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No Surprise: e-Commerce is Changing the Face of Retail Marketing

March 15, 2012


In early 2011, Bob Ferrari, commenting on sales results of the 2010 holiday season, wrote, “Online commerce will remain an attractive option for consumers and e-commerce and logistics providers will be the prime beneficiaries.” [“Online Commerce Makes Another Stunning Presence in 2010,” Supply Chain Matters, 4 January 2011] Jump forward a little over a month and Stu Woo reported, “Internet retail sales in the U.S. will grow 10% a year through 2015 as shoppers spend more time online, Forrester Research says, and the implications aren’t good for brick-and-mortar stores.” [“E-commerce Will Keep Rolling, Research Firm Says,” Wall Street Journal, 27 February 2011] Woo continued:

“E-commerce will grow over the next four years as shoppers continue to shift their spending from physical stores to online ones, the report says. Increased use of smartphones and tablet computers, greater merchandise selection and new business models, such as daily-deals sites such as Groupon, will also aid growth. Online sales remain a relatively small part of the overall retail market. Internet sales in 2010 accounted for 8% of total retail sales, and [Forrester analyst Sucharita] Mulpuru projects that figure will rise to 9% this year and to 11% in 2015. Still, Mulpuru says this trend does not bode well for brick-and-mortar stores. Not only are customers increasingly shopping online, but savvy in-store customers are also armed with smartphones that can help them find better deals elsewhere or score price-matching offers.”

In the Forrester report Mulpuru concluded, “Companies need to think about the permanent implications of smaller margins on stores in the longer-term future and how their multichannel initiatives can help to offset this trend.” Multi-channel commerce has indeed received a lot more attention over the past year. In an article about Big Data, Daniel W. Rasmus, reminded us that new retailing models that disrupt the old order of things are rare, but they do occur. [“Why Big Data Won’t Make You Smart, Rich, Or Pretty,” Fast Company, 27 January 2012] He wrote:

“In 1962, the retail world was dominated by Sears, Montgomery Ward, Woolworth, A&P, and Kresge. Some of those companies no longer exist, and others have merged to the point that they are unrecognizable from their 1962 incarnations. … Would models of retail supply chains built in 1962 be able to anticipate the overwhelming disruption that [Wal-Mart’s] humble storefront would cause for retail? Did Sam Walton understand the impact of Amazon.com when it went live in 1995? The answer to all of the above is ‘no.’ These innovations are rare and hugely disruptive.”

Walmart certainly understands Amazon’s impact today. In 2010, Walmart began serious efforts to gain an online presence. [“Wal-Mart Ramps Up Online Efforts Globally,” by Karen Talley, Wall Street Journal, 7 April 2010] More recently, Walmart announced that it “is taking a 51 per cent stake in Yihaodian, a leading Chinese ecommerce website, in a significant move by the US retailer to boost its online presence in China.” [“Walmart raises stake in Yihaodian,” by Rahul Jacob and Barney Jopson, Financial Times, 20 February 2012]. Jacob and Jopson continue:

“Torsten Stocker, a partner with the Monitor Group, a consulting firm, said: ‘This is testament to how seriously Walmart is developing their ecommerce platform in China. Having a controlling stake obviously gives them a much more direct say in how Yihaodian expands.’ Walmart remains a relative novice in ecommerce in the US where the market is led by Amazon. Online sales account for a tiny percentage of Walmart’s total US revenues but in the past year it has sought to boost its in-house expertise by acquiring two US technology companies: Kosmix, which specialises in organising information from social media sites such as Facebook, and Small Society, which develops apps for mobile shopping.”

The fact that Walmart acquired companies that specialize in social media and mobile applications demonstrates how important those capabilities are in the e-Commerce world. Alan Taliaferro, a senior manager for supply chain management with Deloitte Inc., told the staff at SupplyChainBrain that “social media are having a significant impact on electronic-commerce fulfillment.” [“E-Commerce Fulfillment Is Here to Stay,” 3 February 2012] The article continues:

“Because of their ability to communicate instantly about a service problem, customers are far less tolerant of errors in order processing and delivery by merchandisers. E-commerce fulfillment activity is growing much faster than traditional brick-and-mortar stores, notes Taliaferro, with purchases over the internet cutting deeply into store sales. In the case of the latter, an inventory mistake isn’t particularly costly, and can usually be absorbed without much cost. ‘You’ve just taken it out of one pocket and put it into another,’ he says. In the e-commerce world, by contrast, inventory going to the wrong customer can have much greater implications on brand reputation. A disgruntled customer can immediately go on line and flame the errant retailer.”

Amazon has built its reputation on excellent order fulfillment and, as a result, has a large and loyal following. The article continues:

“‘There’s no buffer in the system for error,’ Taliaferro says. ‘An extremely high level of accuracy is required in e-commerce fulfillment,’ he says. ‘That means that different methods and material-handling systems are necessary.’ Often that means a company must maintain two streams of inventory. Nearly every multi-channel retailer has a separate facility for e-commerce fulfillment. ‘Most enterprise resource planning systems are not able to handle allocated customer inventory in a warehouse environment that’s set up for brick-and-mortar stores,’ Taliaferro says. What’s more, inventory accuracy rates must be much higher. By segregating the two types of inventory, a retailer can manage product in a more precise way.”

Taliaferro is not the first analyst to recommend that companies segment their supply chains to match the needs of multi-channel commerce. In addition to the reasons Taliaferro cites, other analysts note that segmenting supply chains help reduce complexity and improve efficiency. The article concludes:

“Material-handling systems in an e-commerce environment must be set up to handle very small orders, often single items. Taliaferro predicts that the logistics market will see increased demand for batch and group picking equipment, with the capability to sort into smaller orders. In essence, he says, an e-commerce distribution center needs to be treated more like a retail store, ‘because of the inventory accuracy required and the lack of ability of an ERP to handle mixed inventories in the same slot.'”

Gopi Krishnan agrees with Taliaferro. “Retail end-customers now can use a combination of channels (web, mobile, call center, store, EDI, pick-up & drop points etc) to browse, buy and return merchandise,” he writes. [“Multi-Channel Commerce: Not viral yet, but definitely diffusing,” Supply Chain Management, 8 September 2011] He continues:

“At the back-end of the supply chain, shopping cart items need to be split and re-aggregated based on stocked/non-stocked items available across central/regional/ store warehouses following different delivery models across different suppliers with different lead times.”

What makes e-Commerce so appealing to consumers? The obvious answers include lower prices, no sales tax, and convenience. But there are other reasons as well. “E-commerce simplifies life and significantly improves quality of life, according to a new study, Shopping 4.0, conducted by Deutsche Post DHL.” [“E-commerce improves quality of life,” Supply Chain Standard, 13 February 2012] The article explains:

“The study was conducted in cooperation with TNS Infratest and the Market Research Service Centre at Deutsche Post and covered Germany, Austria and Switzerland. Of the online shoppers in Germany, 44 per cent see improvements in their quality of life. Reasons stated were online shopping is more fun (41 per cent), less stressful (63 per cent) and allows them to better manage their time (81 per cent). Of the respondents, 75 per cent are certain that online shopping has a positive impact on quality of life for those who have only limited access to brick-and-mortar retail establishments. Web shopping was also perceived as being an emotional experience. Two-thirds of those surveyed look forward to their package being delivered. Over 50 per cent of respondents said the experience was akin to ‘receiving a gift’, and that they experience an emotional high when their online purchase is delivered.”

Brick-and-mortar stores are beginning to understand these kinds of motivations and are rewarding patrons with “gifts” like loyalty programs, special promotions, and so forth. Costco, for example, understands that many patrons visit the store just to take advantage of the samples that are given out. The big question, of course, is whether these efforts are good enough. With gasoline prices rising, motivating people to leave their homes for a shopping excursion is getting more difficult. According to Brad Plumer, “Americans have cut way back on driving in recent years. Total vehicle-miles traveled has stagnated since 2007. One big question is whether this is a temporary blip due to the downturn — unemployed people, after all, don’t commute — or evidence of a long-term structural shift.” [“Driving, gas prices and the end of retail,” Wall Street Journal, 18 February 2012] Plumer continues:

“Theories for a structural shift generally involve demographics: America’s swelling ranks of retirees don’t drive as much, while kids these days prefer Facebook to motoring around with friends. But there’s another possible factor: the torrid growth of online shopping. Phil Izzo has the numbers, which are striking. In the fourth quarter of 2011, e-commerce surged to 5.5 percent of all retail sales — and, if anything, that understates the trend, since brick-and-mortar stores include online sales in their own figures. When people order from their computers, of course, they save themselves a trip to the store.”

Plumer notes that “analysts attribute the sharp rise in online shopping to the fact that more Americans are comfortable buying online, while smart phones and tablets have made it increasingly simple to shop.” He agrees that those reasons are “plausible,” but he also wonders “whether high gas prices have played a supporting role here.” He reports that “U.S. brick-and-mortar stores first began their steady decline in retail share right around the time that $3.50-per-gallon gasoline became the norm.” With gasoline already over the $4/gallon mark in some locations in the U.S., this could be a long, hot summer for retailers. This trend may also be one of the reasons that some brick-and-mortar stores like Costco and Kroger’s offer discounted gasoline at some locations. Smart thinking. Of course, they may have also started selling gas because gasoline sales now represent an increased share of overall retail sales. In fact, Plumer reports, “In 1999, gas stations represented 7 percent of all retail sales, climbing to 11 percent by the last quarter of 2011. … It’s yet another indicator that rising prices at the pump are crowding out consumer spending on other things, hurting the broader U.S. economy.”


The bottom line is that e-Commerce, for all of the reasons noted above, is only expected to grow over the next several years. Brick-and-mortar stores that don’t implement a complementary multi-channel commerce strategy or don’t adapt their supply chains to meet consumer expectations are not likely to survive in the long run.

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