ELECTRONIC COMMERCE AND RETAILING
Electronic Commerce and Retailing
Retailing is expected to change with the rapid develop-ment of new online sales and distribution channels that literally can be used from anywhere, anytime-from work, school, a hotel, car, or airplane. These developments should impact retailing as much as the advent of strip malls, catalog retailing, and TV-based home shopping.
Almost every retailer is reevaluating every aspect of its operation from customer service to advertising, merchandising to store design, and logis-tics to order fulfillment. Furthermore, reacting to the pressure of retailers, suppliers are assessing technology-
based solutions to drive down costs (la-bor, delivery, and production) and become more efficient producers of goods.
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Online channels such as online services and the Web are also impacting traditional retail business models. In the traditional model, the customer went to the store and located the product. In the online model, the retailer seeks out the customer. The success of catalog retailers demonstrates that a significant portion of consumers have embraced the reverse model: the retailer going to the consumer.
However, retailers need to consider the following issues in developing a business model:
• Product/Content Issues: What kind of products are suited for online re-tailing?
• Software Interface Issues: What kind of features will constitute an effec-tive interface? What features make it easy to find and select items for on-line purchase?
• Process Issues: What are the specific steps in the shopping process from a consumer’s perspective? What kind of processes should companies de-velop to fulfill orders efficiently? Before examining the implications of changing consumer behavior and online retailing in the existing retail business, let us step back for a moment and ask the question: Why should retailers consider the online environment as a way of doing business? The answer lies in understanding the market changes that affect retailing and that will continue to affect it in the future.
Changing Retail Industry Dynamics
Important factors that affecting the retailing industry dynamics
are :
• Overbuilding and excess supply.
• Change in consumer demographics, which more premium placed on efficient use of time
• Changes in consumer behavior, with less focus on brand name and more on lowest prices.
• Technology improvements that provide greater convenience and more information than traditional retailing.
Overbuilding and Excess Capacity
With online retailing, constraints of time and space disappear. There is no bricks and mortar storefront to worry about, no critical locations. This new way of retailing can severely affect companies that have invested in expan-sion and adding capacity. It is important to understand the trouble tradi-tional retailers will face if online retailing takes off.
The 1980s was a period of overexpansion and turmoil for retailers. By the end of the decade, complaints about excessive retail space were being voiced. Profits were declining and control of operating expenses became a paramount management objective. Retailers reduced staff and minimized merchandising in order to enhance profits. Sales growth and market share development were given second priority behind profit enhancement.
In the 1990s, companies are under pressure to grow and produce profit. An important measurement of profit gains is gross margin per square foot. For many retailers, this number is either growing slowly or declining, par-tially reflecting a less favorable product mix and more competition. Inadequate productivity, both per worker and per unit of space, is also reducing profit margins. Overbuilding also resulted in a growing shortage of low-cost, entry-level workers for the retail industry. The shortage of entry -level workers means that retailers are using under trained workers who are less able to empathize with shopper needs-leading to a perception that re-tailers in general and shopping centers in particular are unable or unwilling to provide quality service.
Clearly, with crowded domestic markets and competition constantly grinding away at operating profit, new ways of retailing are being explored by forward-thinking companies such as Wal-Mart.
Demographic Changes
Shopping patterns are beginning to change with the increase of time -strapped, two-career couples and the aging of America. Value and time management are the consumer concerns driving interest in online retailing. Recent retail data shows a decline in the amount of time Americans are spending in shopping malls [EDR95]. The suggested reasons vary: time constraints, safety concerns, and growing frustration with the lack of cour-teous service and insufficient product information. Understanding the im-plications of time constraints on consumer shopping behavior is important as they portend the trends to come. For instance, Americans have openly embraced shopping channels
like QVC and Home Shopping Network and retailers like CUC International.
Today’s time-strapped shoppers have less time and want better values, fewer hassles, and more options. Today, a shopping trip requires a con-sumer to decide what he or she or the family needs, brave the traffic on the way to a store, hunt for parking, find and select items for purchase, take them to a checkout, wait in line, pay for the items, sometimes bag them, and carry them back home. It can be a hassle and a lot of work, so most working professionals have learned to dread shopping trips. As technology improves, it may not be long before driving to the store gives way to online shopping with home delivery as provided by Peapod.
In contrast, there is a growing segment of the population for whom time constraints are less of a problem. The demographic outlook in the United States is for an increasing share of older shoppers (age 50 and above) who prefer shopping at stores rather than online. However, the product mix of-fered by many department stores and malls is increasingly out of touch with the aging population and does not reflect the shift in purchasing power. Also, with the aging of the population, there is evidence to indicate a shift in consumer interest away from material goods and toward experi-ences, such as travel and recreation. In addition, as people get older, they tend to become more frugal.
Retailers will need to concentrate on value by offering new product mixes. By this we mean a product mix that includes not only merchandise but also bundles in entertainment and “recreational” shopping with movie theaters, restaurants, bookstores, libraries, and community meeting facili-ties. This sort of change is already occurring in bookstore design (such as Borders Bookstores and Barnes and Noble), which include a variety of facil-ities such as coffee shops. However, building shopping malls based on these new business models is a risky venture and requires huge investments.
Consumer Behavior
Consumer behavior is more volatile than ever before, and companies need new ways of responding to consumer needs and satisfying demand. According to one survey, the typical consumer spent only four hours a month in a shopping mall in 1990 versus ten hours in 1985, and sales per square foot dropped. Specialty retailing-power centers, discount malls, discount stores, and catalog shopping-has become one solution for closely monitoring consumer trends and reacting to them quickly. All of these alter-natives have one thing in common: they provide consumers with a very large selection of producers
priced with deep discounts.
Consumers are no longer as influenced by brand names as they used to be. The emergence of the value shopper is changing retailing. Today, the shopper is less willing to pay the premium for the brand name and much more attentive to quality and value. The decline in gross margins is the first evidence of the impact of that change, reflecting lower initial markups and more discriminating shoppers in that segment. Clearly, retailers that are fo-cused on providing value-the best price, service, and selection-regardless of the brand name will be successful. The real differentiating characteristic for retailers will be in their ability to define what the broad or niche con-sumer segment is looking for, identifying characteristics of customers in each target segment, and learning how to bundle products and package brands so that they become the preferred choice for
online customers
Technology Improvements in Electronic Retailing
Today, electronic retailing is still far from being a competitive threat to more traditional store retailing (see Table), but it is becoming increas-ingly attractive as technology and applications improve, and retailers gain experience.
Type of Outlet Definition and Examples
Shopping malls and These include under one roof general merchandise, drug stores, and groceries department stores
Supercenters
These consist of three or more anchorstores with a total leasable area between
200,000 and 700,000 square feet
Factory outlet mall
These primarily stock name-brand manufacturers’ items. These are growing
in stature and popularity as well. Like power centers, factory outlet malls are also
gaining market share at the expense of shopping malls.
Warehouse clubs
These are retailers offering common consumer products at near whole sale prices when purchased in bulk quantities. Examples include Wal-Mart’s Sam’s Club,Price/Costco, and BJ’s Wholesale
Three dominant forms of electronic retailing channels are: television re-tailing, CD-ROM retailing, and online service-based retailing, in which we include Web-based retailing. Now we can discuss about the most prominent one: the television retailing.
Television Retailing:
Television retailing grossed an estimated $3.2 billion in 1994. One of the pioneers in this area is Home Shopping Network, Inc. (HSN), which began broadcasting electronic retailing to a small, local audi-ence in 1982. Three years later they took this still unproven idea national- and made it work. Today, HSN is a television-based retail, entertainment company, and online retailer (owns Internet Shopping Network), with coast-to-coast customers and annual sales of $1 + billion.
The breadth and reach of TV retailing are amazing. In. 1994, HSN reached 65.8 million television households throughout
the United States. These households received the signals via
cable, broadcast, and satellite dish, twenty-four hours a day,
seven days a week. Unlike online audiences, which tend to be
predominantly affluent and well educated (net annual in-come
is estimated at $60,000-$80,000), the target audience for
television re-tailing is moderate income households and mostly
women.
How does it work? The TV retail marketing and programming
are di-vided into segments that are televised live, with a show
host who presents the merchandise and conveys information
relating to the product, including price, quality, features, and
benefits. Show hosts engage callers in on-air dis-cussions
regarding the currently featured product or the caller’s previous
experience with the company’s products. Viewers place orders
for products by calling a toll-free telephone number. Generally,
merchandise is delivered to customers within seven to ten
merchandise, drug stores, and groceries
department stores
Supercenters These consist of three or more anchor
stores with a total leasable area between
200,000 and 700,000 square feet
Factory outlet mall These primarily stock name-brand
manufacturers’ items. These are growing
in stature and popularity as well. Like
power centers, factory outlet malls are also
gaining market share at the expense of
shopping
malls.
Warehouse clubs These are retailers offering common
consumer products
at near wholesale
prices when purchased in bulk quantities.
Examples include Wal-Mart’s Sam’s Club,
Price/Costco, and BJ’s Wholesale
business days of placing an order. The purchased item may be returned within thirty days for a full refund of the purchase price, including the original shipping and handling charges.
The success of television shopping is the result of the effective utiliza-tion of electronic media for capturing the power and influence of celebrity and the magic of showmanship, and bringing them to bear on a sale. In its annual report, the Home Shopping Network states that a celebrity can de-but a line of jewelry on HSN and sell more than $2 million in a single weekend. Of course, there’s another advantage to television retailing. When customer interest, which is monitored by the number of calls being re-ceived, begins to wane, the retailer knows it instantly and can simply move on to the next product.
More recently, infomercials have become a crucial retailing topic. The in-fomercial has become a new and interesting way to retail specialty prod-ucts. Modem filming techniques and ingenuity make it possible to create high-quality, cost-efficient, and
entertaining documentaries that sell.
This Coincides with the television viewing public’s appetite for information. Infomercials are an especially logical medium since retailers have the opportunity to economically test and evaluate a product through mass channels such as television retailing before committing major capital resources to infomercial production.
Management Challenges in Online Retailing
While changes in retailing may be driven by technology, managerial vision is required for successful implementation. Traditionally, retailing has been a low-tech environment in
which retailing executives often relegated technol-ogy issues to back-room operators. These managers are most at risk, as they do not have a clue that a major revolution has begun. Most of them have never used a computer (or had to), never been on an online service, and do not know what the Internet is or what it can do. The winners will be the players who understand how to leverage the unique capabilities of the on-line medium to effectively meet the changing needs of the consumer.
While the technology required to implement online retailing is matur-ing, many management issues remain unanswered. No one really knows yet how to build and run a successful, mass-market online mall. The sales Medium is new, the technology is
new , and retailers have a lot to learn about tricky technology, customer behavior , and management issue . But one thing is clear: For online retailing to succeed, online technology must
complement management and operational strategy.
Case Study-II
Online Retailing Success Stories
Peapod, CUC International, and Virtual Vineyards help to explain the intri-cacies of online retailing.
Online Retailing: Peapod’s Experience
Peapod, based in Evanston, Illinois, is using the online medium for food retailing services. Founded in 1989 by two brothers, Peapod (http://www.peapod.com/) is a member of an online grocery / drug-store shopping and delivery service that already has thousands of cus-tomers in the Chicago, San Francisco, and Boston areas.
Peapod was founded on the idea that people do not want to go to the grocery store. Peapod has an online database of over 25,000 grocery and drugstore items, and allows comparison shopping based on price, nutri-tional content, fat, or calories. Other features include electronic coupons, re-tailer preferred customer discounts, and other benefits like recipes, tips, and information. Peapod membership also allows users to use the shopping and home delivery service. Peapod has a staff of professional shoppers, produce specialists, and delivery people who fulfill the order.
How Does It Work?
Peapod provides customers with home shopping ser-vices via Pc. Customers need to buy a software application that enables them to access Peapod’s database through an online computer service. Peapod initially had a DOS-based system with graphics. They introduced a new version of the software in 1995-a Windows platform in which product pictures are available.
Using the PC, a consumer can access all of the items in a grocery store and drug store. Peapod customers create their own grocery aisles in their own virtual store. Customers can request a list of items by category (cere-als), by item (Frosted Flakes), by brand
(Kellogg’s), or even by what is on sale in the store on a given day. Within categories, they can choose to have the items arranged alphabetically by brand or sorted by lowest cost per ounce, package size, unit price, or nutritional value. Customers also can cre-ate repeated use shopping lists (baby items, barbecue needs, and the like). Peapod’s back office is linked with the mainframe databases of the super-markets at which it shops for its customers (Jewel in Chicago and Safeway in San Francisco), allowing it to provide the supermarkets’ stock keeping units and shelf prices electronically to its customers.
Once consumers have made a selection, they can then give specific shopping instructions, such as “substitute with same calories,” or red grapes only.” They can click on the “Comment” button and type in any ex-tra information they would like the Peapod shopper to know. At any time during the order, a consumer can subtotal the amount purchased, or access the “Help” screen for immediate assistance. .
Online ordering is simple: users double-click on the Peapod icon and then enter their user IDs and passwords. On verification, users get access to a whole grocery store and drug store of items. Before the actual purchase of an item, users can view images of it and the nutritional content as well. The system allows users to sort items by various criteria like price, price/ unit, total calories, fat, protein, carbohydrates, and cholesterol. With these fea-tures, Pea pod aims to target the health and fitness conscious consumer who chooses foods tailored to specific dietary needs. There are also search fea-tures to help locate a particular item. A “Find Item” option at the top of the screen lets users search either by brand name or product type.
When users have finished shopping, they click on “Done” and the order is electronically routed to Peapod. During the transaction closing process, users need to choose a delivery
time within a 90-minute slot. Pinpoint delivery within a 3Dminute window) can be selected for a small additional charge. Payment can be made by check, charge, or Peapod Electronic Payment.
Eighty-five to ninety percent of Peapod’s orders come in via computer; the rest are faxed or phoned. Peapod orders are taken centrally, and then faxed to the stores. The store gets a printout with the order, the delivery ad-dress, and instructions for getting there. Each order is filled by a Peapod employee, who shops the aisles of the store. The employee pays for the groceries, often at special Peapod counters in the back of the store.
The order is then taken to a holding area in the supermarket, where the appropriate items are kept cold or frozen until the deliverer picks up a set of orders and takes them to the
customers within their 90-minute pre-selected windows. At each stage-ordering, shopping, holding, and delivery-the processes are tailored to provide personalized service at a relatively low cost.
If a customer has a problem, he or she can call Membership Services, and a service representative will try to resolve the matter. Peapod treats each call as an opportunity to learn (and remember) each customer’s prefer-ences and to figure out what the company can do to improve service as a whole. For example, service representatives found that some customers were receiving five bags of grapefruits when they really wanted
only five grapefruits. In response, Peapod began asking customers to confirm orders in which order-entry errors may occur.
Peapod members are charged actual shelf prices, plus a monthly service fee, a per-order charge of $5.00 plus 5 percent of the order amount. Customers are willing to pay these extra charges for convenience and because Peapod provides a lower cost
shopping experience for the consumer. Consumers save money-despite the extra overhead-because they use more coupons, do better comparison shopping, and buy fewer
impulse items than they would if they shopped at a real supermarket. Reducing im-pulse purchases is important when you consider that 80 percent of the items purchased in a grocery store are impulse items-non-planned pur-chases. In addition, consumers save time and have more control because they can shop from home or work whenever they want.
What is the Business Model?
Rather than automating the trip to a retail store, as other online providers are doing, Peapod is using interactive tech-nology to change the shopping experience altogether. Indeed, the formula for Peapod’s success is the busy American lifestyle. The homes it
delivers to cut across many demographics. The one thing these demographics have in common is they have better things to do than grocery shop. Still, if it were not for well-managed logistics, these customers would be back in the stores in a second. The behind-the-scenes logistics are central to what Peapod is all about; Peapod has to make sure the orders get to the stores and that they are shopped correctly.
How does Peapod Compete with Traditional Retailers?
Traditional retail-ers make money from the suppliers. They provide access to customers and make their money by buying on deals, volume discounts, and getting coop advertising. Peapod makes all of its money on the customers it serves, it is a mass customizer. It creates the supply chain after identifying a specific de-mand from a specific customer, and it feeds off the existing infrastructure to do it.
However, existing retailers do have some advantages. An important, though subtle, advantage enjoyed by food retailers is the shopper’s resis-tance to switching food stores because of familiarity with the shelf locations of products purchased. It is also inconvenient for consumers to relearn dozens of product locations at a new store. The online environment must offer significant advantages to overcome shopper inertia and induce trial, let alone continued, patronage.
Is Peapod a competitor to the retail grocer? Not really. Peapod’s strategy has been to partner with the retailer rather than compete directly. A lot of credibility comes with the name of the retailer in its individual market. Peapod can help grocers expand into places that might not otherwise be practical from a capital investment standpoint. However, it is quite possible that in the future Peapod may be tempted to compete with grocers by
emulating certain aspects of their warehousing. Why? As these new retail formats emerge , and once Peapod gains enough customers, Peapod will be tempted to say it is costing a lot to go to the store and pick up product off the shelf. To avoid the overhead , Peapod could have its own warehouse. As soon as the Peapod does that it is likely to fall into the same traps as the retailers, such as having an overflow warehouse when something is available on a deal or buying products before there is actual need.
Electronic Commerce and Retailing
Retailing is expected to change with the rapid develop-ment of new online sales and distribution channels that literally can be used from anywhere, anytime-from work, school, a hotel, car, or airplane. These developments should impact retailing as much as the advent of strip malls, catalog retailing, and TV-based home shopping.
Almost every retailer is reevaluating every aspect of its operation from customer service to advertising, merchandising to store design, and logis-tics to order fulfillment. Furthermore, reacting to the pressure of retailers, suppliers are assessing technology-
based solutions to drive down costs (la-bor, delivery, and production) and become more efficient producers of goods.
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Its beneficial for you and me both.
Online channels such as online services and the Web are also impacting traditional retail business models. In the traditional model, the customer went to the store and located the product. In the online model, the retailer seeks out the customer. The success of catalog retailers demonstrates that a significant portion of consumers have embraced the reverse model: the retailer going to the consumer.
However, retailers need to consider the following issues in developing a business model:
• Product/Content Issues: What kind of products are suited for online re-tailing?
• Software Interface Issues: What kind of features will constitute an effec-tive interface? What features make it easy to find and select items for on-line purchase?
• Process Issues: What are the specific steps in the shopping process from a consumer’s perspective? What kind of processes should companies de-velop to fulfill orders efficiently? Before examining the implications of changing consumer behavior and online retailing in the existing retail business, let us step back for a moment and ask the question: Why should retailers consider the online environment as a way of doing business? The answer lies in understanding the market changes that affect retailing and that will continue to affect it in the future.
Changing Retail Industry Dynamics
Important factors that affecting the retailing industry dynamics
are :
• Overbuilding and excess supply.
• Change in consumer demographics, which more premium placed on efficient use of time
• Changes in consumer behavior, with less focus on brand name and more on lowest prices.
• Technology improvements that provide greater convenience and more information than traditional retailing.
Overbuilding and Excess Capacity
With online retailing, constraints of time and space disappear. There is no bricks and mortar storefront to worry about, no critical locations. This new way of retailing can severely affect companies that have invested in expan-sion and adding capacity. It is important to understand the trouble tradi-tional retailers will face if online retailing takes off.
The 1980s was a period of overexpansion and turmoil for retailers. By the end of the decade, complaints about excessive retail space were being voiced. Profits were declining and control of operating expenses became a paramount management objective. Retailers reduced staff and minimized merchandising in order to enhance profits. Sales growth and market share development were given second priority behind profit enhancement.
In the 1990s, companies are under pressure to grow and produce profit. An important measurement of profit gains is gross margin per square foot. For many retailers, this number is either growing slowly or declining, par-tially reflecting a less favorable product mix and more competition. Inadequate productivity, both per worker and per unit of space, is also reducing profit margins. Overbuilding also resulted in a growing shortage of low-cost, entry-level workers for the retail industry. The shortage of entry -level workers means that retailers are using under trained workers who are less able to empathize with shopper needs-leading to a perception that re-tailers in general and shopping centers in particular are unable or unwilling to provide quality service.
Clearly, with crowded domestic markets and competition constantly grinding away at operating profit, new ways of retailing are being explored by forward-thinking companies such as Wal-Mart.
Demographic Changes
Shopping patterns are beginning to change with the increase of time -strapped, two-career couples and the aging of America. Value and time management are the consumer concerns driving interest in online retailing. Recent retail data shows a decline in the amount of time Americans are spending in shopping malls [EDR95]. The suggested reasons vary: time constraints, safety concerns, and growing frustration with the lack of cour-teous service and insufficient product information. Understanding the im-plications of time constraints on consumer shopping behavior is important as they portend the trends to come. For instance, Americans have openly embraced shopping channels
like QVC and Home Shopping Network and retailers like CUC International.
Today’s time-strapped shoppers have less time and want better values, fewer hassles, and more options. Today, a shopping trip requires a con-sumer to decide what he or she or the family needs, brave the traffic on the way to a store, hunt for parking, find and select items for purchase, take them to a checkout, wait in line, pay for the items, sometimes bag them, and carry them back home. It can be a hassle and a lot of work, so most working professionals have learned to dread shopping trips. As technology improves, it may not be long before driving to the store gives way to online shopping with home delivery as provided by Peapod.
In contrast, there is a growing segment of the population for whom time constraints are less of a problem. The demographic outlook in the United States is for an increasing share of older shoppers (age 50 and above) who prefer shopping at stores rather than online. However, the product mix of-fered by many department stores and malls is increasingly out of touch with the aging population and does not reflect the shift in purchasing power. Also, with the aging of the population, there is evidence to indicate a shift in consumer interest away from material goods and toward experi-ences, such as travel and recreation. In addition, as people get older, they tend to become more frugal.
Retailers will need to concentrate on value by offering new product mixes. By this we mean a product mix that includes not only merchandise but also bundles in entertainment and “recreational” shopping with movie theaters, restaurants, bookstores, libraries, and community meeting facili-ties. This sort of change is already occurring in bookstore design (such as Borders Bookstores and Barnes and Noble), which include a variety of facil-ities such as coffee shops. However, building shopping malls based on these new business models is a risky venture and requires huge investments.
Consumer Behavior
Consumer behavior is more volatile than ever before, and companies need new ways of responding to consumer needs and satisfying demand. According to one survey, the typical consumer spent only four hours a month in a shopping mall in 1990 versus ten hours in 1985, and sales per square foot dropped. Specialty retailing-power centers, discount malls, discount stores, and catalog shopping-has become one solution for closely monitoring consumer trends and reacting to them quickly. All of these alter-natives have one thing in common: they provide consumers with a very large selection of producers
priced with deep discounts.
Consumers are no longer as influenced by brand names as they used to be. The emergence of the value shopper is changing retailing. Today, the shopper is less willing to pay the premium for the brand name and much more attentive to quality and value. The decline in gross margins is the first evidence of the impact of that change, reflecting lower initial markups and more discriminating shoppers in that segment. Clearly, retailers that are fo-cused on providing value-the best price, service, and selection-regardless of the brand name will be successful. The real differentiating characteristic for retailers will be in their ability to define what the broad or niche con-sumer segment is looking for, identifying characteristics of customers in each target segment, and learning how to bundle products and package brands so that they become the preferred choice for
online customers
Technology Improvements in Electronic Retailing
Today, electronic retailing is still far from being a competitive threat to more traditional store retailing (see Table), but it is becoming increas-ingly attractive as technology and applications improve, and retailers gain experience.
Type of Outlet Definition and Examples
Shopping malls and These include under one roof general merchandise, drug stores, and groceries department stores
Supercenters
These consist of three or more anchorstores with a total leasable area between
200,000 and 700,000 square feet
Factory outlet mall
These primarily stock name-brand manufacturers’ items. These are growing
in stature and popularity as well. Like power centers, factory outlet malls are also
gaining market share at the expense of shopping malls.
Warehouse clubs
These are retailers offering common consumer products at near whole sale prices when purchased in bulk quantities. Examples include Wal-Mart’s Sam’s Club,Price/Costco, and BJ’s Wholesale
Three dominant forms of electronic retailing channels are: television re-tailing, CD-ROM retailing, and online service-based retailing, in which we include Web-based retailing. Now we can discuss about the most prominent one: the television retailing.
Television Retailing:
Television retailing grossed an estimated $3.2 billion in 1994. One of the pioneers in this area is Home Shopping Network, Inc. (HSN), which began broadcasting electronic retailing to a small, local audi-ence in 1982. Three years later they took this still unproven idea national- and made it work. Today, HSN is a television-based retail, entertainment company, and online retailer (owns Internet Shopping Network), with coast-to-coast customers and annual sales of $1 + billion.
The breadth and reach of TV retailing are amazing. In. 1994, HSN reached 65.8 million television households throughout
the United States. These households received the signals via
cable, broadcast, and satellite dish, twenty-four hours a day,
seven days a week. Unlike online audiences, which tend to be
predominantly affluent and well educated (net annual in-come
is estimated at $60,000-$80,000), the target audience for
television re-tailing is moderate income households and mostly
women.
How does it work? The TV retail marketing and programming
are di-vided into segments that are televised live, with a show
host who presents the merchandise and conveys information
relating to the product, including price, quality, features, and
benefits. Show hosts engage callers in on-air dis-cussions
regarding the currently featured product or the caller’s previous
experience with the company’s products. Viewers place orders
for products by calling a toll-free telephone number. Generally,
merchandise is delivered to customers within seven to ten
merchandise, drug stores, and groceries
department stores
Supercenters These consist of three or more anchor
stores with a total leasable area between
200,000 and 700,000 square feet
Factory outlet mall These primarily stock name-brand
manufacturers’ items. These are growing
in stature and popularity as well. Like
power centers, factory outlet malls are also
gaining market share at the expense of
shopping
malls.
Warehouse clubs These are retailers offering common
consumer products
at near wholesale
prices when purchased in bulk quantities.
Examples include Wal-Mart’s Sam’s Club,
Price/Costco, and BJ’s Wholesale
business days of placing an order. The purchased item may be returned within thirty days for a full refund of the purchase price, including the original shipping and handling charges.
The success of television shopping is the result of the effective utiliza-tion of electronic media for capturing the power and influence of celebrity and the magic of showmanship, and bringing them to bear on a sale. In its annual report, the Home Shopping Network states that a celebrity can de-but a line of jewelry on HSN and sell more than $2 million in a single weekend. Of course, there’s another advantage to television retailing. When customer interest, which is monitored by the number of calls being re-ceived, begins to wane, the retailer knows it instantly and can simply move on to the next product.
More recently, infomercials have become a crucial retailing topic. The in-fomercial has become a new and interesting way to retail specialty prod-ucts. Modem filming techniques and ingenuity make it possible to create high-quality, cost-efficient, and
entertaining documentaries that sell.
This Coincides with the television viewing public’s appetite for information. Infomercials are an especially logical medium since retailers have the opportunity to economically test and evaluate a product through mass channels such as television retailing before committing major capital resources to infomercial production.
Management Challenges in Online Retailing
While changes in retailing may be driven by technology, managerial vision is required for successful implementation. Traditionally, retailing has been a low-tech environment in
which retailing executives often relegated technol-ogy issues to back-room operators. These managers are most at risk, as they do not have a clue that a major revolution has begun. Most of them have never used a computer (or had to), never been on an online service, and do not know what the Internet is or what it can do. The winners will be the players who understand how to leverage the unique capabilities of the on-line medium to effectively meet the changing needs of the consumer.
While the technology required to implement online retailing is matur-ing, many management issues remain unanswered. No one really knows yet how to build and run a successful, mass-market online mall. The sales Medium is new, the technology is
new , and retailers have a lot to learn about tricky technology, customer behavior , and management issue . But one thing is clear: For online retailing to succeed, online technology must
complement management and operational strategy.
Case Study-II
Online Retailing Success Stories
Peapod, CUC International, and Virtual Vineyards help to explain the intri-cacies of online retailing.
Online Retailing: Peapod’s Experience
Peapod, based in Evanston, Illinois, is using the online medium for food retailing services. Founded in 1989 by two brothers, Peapod (http://www.peapod.com/) is a member of an online grocery / drug-store shopping and delivery service that already has thousands of cus-tomers in the Chicago, San Francisco, and Boston areas.
Peapod was founded on the idea that people do not want to go to the grocery store. Peapod has an online database of over 25,000 grocery and drugstore items, and allows comparison shopping based on price, nutri-tional content, fat, or calories. Other features include electronic coupons, re-tailer preferred customer discounts, and other benefits like recipes, tips, and information. Peapod membership also allows users to use the shopping and home delivery service. Peapod has a staff of professional shoppers, produce specialists, and delivery people who fulfill the order.
How Does It Work?
Peapod provides customers with home shopping ser-vices via Pc. Customers need to buy a software application that enables them to access Peapod’s database through an online computer service. Peapod initially had a DOS-based system with graphics. They introduced a new version of the software in 1995-a Windows platform in which product pictures are available.
Using the PC, a consumer can access all of the items in a grocery store and drug store. Peapod customers create their own grocery aisles in their own virtual store. Customers can request a list of items by category (cere-als), by item (Frosted Flakes), by brand
(Kellogg’s), or even by what is on sale in the store on a given day. Within categories, they can choose to have the items arranged alphabetically by brand or sorted by lowest cost per ounce, package size, unit price, or nutritional value. Customers also can cre-ate repeated use shopping lists (baby items, barbecue needs, and the like). Peapod’s back office is linked with the mainframe databases of the super-markets at which it shops for its customers (Jewel in Chicago and Safeway in San Francisco), allowing it to provide the supermarkets’ stock keeping units and shelf prices electronically to its customers.
Once consumers have made a selection, they can then give specific shopping instructions, such as “substitute with same calories,” or red grapes only.” They can click on the “Comment” button and type in any ex-tra information they would like the Peapod shopper to know. At any time during the order, a consumer can subtotal the amount purchased, or access the “Help” screen for immediate assistance. .
Online ordering is simple: users double-click on the Peapod icon and then enter their user IDs and passwords. On verification, users get access to a whole grocery store and drug store of items. Before the actual purchase of an item, users can view images of it and the nutritional content as well. The system allows users to sort items by various criteria like price, price/ unit, total calories, fat, protein, carbohydrates, and cholesterol. With these fea-tures, Pea pod aims to target the health and fitness conscious consumer who chooses foods tailored to specific dietary needs. There are also search fea-tures to help locate a particular item. A “Find Item” option at the top of the screen lets users search either by brand name or product type.
When users have finished shopping, they click on “Done” and the order is electronically routed to Peapod. During the transaction closing process, users need to choose a delivery
time within a 90-minute slot. Pinpoint delivery within a 3Dminute window) can be selected for a small additional charge. Payment can be made by check, charge, or Peapod Electronic Payment.
Eighty-five to ninety percent of Peapod’s orders come in via computer; the rest are faxed or phoned. Peapod orders are taken centrally, and then faxed to the stores. The store gets a printout with the order, the delivery ad-dress, and instructions for getting there. Each order is filled by a Peapod employee, who shops the aisles of the store. The employee pays for the groceries, often at special Peapod counters in the back of the store.
The order is then taken to a holding area in the supermarket, where the appropriate items are kept cold or frozen until the deliverer picks up a set of orders and takes them to the
customers within their 90-minute pre-selected windows. At each stage-ordering, shopping, holding, and delivery-the processes are tailored to provide personalized service at a relatively low cost.
If a customer has a problem, he or she can call Membership Services, and a service representative will try to resolve the matter. Peapod treats each call as an opportunity to learn (and remember) each customer’s prefer-ences and to figure out what the company can do to improve service as a whole. For example, service representatives found that some customers were receiving five bags of grapefruits when they really wanted
only five grapefruits. In response, Peapod began asking customers to confirm orders in which order-entry errors may occur.
Peapod members are charged actual shelf prices, plus a monthly service fee, a per-order charge of $5.00 plus 5 percent of the order amount. Customers are willing to pay these extra charges for convenience and because Peapod provides a lower cost
shopping experience for the consumer. Consumers save money-despite the extra overhead-because they use more coupons, do better comparison shopping, and buy fewer
impulse items than they would if they shopped at a real supermarket. Reducing im-pulse purchases is important when you consider that 80 percent of the items purchased in a grocery store are impulse items-non-planned pur-chases. In addition, consumers save time and have more control because they can shop from home or work whenever they want.
What is the Business Model?
Rather than automating the trip to a retail store, as other online providers are doing, Peapod is using interactive tech-nology to change the shopping experience altogether. Indeed, the formula for Peapod’s success is the busy American lifestyle. The homes it
delivers to cut across many demographics. The one thing these demographics have in common is they have better things to do than grocery shop. Still, if it were not for well-managed logistics, these customers would be back in the stores in a second. The behind-the-scenes logistics are central to what Peapod is all about; Peapod has to make sure the orders get to the stores and that they are shopped correctly.
How does Peapod Compete with Traditional Retailers?
Traditional retail-ers make money from the suppliers. They provide access to customers and make their money by buying on deals, volume discounts, and getting coop advertising. Peapod makes all of its money on the customers it serves, it is a mass customizer. It creates the supply chain after identifying a specific de-mand from a specific customer, and it feeds off the existing infrastructure to do it.
However, existing retailers do have some advantages. An important, though subtle, advantage enjoyed by food retailers is the shopper’s resis-tance to switching food stores because of familiarity with the shelf locations of products purchased. It is also inconvenient for consumers to relearn dozens of product locations at a new store. The online environment must offer significant advantages to overcome shopper inertia and induce trial, let alone continued, patronage.
Is Peapod a competitor to the retail grocer? Not really. Peapod’s strategy has been to partner with the retailer rather than compete directly. A lot of credibility comes with the name of the retailer in its individual market. Peapod can help grocers expand into places that might not otherwise be practical from a capital investment standpoint. However, it is quite possible that in the future Peapod may be tempted to compete with grocers by
emulating certain aspects of their warehousing. Why? As these new retail formats emerge , and once Peapod gains enough customers, Peapod will be tempted to say it is costing a lot to go to the store and pick up product off the shelf. To avoid the overhead , Peapod could have its own warehouse. As soon as the Peapod does that it is likely to fall into the same traps as the retailers, such as having an overflow warehouse when something is available on a deal or buying products before there is actual need.
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