One forecasting for the retailer industry caught my eyes: e-commerce sales will represent 8 percent of all retail sales in the U.S. by 2014; and 154 million people in the U.S. bought something online, or 67 percent of the online population. Every day, more and more consumers in the world are switching over to e-commerce to fulfill their shopping needs. For me, online stores and marketplaces are a convenient, and often cheaper, option for anyone with an internet connection and a credit card. With everything from cars to groceries to clothes and electronics being sold for reasonable prices online (often tax-free and with free shipping), there is little reason for consumers to ever leave the house to go shopping anymore.
"It's the fact that you can research the products that are available," said Barbara Staib, president of Safe Home Products, "survey indicates 89% of consumers prefer online shopping." What a surprising data it is! Online retail does not appeal to one demographic or region in particular, it has expanded in scope to encompass the entire world, as everyone desires to find the best bargain possible, something that online retail often provides. Neilsen reported in 2005 that 1 out of 10 people around the world now shops online, and cites a desire for better pay options as a barrier from more entering the online marketplace. And I believe, this number is keeping growing.
Large multi-national e-commerce companies such as Amazon.com compete for the same customers. For sure, consumers would like shop at Large e-commerce companies because it offer the lowest prices due to the fact that they benefit the most from economies of scale. In additional, because they carry so many different merchandises, they offer more product choice to all customers in different marketing segments. For example, let me give you a number first: including the Amazon “market place”, Amazon's total SKU reaches to million. As the online sales keep growing year after year, nobody want to reject the statement that on-line retailer will replicate the leading retailer position held by Wal-Mart today, giving leaders in the E-commerce industry more ability to dictate rules and pricing to its suppliers simply because of their enormous market share.
So, it looks like E-commerce is a pretty ideal business to start. Really? I want to say that the barrier to entry in the e-commerce industry can be either low or high. Do you believe for only a few thousand dollars, new entrants can establish their own website and begin selling products immediately? Yes, this can be true. However, new entrants are very unlikely to be successful outside of small niche markets. To compete with industry leaders such as Amazon.com, Yahoo.com, and Ebay.com, new entrants must be willing to commit hundreds of millions of dollars to investments in distribution, technology development, and relationships.
Let's take an observation about running an E-commerce company. First of all, we all agree a competitive e-commerce company successfully establish the advantage in distribution by operating multiple fulfillment centers across the United States (or whatever country they are doing business in). Fulfillment centers are located hundreds of miles apart from one another and are frequently located near airports to ease transportation. Large volumes allow industry leaders to benefit from economies of scale.
Secondly, operating a successful e-commerce website requires a huge investment into web development and technology – millions of dollar. For example, Amazon.com has a competitive advantage due to its patented "one click buying" technology. I like make an online purchase through a single click by using previously entered billing and shipping information. This creates a more enjoyable buying experience for me and customers and encourages repeat business. At the same time, legal protections prevent competitors from copying this technology. "Amazon Windowshop is a top-to-bottom rewrite of Amazon.com – designed and built without compromise ," said Jeff Bezos, founder and CEO of Amazon.com. "Try it. I think you'll find it’s an amazing way to shop Amazon's millions of items. Same selection, same low prices, same fast delivery, same benefits of your Amazon Prime membership – just a completely new, fluid interface designed specifically for lean-back, touch screen tablets.”
Moreover, new e-commerce companies have an especially tough time with relationship building due to the fact that the e-commerce industry is still dominated by the original “first movers.” Established e-commerce companies have relationships with industry and channel players that date back to the birth of the industry. As we can image, a new entrant could not expect to have enough time nor money to build closer relationships with these players before facing stiff competition from the first movers. The new entrant will constantly be judged based upon a performance benchmark set by the first movers.
One the other hand, the rivalry in the e-commerce industry is pretty high. This is due to the tremendous amount of power that we all have in the e-commerce industry. Because there are very low switching costs on the internet, we-the buyers- definitely want to find a cheaper competitor that offers the same product. This has led many e-commerce companies to target niche markets where they can avoid purely competing on price. Often niche markets will only have one or two direct competitors.
Furthermore, the threat of substitutes in the e-commerce industry is a big concern for most E-commerce companies. Large e-commerce companies like Overstock.com or Amazon are able to offer customers a wide range of products and services, however they are not without many competitors and thus substitutes. Within the e-commerce industry, there are many different retailers that sell the same product. The largest substitutes for the industry overall are the brick-and-mortar stores such as Costco, Target, Ralph’s Macy’s or Barnes & Noble. These traditional stores offer customers a lot of tangible benefits that online stores cannot. For instance, reading a book with a cup of aroma coffee at a Barnes & Noble offers its customers a relaxed atmosphere and environment where they can spend time browsing books, listening to music, and drinking coffee without feeling pressure to make a purchase.
Traditional brick-and-mortar stores also provide customers instant gratification because they can use their product immediately, whereas online customers have to wait for their product to be shipped. Also, customers at brick-and-mortar stores can physically touch a product before buying it, which allows them to verify that they have the right size. Physically touching the product may also cause the customer to become emotionally attached to the product, creating an impulse buy. Because they can see what they are purchasing, it is easier for customers to trust brick-and-mortar stores.
Regardless of type, it is very easy for shoppers to switch between substitutes. There is relatively no switching costs and it is difficult for online retail stores to build strong customer loyalty—although some companies like Amazon are rare exceptions.
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