Will the Web Kill Traditional Retail?

Internet guru John Audette argues that many storefronts won't satisfy once customers try the Web.

"We don't stock that, but we can order it for you. It's trucked in from the MidWest and it should take about two weeks."

That well meaning, but wholly impotent comment has haunted me for several days. I'm in the process of building a home theater and I had called a local retailer looking for a projection screen. I needed to buy one that is concealed in the ceiling when not in use, as my wife has traditional decorative standards that constrain my compulsiveness to automate our entire house with techno-gadgets.

I live on Internet time, so in addition to being compulsive, I'm also impulsive, at least as measured by real world time. After all, two weeks in Internet time is what, six months in real time? (I digress, but I think this is one reason why the Internet suits me so well. At a dinner party in Dublin a few months ago I kidded my host that Ireland had been accused of a manana culture, but many felt that was an unfair accusation as manana was much too quick for Ireland. To which my nimble host replied, "And America has often been accused of an instant gratification culture. Which is obviously an unfair accusation, as that is much too slow for most Americans".)

In any event, two weeks (six months!). Time to check out the Web.

I immediately found a company called Home Automations Systems. Their Home Theater section offered exactly the type of motorized projection screen that I was looking for -- and a lot of other cool home automation technology as well (my next project is going to be to automate the leaves on our dining room table). I placed my order and I'll have my screen in two business days.

So what's the big deal, you say? We've all bought stuff on the Web. The big deal is the many, many implications that this simple experience has for the hundreds of thousands of retailers and other intermediaries around the world.

First of all, to recap my little shopping experience, here is what I encountered:

- good pricing
- good selection
- immediate availability
- ease of shopping (it was snowing and I didn't leave the house)
- interesting information and products regarding other home
automation possibilities
- ability to sign up for a newsletter that covers an area of personal
interest
- simple payment via credit card
- home delivery

How can my local retailer, whom I would love to support, compete with this? Compare his effort to compete with each of the points listed above and it's clear that he will fall short on most of them. He does have some competitive advantages, admittedly, but this is all I can identify:

- personal interaction -- he might know me by name and greet
me when I walk into his store
- immediate availability -- if it's in stock, oftentimes a big if
- an opportunity to touch and feel the product

We call it the World Wide Web. But there is another World Wide Web, and that is the retail distribution system that has grown up in the past few hundred years. Picture at its center the manufacturer. From there you can draw many lines out to distributors. Next draw more lines from distributors to wholesalers. Next draw many more lines from wholesalers to retailers. And last lines from each retailer to customers, often in geographical groupings.

Now it's possible to have the customer at the center with direct lines to manufacturers of all kinds of products, with little or no regard to intermediaries or geography.

Systems evolve in response to their environment and the old Retail Web is no exception. It took form as a result of the inherent limitations of its environment, which is why it was (is) so geographically oriented. It was formed: before we had digital payment (credit cards); before we had 1-2 day shipping (UPS, FedEx, et al); and before consumers had ubiquitous access to information (Internet). Retailers were able to add value by acting as a local distribution point. This was important as it enabled customers to pay by cash or check; to pick up products immediately; and to find products via the retailer connections to their wholesalers. These value adds were the bulk of the retailers value proposition, enabling them to earn a decent margin. And many also enjoyed extra margin as the result of a "geographical monopoly". The store in the next town (or across town) might have better pricing, but the customer was not aware of it. And the customer didn't want to drive around all day comparing prices.

Many products sold by retailers today do not offer them these old ways of adding value. And if they can't add value, their product is reduced to a commodity. And if their product is a commodity customers care about only two things: price and availability.

There's a fancy word for this relentless assault on the value proposition for intermediaries: disintermediation. And it's a VBD (very big deal), indeed. One example that I have intimate knowledge of, having spent 12 years as one, is the retail stock broker. Do we need a retail stockbroker if financial information is freely available and we can trade online for $9.99 per transaction, trades my full service firm used to charge hundreds of dollars for, at Datek? In fact, do we need Datek? Couldn't Nasdaq set up their own online trading and eliminate brokers altogether?

This is profound change and it won't happen overnight. But the Internet is steadily weaving itself into the fabric of everyday life, and as it does so it will steadily pressure intermediaries of all kinds.

More and more of us are realizing that we can buy it ourselves. But can Internet merchants make any money if most of their products become commodities and trade on price and availability? How can online merchants add enough value to earn a decent margin? That's the topic of next weeks column.

URLs For Companies Mentioned in Article
Home Automations Systems - http://www.smarthome.com
Datek - http://ww.datek.com

Supporting Data -----------------------

* Web originated mortgages forecast to achieve a 30% market share in the home loan market by 2005. Source: Killen & Associates as quoted in ICONOCAST - http://www.iconocast.com

* Business-to-business and consumer e-merchants will ring up $27 billion in sales this year. Source: MMG E-Commerce Clock - http://www.mmgco.com

* Web originated auto loans forecast to achieve a 40% market share by 2005. Source: Killen & Associates as quoted in ICONOCAST

* The purchase of goods and services over the Internet in the United States will close in on $250 billion in 2002 Source: IDC - http://www.idc.com

* Schwab & Co. handles about 55,000 transactions each day. Schwab's customers buy and sell $2 billion in securities online. Source: Schwab CEO David Pottruck - http://www.schwab.com

* 31% of the U.S. investment market to be transacted online by 2002. Source: Jupiter Communications - http://www.jup.com

* Amazon.com, which started selling books online three years ago, acquired 1.2 million customers in the third quarter of this year alone. Source: Mercury News Wire Services - http://www.mercurycenter.com/

* Shoppers are expected to spend $2.3 billion online during the 1998 holiday shopping season, up from $1.1 billion in 1997. Source: Jupiter Communications - http://www.jup.com

* $200 to $300 billion per year is where Cisco CEO John Chambers sees e-commerce going by 2002 Source: Rapidly Changing Face of Computing http://www.compaq.com/rcfoc/

* A recent Nielsen Media Research study found that 5.6 million people are online book-buyers, and 8.4 million people have purchased hardware and software online (the three top items purchased online). Overall, Nielsen found that 78 million people used the Web in the first half of this year, and 20 million of them bought something. Source: Nielsen Media - http://www.nielsenmedia.com/

John Audette is the president and CEO of Multimedia Marketing Group, Inc., a major Internet marketing company. He founded and moderates the I-Sales Discussion List, first published in November, 1996 and now with over 10,500 subscribers. He founded: the LinkExchange Discussion List, which currently has over 100,000 subscribers; the Internet News Bureau, one of the leading press release clearinghouses on the Internet; and AudetteMedia, the world's leading publisher of e-mail discussion lists. He also created the WebStep Top 100 website submission tool. This article originally appeared in the premier issue of ADVENTIVE.COM, a new weekly newsletter. Click here to subscribe.


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