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:
Cybermalls—the most famous cybermall is eBay, which offers access to products from a variety of independent retailers.
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 control. 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 the start-up companies from that era, 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 homes, and have them delivered to their doors. Furthermore, online shopping appeals to the environmentally conscious. In March 2009, researchers at Heriot-Watt University in the United Kingdom 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. In June 2009, a study by the Carnegie Mellon Green Design Institute in the United States found that shopping online can reduce “our environmental impact by as much as 66%.”
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.
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.
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 increase in data connection speeds on mobile phones with the introduction of 3G and 4G (3rd and 4th generation) technology has opened up another avenue for e-tailers. Certainly, e-tailers are now targeting the mobile phone. In April 2010, for example, the UK online grocery retailer Ocado launched an Android app, which allows shopping to be conducted on a mobile phone with voice command. Ocado was the United Kingdom’s first supermarket to develop an app for Google’s operating system, allowing users to search the virtual aisles by speaking into their handset.
The UK market analysis company Predictive Intent points out that by 2011 m-commerce (mobile ecommerce) had moved beyond mobile phones to embrace the idea of content being accessed anywhere from any device. They point out that this puts pressure on e-tailers to rethink the way they approach ecommerce. Users on the move do not want to sift through hundreds of products to find the one they want, so fast and smart search engines are critical, as is a good predictive choice analytical system that can do a smart version of “if-you-liked-that-you’ll-also-like-these.” E-tailing has also moved on to embrace e-mail marketing based on users’ buying, browsing, and clicking habits. So smart user tracking is also now an essential tool for e-tailers.
Surprisingly, given that the United States 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 2009, the Netherlands had the highest penetration rate for broadband, at 38.1 per 100 inhabitants, followed by Denmark with 37.0. It was followed by Norway (34.5), Switzerland (33.8), and South Korea (32.8). The United States was in 15th place, with a penetration rate of 26.7 per 100 inhabitants.
E-commerce is also making increasing inroads into areas where it was thought difficult to sell goods online. Historically, for example, it was thought difficult to sell clothes online because shoppers could not try on the goods. However, sites such as Asos, which targets 16 to 34-year-olds with outfits and accessories styled on those worn by celebrities, have shown that it is possible to successfully sell clothes online.
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 of the various sectors of the market (B2B, B2C, etc). However, estimates from various analysts suggest the global market was worth around US$500 billion in 2009. According to IMRWorld (www.imrg.org), the UK industry association for global e-retailing, by 2010 total business-to-consumer (B2C) e-commerce sales were worth €591 billion, up 25% on the 2009 B2C figure and IMRWorld estimates that worldwide, the trillion dollar mark will be passed by 2013.
The United States is the world leader, followed by the United Kingdom and Japan. Total e-commerce sales in the United States during 2009 were estimated at US$134.9 billion, an increase of 2% on 2008, according to the US Commerce Department. However, research firm Key Note Ltd says that use of the internet is certainly growing most rapidly in fast-developing countries such as China, India, and Brazil, which 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 most rapid growth is now occurring in emerging economies such as China. Statistics from the government-linked China Internet Network Information Center (CINIC) showed that China’s online trade in 2009 reached ¥248.35 billion (US$36.38 billion), up 93.7% from 2008, and is expected to reach ¥1 trillion in 2013.
China’s online population, the world’s largest, grew by 86% in 2009, to 384 million, according to CINIC. The number of internet users in China, which has a population of 1.3 billion, was thus far greater than the entire population of the United States. CINIC said that the number of broadband users reached 346 million, growing by 76 million compared to 2008. In spite of the high penetration rate of broadband, China’s broadband access speed is far behind that in the developed economies, according to CINIC.
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 United Kingdom. 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 United Kingdom to car parks, where the pods are slotted onto individual vans for street-level deliveries. Other retailers pursue different models. The United Kingdom’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, 2009, Amazon’s net sales increased 28% year-on-year to US$24.51 billion.
The established online retailer may face a fresh competitive challenge in the coming years in the shape of Wal-Mart, which in April 2010 said that it was seeking to boost online sales outside the United States. The megastore operator was reportedly studying the best methods to promote its e-commerce initiative worldwide. The company, which operates in 14 countries, hopes to beat off competitors like Amazon. The retailer launched an e-commerce business in 2008 in Brazil, the country with the highest level of broadband penetration in Latin America, and in April 2010 it unveiled plans to launch e-commerce businesses in China and Japan.