Alexander Graf / Holger Schneider
The E-Commerce Book
The E-Commerce Book
About a channel that became an industry
eISBN 978-3-86641-505-8
© 2016 by Deutscher Fachverlag GmbH, Frankfurt am Main, Germany.
All rights reserved. This book or parts thereof may not be reproduced in any form, stored in any retrieval system, or transmitted in any form by any means – electronic, mechanical, photocopy, recording, or otherwise – without prior written permission of the publisher.
Translation: Brian Melican, Hamburg, Germany
Cover Design: Grafische Gestaltung Guido Klütsch, Köln, Germany
Type Setting: Fotosatz L. Huhn, Linsengericht, Germany
Project Coordination: Birga Andel, Lektorat & mehr, Rüsselsheim, Germany
For as long as the word “e-commerce” has been in existence, its definition has been unclear: from the moment it was coined, “e-commerce” as a term has always meant more than just an additional way to purchase goods. The result is that it has become almost impossible to find a proper definition. Wikipedia makes a valiant attempt:
Electronic commerce, commonly written as e-commerce or eCommerce, it the trading or facilitation of trading in products or services using computer networks, such as the Internet.
What happens, however, is that when people try to adapt a definition to their role, their company, or their overall professional environment, they find it hard to describe precisely what has changed as against the situation 10 years ago. E-commerce seems to be everywhere, in every process, channel and tool. Over the last decade, words like “multichannel commerce” and “omnichannel commerce” have emerged to back up often questionable company strategies; the rise of the smartphone is now accelerating this development to even higher speeds. Nevertheless, the result is little more than new buzzwords to describe failing approaches which do little to reassure unsettled employees. Even as e-commerce experts, though, we have trouble formulating an exact definition of this term currently in flux. So instead, we have decided to propose a definition of e-commerce for the future - say, the year 2030. If Wikipedia is still around then, we reckon the entry on the word “e-commerce” will read roughly as follows:
E-commerce started as a purchasing channel on desktop computers in the early 1990s. A new generation of retail companies such as Amazon and Alibaba dominated this channel and, over the coming decades, replaced most existing retailers (see BestBuy and Walmart) due to the better service they offered and the more favourable cost structures they ran. Today, however, e-commerce has been subsumed entirely into commerce and is the standard way of buying goods.
E-commerce led directly to the disappearance of brick and mortar stores as primary sale channels; store locations today are mainly used by companies who run them for marketing purposes. See also: Disappearance of in-store trading, The Great Commercial Property Crash 2022, and List of in-store trader insolvencies 2000-2025.
This is our prediction. In this book, we intend to explain what has happened up to this point and impart to you the reasons why we think this version of the future will come to pass - and a tool set to understand it as it happens.
Since its beginnings around 20 years ago, online shopping has grown from a niche channel into an integral part of today’s business and retail structures. Yet still, there are a range of misconceptions afloat about the drivers behind growth in e-commerce and the effects this growth is having. In what follows, we will examine the history of online shopping, going back to its beginnings and tracing its path through to the present day in order to discern the effects the meteoric rise in online sales has had – and is continuing to exert – on various market participants.
The era of e-commerce dawned with the arrival of the first consumer-friendly web browsers (Mosaic in 1993, Netscape 1995) and the development of online payment systems in the mid-90s. In 1995 in a garage in Seattle, Jeff Bezos packed and posted the first order received through his online bookstore (which, back then, was called Cadabra), and started on his course as a pioneer in the industry; three years later, Amazon went public and today is the most valuable retailer on the planet. Similarly, in 1995, Pierre Omidiyar launched an online listing service – legend has it – to help buyers and sellers of Pez candy dispensers transact. His idea quickly turned into the first large online marketplace, which is still relevant today. Yet not every e-commerce pioneer met with the same success as Bezos or the man behind Ebay, Pierre Omidyar. In fact, many of the dot-com doyens disappeared1 as quickly as they came in the ensuing boom. Nevertheless, established business models were turned upside down, too, as a rash of insolvencies in the mail order sector and the disastrous financial results of department stores such as Sears in the USA or Karstadt in Germany go to show.
In this chapter, we will map the course of these developments step by step, using a framework of six distinct business models to determine the winners – and who still stands to lose out. As a part of this analysis, we will be taking a closer look at phenomena such as the growth in e-commerce and the factors driving this growth, changes in the personal purchasing process, and competition in retail. The six business models we distinguish between are: online marketplaces, online retailers, intermediaries, mail order companies, in-store retailers, and (brand) manufacturers.
Online marketplaces offer a platform for multiple third parties to sell goods or services, with the transaction being processed in the online shop of the marketplace operator while shipping and service tend to be handled by the seller. Amazon runs a hybrid system in which it sells products as a retailer on its own marketplace platform and offers shipping and service for third-party sellers. Ebay, meanwhile, is focussed entirely on its role as an online marketplace.
Online retailers are online pure-players (online-only retailers) who offer a product range composed of bought-in merchandise on the internet only; frequently, they are specialised in particular product groups or consumer segments. Examples include online furniture retailer Wayfair (USA), the vente-privée.com shopping club (France) or online fashion store Zalando (Germany).
Intermediaries are aggregators of various online offers, usually applying intelligent search technology to support consumers looking for specific products. This model includes non-sector-specific services such as Google Shopping (international), Shopping.com (USA), and Dooyoo (Germany) as well as industry-specialised intermediaries in areas such as travel which earn commission on sales and bookings made via their websites.
Mail order companies have been a feature of American retail for well over a century now, and also have a long tradition in many European countries such as Britain and Germany. In a manner similar to online pure-plays, mail order operators market product ranges (composed either of their own-brand products, bought-in merchandise, or a mix) directly to home shoppers. Although many have gone insolvent or changed business models, brand names such as Sears, JC Penney, and Bloomingdales (US), Littlewoods, Kays, and Argos (UK) or Otto, Neckermann, and Quelle (Germany) are still indelibly associated with their catalogues.
In-store retailers are the most numerous and varied of the models, ranging from the luxurious Neiman Marcus (USA) to the budget fashion retailer Primark (Ireland, UK, and Europe), from France’s chic Galeries Lafayette to Germany’s bargain-basement Media Markt. These retailers make most of their sales in their networks of stores, mainly situated in busy town and city centres or shopping centres.
(Brand) manufacturers produce goods for consumers (or B2B customers) and include names such as Samsung, Fossil and Adidas. They require a range of distribution channels as they generally do not have their own retail networks (or only limited elements of one) and make most of their sales through retailers, whether online or offline. Some companies such as Apple and H&M are exceptions to this rule, retaining both production and distribution in-house.
In the following five sections, we will portray the developments and prospects of each of these business models at various points in time over the last two decades; using a “traffic lights system”, we will show what the overall mood and situation was among each group of companies in each phase:
Green = good prospects, confidence
Red = poor prospects, anxiety
Yellow = no change
1998: Calm before the storm
The “personal touch” misnomer
“People will always want to buy books in bookstores and never online.” The Riggio brothers (Barnes &Nobles), to Jeff Bezos (Amazon)2
It’s three years since Ebay and Amazon were founded and e-commerce is still a very young industry. Nevertheless, American customers are quickly discovering the benefits of online shopping: in 1998, online sales in the USA total roughly eight billion dollars; in the previous year, Dell became the first company to turn over more than a billion with online sales3. In Britain, too, “e-tailers” – as the jargon of the time has them – are racing ahead. In much of continental Europe, meanwhile, development is slower: under 10% of the population of Germany, for example, even have the internet; e-commerce as a whole isn’t even anywhere near the billion mark.
In the States above all, however, Jeff Bezos and his online bookstore Amazon have proved that customers are quite happy to purchase small, standardised items such as books and CDs on the internet and have them delivered to their homes. Indeed, with its huge selection of books and easy-to-use interface, Amazon is already starting to trump the personal touch of in-store consultation and poach customers. 1998 is also the year in which PayPal is born, this far-sighted concept for a standard means of payment online which will soon have established itself as an important alternative to other methods such as credit cards and (this being 1998) cheques.
In these early days of digital commerce, many offline retailers are rather reluctant to pursue an e-commerce strategy that would divert resources and revenue from their dominant in-store sales. This fear of cannibalisation is why Amazon’s biggest rival in books, Barnes & Nobles, remains slow to adapt to the new market segment. Why not let Amazon race ahead, make the first mistakes, and then invest in e-commerce later, when more customers will be online and the market more mature? Bezos is unconcerned about any threat at some point further down the line. When questioned on the prospect of big-name market entries at a later date, he replies: “I think you might be underestimating the degree to which established brick-and-mortar business, or any company that might be used to doing things a certain way, will find it hard to be nimble or to focus attention on a new channel.”4 He will, of course, turn out to be quite right. Meanwhile, Amazon starts gearing up to add more product categories such as toys and electronics to its range.
Prospects in 1998
Online marketplaces are the clear winners of the first stage of the race in e-commerce, a success embodied by none other than the online auctioneer Ebay, which is already able to generate a solid profit of $2.4m from sales of $47m in 1998; that year, almost 1.8 million C2C auctions take place on the site.5
Online retailers are also profiting from the initial growth in e-commerce: Amazon is, until 2000, solely an online pure-player and will not add a marketplace until 2000. It goes into 1998 with a turnover of $150m from the previous year, growing at an astronomical rate of 800%6 , and having held a successful IPO on 15th May 1997.7
1998 is the year in which the first intermediaries appear on the scene: price comparison and product search engines such as Yahoo Stores and Shopping.com make an entrance. Europe, too, sees several comparable sites set up, including Dooyoo (Germany), PriceRunner (Sweden) and Kelkoo (France). They benefit from the growth in online-shopping paired with the internet users’ pressing need for orientation (Google is not founded until September of that year).
While many of the North American catalogue publishers have already diversified into store outlets, many established mail order companies remain unfazed – and unimpressed – by e-commerce. While some have set up websites or even online shops, for most of them the internet is mainly a supplementary channel for catalogue orders – much like fax machines (this is still 1998, after all).
In-store retailers, however, make out a threat in the approaching e-commerce wave, even if few of them are investing in online shopping infrastructure. Barnes&Nobles, for example, recognises Amazon as a serious contender, having tactically filed a lawsuit against Amazon one day before its IPO in May 1997 about this latter’s claim to be “the world’s largest bookstore”. Shakily predicated on semantics (“It isn’t a bookstore at all. It’s a book broker.”), the suit was retracted five months later.8
For manufacturers, e-commerce is first and foremost a challenge. The prices and services offered by online retailers are almost impossible for producers to keep track of and therefore difficult to set; many fear that they will lose control of where and how their brands are presented. The reputation of Ebay, especially, is at rock bottom among brand manufacturers, above all in Europe.9 Some are taking their own first steps in direct sales, but the results are often discouraging: B2C is a challenging field for inexperienced manufacturers (user experience is often poor at first) and existing retailers feel snubbed, which endangers sales relationships.
A CLOSER LOOK 1998: The rise of Amazon
As far back as 1997, Jeff Bezos has already settled on his long-term strategy for Amazon – a strategy he will continue to pursue over the coming two decades at the helm: move quickly, think long term and always, always put the customer at the centre of your decision-making.
Jeff Bezos’ first LETTER TO SHAREHOLDERS, 1997 (extract):
Amazon.com passed many milestones in 1997: by year-end, we had served more than 1.5 million customers, yielding 838% revenue growth to $147.8 million, and extended our market leadership despite aggressive competitive entry. But this is Day 1 for the Internet and, if we execute well, for Amazon.com. Today, online commerce saves customers money and precious time. Tomorrow, through personalization, online commerce will accelerate the very process of discovery. Amazon.com uses the Internet to create real value for its customers and, by doing so, hopes to create an enduring franchise, even in established and large markets.
We have a window of opportunity as larger players marshal the resources to pursue the online opportunity and as customers, new to purchasing online, are receptive to forming new relationships. The competitive landscape has continued to evolve at a fast pace. Many large players have moved online with credible offerings and have devoted substantial energy and resources to building awareness, traffic, and sales. Our goal is to move quickly to solidify and extend our current position while we begin to pursue the online commerce opportunities in other areas. We see substantial opportunity in the large markets we are targeting. This strategy is not without risk: it requires serious investment and crisp execution against established franchise leaders.
It’s All About the Long Term: We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital […].
[…] Obsess Over Customers: From the beginning, our focus has been on offering our customers compelling value. We realized that the Web was, and still is, the World Wide Wait. Therefore, we set out to offer customers something they simply could not get any other way, and began serving them with books. We brought them much more selection than was possible in a physical store (our store would now occupy 6 football fields), and presented it in a useful, easy-to-search, and easy-to-browse format in a store open 365 days a year, 24 hours a day. We maintained a dogged focus on improving the shopping experience, and in 1997 substantially enhanced our store. We now offer customers gift certificates, 1-Click(SM) shopping, and vastly more reviews, content, browsing options, and recommendation features. We dramatically lowered prices, further increasing customer value. Word of mouth remains the most powerful customer acquisition tool we have, and we are grateful for the trust our customers have placed in us. Repeat purchases and word of mouth have combined to make Amazon.com the market leader in online bookselling.
2002: Intermediaries on the march
The (mis)information issue
“Nobody is going to buy shoes without trying them on.”
Silicon Valley venture capitalists (too numerous to count) to Tony Hsieh and Nick Swinmurn, Zappos10
Around the Millennium, e-commerce is a dynamic, booming industry, turning over $54 billion in the USA, close to £4 billion in the UK11, Europe’s online shopping pioneer, and managing €5.3 billion in a historically conservative market like Germany.12 These are the heady years of the Dot-com bubble13, as the period will later come to be known, and the halcyon days of the intermediaries, which – along with the online retailers – are attracting huge amounts of venture capital. The latter are proving again and again that complicated, emotionally-loaded products such as shoes (Zappos.com) and ladies’ lingerie (Victoria’s Secret) can successfully be sold on the internet; user-friendly product presentation and a focus on services such as Zappo’s free, year-long free returns policy, are attracting customers.14
In just a few short years, both the technology and internet users have changed rapidly and are using new means of payment which drive e-commerce growth: PayPal has become a popular method of transferring money and celebrates its millionth user in late 2002. Across all areas of retail, it is consumers who are benefitting from a tangible shift in power as new ways of buying products on the internet overturn existing assumptions.
Fig. 1.1: Purchasing process in-store versus e-commerce
Source: B. Schäfers, Social Shopping für Mode, Wohnen und Lifestyle am Beispiel Smatch.com in Web- Exzellenz im E-Commerce, Gabler, p. 313
Traditionally, in the brick-and-mortar world, a prospective customer with a defined interest in acquiring a certain product settles on a retailer and then views the product range provided by that retailer. The investment of time alone and, often enough, the geographical distance between suitable retailers mean that comparing several product ranges across various retailers is seldom worthwhile. On the internet, however, this is no longer the case. In fact, the next retailer is only a click away, while price comparison and product search engines are available to aggregate the various listings, categorising them by price or service level in an at-a-glance format. This often allows customers to cut out several middlemen and opt for the most attractive offer; as such, the consequence of this transparency is that the provider with the lowest price – or the broadest product range at acceptable prices – wins out. In the online environment, the retailer is often reduced to little more than a transaction assistant, earning a lower margin than in other retail situations due to the prevalence of competition by price. The problem, however, is that the retailer’s position in the brick-and-mortar world remains by no means unaffected by this race to the bottom if the products it sells are also being marketed on the internet. This effect becomes clear shortly after the Millennium in the consumer electronics segment, in which Best Buy (US), Curry’s (UK), or Media Markt (Germany) suddenly find themselves competing with online stores.15
This doesn’t mean that everything is running smoothly for the online retailers, though. As the Dot-com bubble bursts in 2002, a range of businesses set up in the euphoria of the late 90s are making such heavy losses that they have to shut down. Amazon circa 2002 is running seven fulfilment centres and makes what will turn out to have been a key decision in concentrating on its in-house distribution structures as its key value driver.16
Insight
By 2002, e-commerce has become an important strategic issue for all retailers, yet the switch in the personal purchasing process as depicted in figure 1.1 is still disputed (and remains so to this day) in some retail management circles. Since so many of the existing retail concepts rely on classification systems from the pre-internet era in order to define and understand their target groups, the reality of this new buying process is particularly unwelcome. Offers have thus far been structured for target groups defined by gender, age, income, or consumer preference, and managers who are accustomed to using these kinds of classifications have trouble accepting that these divisions are becoming increasingly meaningless – especially if a large enough proportion of customers in a certain group still appears to be behaving in the way traditional consumer research expects of them. New retail business models, such as the Otto Group’s Collins Project, now assume that consumers can no longer be classified by classic market research systems.17
Prospects in 2002
In 2000, Jeff Bezos applies the online marketplace concept by launching Amazon Marketplace and opening up its infrastructure for third-party sellers. In so doing, he not only secures Amazon an early place in the marketplace segment, but can also offer customers an even larger selection of products and more information about them. By 2002, Amazon’s annual turnover has grown to almost $4b.18 Other marketplace models develop in Europe, such as Rue De Commerce and Price Minister in France.
Instead of following Amazon into a broader product mix, most online retailers are concentrating on conquering specific categories. The current theory is that every product category will soon have a champion that will dominate that part of the market: as such, concepts such as Zappos in the USA, Appliances Online (now AO World) in the UK, and MyToys in Germany are set up to conquer their respective segments.
2002 is the year of the intermediaries, with the price-led purchasing patterns of online shoppers fuelling the growth of comparison engines in every category. From six, the German intermediary Dooyoo.de increases its staff to 170 by 200219, while Google launches its Google Shopping product search (back then, still punningly known as Froogle).20
Mail order companies have finally joined everyone in the new Millennium and are now making substantial – if somewhat belated – investments in e-commerce. In the USA, traditional catalogue publishers had been forcing their expansion into the brick-and-mortar segment, but now start to see the potential synergies offered by adding online retailing operations to their existing catalogue-based home shopping business. In the UK, the Next Directory goes online just before “Y2K”, while in Germany, the Big Three catalogue companies Quelle, Neckermann, and Otto all open online operations: in 2002, Otto grows its internet business by 56% year on year to €1.7b.21
For in-store retailers, e-commerce is fast turning from an abstract threat to a clear and present danger. Some larger operators such as Target (USA) and Thalia (Germany) start experimenting with their own online shopping concepts. Others, such as Macy’s in the USA, John Lewis in the UK, and Tchibo in Germany have already established their web shops as an integral part of their sales infrastructure.22
The pressure on manufacturers does not let up. Many of the new sales concepts arising do not suit distribution strategies, while low margins in e-commerce and the loss of control occasioned by the sheer number of online outlets continue to be disruptive: Ebay power-sellers, for instance, hit the wholesalers and offer branded trainers such as Adidas, Nike, Asics on the auctions site at way below normal retail prices; but thanks to their low costs, they still cut a profit.23 This forces price reductions across the board and poses a serious challenge to brand manufacturers.
A CLOSER LOOK 2002: The Dot-Com Bubble Bursts
As soon as the first major successes become clear in and around 1998, the internet generally – and online retail specifically – begins to attract the attention of entrepreneurs and investors: it’s a gold-rush, and just like any boom, the miraculous “New Economy” leads to risky financial decisions. Hundreds of new e-commerce companies are set up and kitted out with huge sums of venture capital – which they promptly blow on hiring sprees, technology development, and, more than anything else, marketing campaigns. Bigger, faster, further, and don’t spare the horses! Big-name companies hit the stock market at record speed while still deep in the red and making nine-figure losses.
Investor optimism on the major indexes facilitates this: in 1999, the USA alone records 457 initial public offerings (IPOs), most of which are young tech start-ups24. In early 2000, the Nasdaq shoots up to heights of over 5000 points, setting all-time records for the American markets. Yet what goes up must always come down: many of the rising stars start to lose momentum and soon the series of IPOs is turning into a series of Chapter 11s: just one year later, the Nasdaq is lulling at 1962 points (that’s a loss of 62%). As the Dot-com bubble bursts, more than 5000 internet companies shut up shop: two of the most high-profile failures are Webvan and Pets.com:
* www.nasdaq.com, www.gartner.com, www.wsj.com and www.cnn.com (as of March 2016)
** www.cnn.com, www.businessinsider.com and www.cnet.com (as March 2016)
*** www.businessinsider.com (as of March 2016)
What is fascinating, however, is that this rash of insolvencies doesn’t actually put much of a dent in B2C e-commerce turnover as a whole25. In fact, online shopping continues to grow a rapid pace and will go on to revolutionise the entire retail sector within just a few short years.
2007: Online euphoria
The “retail experience” mirage
“We see that internet and e-commerce is growing, but at the same time, when buying a new bed, a lot of people want to try it first; and if you buy a sofa, you may want to touch the fabric.”
Peter Agnefjäll, CEO of Ikea26
In the five years from 2002, e-commerce undergoes another growth spurt, expanding to an annual turnover of $136 billion in the USA27, approaching £14 billion in the UK28, and €11 billion in Germany.29 With 60% of consumers now having shopped online at least once, e-commerce has doubled its reach and is showing strong growth in new customers30. These customers are ordering more than just books and clothes, too: bigger-ticket items such as furniture and consumer electronics are now being bought online. Detailed product information and advice, as well as increasingly attractive viewing options, mean that customers feel confident spending on more complex items online. 2007 is also the year in which it becomes clear that the internet favours a handful of champions over a broader field as Amazon, Ebay, and Google become increasingly powerful. Amazon, above all, breaks away from the pack, with turnover hitting $15 billion by 2007.
Fig. 1.2: Amazon’s virtuous cycle
Source: after Jeff Bezos, 2001
figure 1.2 shows how Amazon manages to become a lastingly dominant force in the market. The starting point is the broad selection of products, which creates a positive customer experience, which in turn increases traffic as customers return to buy and recommend the site. Amazon’s appeal to visitors also makes it attractive for third-party sellers, be they merchants or makers, who in turn further extend the product selection. This virtuous circle spins around Amazon’s growth, which it drives, and while this model can be applied to any marketplace, in the case of the online retail giant, there is an important peculiarity: instead of using its growth to generate high margins and operate profitably, Amazon uses the extremely high volume of sales to lower its cost structure and then lower prices for customers to the greatest possible extent. This in turn contributes to a positive customer experience and puts even more impetus into the growth cycle. In so doing, Amazon secures itself a permanent competitive edge and is essentially operating as a particularly efficient wholesaler, rather than a marketplace or a retailer. And while this “wholesaler strategy” can certainly work for an in-store retailer in any urban conurbation, it becomes clear that on the internet – with no need for a network of stores to be available to customers everywhere – there is only one top spot to be taken in each country or region.
As if that weren’t enough, Jeff Bezos has been keeping another ace up his sleeve, launching Amazon’s Prime service concept in 2004. Prime members pay $79 a year (this will later increase to $99) for two-day shipping of all purchases at no further cost; and while Amazon loses around $8 per shipment in logistics costs, Prime soon proves to be one of the greatest drivers of growth for the business. Bezos is typically candid about this: “It was never about the $79. It was really about changing people’s mentality so they wouldn’t shop anywhere else.”31
Meanwhile, B2B has become another focus of Amazon’s strategy. After launching Amazon Webstore, an e-commerce platform which hosts other retailer’s online channels (Target.com uses it for years), the online giant launches its cloud IT infrastructure services AWS in 2006. AWS will continue to grow and become a highly profitable part of Amazon’s business model by 2016, while more and more brands and retailers will insource their e-commerce IT as it becomes strategic to their success; Amazon Webstore will announce its shutdown in 201532.
The approaching recession of 2007-2009 also works out in Amazon’s favour, as a wealth of competitors reduce their investments in view of the downturn and customers become more price-sensitive – and Amazon continues to invest in lower prices and growth.33
Insight
A defining element of this phase is the enormous level of investment in what are known as “category killers”: every segment, every product group will soon be dominated by a native market leader – or so most investors think. In fashion in Germany, for example, it could be Zalando, with AO.com ruling the regional roost for home appliances in the UK and the US pure-play Wayfair dominating the North-American online furniture market. These projections make sense from a 2007 perspective, with e-commerce sales still split quite strongly across various retail concepts and the eventual dominance of a few marketplaces still hard to see coming. What is more, untapped potential in online marketing and customer relationship management are used to support phenomenal growth projections in the business cases of the time.
Prospects in 2007
Online marketplaces continue to grow, led by Amazon and Ebay. In 2003, Amazon turns its first (albeit small) profit, while country-level market leaders rise to the top of several national markets: Amazon and Ebay win in North America and Europe, Alibaba annexes Asia, Rakuten takes Japan, and Ozon rules in Russia. Innovative new marketplace concepts such as Etsy attract huge amounts of venture capital.
Meanwhile, online retailers grow with the market and continue to attract new customers. At the height of their powers, online retail concepts join marketplaces as they draw in investors by the busload, who pour money into new players such as Wayfair in the USA or Zalando in Germany. Some of the most hyped newcomers are shopping clubs such as Gilt, founded in 2007, and the much older vente-privée. com, which starts to attract high value investment that year, too.
For intermediaries, meanwhile, the party is over: price comparison engines start to make losses: Dooyoo (Germany) is forced to cut staff steeply from a high-water mark of 170 down to 2434; Shopping.com (USA) watches as its growth dwindles.35 The reason is simple: a few select champions have won the race for market share, above all Google (with Google Shopping and its – then new – Universal Search) and a limited number of travel and finance aggregators. Following its launch in 2008, the new intermediary concept Groupon seems to be immune from this, forcing its way into the market at an astonishing pace.
Mail order companies, too, are in a funk. The future is looking less and less bright as Amazon and others grab more and more market share. Although catalogue companies’ web businesses are growing as a whole, some of the biggest names – above all JC Penney (USA), Littlewoods Index (UK), and Quelle and Neckermann (Germany) – are facing heavy losses, even closure.
Many in-store retailers are feeling more bullish about the future: having understood that online retailers are merciless foes, an attitude of “If you can’t beat ‘em, join ‘em!” leads to increased investment in online infrastructure as more and more stores start to integrate e-commerce. The idea is that customers will be able to get “the best of both worlds”, but many retailers soon find out that this vision is actually very difficult to make into a reality. In Germany, Media Markt closes its online shop Mediaonline.de in late 200736 and announces that it will relaunch with a new concept soon. It will take until 2012 for mediamarkt.de to replace it.37
Manufacturers continue to look askance at the developments in the industry. While online distribution is slowly becoming less chaotic as contact to internet retailers is improved and brand-owned shops are set up on online marketplaces, manufacturers remain very much at the beginning of the transition. Many still draw a line at direct distribution or marketplace presence in order to avoid jeopardising existing sales agreements with specialist in-store retailers. Some, however, start their own online shops: hugoboss.com, for example.
A CLOSER LOOK 2007: Online Zappos shopping for shoes
One of the most exciting e-commerce success stories is that of Zappos. Set up in 1999 as shoesite.com, this pure player is, at first, eyed sceptically by many industry observers: “Shoes are just too personal…” “Customers simply have to try them on before they decide to buy…” “You can’t make that work on the internet.” Yet founding duo Nick Swinmurn and Tony Hsieh disagree with the naysayers, citing the large number of established mail order companies who have been successfully selling shoes to home shoppers for decades. All that is needed is a mechanism which lowers the various hurdles to the point where customers have no qualms about ordering: Zappos famously offers all deliveries and returns free of charge, gives customers 365 days to exchange unwanted items, and tops it off with astounding customer service (toll-free hotline, no sales script for call-centre staff, no quantitative performance metrics). This customer-focussed approach soon gets people talking and rewards Zappos with a steep growth curve: in 2008, turnover breaks through the billion barrier. The company states that it keeps customer acquisition to a minimum, with 75% of all orders reported as coming from existing accounts. In 2009, Amazon snaps up the online retailer, which is by now selling much more than just shoes, for $1.2 billion.
Here are some clippings illustrating how the press reported the Zappos story:
Inc Magazine. “How I Did It: Tony Hsieh, CEO, Zappos”38 (2006)
We all sat around one day talking about what we wanted the Zappos brand to represent. We decided to be about providing the best service; we said, “We’re a service company that just happens to sell shoes.” But in order for that to happen, we had to control the entire customer experience. We expanded the warehouse to 77,000 square feet and stopped having manufacturers ship directly to customers. It was a scary time--drop shipping was 25 percent of revenue, and we gave it up all at once.
Internet Retailer. “Repeat customers walk all over Zappos.com”39 (2007)
Online shoe retailer Zappos Inc. has reached a milestone: six million paying customers. Zappos, which is expecting online sales to total about $800 million in 2007, also says that 75% of shoppers who make a purchase each day on Zappos.com are repeat customers. “We continue to grow sales in all of our categories, especially our non-footwear categories of apparel, handbags, sunglasses, watches and other accessories, which are growing even faster than footwear,” says Zappos CEO Tony Hsieh.
The New Yorker. “Happy Feet”40 (2009)
The Customer Loyalty Team, or C.L.T., is the nerve center of Zappos, whose thirtyfive-year-old C.E.O., Tony Hsieh, has earned a zealous following by imposing an ethos of live human connection on the chilly, anonymous bazaar of the Internet. He talks about being the architect of a movement to spread happiness, or “Zappiness,” via three “C”s: clothing, customer service, and company culture. “Eventually, we’ll figure out a way of spreading that knowledge to the world in general, and that has nothing to do with selling shoes online,” Hsieh told me after I visited the company over the summer.
2012: The multichannel bubble
Sales talk – but who’s listening?
“I believe the death of the retail store has also been greatly exaggerated. The influence of the internet and online sales will continue to increase, but […] multichannel retail platforms will be the primary beneficiary of this trend.”
Bill Bishop, Brick Meets Click 41
In the five years to 2012, the explosive growth in e-commerce continues, catapulting sales to $227 billion in the US, £31 billion in the UK, and €28 billion in Germany. Innovative concepts emerge such as Etsy, an online peer-to-peer marketplace for handmade products, and the ‘daily deal’ sites such as Groupon and Fab.com. Founded in 2008, Groupon is the trailblazer: by 2010, Forbes is already titling it “the fastest-growing company ever“42, and it turns down mega-bucks take-over offers from both Yahoo ($3-4bn) and Google ($5.75bn) before the year is out. Yet just twelve months on, Groupon has become “the world’s most controversial company”, in no small part due to its bumpy IPO in November 2011.43 Local service companies, restaurants, and other Groupon merchants begin to realize that an over-supply of offers has decimated prices. Furthermore, the assumption that Groupon customers would become regulars after using a “get to know you” offer soon turns out to be shaky: as it happens, Groupon customers are rarely willing to pay the full price after having received a discount once – and will instead continue to trawl the platform for other one-time offers for similar products and services.
Further e-commerce controversy comes in the form of Fab.com, a flash-sale community launched in 2011 with the goal of becoming the world’s largest designer store44. In its first year, it acquires one million members, reaching the 10 million mark after another twelve months. This rapid growth comes with a hefty price-tag, though: its marketing spend is out of control at 35% of revenue and yet still, congenitally disloyal online customers prove difficult to keep.45 The $300m of venture capital it has attracted start to run out ahead of time. By mid-2012, the company is deep in the red and begins shedding employees: the rounds of redundancies don’t stop until the staff of 750 has been reduced to a mere 25.46 Between September 2012 and 2013, Fab.com loses 75% of daily visits year on year47 and limps on today as a near-forgotten e-commerce irrelevancy.
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Fig. 1.3: Revenue distribution between catalogue and online sales over time
Source: Our graphic based on Excitingcommerce.de, Statistisches Bundesamt, BVH, and our own forecasts (linear progression)
Meanwhile, some of the most exciting e-commerce developments are happening in traditionally conservative markets. In Germany, for example, growth in e-commerce has, up until around 2010, mainly come from a reduction in mail order sales: i.e. catalogue customers have been migrating to online shopping (see figure 1.5), leaving in-store retailers more or less unscathed. Overall, the German retail sector as a whole is – once inflation has been accounted before – barely growing. From 2011 onwards, however, e-commerce breaks away from mail order entirely and its growth curve starts to point ever more steeply upwards. Given the lack of growth in retail as a whole, this means that in-store retailers start to lose between 500 million and one billion Euros to the online competition – every month, with no sign of any deceleration. Already weakened in the years up to 2010, the anaemic in-store retail segment is now bleeding customers and turnover to the fast-growing e-commerce challengers.
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