Consumers Drive E-commerce, Not Retailers- Pool Autumn 2004

Editor's comment: On-line shopping is growing rapidly in the UK. However, while some retailers have eagerly embraced this major consumer trend, others have made little or no investment in this area, effectively opting out of a major and growing market.

Many retailers still do not see why they should bother investing in on-line shopping when they can cream off easy profits or just ignore the sector altogether. The obvious reason is that a large and growing number of their customers are going on-line to shop and expect them to be there with appropriate services. On-line sales are growing by 40% per annum, six times faster than the High Street, and if retailers do not supply what customers want, on-line, competitors are just a click away.

British consumers are investing £6 billion a year in PCs and Internet connections that give them their own, personal shopping environments - their High Street at home - where merchants may be embraced or clicked to oblivion on a whim. So who 'owns' these retail customers now, and what are the implications for retailers and consumer brands?

More than half of all the 24.5 million UK households are now on-line, so that's 13 million PCs that have been bought and are being renewed every two to four years at a cost of around £3.5 billion per annum. Internet connectivity adds a further £2.5 billion to consumers' bills for being on-line, giving an average annual investment per on-line household of £230.

Whether the on-line shopping function is originally a driver or by-product, more than half of those who go on-line soon shop on-line and then become regular Internet shoppers. British shoppers are spending over £1 billion on-line each month, and this figure is expected to rise to £2 billion in November, boosted by Christmas sales.

Meanwhile, Britain's 100 most profitable High Street retailers, who account for half of the on-line shopping trade, are collectively investing a meagre £100 million per annum on website infrastructure and development, which equates to less than £8 per on-line household. And within this group there is distinct polarisation between those who 'get it' [e-retail] and those who don't: of the £100 million they invest between them, 50% is accounted for by just seven companies, who are taking Internet shopping very seriously and spending £5 million or more per annum on it. Brands in the 'definitely get it' group include Tesco, Argos and Comet.

At the 'don't get it' pole is a cluster of forty of the top 100 retailers who are spending next to nothing at all on on-line shopping functionality. Their websites are mainly 'placeholders' that typically offer a few marketing messages and a list of where their shops are - sometimes not even that. Brands that fall into this category include Bhs, DFS, H&M, House of Fraser, JJB Sports, Matalan, Monsoon, Safeway, New Look Group, Primark, Selfridges and Somerfield.

Between the poles of investment extremes are some 50 merchants - i.e. half of the top 100 - who have 'ticked the Internet box' and are 'showing willing'. They probably let shoppers buy a few items on-line from them - some may even have large databases populated with nice little pictures of products, each with its own 'add to basket' button. But their on-line brochures generally add little value and are either 'out of the box' solutions or look like they are. These e-retail operations appear to have been whipped up by graphic designers rather than built by business architects backed up by competent implementation teams. Brands that fall into this category include Hamleys, Harrods, River Island and WH Smith.

By providing the PC, the Internet connection, the electricity, the desk and the floor space, consumers are effectively providing their own 'High Street at home' - the physical environment in which merchants' offers can be displayed. All that a top retailer has to do in this context is to turn up, make useable content available, and then service the sales that will come flooding in from the millions of consumers who are shopping on-line everyday.

As a rough rule of thumb, in the bricks-and-mortar retail world around half of a shop's revenue is consumed by operating costs. Many of these costs is associated with floor space, labour and display stock - costs that in the Internet-model are either removed or directly borne by the consumer. So if the top 100 UK retailers take around half of this year's £15 billion on-line shopping trade (say, £7 billion of turnover), and a large proportion of the normal operating costs associated with these sales (say, £3 billion) are either removed (e.g. virtual products stand in for physical products, reducing inventory and obsolescence costs) or carried by the customer, you might expect those merchants to be investing far more in the medium than a paltry £100 million per annum.

But why should merchants bother to invest in on-line shopping when they can cream off easy profits or just ignore the sector altogether - after all, it only represents 6% of retail? The obvious answer is that a large and growing number of their customers are going on-line to shop and expect them to be there with appropriate services. On-line sales are growing by 40% per annum, six times faster than the High Street, and if retailers don't supply what customers want, on-line, competitors are just a click away.

British retailing has been obsessed with cost reduction for several decades and is caught in the vicious cycle of a commodity marketplace. As a result and usually to the detriment of the consumer, merchants have got into the habit of giving away as little at they can, customer service has been decimated, and self-service has become the shopping norm. Shopping today is seldom the friendly, social interaction with a shopkeeper that it once was.

Consumers' investment in the Internet is shifting power from shops to shoppers, and empowered consumers are naturally going to put their own priorities first. They are time-pressured and want more convenience, choice and customisation. Self-service on-line offers far better functionality and rich information than self-service in-store ever can, and millions of consumers are now familiar with the kind of value-adding services that the Internet can provide - they've seen them at Amazon.com. You can take it as read that they will expect good utility from Internet retailers - to be able to find things quickly, a wide range of products, rich information and keen prices - but they also want respect, care and friendliness.

If retailers wish to be welcomed into consumers' homes, it's probably best not to turn up to the party late, inappropriately dressed with a thoughtless gift. And to have any hope of being invited back they will have to be good houseguests because, with the consumer as host and calling the shots, their 'visitor rules' will apply. So, Mr. New Internet Retailer:

don't arrive uninvited (with your intrusive emails or other invasive marketing paraphernalia)
don't shove your foot in the door (with underhand marketing methods)
don't block the door (with bandwidth and processor-hungry applications / big files / buggy software)
don't be unreliable (because your cheap implementation means your site may / may not be available)
don't be standoffish, as if you are doing the customer a favour allowing them to shop with you (by forcing pre-registration / inappropriate terms)
don't be late (deliver when you say you will and make that soon)
know when it's time to leave (don't lock people into processes - instead make it easy for them to leave and invite you back whenever they like, and to pick up where they left off).

Nothing encourages consumers to take up Internet shopping more than the availability of 'always on' broadband, so it is highly relevant that broadband take-up has doubled in the past year, resulting in more than a third of on-line homes now having broadband connections of one kind or another. If the UK follows the US model in which more than half of all households now have broadband, the number of British homes with high-speed Internet connections will jump from 5 million to 12 million within the next two and a half years.

The growth potential for Internet shopping clearly remains huge, and so are the implications for retailers. Brands that think in terms of 'owning' customers will struggle, and the switch from host to guest will be too hard for some. But it really doesn't matter to the 16 million consumers who are just getting on with shopping on-line because plenty of other suppliers are available and working hard to win their custom. And the competition is just delighted that so many primary retail incumbents are still Internet laggards - they can hardly believe their luck.


	*Number 28: Autumn 2004*

About James Roper Electronic Commerce Index	*Consumer Drive E-Commerce, not Retailers* *By James Roper* Editor's comment: On-line shopping is growing rapidly in the UK. However, while some retailers have eagerly embraced this major consumer trend, others have made little or no investment in this area, effectively opting out of a major and growing market. Many retailers still do not see why they should bother investing in on-line shopping when they can cream off easy profits or just ignore the sector altogether. The obvious reason is that a large and growing number of their customers are going on-line to shop and expect them to be there with appropriate services. On-line sales are growing by 40% per annum, six times faster than the High Street, and if retailers do not supply what customers want, on-line, competitors are just a click away. British consumers are investing £6 billion a year in PCs and Internet connections that give them their own, personal shopping environments - their High Street at home - where merchants may be embraced or clicked to oblivion on a whim. So who 'owns' these retail customers now, and what are the implications for retailers and consumer brands? More than half of all the 24.5 million UK households are now on-line, so that's 13 million PCs that have been bought and are being renewed every two to four years at a cost of around £3.5 billion per annum. Internet connectivity adds a further £2.5 billion to consumers' bills for being on-line, giving an average annual investment per on-line household of £230. Whether the on-line shopping function is originally a driver or by-product, more than half of those who go on-line soon shop on-line and then become regular Internet shoppers. British shoppers are spending over £1 billion on-line each month, and this figure is expected to rise to £2 billion in November, boosted by Christmas sales. Meanwhile, Britain's 100 most profitable High Street retailers, who account for half of the on-line shopping trade, are collectively investing a meagre £100 million per annum on website infrastructure and development, which equates to less than £8 per on-line household. And within this group there is distinct polarisation between those who 'get it' [e-retail] and those who don't: of the £100 million they invest between them, 50% is accounted for by just seven companies, who are taking Internet shopping very seriously and spending £5 million or more per annum on it. Brands in the 'definitely get it' group include Tesco, Argos and Comet. At the 'don't get it' pole is a cluster of forty of the top 100 retailers who are spending next to nothing at all on on-line shopping functionality. Their websites are mainly 'placeholders' that typically offer a few marketing messages and a list of where their shops are - sometimes not even that. Brands that fall into this category include Bhs, DFS, H&M, House of Fraser, JJB Sports, Matalan, Monsoon, Safeway, New Look Group, Primark, Selfridges and Somerfield. Between the poles of investment extremes are some 50 merchants - i.e. half of the top 100 - who have 'ticked the Internet box' and are 'showing willing'. They probably let shoppers buy a few items on-line from them - some may even have large databases populated with nice little pictures of products, each with its own 'add to basket' button. But their on-line brochures generally add little value and are either 'out of the box' solutions or look like they are. These e-retail operations appear to have been whipped up by graphic designers rather than built by business architects backed up by competent implementation teams. Brands that fall into this category include Hamleys, Harrods, River Island and WH Smith. By providing the PC, the Internet connection, the electricity, the desk and the floor space, consumers are effectively providing their own 'High Street at home' - the physical environment in which merchants' offers can be displayed. All that a top retailer has to do in this context is to turn up, make useable content available, and then service the sales that will come flooding in from the millions of consumers who are shopping on-line everyday. As a rough rule of thumb, in the bricks-and-mortar retail world around half of a shop's revenue is consumed by operating costs. Many of these costs is associated with floor space, labour and display stock - costs that in the Internet-model are either removed or directly borne by the consumer. So if the top 100 UK retailers take around half of this year's £15 billion on-line shopping trade (say, £7 billion of turnover), and a large proportion of the normal operating costs associated with these sales (say, £3 billion) are either removed (e.g. virtual products stand in for physical products, reducing inventory and obsolescence costs) or carried by the customer, you might expect those merchants to be investing far more in the medium than a paltry £100 million per annum. But why should merchants bother to invest in on-line shopping when they can cream off easy profits or just ignore the sector altogether - after all, it only represents 6% of retail? The obvious answer is that a large and growing number of their customers are going on-line to shop and expect them to be there with appropriate services. On-line sales are growing by 40% per annum, six times faster than the High Street, and if retailers don't supply what customers want, on-line, competitors are just a click away. British retailing has been obsessed with cost reduction for several decades and is caught in the vicious cycle of a commodity marketplace. As a result and usually to the detriment of the consumer, merchants have got into the habit of giving away as little at they can, customer service has been decimated, and self-service has become the shopping norm. Shopping today is seldom the friendly, social interaction with a shopkeeper that it once was. Consumers' investment in the Internet is shifting power from shops to shoppers, and empowered consumers are naturally going to put their own priorities first. They are time-pressured and want more convenience, choice and customisation. Self-service on-line offers far better functionality and rich information than self-service in-store ever can, and millions of consumers are now familiar with the kind of value-adding services that the Internet can provide - they've seen them at Amazon.com. You can take it as read that they will expect good utility from Internet retailers - to be able to find things quickly, a wide range of products, rich information and keen prices - but they also want respect, care and friendliness. If retailers wish to be welcomed into consumers' homes, it's probably best not to turn up to the party late, inappropriately dressed with a thoughtless gift. And to have any hope of being invited back they will have to be good houseguests because, with the consumer as host and calling the shots, their 'visitor rules' will apply. So, Mr. New Internet Retailer: don't arrive uninvited (with your intrusive emails or other invasive marketing paraphernalia) don't shove your foot in the door (with underhand marketing methods) don't block the door (with bandwidth and processor-hungry applications / big files / buggy software) don't be unreliable (because your cheap implementation means your site may / may not be available) don't be standoffish, as if you are doing the customer a favour allowing them to shop with you (by forcing pre-registration / inappropriate terms) don't be late (deliver when you say you will and make that soon) know when it's time to leave (don't lock people into processes - instead make it easy for them to leave and invite you back whenever they like, and to pick up where they left off). Nothing encourages consumers to take up Internet shopping more than the availability of 'always on' broadband, so it is highly relevant that broadband take-up has doubled in the past year, resulting in more than a third of on-line homes now having broadband connections of one kind or another. If the UK follows the US model in which more than half of all households now have broadband, the number of British homes with high-speed Internet connections will jump from 5 million to 12 million within the next two and a half years. The growth potential for Internet shopping clearly remains huge, and so are the implications for retailers. Brands that think in terms of 'owning' customers will struggle, and the switch from host to guest will be too hard for some. But it really doesn't matter to the 16 million consumers who are just getting on with shopping on-line because plenty of other suppliers are available and working hard to win their custom. And the competition is just delighted that so many primary retail incumbents are still Internet laggards - they can hardly believe their luck.
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