E-Commerce : ’Tis the Season to Be Nervous E-Tailers

With the Christmas selling season in full swing, the general contour of online retailing should soon come into view. Last year, Americans discovered online retailing for the first time in a big way. The results captured the attention of almost every sizeable company in America. Why? Revenues at a lot of Internet companies quadrupled, albeit from low base numbers. More significantly, the stocks of Internet companies skyrocketed as online retailing and e-commerce came to be seen as the next big thing. Everybody wanted to join the dot.com bandwagon.

The hype surrounding online retailing has been astounding, with many pundits predicting that Internet-based retailers will capture a significant portion of all retail sales within the next two or three years. Those of us who witnessed the invention of home shopping networks and the explosion of home video in the 1980s may be just a little skeptical.

Let’s start with the obvious: E-tailing has already proven that it is a viable new channel for retail sales and distribution. A lot of people are buying online and a lot of people will continue to buy online. The only question is: How big will it be?

The answer to that question is a two-part equation. Part one is: How many people will actually buy online? Part two is: How much will each person spend? Last year’s experience did not shed light on either part of the equation. This year’s Christmas selling season might.

Why should last year’s stellar performance be discounted? The history of other new forms of retailing says it should. For example, when home shopping via television was launched in the mid-1980s, sales climbed from zero to around $1 billion in the first year or so. At that point, pundits were also predicting that all sorts of products could be sold via the television and that people would naturally gravitate to the convenience of couch-potato commerce. The only question was how quickly home shopping networks sell more than Sears or WalMart.

A year later, it was clear that while there was an audience for home shopping, it was finite. Moreover, the range of goods that could flow through that channel was limited. In short, home shopping was viable; it was just not nearly as big as many people thought.

The lesson of video retailing can shed light on the second part of the equation. When videocassette recorders reached a mass audience in the early 1980s, it was not uncommon for newbies (to use the Internet term) to rent videos virtually every night. Some folks would rent five videos at a time. That pattern grew old very quickly. People found they couldn’t watch five videos a night. By the mid-1990s, the challenge for video retailers was to make sure that customers did not leave their stores empty-handed.

Online retailing will undoubtedly follow similar patterns. Already, hedge fund manager Eric Von Der Porten has reported that revenues per customer at Amazon.com and CDNow have dropped sharply over the past year. Faye Landes, an analyst with the investment firm Thomas Weisel Partners has reported a similar trend for eBay.

The online retailers argue that the methodology of those kinds of studies is flawed, because they use total customers rather than active customers. But the e-tailers generally refuse to make public the number of active customers they have. Nevertheless, the history of retailing seems to indicate that as people become more familiar with the products offered through a specific retail channel, the average purchase size goes down.

And how many people will eventually buy online? The answer to that part of the equation depends on the quality of the online buying experience. Can people find what they want at a good price and take delivery of the goods in a reasonable time? Moreover, if there are problems, how expeditiously are they resolved?

Currently, the trend is a troubling one. The market research company Jupiter Communications reported that while in the spring of 1998, 63 percent of online shoppers rated their experience highly, in the spring of 1999, only 43 percent did.

The reason for the drop-off could be, in part, that less technologically savvy, less-technologically-forgiving customers are now buying online. But part of the reason could be that the quality of service is deteriorating. In my own experience with Amazon, when I first bought a book, I loved it. The company kept sending me e-mails updating me about my purchase, which shipped in one to three days.

When I purchased from Amazon this summer, however, it was a different story. I ordered a recently published book that had earned a front-page review in The New York Times. It took nine days to ship. I didn’t hear back from Amazon for over a week. Hey, I could have gotten this book from a store with much less hassle.

One of the lessons that Amazon has seemed to learn is that if you offload fulfillment and shipping to third parties, you cannot control the quality of the customer’s total experience. That is why the pioneer Internet retailer is investing many millions of dollars to build a bricks-and-mortar distribution infrastructure.

More lessons along those lines are yet to be learned. So, while last Christmas could be called the season of discovery for e-tailing, this season, the landscape will begin to be mapped.

About the Author:Elliot King is an Associate Professor of Communications at Loyola College in Maryland. He can be reached at (410) 356-3943, or by e-mail at eking2@prodigy.net.