CHAPTER 9

Online Retail and Services

E-commerce Retail: The Vision
The Online Retail Sector Today
Strategic Analysis—Business
Strategy
 E-commerce Retail:

The Vision
In the early years of e-commerce, literally thousands of
entrepreneurial web-based
retailers were drawn to the marketplace for retail
goods, simply because it was one of
the largest market opportunities in the U.S. economy.
Many entrepreneurs initially
believed it was easy to enter the retail market
 Continue

Many entrepreneurs initially
believed it was easy to enter the retail market. Early writers
predicted that the retail
industry would be revolutionized, literally “blown to bits”—
as prophesied by two consultants in a famous Harvard
Business School book (Evans and Wurster, 2000). The
basis of this revolution would be fourfold. First, because the
Internet greatly reduced
both search costs and transaction costs, consumers would use
the Web to find the
lowest-cost products.
 Continue

Several results would follow. Consumers would
increasingly
drift to the Web for shopping and purchasing, and only
low-cost, high-service, quality
online retail merchants would survive. Economists
assumed that the online consumer
was rational and cost-driven—not driven by perceived
value or brand, both of which
are nonrational factors.
 Continue

Second, it was assumed that the entry costs to the
online retail market were much less than those needed
to establish physical storefronts, and that online
merchants were inherently more efficient at marketing
and order fulfillment than offline stores. The costs of
establishing a powerful website were thought to be
minuscule compared to the costs of warehouses,
fulfillment centers, and physical stores.
 Continue

There would be no difficulty building sophisticated
order entry, shopping cart, and fulfillment systems
because this technology was well known, and the cost
of technology was falling by 50% each year.
Even the cost of acquiring consumers was thought to be
much lower because of search engines that could
almost instantly connect customers to online vendors.
 The Online Retail Sector Today

Although online retailing is one of the smallest
segments of the retail industry, constituting only about
8% of the total retail market today, it is growing at a
faster rate than its offline counterparts, with new
functionality and product lines being added every day
(see Figure 9.2). The apparel and accessories category
generates the highest percentage of revenue, around
$64 billion in 2015.
 The Online Retail Sector Today

Consumers have a wide choice of online shopping
options in this category, such as omni-channel
department store chains like Macy’s, Nordstrom,
Target, and Walmart and specialty retailers like Gap,
Zulily, J.Crew, Urban Outfitters, Abercrombie & Fitch,
and Ralph Lauren.
 Continue

This is one category where Amazon does not dominate,
in part because clothing shoppers tend to identify more
strongly with a specific brand than they do with
products that are more of a commodity, such as
consumer electronics.
The computers and consumer electronics category
generates the second-highest percentage of revenue,
around $54 billion in 2015.
 Continue

Online shopping options for this category include
Amazon, direct-manufacturers such as Apple, Dell, HP,
and Lenovo, omni-channel chains such as Best Buy, and
catalog merchants such as CDW and PC Connection.
The automobile and automobile parts and accessories
category is in third place, generating around $36 billion
in 2015, primarily from auto parts and accessories
 Continue

Currently, U.S. franchising law prohibits automobile
manufacturers from selling cars directly to consumers,
so automobile retailing is dominated by dealership
networks. Automobile manufacturers use the Internet
to deliver branding advertising, while dealers focus on
generating leads. Consumers typically focus on product
and pricing research, which they then use to negotiate
with dealers.
Strategic Analysis—Business Strategy

Amazon engages in a number of business strategies
that seek to maximize growth in sales volume, while
cutting prices to the bare bones. Its revenue growth
strategies include driving the growth of e-book sales by
offering continuing enhancements of its Kindle e-reader
and Kindle Fire tablet computer, both in the United
States and internationally, as well as new e-book
publishing initiatives;
 Continue

Amazon is still following Walmart’s and eBay’s
examples by attempting to be a mass-market, low-price,
high-volume online supermarket where you can get
just about anything. To achieve profitability in this
environment, Amazon has invested heavily in supply
chain management and fulfillment strategies to reduce
its costs to the bare minimum while providing excellent
customer service and even free shipping
 Continue

Amazon Prime membership is steadily increasing, with
an estimated 54 million members in the United States in
2016. Usage is also increasing: in 2015, Prime Video
streaming hours grew 47% in the United States and 51%
internationally, and Prime Music streaming hours
tripled in 2015 over the previous year.