Chapter 9 Online Retailing and Services Part 1

E-commerce 2019: business. technology. society Chapter 9 Online Retailing and Services 1) Which of the following is not a major trend in online retail for 2018-2019? A) Buying online has become a normal, mainstream, everyday experience. B) The average annual purchase of online buyers continues to increase. C) Specialty retail sites show rapid growth in online retail. D) The number of online buyers begins to plateau. Answer: D Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 2) The MOTO sector of the retail industry is most similar to the ________ sector. A) specialty stores B) general merchandise C) online retail sales D) consumer durables Answer: C Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 3) Which of the following is not one of the seven major segments of the retail industry? A) electronics and computers B) specialty stores C) gasoline and fuel D) food and beverage Answer: A Difficulty: Easy AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 4) All of the following statements about the MOTO sector are true except: A) compared to general merchandisers, the transition to e-commerce was easier for MOTO firms. B) the MOTO sector is also referred to as the specialty store sector. C) MOTO was the last technological retailing revolution that preceded e-commerce. D) distribution of catalogs is one of MOTO retailers' biggest expenses. Answer: B Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 1 5) All of the following were factors that precipitated the growth of MOTO except: A) the national toll-free call system. B) the growth of the cellular phone industry. C) falling long distance telecommunications prices. D) the growth of the credit card industry. Answer: B Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 6) All of the following were parts of the vision during the early days of e-commerce except the belief that: A) new, "first-mover" middlemen, with expertise in e-commerce, would force traditional intermediaries out of business. B) online consumers were rational and cost-driven. C) entry costs to the online retail market would be much less than those needed to establish a physical storefront. D) the cost of acquiring customers would be much lower. Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 7) All of the following have introduced their own versions of Buy buttons except: A) Facebook. B) Pinterest. C) Instagram. D) Tumblr. Answer: D Difficulty: Easy AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 8) In 2018, approximately what percentage of Internet users over the age of 14 made a purchase at an online retail store? A) almost 40% B) almost 60% C) almost 70% D) almost 80% Answer: D Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 2 9) Which of the following categories generates the highest percentage of online retail revenue? A) computers and electronics B) apparel and accessories C) books/music/video D) automobile and automobile parts and accessories Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 10) All of the following are advantages of online retail except: A) lower supply chain costs. B) lower cost of distribution. C) ability to change prices. D) faster delivery of goods. Answer: D Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 11) Which of the following is not one of the central challenges facing the online retail industry? A) lack of physical store presence B) consumer concerns about the privacy of personal information C) inconvenience in returning goods D) delivery delays Answer: A Difficulty: Difficult AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 12) Which of the following is not one of the methods used by traditional retailers to develop omni-channel integration? A) online catalog B) online order, in-store pickup C) online supply-push D) online promotions for offline purchases Answer: C Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 13) Which of the following statements is not true about the automobile, and automobile parts and accessories, online retail category? 3 A) Most of the revenue in this category is generated from the sales of automobiles. B) Automobile manufacturers use the Internet to deliver branding advertising. C) U.S. franchising law prohibits automobile manufacturers from selling cars directly to consumers. D) Automobile retailing is dominated by dealership networks. Answer: A Difficulty: Easy AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 14) Apart from Amazon, the top online retail firms in terms of online sales are all primarily ______ firms. A) manufacturer-direct B) omni-channel C) web-only D) catalog merchant Answer: B Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 15) Which of the following is not a digitally native vertical brand? A) Warby Parker B) Wayfair C) Everlane D) Caspar Answer: B Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 16) Online retail constitutes about 20% of the total retail market today. Answer: FALSE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 17) In 2018, the number of online buyers in the United States was over 190 million. Answer: TRUE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 4 18) Personal consumption of retail goods and services accounts for over 80% of total gross domestic product (GDP). Answer: FALSE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 19) In 2018, over 90% of online buyers were expected to make a purchase using a mobile device. Answer: FALSE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 20) Contrary to predictions of analysts made during the early days of e-commerce, the Internet has led to both disintermediation and hypermediation on a widespread basis. Answer: FALSE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 21) Consumers are primarily price-driven when shopping on the Internet. Answer: FALSE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 22) Online retailing provides an example of the powerful role that intermediaries continue to play in retail trade. Answer: TRUE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 23) Barkbox is an example of a subscription-based retail revenue model. Answer: TRUE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 24) Big data plays an important role in predictive marketing. Answer: TRUE Difficulty: Easy 5 AACSB: Application of knowledge Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 25) What are the challenges faced by automobile manufacturers in selling online? Answer: Currently, U.S. franchising law prohibits automobile manufacturers from selling cars directly to consumers, so automobile retailing is dominated by dealership networks. Automobile manufacturers use the Internet to deliver branding advertising, while dealers focus on generating leads. Consumers typically focus on product and pricing research, which they then use to negotiate with dealers. Direct online automobile sales are currently not common due to the complexity of the vehicle purchasing process. Difficulty: Moderate AACSB: Application of knowledge; Written and oral communication Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 26) Describe the vision of online retailing during the early days of e-commerce. Did these predictions and assumptions turn out to be true? Answer: In the early days of e-commerce, entrepreneurial online retailers saw the Web as one of the largest market opportunities in the United States economy. They believed that entering the online retail market would be an easy proposition because the new marketing channel would revolutionize the retail industry. The belief was that the Internet would greatly reduce both search costs and transaction costs, causing consumers to use the Internet to find the lowest prices for products. This would result in consumers being increasingly drawn to the new channel, and only the low-cost, high-service quality e-tailers would survive. Economists assumed that online consumers would be rational and cost-driven rather than brand-name and perceived-value driven. Entrepreneurs also believed that entry costs to the online retail market would be much lower than the costs to establish a physical store, and that they could be more efficient at marketing and order fulfillment than their offline counterparts. They believed they could inexpensively create compelling websites that would attract customers and that these costs would no doubt be far less than the costs of warehouses, fulfillment centers, and physical stores. They severely underestimated the costs to build sophisticated order entry, shopping cart, and fulfillment systems because they believed the technology had already been developed and furthermore believed with technology prices falling every year, updating and building any other necessary systems would be economical. With search engines almost instantaneously connecting consumers to relevant online vendors, customer acquisition costs would also be negligible. As prices fell, the unwieldy and outdated offline merchants would be driven out of business and the new entrepreneurs of the efficient online marketplace would take over. Smart entrepreneurs would exploit first mover advantages to take their place at the head of the online merchant class and the old general merchandisers would be locked out of the market. In some industries, such as apparel, electronics, and digital content, the market would be disintermediated, eliminating the traditional "middlemen" as manufacturers and distributors built a direct relationship with the consumer. The Web would become the dominant channel replacing 6 the physical stores, sales clerks, and sales forces. In other industries, retailers would outsource the warehousing and order-fulfillment functions and a kind of hypermediation would occur in which many intermediaries would perform the functions for the virtual firm. Unfortunately for many failed businesses and investors, these assumptions did not turn out to be correct. The structure of the retail marketplace remained intact, and consumers have proven to be less price sensitive than the economists expected. In online merchandising, the importance of brand names to consumers' perceptions of quality and service has been extended rather than decreased or eliminated. The retail marketplace was neither disintermediated nor revolutionized. Although an entirely new channel emerged, it today belongs not just to the pure-play, onlineonly, first movers, but also to omni-channel firms with established brand names. Difficulty: Moderate AACSB: Analytical thinking; Written and oral communication Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 27) Describe the state of the online retail sector today. Answer: Although the online retail sector is one of the smallest segments of the total retail market, constituting only about 10% of the total retail market in 2018, it is growing faster than its offline counterparts, with new functionality and product lines being added every day. During the recession of 2008-2009, online retail revenues were basically flat, but have since resumed their upward trajectory. More people than ever are shopping online, and for most consumers, the advantages of online shopping overcome the disadvantages. While the number of new Internet users in the United States is not growing as rapidly as it was, this slowdown will not necessarily reduce the growth in online retail e-commerce because the average shopper is spending more on the Internet each year and finding many new categories of items to buy. For instance, in 2003, the average annual amount spent online by users was $675, but by 2018, it had jumped an estimated $2,955. Millions of additional consumers more look for information online about purchases they make at offline stores. Offline retailers who have the brand-name recognition, supportive infrastructure, and financial resources have entered the online marketplace successfully and continue to integrate their online operations with their physical store operations to provide an integrated shopping customer experience and leverage the value of their physical stores. Some of the most significant changes in retail e-commerce in 2018 were the continuing growth in social e-commerce, the growing ability of firms to market local services and products using location-based marketing, and, not least, the rapidly growing mobile platform composed of smartphones and tablet computers. In retail circles, smartphones have become a leading shopping tool, while tablets are increasingly both shopping and purchase platforms. Social networks like Facebook, Twitter, Pinterest, Instagram, Snapchat and others have developed into major marketing and advertising platforms. After trials, Facebook, Pinterest, and Instagram have all introduced their own versions of "buy buttons" that allow consumers to more easily purchase goods on a much wider scale. In addition, location-based mobile marketing and advertising solutions such as Groupon have enabled local merchants to inexpensively enter local mobile marketing. Social and local e-commerce are enabled by the tremendous growth in mobile Internet devices, both smartphones and tablet computers. In 2018, U.S. retail m-commerce was expected to generate over $210 billion overall. In 2018, over 80% of online buyers were expected to make a purchase using a mobile device, and it is estimated that this percentage will grow to over 85% by 2022. 7 Difficulty: Moderate AACSB: Analytical thinking; Written and oral communication Learning Objective: 9.1: Understand the environment in which the online retail sector operates today. 28) Which of the following is not a key industry strategic factor? A) synergies B) barriers to entry C) industry value chain D) existence of substitute products Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 29) All of the following are strategic factors that pertain specifically to a firm and its related businesses except: A) core competencies. B) synergies. C) technology. D) power of customers. Answer: D Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 30) The lower the ________ compared to revenue, the higher the gross profit. A) assets B) cost of sales C) gross margin D) operating expenses Answer: B Difficulty: Difficult AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 31) Gross margin is defined as gross profit: A) minus total operating expenses. B) divided by net sales revenues. C) divided by cost of sales. D) minus net income. Answer: B Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 32) Which of the following is not categorized as an operating expense? A) the cost of products being sold 8 B) marketing costs C) administrative overhead D) amortization of goodwill Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 33) Operating margin is defined as: A) operating income or loss divided by net sales revenues. B) operating income or loss divided by total operating expenses. C) net sales revenues divided by net income or loss. D) net assets divided by net liabilities. Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 34) What is another name for pro forma earnings? A) net margin B) operating income C) earnings before income taxes, depreciation, and amortization (EBITDA) D) generally accepted accounting principles (GAAP) earnings Answer: C Difficulty: Difficult AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 35) Which of the following is not considered a current asset? A) long-term investments B) cash C) accounts receivable D) marketable securities Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 36) Current liabilities are debts of the firm that will be due within: A) three months. B) six months. C) one year. D) two years. Answer: C Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 9 37) For a quick check of a firm's short-term financial health, examine its: A) working capital. B) gross margin. C) long-term debt. D) cost of sales. Answer: A Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 38) Which of the following measures the percentage of sales revenue a firm can retain after all expenses are deducted from gross revenues? A) gross profit B) net margin C) operating margin D) working capital Answer: B Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 39) Which of the following provides a financial snapshot of a company's assets and liabilities (debts) on a given date? A) working capital B) operating margin C) balance sheet D) gross margin Answer: C Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 40) The existence of substitute products is a key industry strategic factor. Answer: TRUE Difficulty: Moderate AACSB: Application of knowledge Learning Objective: 9.2: Explain how to analyze the economic viability of an online firm. 41) Define the term economic viability and explain the factors involved in assessing a firm's economic viability. Answer: Economic viability refers to the ability of a firm to survive during a specified time period as a profitable business firm. To analyze the economic viability of a firm, both strategic and financial assessments are conducted. Strategic approaches to economic viability focus on both the industry in which a firm operates and the firm itself. Industry factors to examine include barriers to entry, which are expenses such as high capital costs, or intellectual property such as patents or copyrights held by other firms, and make it difficult for new entrants to join the industry. 10 The power of the suppliers and power of the customers in the industry must also be considered. If suppliers are sufficiently powerful, they can charge higher prices, whereas if the manufacturers or retailers are more powerful, they can bargain effectively for lower prices from their suppliers. The relative power of the customers determines whether they will be able to shop among the firm's competitors, thus keeping prices down. The existence of substitute products in an industry can also drive prices down if consumers have access to products with a similar function that they determine will fill their needs just as adequately. The industry value chain must be evaluated to determine if the chain of production and distribution for the industry is changing in ways that will benefit or harm the firm. Finally, the nature of the intra-industry competition must be evaluated to determine if the competition within the industry is based on differentiated products and services, price, the scope of the offerings or the focus of the offerings, and whether any imminent changes in the nature of the competition will benefit or harm the firm. The strategic factors to analyze include the firm value chain, the core competencies of the firm, the synergies available to the firm, the technology used by the firm, and the social and legal challenges facing the firm. The firm value chain must be evaluated to determine if the firm has adopted business systems that will enable it to operate at peak efficiency and whether there are any looming technological changes that might force the firm to change its processes or methods. The core competencies of a firm are its unique skills that cannot be easily duplicated. When analyzing the economic viability of a firm it is important to consider whether technological changes might invalidate these competencies. Synergies refer to the availability to the firm of the competencies and assets of related firms that it owns or with which it has formed strategic partnerships. The firm's current technology must be evaluated to determine if it has proprietary technologies that will allow it to scale with demand and if it has developed the customer relationship, fulfillment, supply chain management, and human resources systems that it will need to be viable. Finally, the social and legal challenges facing the firm should be examined to determine if the firm has considered consumer trust issues such as the privacy and security of personal information and if the firm may be vulnerable to legal challenges. The financial factors to analyze are the firm's revenues, cost of sales, gross margin, operating expenses, operating margin, and net margin. Revenues must be examined to determine if they are growing and at what rate. Cost of sales is the cost of the products sold including all related costs. The lower the cost of sales compared to revenue, the higher the gross profit. Gross margin is calculated by dividing gross profit by net sales. If the gross margin is improving consistently, the economic outlook for the firm is enhanced. Operating expenses such as marketing, technology, and administrative costs should be evaluated to determine if the firm's needs in the near interim will necessitate increased outlays. Large increases in operating expenses may result in net losses for the firm. Operating margin tells us if the firm's current operations are covering its operating expenses, not including interest expenses and other non-operating expenses. Net margin is calculated by dividing net income or net loss by net sales. It evaluates the net profit or loss for each dollar in sales. For example, a net margin of 12% indicates that a firm is making 12 cents on each dollar in sales. These figures can be found on a firm's consolidated statement of operations and summary balance sheet. A thorough strategic and financial analysis will often reveal the true economic prospects for a firm in the near to medium term. Difficulty: Difficult AACSB: Analytical thinking; Written and oral communication 11