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2. CHAPTER 10 Retailing on the Web
Created by, David Zolzer, Northwestern State University—Louisiana
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3. Learning Objectives Identify the major features of the retail sector
Describe the vision of online retailing in the E-commerce I period
Understand the environment in which online retail sector operates today
Explain how to analyze the economic viability of an online firm
Identify the challenges faced by different types of online retailers
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4. The Retail Sector
Durable goods are goods that are consumed over a longer period of time (generally more than one year)
Nondurable goods are goods that are consumed quickly and have shorter life spans
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5. Personal Consumption of Goods and Services
Retail goods and services comprise 63% of gross domestic product (GDP)
Services account 56% of total retail sales
Durable goods account for 14% of total retail sales
Nondurable goods account for 30% of total retail sales
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6. Sources of GDP in the United States
Page 528, Figure 10.1
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7. Composition of the U.S. Retail Industry
Page 529, Figure 10.2
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8. The Top Ten General Merchandisers
Page 530, Table 10.1
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9. The Top Ten MOTO Retailers (2000)
Page 530, 10.2
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10. Online Retailing Vision (E-commerce I)
Greatly reduced search costs on the Internet would encourage consumers to abandon traditional marketplaces in order to find lower prices for goods
First movers who provided low-cost goods and high-quality service would succeed
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11. Online Retailing Vision (E-commerce I)
Market entry costs would be much lower that those for physical storefront merchants, and online merchants would be more efficient at marketing and order fulfillment than their offline competitors because they had command of the technology (technology prices were falling sharply)
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12. Online Retailing Vision (E-commerce I)
Online companies would replace traditional stores as physical store merchants were forced out of business.
Older traditional firms that were too slow to enter the online market would be locked out of the marketplace
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13. Online Retailing Vision (E-commerce I)
In certain industries, the “middleman” would be eliminated (disintermediation) as manufacturers or their distributors entered the market and built a direct relationship with the consumer
The cost savings would ensure the emergence of the Web as the dominant marketing channel
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14. Online Retailing Vision (E-commerce I)
In other industries, online retailers would gain the advantage over traditional merchants by outsourcing functions such as warehousing and order fulfillment, resulting in a kind of hypermediation, in which the online retailer gained the upper hand by eliminating inventory purchasing and storage costs
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15. The Online Retail Sector Today
Few E-commerce I assumptions about future online retail were correct
Structure of the retail marketplace in the United States has not been revolutionized
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16. The Online Retail Sector Today
Online consumers are not primarily cost-driven -- instead, they are brand-driven and influenced by perceived value as their offline counterparts
Online market entry costs were underestimated, as was the cost of acquiring new customers
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17. The Online Retail Sector Today
Older traditional firms such as general merchandising giants and the established catalog-based retailers are taking over as the top online retail sites
Disintermediation did not occur
Online retailing has become an example of the powerful role that intermediaries play in the retail trade
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18. Online Retail is Alive and Well
Page 533, Figure 10.3
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19. Top Ten E-tailers Ranked by Share of Online Purchasing Audience
Page 534, Table 10.3
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20. Online Retail Market Product Penetration Rate (%)
Page 535,
Table 10.4
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21. Analyzing the Viability of Online Firms
Economic Viability refers to the ability of firms to survive during the specified period as profitable business firms
Can be analyzed by examining the key industry strategic factors
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22. Strategic Analysis Barriers to entry
Can new entrants be barred from entering the industry through high capital costs or intellectual property barriers (such as patents or copyrights)?
Power of suppliers
Can suppliers dictate high prices to the industry or can vendors choose from among many suppliers?
Have firms achieved sufficient scale to bargain effectively for lower prices from suppliers?
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23. Strategic Analysis
Power of customers: Can customers choose from the many competing suppliers and hence challenge high prices and high margins?
Existence of substitute products: Can the functionality of the product or service be obtained from alternative channels or competing products in different industries? Are substitute products and services likely to emerge in the near future?
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24. Strategic Analysis Industry value chain
Is the chain of production and distribution in the industry changing in ways that benefit or harm the firm?
Nature of intra-industry competition
Is the basis of competition within the industry based on differentiated products and services, price, scope of offerings, or focus of offerings?
How is the nature of competition changing?
Will these changes benefit the firm?
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25. Strategic Factors Firm value chain
Has the firm adopted business processes and methods of operation that allow it to achieve the most efficient operations in the industry?
Will changes in technology force the firm to realign its business processes?
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26. Strategic Factors Core competencies
Does the firm have unique competencies and skills that can not be easily duplicated by other firms?
Will changes in technology invalidate the firm’s competencies, or strengthen them?
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27. Strategic Factors Synergies
Does the firm have access to the competencies and assets of related firms either owned outright or through strategic partnerships or alliances?
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28. Strategic Factors Technology
Has the firm develop proprietary technologies that allow it to scale with demand?
Has the firm developed the operational technologies (e.g. customer relationship management, fulfillment, supply chain management, inventory control, and human resources systems) to survive?
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29. Strategic Factors Social and legal challenges
Has the firm put in place policies to address consumer trust issues (privacy and security of personal information)?
Is the firm the subject of lawsuits challenging its business model, such as intellectual property ownership issues?
Will the firm be liable to changes in Internet taxation laws or other foreseeable statutory developments?
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30. Financial Analysis Revenues Are revenues growing and at what rate?
Cost of sales
What is the cost of sales compared to revenues?
Gross margin
What is the firm’s gross margin (gross profit divided by net sales) and is it increasing or decreasing?
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31. Financial Analysis Operating expenses
What are the firm’s operating expenses, and are they increasing or decreasing?
Net margins
What is the firm’s net margin, and is it increasing or decreasing?
Net margin (net income or loss divided by net sales/revenue) sums up in one number how successful a company has been at the business of making a profit on each dollar of sales
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32. Summary Balance Sheet
Balance sheet provides a financial snapshot of a company on a given date and show it financial assets and liabilities
Assets refers to stored value
Current assets such as cash, securities, accounts receivable, inventory, or other investments that are likely to be converted to cash within one year
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33. Summary Balance Sheet
Liabilities are outstanding obligations of the firm
Current Liabilities are debts of the firm that will be due within one year
Long-term debt are liabilities that are not due until the passage of a year or more
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34. Amazon’s Balance Sheet
Page 539,
Table 10.5
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35. Online Business Models
Virtual Merchants
Single-channel Web firms that generate almost all their revenue from online sales
General merchandiser -- Buy.com
Niche player -- Ashford.com
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36. Buy.com’s Balance Sheet
Page 543,
Table 10.6
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37. Ashford.com’s Balance Sheet
Page 546,
Table 10.7
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38. Online Business Models
Click and Mortar
Companies that have a network of physical stores as their primary retail channel, but also have introduced online offerings
Wal-Mart.com
JCPenney.com
Sears.com
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39. JCPenney’s Balance Sheet
Page 551,
Table 10.8
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40. Online Business Models
Catalog merchants
Established companies that have a national offline catalog operation that is their largest retail channel, but who have recently developed online capabilities
Lands’ End
Victoria’s Secret
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41. Lands’ End’s Balance Sheet
Page 555,
Table 10.9
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42. Online Business Models
Online malls
A variation on the virtual merchant business model, they generate revenue from “rents” and services paid for by retailers who sell under the mall’s umbrella
Fashionmall.com
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43. Fashionmall.com’s Balance Sheet
Page 562,
Table 10.10
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44. Online Business Models
Manufacturer direct
single or multichannel manufacturers who sell directly online to consumers without the intervention of retailers
Dell.com
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45. Dell.com’s Balance Sheet
Page 567,
Table 10.11
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46. Distribution of Retail Sales by Type of Retailer
Page 564, Figure 10.4
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47. Profitability Per Order by Online Retail Category
Page 569, Table 10.12
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