Online Retailing

An area that has been growing rapidly over the years. Let’s start by looking at some data. If we look at global e-commerce sales, they’ve been growing since 2014. These data show started at 5.9 percent of total retail sales globally and in 2018 it’s 8.8 percent. By many estimates actually, this is an underestimate of the activity. But some other estimates is as high as 10 percent of all global sales are now e-commerce sales. By the way this does not include transactions overall, for example banking transactions, or airline ticket transactions. This is what we will call as regular retail sales. If we look across countries you see some interesting differences. Let’s focus on China, where 16.6 percent of total retail sales are online compare that with the US which is 8.9 percent in 2018. So China has in terms of percentage of sales that have gone online, is much higher than the US. In fact, I was in China just a few days ago. It is very hard to actually make payments by cash, all payments have moved online and much of the store sales have also moved online. What is interesting also is that UK is as high as China, or in fact even higher than China when it comes to retail sales. So understanding these differences across countries is interesting and important. Our focus today is going to be predominantly on what’s going on in the US. 

If we look at how frequently people shop online, you’ll see some interesting differences. Now please note that these data look at, given that people shop online, how frequently they shop. So when you look at men, 30 percent of men shopping is at least once a week online and shop once a week per month is 32 percent, at least once a year 38 percent. On the women side, it is little bit less when it comes to frequency of shopping online. If you add these numbers in any row together you’ll get a 100 percent. These data are not saying who shops more often. It’s saying given that this shop online, how frequently those who shop once a week, versus once per month, or once a year. If you look at differences across ages, it’s not surprising that younger people are more frequent shoppers. But that is not to say that older people do not shop online. Even those who are 65-plus at least make one purchase every year, 58 percent of them make one purchase every year online. So what this all indicates is that, online shopping is now become common place. It’s not just for a few people, but more people are buying products online. You look at a little bit more in terms of how they buy online, and this gives some interesting ideas on what’s going on behind the scenes. If you look at traffic, percentage of traffic on the PC, is e-commerce traffic is about 54 percent. But if you look at percentage of sales, it’s close to 77 percent. What does that mean? It means more percentage conversions happened on the PC on smartphone it’s 33.7 percent e-commerce traffic, but only 10.7 percent retail sales. What that means is people are browsing on the smartphone, but when it comes to buying they probably shift to the PC. Same way for tablet. It’s about the same. So tablet is somewhere in between the PC and the smartphone as we would expected. So again PC is the dominant conversion channel when it comes to actually buying the product. But yes, smartphone is more for browsing. But these numbers are likely to change as smartphones become better, as we become more used to buying on the smartphone. But this is where it stands today. Now let’s ask a broader question, which is, Why is this trend happening? Why are we shifting more towards e-commerce? There are many reasons for that. It’s convenience, it’s ease, It could be some people say it’s lower prices. But let’s go a little deeper and try to understand why we are all shifting towards online purchases. Anyone of us when we are buying a new product, our first task is to get more information about the product. So in marketing terms we think of each product as a bundle of attributes benefits or features. So think of a notebook computer. A notebook computer has features such as screen size, its memory, whether it has a touch screen or not and whether, you know what’s the feel of the keyboard is it soft, is it hard, those are the kinds of features or benefits we are looking at a notebook computer. We can classify these attributes into two types. Let’s say screen size and memory, we’ll call them digital attributes. Why would we call them digital attributes? Because these are just numbers. We can actually just get as much of a sense of this by looking at online website or looking at actually go into a store. But there are non-digital attributes such as feel of the keyboard, or the feel of the mouse pad. We’ll call these non-digital attributes. Now if you look across products, some products are predominantly consisting of digital attributes, and the other products consists of non-digital attributes. So let’s look at some examples. US open is going on, and tennis balls some of well-known brand. I would say are mostly digital attributes. I know what it is, whether it’s hard or soft, the brand is there, I’ve known it. So I know, I don’t need to go open the box and feel that tennis balls to find out what they are. But then compare that with a car. We are thinking of buying a new car. We look at all the features engine size, car size on the web, but both my wife and I would like to actually go and test drive the car before we buy it, because you want to get a better sense of the feel of the car. How comfortable are the seats. When I put my foot down does the car move or not? Is it smooth? All those are non-digital attributes. Products that are predominantly digital attributes can be purchased via the internet more easily. So these products can more easily shift to online sales. Products that have more non-digital attributes, I would say less so, because the consumer has to touch and feel the product to get as field, get a sense of the product. So I’d like to test drive a car before buying. I’d like to try a pair of shoes before I buy, even though I know what the size of the shoe is. So those are kinds of the products examples where I would like to actually touch the product, feel the product before I buy. Now let’s superimpose on this another important aspect, and that’s the aspect of repeat purchase. If I bought a product before, some of the non-digital attributes get converted to digital attributes. So let’s look at another example. Once I bought a pair of socks of a particular brand and tried them on and use them. I know what they feel like. First time when I bought them, I didn’t know what they feel like, whether there’s soft or rough, weather they stretch nicely or not, whether they fitted on my forte. But once I’ve tried them I’ve used them for a month or so and I need to buy them again, I can reorder them online. Why? Because all the non-digital attributes get converted to digital attributes, once I’ve tried the product or once I bought it. So in the next purchase will be similar to what I bought before. The same may be true of a shirt. I usually wear a blue shirt, I buy it from the same company. First time when I tried this, I had to go to the store to see the fit of the shirt. But from this point on wards, I just order it online. Why because I know exactly what it feels like and how that particular size fits me. So the first purchase is made in a bricks and mortar store and then repurchase goes online. If you really think about this whole process of digital and non-digital attributes, and how not digital attributes over time gets converted to digital attributes, is a major driver of increase in e-commerce sales over time. Because many of the products we buy again and again. First time we can buy at bricks and mortar store, when we buy the same product again, the non-digital attributes become digital attributes and we are very comfortable buying them online. This particular phenomenon is giving a dramatic boosts to online sales over time, no matter which country we live in, whether we’re male or female, no matter how old we are. Let’s now talk a little bit about competition between online and offline retail. This is an interesting topic, and anyone who’s starting an online store or an offline store needs to keep this in mind. Consumers can shop offline to get a feel for the product, look at all the digital and non-digital attributes, and then often go buy online at a cheaper price. This phenomenon is referred to as show-rooming, and I’ve studied this quite deeply in my research. One way to minimize show-rooming is to price match, the other way is to offer a unique selection in your offline bricks and mortar store. Best buy at one time was very concerned about show-rooming, but tackled it by improving its own online store. Look at the reverse pattern, and this is what Amazon often complaints about. Consumers can search online and buy offline. This is referred to as webrooming. How does a company like Amazon take care of webrooming? Well, they can improve the speed of delivery, they can improve the cost of delivery, or reduce the cost of delivery, or bundled delivery, or have better return policies, or a larger assortment that can help against webrooming because people who will be worried whether they go to the offline store, whether the product will be in stock or not. So I think both offline and online stores have to worry about not just competition between online stores, but between online and offline also through the process of show-rooming and webrooming, and there are ways to tackle both. I think what we are leading towards these days is what we call as omni-channel retail. Many online retailer are setting up Physical bricks and mortar stores where people can buy the product. Warby Parker is a good example and there are several online mortar stores that are also opening offline stores. Many offline stores have already set up online stores, we talked about Best buy earlier. Walmart and Macy’s are other good examples. Having both online and bricks and mortar presence, creates what we call as multiple channels. Some consumers may have preferences for one channel, other may have preference for another channel. No matter which channel you have a preference for, we have both channels. This is called multichannel retailing. The difference between multi-channel and omni-channel retailing is how well a particular brand aligns the two channels. So brands such as Starbucks have created what we call as integrated multi-channel experiences, resulting in omni-channel retailing. A customer can order offline and by online, or customer can order online and buy offline, and the two channels are well integrated. As we go forward omni-channel retailing is no longer an option, but is becoming a necessity for success, both for online commerce as well as bricks and mortar commerce.