Copyright © 2002 Pearson Education, Inc.
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CHAPTER 10
Retailing on the Web
Created by, David Zolzer, Northwestern State University—Louisiana
Copyright © 2002 Pearson Education, Inc.
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Learning Objectives
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Identify the major features of the retail sector
Describe the vision of online retailing in the Ecommerce I period
Understand the environment in which online retail
sector operates today
Explain how to analyze the economic viability of
an online firm
Identify the challenges faced by different types of
online retailers
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The Retail Sector

Durable goods are goods that are
consumed over a longer period of time
(generally more than one year)
 Nondurable goods are goods that are
consumed quickly and have shorter life
spans
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Personal Consumption of
Goods and Services

Retail goods and services comprise 63%
of gross domestic product (GDP)
 Services account 56% of total retail sales
 Durable goods account for 14% of total
retail sales
 Nondurable goods account for 30% of
total retail sales
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Sources of GDP in the
United States
Page 528, Figure 10.1
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Composition of the U.S.
Retail Industry
Page 529, Figure 10.2
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The Top Ten General
Merchandisers
Page 530, Table 10.1
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The Top Ten MOTO Retailers
(2000)
Page 530, 10.2
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Online Retailing Vision (Ecommerce I)
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Greatly reduced search costs on the
Internet would encourage consumers to
abandon traditional marketplaces in order
to find lower prices for goods
 First movers who provided low-cost
goods and high-quality service would
succeed
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Online Retailing Vision (Ecommerce I)
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Market entry costs would be much lower
that those for physical storefront
merchants, and online merchants would
be more efficient at marketing and order
fulfillment than their offline competitors
because they had command of the
technology (technology prices were falling
sharply)
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Online Retailing Vision (Ecommerce I)
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Online companies would replace
traditional stores as physical store
merchants were forced out of business.
 Older traditional firms that were too slow
to enter the online market would be locked
out of the marketplace
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Online Retailing Vision (Ecommerce I)
In certain industries, the “middleman”
would be eliminated (disintermediation) as
manufacturers or their distributors
entered the market and built a direct
relationship with the consumer
 The cost savings would ensure the
emergence of the Web as the dominant
marketing channel
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Online Retailing Vision (Ecommerce I)
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In other industries, online retailers would
gain the advantage over traditional
merchants by outsourcing functions such
as warehousing and order fulfillment,
resulting in a kind of hypermediation, in
which the online retailer gained the upper
hand by eliminating inventory purchasing
and storage costs
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The Online Retail Sector Today

Few E-commerce I assumptions about
future online retail were correct
 Structure of the retail marketplace in the
United States has not been revolutionized
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The Online Retail Sector Today
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Online consumers are not primarily costdriven -- instead, they are brand-driven
and influenced by perceived value as their
offline counterparts
 Online market entry costs were
underestimated, as was the cost of
acquiring new customers
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The Online Retail Sector Today

Older traditional firms such as general
merchandising giants and the established
catalog-based retailers are taking over as
the top online retail sites
 Disintermediation did not occur
 Online retailing has become an example of
the powerful role that intermediaries play
in the retail trade
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Online Retail is Alive and Well
Page 533, Figure 10.3
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Top Ten E-tailers Ranked by Share of Online
Purchasing Audience
Page 534, Table 10.3
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Online Retail Market Product
Penetration Rate (%)
Page 535,
Table 10.4
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Analyzing the Viability of Online
Firms

Economic Viability refers to the ability of
firms to survive during the specified
period as profitable business firms
 Can be analyzed by examining the key
industry strategic factors
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Strategic Analysis
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Barriers to entry
 Can new entrants be barred from entering the
industry through high capital costs or
intellectual property barriers (such as patents
or copyrights)?
Power of suppliers
 Can suppliers dictate high prices to the
industry or can vendors choose from among
many suppliers?
 Have firms achieved sufficient scale to bargain
effectively for lower prices from suppliers?
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Strategic Analysis
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Power of customers: Can customers choose
from the many competing suppliers and hence
challenge high prices and high margins?
Existence of substitute products: Can the
functionality of the product or service be
obtained from alternative channels or competing
products in different industries? Are substitute
products and services likely to emerge in the
near future?
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Strategic Analysis
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Industry value chain
 Is the chain of production and distribution in
the industry changing in ways that benefit or
harm the firm?
 Nature of intra-industry competition
 Is the basis of competition within the industry
based on differentiated products and services,
price, scope of offerings, or focus of
offerings?
 How is the nature of competition changing?
 Will these changes benefit the firm?
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Strategic Factors
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Firm value chain
 Has the firm adopted business
processes and methods of operation
that allow it to achieve the most
efficient operations in the industry?
 Will changes in technology force the
firm to realign its business processes?
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Strategic Factors
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Core competencies
 Does the firm have unique
competencies and skills that can not be
easily duplicated by other firms?
 Will changes in technology invalidate
the firm’s competencies, or strengthen
them?
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Strategic Factors
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Synergies
 Does the firm have access to the
competencies and assets of related
firms either owned outright or through
strategic partnerships or alliances?
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Strategic Factors
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Technology
 Has the firm develop proprietary
technologies that allow it to scale with
demand?
 Has the firm developed the operational
technologies (e.g. customer relationship
management, fulfillment, supply chain
management, inventory control, and
human resources systems) to survive?
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Strategic Factors
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Social and legal challenges
 Has the firm put in place policies to address
consumer trust issues (privacy and security of
personal information)?
 Is the firm the subject of lawsuits challenging
its business model, such as intellectual
property ownership issues?
 Will the firm be liable to changes in Internet
taxation laws or other foreseeable statutory
developments?
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Financial Analysis
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Revenues
 Are revenues growing and at what rate?
 Cost of sales
 What is the cost of sales compared to
revenues?
 Gross margin
 What is the firm’s gross margin (gross
profit divided by net sales) and is it
increasing or decreasing?
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Financial Analysis
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Operating expenses
 What are the firm’s operating expenses, and
are they increasing or decreasing?
Net margins
 What is the firm’s net margin, and is it
increasing or decreasing?
 Net margin (net income or loss divided by net
sales/revenue) sums up in one number how
successful a company has been at the
business of making a profit on each dollar of
sales
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Summary Balance Sheet
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Balance sheet provides a financial
snapshot of a company on a given date
and show it financial assets and liabilities
 Assets refers to stored value
 Current assets such as cash, securities,
accounts receivable, inventory, or other
investments that are likely to be converted
to cash within one year
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Summary Balance Sheet
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Liabilities are outstanding obligations of
the firm
 Current Liabilities are debts of the firm
that will be due within one year
 Long-term debt are liabilities that are not
due until the passage of a year or more
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Amazon’s Balance Sheet
Page 539,
Table 10.5
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Online Business Models
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Virtual Merchants
 Single-channel Web firms that generate
almost all their revenue from online
sales
 General merchandiser -- Buy.com
 Niche player -- Ashford.com
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Buy.com’s Balance Sheet
Page 543,
Table 10.6
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Ashford.com’s Balance Sheet
Page 546,
Table 10.7
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Online Business Models
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Click and Mortar
 Companies that have a network of
physical stores as their primary retail
channel, but also have introduced
online offerings
 Wal-Mart.com
 JCPenney.com
 Sears.com
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JCPenney’s Balance Sheet
Page 551,
Table 10.8
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Online Business Models
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Catalog merchants
 Established companies that have a
national offline catalog operation that is
their largest retail channel, but who
have recently developed online
capabilities
 Lands’ End
 Victoria’s Secret
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Lands’ End’s Balance Sheet
Page 555,
Table 10.9
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Online Business Models
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Online malls
 A variation on the virtual merchant
business model, they generate revenue
from “rents” and services paid for by
retailers who sell under the mall’s
umbrella
 Fashionmall.com
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Fashionmall.com’s Balance Sheet
Page 562,
Table 10.10
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Online Business Models
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Manufacturer direct
 single or multichannel manufacturers
who sell directly online to consumers
without the intervention of retailers
 Dell.com
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Dell.com’s Balance Sheet
Page 567,
Table 10.11
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Distribution of Retail Sales by
Type of Retailer
Page 564, Figure 10.4
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Profitability Per Order by Online
Retail Category
Page 569, Table 10.12
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