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US: Net shoppers rock retail sector


US: Net shoppers rock retail sector

Key points:

  • Aided by faster Internet connections, more secure payment services, high-quality search engines and high-performance PCs, online consumers in the US are branching out
  • For the current holiday shopping season, the National Retail Federation is predicting an overall increase in retail sales of 5.7%, while online sales are expected to jump by 29%
  • The success of the web this time--as opposed to the dotcom debacle of a few years ago--can be pinned to a stronger focus on customer service from merchants developing their web presence and a more cautious approach to investing in the Internet
  • Another route to web fame and fortune is through the powerful web search engines, such as Google

More than 80m Americans are now shopping online, with more bypassing the mall to buy electronically every day. As a result, the US retail sector is starting to show the effects of what amounts to the biggest change in shopping habits since Sears Roebuck published its first mail-order catalogue.

Aided by faster Internet connections, more secure payment services, high-quality search engines and high-performance PCs, online consumers in the US are branching out. They are moving from purchases of books and travel into property, clothes and home appliances. Helping to fuel this shift, large department stores and well-known discounters have developed savvy websites and new services, such as in-store pick-up and individualised web pages for each shopper. Internet sales growth, as a result, is outpacing traditional sales by a wide margin, albeit from a smaller base. Given the size of the stampede to online shopping, however, smaller retailers with no clear web strategy are likely to be trampled.

Indeed, the December 4th announcement by US toy retailer FAO Inc that it has filed for Chapter 11 bankruptcy protection, for the second time this year, is a case in point. Upmarket toy retailers have been struggling for more than a decade, hard hit by tough competition from toy discounters such as Toys R Us and Wal-Mart. This competition has intensified now that their customers, equipped with fancy home computers and fast Internet connections, are buying from discounters they wouldn’t dream of visiting in person. Comparison shopping, it seems, is as appealing to a well-heeled yuppie as it is to a Wal-Mart shopper.

The figures clearly reflect this trend. Visa, the credit-card company, says that online sales made by its customers, including travel, increased by 47% over the recent Thanksgiving weekend in the US, compared with last year. Traditional retail sales rose by just 9% during the same period. For the full holiday week, online spending accounted for a record 7.4% of the US$19.4bn charged to Visa cards. For the current holiday shopping season, the National Retail Federation is predicting an overall increase in retail sales of 5.7%, while online sales are expected to jump by 29%.

The success of the web this time--as opposed to the dotcom debacle of a few years ago--can be pinned to a stronger focus on customer service from merchants developing their web presence and a more cautious approach to investing in the Internet. Taking lessons from the success of Amazon.com and eBay, traditional retailers have realised that websites must offer more than a wide variety of products and low prices. Further, the needs of today’s online shopper are even more demanding than those of the seasoned web customers.

Lamps Plus, for example, the largest speciality lighting chain in the US, has succeeded online by completely integrating its web and bricks-and-mortar businesses. For the online customer, the group features a web-enabled call centre for real-time assistance from experienced salespeople. For visitors to its shops, Lamps Plus has installed online information kiosks that provide the same product selection and search capabilities found online. Using these kiosks, shoppers can create their own web pages that store customer purchases and delivery data. These sites can then be accessed at home, boosting the chances of an online purchase. As a result, more than 10% of the lighting company’s sales now come from its website, which is more than double that of larger companies such as Wal-Mart.

Building the percentages
But the big discounters are working hard to catch up. Although Wal-Mart set up its website in l996, it did not become an official subsidiary of the company until three years ago. The group’s strategy has been to offer something different to its online customers--which primarily has been to extend its price points upwards.

For example, while the US$244bn-a-year discounter sells digital cameras for US$99-200 in its stores, it offers digital cameras for as much as US$1,000 on its website. In its online jewellery section, it features a US$3,000 diamond ring, another item not found in its stores. Its online auto section also sells high-performance tyres for BMWs, a make of car not likely to be found in a Wal-Mart parking lot. According to Wal-Mart executives, the sites are meant to complement the Wal-Mart stores, a strategy that appears to be working. The company says it expects its holiday Internet sales will increase by 60% compared with a year ago.

Other traditional retailers tempt customers to their websites by offering traditional services to go with web purchases. About 40% of Sears’ online customers, for example, opt to collect their purchases in Sears stores. At Circuit City, the electronics retailer, the total is about 50%.

The increased use of the web by big retailers does not mean that all small retailers will necessarily be crowded out by their bigger competitors. Some, particularly those in niche markets, are finding that the web is bringing them unexpected sales growth. One key to success for these retailers is to be featured on a top website such as Amazon.com, Yahoo or eBay. Fossil Farms, a wild game farm in Pennsylvania, has seen its sales of duck, ostrich and buffalo steaks increase by a factor of ten since the company was included in Amazon’s gourmet food section. In this way, a small local company can go national or even international at almost no cost.

Another route to web fame and fortune is through the powerful web search engines, such as Google. By adjusting the wording on specific web pages, small companies can come up on top of a list of companies that sell a particular product. Small companies can also buy ads on search engine pages, called sponsored listings, which appear above and to the side of search engine results. Without a nationally known brand name, these kind of incremental investments can help put a small company on the Internet map.

Those that succeed on the web are also paying increasing attention to one other factor--customer satisfaction. According to the latest American Customer Satisfaction Index update, published by the University of Michigan, satisfaction with web retailers rose 6% last year to a rating of 83 out of 100. That compares with a flat rating of 75 for traditional retailers. Web-based merchants, whether part of an established retailer or not, are keenly aware that they need to hang on to this advantage if they want to continue to prosper.

Source: The Economist Intelligence Unit.

 


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