2.1.1 The definition of E-retailing
The Internet currently plays an important role as a business medium. People use the Internet as a business medium, so-called electronic commerce (e-commerce) (Eastin, 2002). More precisely explanation could refer to the definition adopt by Grandon and Pearson (2004): the process of buying and selling products or services using electronic data transmission via the Internet and the www.
Based on two classification schemes- Seller and Buyer, e-commerce can be placed into four categories. There are: B2B, B2C, C2B, and C2C business model. This study will focus on business-to-consumer model which concentrates on the business to end-consumer view of e-commerce, often termed e-retailing.
Table 2.1 Internet Business Model Buyer
Seller Business Consumer Business B2B B2C
Consumer C2B C2C Source: Kricjnamurthy, 2003.
Defined by Kricjnamurthy (2003), business models in the B2C sector can be broadly classified as 5 groups as below:
1. Direct sellers
Direct sellers make money by selling products or services to consumers.
Their primary source of income is the margin on each transaction. There are two types of direct sellers- E-tailers and manufacturers. E-tailers, such as Amazon.com, collect orders from consumers and either directly ship the products or pass the order on to wholesalers or manufacturers for delivery.
Manufacturers that sell directly are using the power of the Internet to reach customers directly. A prime example of this is Dell.com gaining market power by establishing direct customer relationships.
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2. Intermediaries
Online intermediaries are the largest number of B2C companies today.
These companies facilitate transactions between buyers and sellers and receive a percentage of the value of each transaction.
B2C intermediaries are of two types- brokers and infomediaries. Brokers facilitate transactions between buyers and sellers. Infomediaries act as a filter between companies and consumers. Individuals provide the infomediary with personal information and, in turn, receive targeted ads and offers. Companies can buy aggregated market research reports and target individuals based on data held private by the infomediary. Brokers make money by charging a fee on each transaction; while informediaries make money by selling market reports and helping advertisers target their ads.
One example of broker is virtual mall- a company that helps consumers to buy from a variety of stores. The company makes money on each transaction (e.g., Yahoo! Stores, Rakuten). Broker is also the role of the case introduced later in this study.
3. Advertising-Based Business
These businesses have ad inventory on their site and sell it to interested parties.
4. Community-Based Model
Community-based models allow users worldwide to interact with one another on the basis of interest areas. These businesses make money by accumulating loyal users and then targeting them with advertising.
5. Fee-Based Model
This type of business charges viewers a subscription fee to view its content.
2.1.2 Characteristic of E-retailing
Shopping online is more complex than traditional shopping, where consumers select, purchase and then leave a store with their items. The online shopping process involves finding an appropriate site and then navigating that site to select and make purchases. The next part of the process involves waiting for fulfillment, checking the order when it arrives, and returning it if there is a problem (Boston Consulting Group, 1998).
Reynolds (1997) identified four major challenges for e-retailing.: the transferability of retail brands; the appropriateness and availability of distribution networks; the market share practicalities of extending market reach; and supplier relationships. He concluded ‘‘a truly profitable, transactional presence on the Internet appears somewhat more problematic than many of its proponents would have retailers believe’’ in 2000.
Wood (2001) pointed when consumers shop by catalog or internet, their physical remoteness from product creates two key differences from in-store shopping.
First, direct examination of the product alternatives is precluded, and therefore the quality of information about sensory product attributes may be inferior. Second, for non-digital products, customers cannot simply take their purchases home; they must wait for delivery to gather the kind of experiential information that is present during in-store purchases. Both characteristics raise the level of risk to the consumer.
Lee and Tan (2003) integrated extant literature on retailing and consumer choice to develop an economic model of consumer choice in which a consumer self-selects between online and in-store shopping. Two important factors impacting consumer choice between online versus in-store shopping are identified: (1) the retail context utility and (2) the consumers’ perceived product and service risks.
The model developed by Lee and Tan (2003) postulated that consumers derive utility from the shopping experience and are more likely to shop online for products/services that are low in purchase risks. Consumers are also more likely to shop online for products with well-known brands than lesser-known ones. However, they are less likely to shop online from lesser-known retailers who carry well-known brands than from reputable retailers, even if the latter carry lesser-known brands.
The result confirmed that most consumers still value the physical aspects of a shopping experience. It also shows that consumers’ perceived product risk may not necessarily be higher for the online shopping context. However, consumers do perceive service risk to be higher in the online shopping context.
The close correlation between risk aversion and Internet shopping tendency shown suggested that traditional retailers and entrepreneurial startups who are contemplating venturing into online retailing should focus on the less risk-averse consumers as their initial target segment. The result also implies that traditional retailers could use the appropriate risk relievers to lower the perceived risk of the more risk-averse consumers.
In the end of this study, the authors suggested well-established traditional
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retailers could use their known reputation and/or well-known brands as risk relievers to reduce the risk aversion of online consumers. New startups in electronic retailing are disadvantaged by their lack of an established reputation. Entrepreneurial start-ups in electronic retailing can reduce consumers’ perceived risk of purchase by carrying only well-known brands.
Burt and Sparks (2003) considered the retail process as five directions:
comprising the sourcing of products; stockholding, inventory and store merchandising;
the marketing effort including branding; customer selection, picking and payment;
and distribution of items by or to the consumer. (See Table 2.2)
They pointed that buyers and suppliers that have previously had trouble reaching each other can connect in E-retailing. Suppliers can gain access to more buyers. Buyers can participate easily and view items from multiple suppliers. The electronic interface should lower transaction costs for both buyer and seller, and this transparency will likely drive down prices as well.
E-retailing provides a 24 hrs shopping opportunity and in theory widens the
“store” catchment area from the local to national or global level. Thus the traditional retail boundaries of “store reach” are changed both temporally and geographically.
Further observation, in most sectors the logistics process and associated activities have moved towards fewer large consolidated drops whether to a centralized depot or store. The in-built inefficiencies in terms of cost and service levels of a large number of direct deliveries (to store) are recognized. However, e-retailing would appear to reverse or add to this process, requiring a large number of small drops (to the home). In reality these journeys currently take place but the scheduling and cost of this activity is borne by the customer. In an e-retailing system, the management of this process (and possibly the cost) will now be passed on to the retailer.
Table 2.2 Re-thinking the E-retailing Process
Aspects Activity/process Ownership Costs Efficiency
Sourcing of
Efficiency gains, arguably to all parties and not product more important, more QR and JIT type activity
Probably unchanged, though in some categories potential to transfer stock to supplier
Potential to reduce costs of stockholding through less stock, but to increase costs of transport
Some online replenishment benefits and possible stock reduction grow, clearer view of customer loyalty
Brand ownership become more critical including retailer brands, but also key
manufacturer brands (of which there will be fewer)
More spend on the brand, but unclear about the returns
Reduced efficiency for retailers, but less clear for manufacturers, potential for gains from loyal customers
Customer selection, picking and
payment
Menus and scripts will help customers, possibilities of Automated replenishment for some
Consumers taking ownership but retailers left to do the process, e.g. picking and delivery
Retailers may see costs rise Reduced retailer efficiency
Currently done by consumers but moving to retailer
Costs will be incurred, for some retailers the consumer may be persuaded to pay
Reduced efficiency for retailers
Source: Burt and Sparks (2003).