Retailing Online: Today's Promise and Tomorrow's Opportunity

Business America, Jan, 1998 by Aaron Schavey

Technology plays a vital role in retail businesses, improving efficiency and allowing retailers to provide higher value and greater convenience to their customers. Perhaps the most exciting new technology with the potential to make a significant impact on the industry is the Internet. The Internet allows retailers to reach both their customers and suppliers and provides another medium for retailers to expand internationally at a relatively low cost. Predictions of sales over the Internet are wide-ranging -- from a low of $7 billion to a high of $16 billion by the year 2000.

Some small business retailers such as Amazon.com and Virtual Vineyards have move moved aggressively on the Internet. Amazon.com is an online bookstore offering more than 2.5 million titles with sales increasing at a rate of 30 percent each month. Because of Amazon.com's low distribution costs, it is able to pass a 30 percent discount on to its customers on average. Virtual Vineyards, a specialty retailer which opened in 1994, offers hard to find wines and gourmet foods. The company reports that its "online shop" is visited by over 100,000 people each month and that it is projecting profits this year.

In addition to selling rare wines, fine foods, and gifts, Virtual Vineyards provides customers with wine selections from a nationally known wine expert, Peter Granoff, and gives customers advice on matching food and wine. If trends continue, Amazon.com and Virtual Vineyards will be profitable online retail stores in the near future, showing that retailing over the Internet can be a profitable venture. Many retailers, however, are proceeding cautiously, using the Internet as a means to advertise their merchandise and providing an (800) telephone number for customer orders. At this time, retailers are reluctant to devote more resources to the Internet until they feel more confident of consumer interest. In a recent USA Today poll, 95 percent of Americans said that they would not give out their credit card number online. In response, MasterCard and Visa are developing a technology called Secure Electronic Transfer (SET), which would make credit cards safer on the Internet than they are in the physical world. The current technology that secures credit transactions over the Internet is similar to a real-world transaction -- it is as if the consumer physically handed his or her credit card to the merchant. SET will encrypt the consumer's credit card number all the way to the bank, so that merchants will not even be able to see the consumer's credit card number. This will prevent merchants from selling a product over the Internet, whose ultimate purpose is to collect credit card numbers. As technology develops and consumers become more acclimated to the Internet, it is likely that privacy/ encryption issues will not be the barrier they are today to selling merchandise over the Internet.

In addition to security concerns, the Internet is also perceived to be "slow" -- some analysts argue that consumers

do not have the patience to wait two-three minutes for images on a "home page" to download for viewing. However, the recent steps toward deregulation of the communications industry in the United States should increase competition and make available faster, affordable access to the Internet. As these problems are resolved, the Internet will, at a minimum, provide an additional medium for retailers to reach their customers both domestically and internationally.

Selling merchandise over the Internet reaches not only domestic consumers but also international consumers. A resident from a foreign country can just as easily browse the books at Amazon.com as a U.S. citizen. However, the Internet is much more expensive to log onto in foreign countries than it is in America. For example, Europeans pay 1 1/2 times as much to connect to the Internet and pay an additional 30 cents for each minute of connection. Clearly the cost of connecting to the Internet must decrease in Europe before it is profitable for American retailers to use the Internet to sell their merchandise to this market. Analysts believe that connection charges will decrease when the deregulation of Europe's telecommunication companies occurs next year. It is expected that the number of users of the Internet -- both business and individual -- will increase to 35 million in 2000 from the 9 million users today. Internet sales in Europe are expected to increase to $3 billion in 2000 from today's $500 million.

The future of retailing on the Internet promises to greatly benefit consumers. Firms are developing search engines right now that will be able to find merchandise on the Internet with the lowest quoted price. This means that there will be pressure on retailers to cut their margins. Some analysts believe that retail prices will drop by 30 percent over the next 10 to 15 years, as a result of consumers being more informed about prices.

Another technology that is being developed that will assist consumers in making purchases over the Internet is 3-D imaging. Instead of just reading a description and looking at a photograph, a consumer will be able to visually inspect the product at virtually any angle.