the potential revenues generated by e-commerce.
Traditionally, individuals and businesses have ordered goods or services online via computers, but the increasing availability of broadband on mobile phones has opened up another avenue for e-tailers. Indeed, a report published in March 2009 by ABI Research, based in New York, said that consumers are increasingly using their phones for financial transactions. ABI said that growth in e-commerce is being driven primarily by payment via SMS (short message service), mobile internet, and mobile applications. In industrialized countries, mobile users are becoming familiar and comfortable with using cell phones for more than just voice communication. In developing nations, mobile financial services are popular as an alternative to scarce local financial institutions.
Surprisingly, given that the US is generally regarded as the most advanced economy in the world, its broadband penetration rates are relatively low, according to the Organization for Economic Cooperation and Development (OECD), which publishes data on the subject (see More Info). In June 2008, Denmark had the highest penetration rate for broadband, at 36.7 per 100 inhabitants. It was followed by the Netherlands (35.5), Norway (33.4), Switzerland (32.7), and Iceland (32.3). The USA was in 15th place, with a penetration rate of 25 per 100 inhabitants.
Advances in technology are increasing the penetration of e-commerce in sectors previously regarded as unsuitable for this type of retailing, such as clothing. Currently, online sales account for just 3–5% of the total clothing market in Europe. However, innovative websites now allow consumers to “try on” clothes virtually, and analysts believe that this will cause online sales of clothing to grow rapidly.
Market Analysis
Calculating the overall size of the global e-commerce market is complicated by the relatively high levels of cross-border sales that take place. Furthermore, few research companies measure all the various sectors of the market (B2B, B2C, etc). However, the research company eMarketer, which is based in the US, estimated worldwide e-retail sales at US$438 billion in 2008.
The US is almost certainly the largest market, reflecting the size of its economy. Total e-commerce sales in the US during 2008 were estimated at $133.6 billion, an increase of 4.6% on 2007, according to the US Commerce Department. However, according to a report by the analysts, Forrester Research, published in March 2009, UK online shoppers outspend both their American and European counterparts. More than half of all UK consumers, or about 28 million people, shop online regularly—and these shoppers estimate that they spend an average of £1,312 per year online. By comparison, German consumers spend an average of £771 per year online, while French consumers spend an average of £693. Forrester says that UK retailers are the “most sophisticated in all of Europe” when it comes to web retailing, because they realize that “the internet is their biggest opportunity.”
Rapidly developing countries such as China, India, and Brazil have huge potential in terms of internet sales, according to the research firm, Key Note Ltd. The company says that “these countries are not only benefiting from fast-rising living standards, but are also spread over huge geographic distances, and thus offer great potential for online sales.” The use of the internet is certainly growing rapidly in these countries. China’s online population, the world’s largest, grew by 41.9% in 2008, to 298 million, according to the government-linked China Internet Network Information Centre (CINIC). The number of internet users in China, which has a population of 1.3 billion, was thus almost the same as the entire population of the US. A study by CINIC said that 234 million people in China had surfed the internet to read or watch news by the end of 2008.
Varying Business Models
Companies have adopted differing business models for their e-commerce operations. Amazon operates from vast warehouses, as does Ocado, a grocery retailer based in the UK. In the Ocado model, pickers inside the warehouse service thousands of internet orders, which are stacked, packed into pods that are attached to big trucks, and then transported all over the UK to car parks, where the pods are slotted onto individual vans for street-level deliveries. Other retailers pursue different models. The UK’s Tesco, the third-largest retailer in the world, bases its online shopping business at individual stores. Tesco’s website sends orders to the store nearest to the shopper, and pickers visit the store’s shelves to fill the orders. Tesco vans then take the orders out locally.
Amazon is regarded as one of the pioneers of e-commerce, and continues to go from strength to strength. Founded in 1995 by Jeff Bezos to sell books, Amazon now sells a wide range of consumer products, and is one of the best-known internet retailers. By the end of the 1990s, Amazon’s revenue was around US$1.5 billion a year, but it was still making a loss—it had to borrow around US$1 billion each year just to keep afloat. However, it managed to survive the financial storm, and, by the middle of the current decade, was making a healthy profit. Indeed, in 2005, on Amazon’s 10th birthday, Bezos said that his aim was to turn Amazon into the Wal-Mart of electronic retailing, with a company mantra of “get big fast.” In the year ending December 31, 2007, Amazon’s net sales were US$14.835 billion, a 38.5% increase on the previous year. In 2008, sales continued to surge, expanding by 18%, to US$6.7 billion, in the final quarter of the calendar year.
However, another pathfinder, eBay, has encountered difficulties in recent years. Indeed, in March 2009, the company unveiled a new three-year business plan, and a change in strategy. eBay remains best known for its auction site. In recent years, it has expanded into fixed-price goods in a wide variety of product categories, with the apparent aim of taking on Amazon, but growth has slumped at its auction business, while eBay has failed to make significant progress with its fixed-price goods. The company’s PayPal payment-processing division is now the fastest-growing sector of the business. eBay now plans to create a one-stop shop, where customers can make purchases in a variety of ways—from bidding in auctions to clicking on advertisements, scanning classifieds, or making outright purchases. However, the company admitted in March 2009 that even an improved site will grow more slowly than overall e-commerce during the year. eBay hopes to grow as quickly as the industry in 2010, and to once again start outpacing it in 2011. The company forecast that sales would rise from US$8.5 billion in 2008, to US$11–12 billion in 2011.
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