Chapter 3 Multichannel Retailing

HDCS 3303 – Section 12711 Introduction to Merchandising I. Non-store Versus Store-based Retailers • While only 10% of retail sales are made through non-store channels, sales in non-store formats are growing faster than store sales. • Non-store retailing is a form of retailing in which sales are made to consumers without using stores. I. Non-store Versus Store-based Retailers • • • • • The various types of non-store retailers are defined in terms of the medium they are using to communicate with customers: Electronic retailers use an interactive computer or computer-like interface to communicate with customers. Catalog and direct mail retailers communicate using printed material. Direct selling retailers communicate with customers through a personal, face-to-face contact by a salesperson. TV home shopping retailers use television. Vending machine retailers have limited communications through the display of the merchandise in the machine. I. Non-store Versus Store-based Retailers The nature of the communications between the retailer and its customers differs for the various non-store retailing formats. The communications in direct selling are highly interactive. Electronic retailing has the potential for providing this same high level of interactivity. On the other hand, the communications in TV home shopping, vending machine, and catalog retailing are not very interactive. I. Non-store Versus Store-based Retailers • Most non-store retailers offer consumers the convenience of selecting and purchasing merchandise at a time and location of their choosing. • While non-store retailing provides unique convenience benefits over in-store retailing, frequently consumers are not able to get some important services provided by store-based retailers including that they cannot touch and feel the merchandise, try it on, attend sessions on how to use it, or have it altered prior to purchase. II. Electronic Retailing Electronic retailing is a retail format in which the retailer and customer communicate with each other through an interactive electronic network. • After an electronic dialog between the retailer and customer, the customer can order merchandise directly through the interactive network or by telephone and the merchandise is typically delivered to the customer’s home. • The bandwidth of the Internet connection into most household limits the interactivity and amount and quality of information that can be presented. Experts predict that a large % of households will have broadband services by 2003. Thus, over the next few years, the quantity and quality of information you will get from electronic retailers will improve dramatically. II. Electronic Retailing A. Factors Affecting the Growth of Electronic Retailing • Electronic retailing is less than 1% of retail sales in the U.S. and even less in Europe and Asia. However, the annual growth of U.S. electronic retail sales is over 100%. If this growth rate continues, electronic retailing will have a major impact on the retail industry significantly decreasing retail sales in stores. • Three critical factors affecting the adoption of a new innovation such as shopping electronically are: 1. The environment where customers can try the innovation 2. The perceived risks in adopting the innovation 3. The benefits offered by innovation compared to the present alternatives. II. Electronic Retailing (Cont.) 1. Trying Out Electronic Shopping • To experience electronic shopping, consumers need to have access to the Internet through a computer. In 1999, over 180 million people around the world had access to the Internet with a majority living in North America. • Women now comprise slightly less than half of Internet users, which is important for the electronic retailer because women do most of the shopping. • The substantial Internet usage by Generation Y suggest a bright future for electronic shopping retailing. II. Electronic Retailing (Cont.) 1. Trying Out Electronic Shopping (Cont.) • The US, adults over 50 years old are the fastest growing market going online, now comprising 20% of the Internet users. Older people tend to buy more merchandise and services on-line because shopping in stores is more difficult for them. • Internet usage and electronic shopping in Europe is much less than in the US, due in part to higher telephone charges while on the Internet, and unreliable postal service, tax differences, and credit card security fears. In addition, Europeans tend to see shopping as a social activity. II. Electronic Retailing (Cont.) 2. Perceived Risks in Electronic Retailing A critical concern of consumers is that credit card transactions are not secure when shopping on the Internet. A perception of risk is diminishing as credit card companies promote the use of their cards on the Internet and inform customers that the customers will not be responsible for security lapses. II. Electronic Retailing (Cont.) Issues about Shopping on the Internet 1. Entertainment and Social Experiences 2. Safety 3. Ordering and Getting Merchandise 4. Number of Alternative 5. Assistance in Screening Alternatives 6. Providing Information to Evaluate Merchandise 7. Cost of Merchandise Electronic retailing sales will grow only if the format offers consumers advantages over the existing retail formats. II. Electronic Retailing (Cont.) 1. Entertainment and Social Experiences • In-store shopping can be a stimulating experience for some people, providing a break in their daily routine and enabling consumers to interact with friends. • All non-store retail formats are limited in the degree to which they can satisfy these entertainment and social needs. II. Electronic Retailing (Cont.) 2. Safety • Non-store retail formats have an advantage over store-based retailers by enabling customers to review merchandise and place orders from a safe environment-their homes II. Electronic Retailing (Cont.) 3. Ordering and Getting Merchandise • Electronic retailing, like most non-store retail formats, enables consumer to order merchandise from any location at any time of the day. However, consumers usually have to wait several days to get the merchandise. Thus, all non-store retailers suffer in comparison to stores on this dimension. • The importance of getting merchandise immediately to customers depends on the type of buying situation and merchandise. II. Electronic Retailing (Cont.) 4. Number of Alternative • A person living in Columbus, Ohio can shop electronically at Harold's in London in less time that it takes to visit the local supermarket. • Having a lot more alternatives to consider might not be that much of a benefit. While it is easy to go from one web sight to another, finding what you want is not so easy because each web site has a different interface which customers have to learn to get the information they want. II. Electronic Retailing (Cont.) 5. Assistance in Screening Alternatives • Another potential, more significant, benefit of electronic retailing, is the ability to have a FRED search through a wide range of alternatives and select a small group for the customer to look at in more detail. • FRED is called an intelligent agent. An intelligent agent is a computer program that locates and selects alternatives based on some predetermined characteristics. Shopping Bots or search engines are computer programs that simply search for and provide a listing of all Internet sites selling a product category. II. Electronic Retailing (Cont.) 6. Providing Information to Evaluate Merchandise • Retailers vary in the sheer amount of information provided about the merchandise they offer. Storebased retailers also are different in the information they make available to consumers. • Specialty and department stores typically have trained and knowledgeable sales associates, while many discount stores do not. • Electronic retailers have greater opportunities to provide information to their customers than specialty and department store retailers. II. Electronic Retailing (Cont.) 6. Providing Information to Evaluate Merchandise (Cont.) • Using and interactive electronic communication channel, retailers can respond to the customer’ inquiries just like a sales associate would. • If information provided by the electronic database can be frequently updated and will always be available, consumers have advantages while store-based retailers have a very difficult time retaining knowledgeable sales associates, and in many cases it is not cost-effective for them to do so. • Electronic retailers can easily provide information to have side-by-side comparisons of alternatives. Customers in stores usually have to inspect each brand, one at a time, and then remember different attributes to make a comparison. II. Electronic Retailing (Cont.) 7. Cost of Merchandise • Some experts suggest that electronic retailers will have much lower costs than in-store retailers because electronic retailers do not have to spend money building and operating stores at convenient locations. • However, electronic retailers, or their customers, will have higher costs of delivering small quantities of merchandise to homes, as well as dealing with the high level of return, and attracting customers to their websites. II. Electronic Retailing C. What Type of Merchandise Will be Sold Effectively by Electronic Retailers? • In addition to the amount and presentation of information, retail formats also differed in the type of information they can present effectively. For instance, when purchasing apparel, some critical information might be “look and see” attributes like color and style, as well as “touch and feel attributes” like how the apparel fits. • Based on the difficulty of providing “touch and feel” information through non-store channels, one might conclude that non-store retailers will not be able to successfully sell merchandise with more important “touch and feel” attributes like clothing, perfume,flowers, and food. However, this type of merchandise is presently sold by non-store retailers. II. Electronic Retailing C. What Type of Merchandise Will be Sold Effectively by Electronic Retailers? (Cont.) • Branding overcomes many of the uncertainties in purchasing merchandise without touching and feeling it. • In some situations, the electronic retailer might even be able to provide superior information compared to store retailers. • In other situations, “touch and feel” information might be important, but the information in a store is not much better than the information provided by an electronic retailers. II. Electronic Retailing C. What Type of Merchandise Will be Sold Effectively by Electronic Retailers? (Cont.) • Some services retailers have been very successful over the Internet, because their “look and see” offering can be presented very effectively over the Internet. • The critical issue determining what types of merchandise can be sold successfully by electronic retailers is whether the electronic retailer can provide enough information appropriate to the purchase to make sure customers will be satisfied with the merchandise once they get it. II. Electronic Retailing (Cont.) D. Will Electronic Retailing Lead to More Price Competition? • With electronic retailing, consumers can search for merchandise across the Internet at a low cost. The number of stores that a consumer can visit and compare prices is not limited by physical distance. • To limit price comparisons, presently HIS retailers make it difficult for customers to go from one Internet site to another. • In addition, Internet retailers electronically prevent search agents like FRED from accessing their sites and collecting information about the products sold at the site. II. Electronic Retailing (Cont.) D. Will Electronic Retailing lead to More price Competition? (Cont.) • Thus by making these comparison difficult, electronic retailers are limiting attractiveness and growth of the format. However, consumers eventually will insist on making these comparisons and will reward electronic retailers that offer this service by going to their sites. • While consumer shopping electronically can collect price information with little effort, they can also get a lot of other information about the quality and performance of products at a low cost. II. Electronic Retailing (Cont.) E. Keys to Success in Electronic Retailing Some critical resources needed to successfully sell merchandise electronically are (1) strong brand name and image, (2) customer information, (3) complementary merchandise and services, (4) unique merchandise, (5) the ability to effectively present information on the web pages, and (6) a distribution system to efficiently ship merchandise to homes and receive returns. II. Electronic Retailing (Cont.) F. Potential Winners and Losers in Electronic Retailing F1. Catalog Retailers • Catalog retailers are best positioned to exploit electronic retailing. They have order fulfillment systems, and database management skills needed for effective electronic retailing. Also, the visual merchandising skills necessary for preparing catalogs are similar to those in setting up an effective website. • Catalog retailers vary in the uniqueness of their merchandise and will need to develop this area. II. Electronic Retailing (Cont.) • • • • F2. Store-based Retailers The Internet provides an attractive opportunity for storebased retailers to expand their customer base with relatively low cost and risk. Electronic retailing is particularly attractive to firms with strong brand names but limited locations and distribution. On the other hand, some store-based retailers with extensive market coverage are cautious about selling merchandise over the Internet because they believe their electronic offering might cannibalize there in-store sales. Self-service, store-based retailers such as some category specialists and general merchandise discount stores compete primarily on price and depth and breadth of assortments. These retailers are particularly vulnerable to competition from electronic retailers. II. Electronic Retailing (Cont.) F3. Electronic-Only Retailers • While electronic-only retailers such as Amazon.com have been highly valued by investors, they presently do not possess some of the resources needed for longterm success. • If and when major retailers decide to exploit the electronic retailing channel, store-based retailers have some significant resources that can be used to compete effectively in the emerging channel. Resources include strong brand names and reputation, relationships with vendors, skills in editing assortment, and local stores for displaying merchandise and providing information and services. II. Electronic Retailing (Cont.) F4. Manufacturers and Disintermediation • Disintermediation is when a manufacturer sells directly to consumer by passing retailers. This concern arises because manufacturers can get direct access to consumers by establishing a retail site on the Internet without making the heavy investment that retailers have made in store locations. • But retailers are more efficient in dealing with customers directly than manufacturers. They have considerable more experience than manufacturers in (1) distributing merchandise directly to customers, (2) providing assortments, and (3) collecting and using information about customers. III. Catalog and Direct Mail Retailing • Catalog retailing is a non-store retail format in which the retail offering is communicated to a customer through a catalog, while direct mail retailers communicate with their customers using letters and brochures. • Historically, catalog and direct mail retailing was most successful with rural consumers, who lacked ready access to retail stores. With the rise of dual-income families and other people with limited time for shopping in stores, catalog retailing has grown in popularity and now appeals to a broad cross section of consumers. • Some merchandise categories experiencing higher than average growth include apparel, hosiery, computer hardware and software, gifts, and pharmaceuticals and vitamins. Cosmetics, books food, etc. had lower, than average growth. III. Catalog and Direct Mail Retailing (Cont.) A. Types of Catalog and Direct Mail Retailers • Two types of firms sell products through the mail (1) general merchandise and specialty catalog retailers and (2) direct mail retailers. 1. General merchandise catalog retailers offer a broader variety of merchandise in catalogs that are periodically mailed to their customers, 2. Specialty catalog retailers focus on specific categories of merchandise. III. Catalog and Direct Mail Retailing (Cont.) A. Types of Catalog and Direct Mail Retailers (Cont.) • Direct mail retailers typically mail brochures and pamphlets to sell a specified product or service to customers at one point in time. In addition to the focus on a specific product or service, most direct mail retailers are primarily interested in making a single sale from a specific mailing, while catalog retailers typically maintain relationships with customers over time. About two-thirds of the sales are for merchandise and one-third are for services. III. Catalog and Direct Mail Retailing (Cont.) B. Issues in Catalog Retailing • Direct mail and catalog retailing are attractive business opportunities because the start-up costs are relatively low. • On the other hand, mailing and printing costs of catalogs are high, and it is increasingly hard to capture consumers’ attention as the receive more catalogs each year. • The length of time required to design, develop, and distribute catalogs makes it difficult for catalog and direct-mail retailers to respond quickly to new trends and fashions. IV. Other Methods Direct selling is a retail format in which a salesperson, frequently an independent distributor, contacts a customer directly in a convenient location, either at the customer’s home or work, and demonstrates merchandise benefits, takes an order, and delivers the merchandise to the customer. Special types of direct selling include party plan systems and multilevel networks. IV. Other Methods (Cont.) Television home shopping is a retail format in which customers watch a TV program demonstrating merchandise and then place orders for the merchandise by telephone. The 3 forms of TV shopping are (1) cable channels dedicated to home shopping, (2) infomercials, and (3)direct response advertising shows on broadcast and cable TV. IV. Other Methods (Cont.) Vending Machine retailing is a non-store format in which merchandise or services are stored in a machine and dispensed to customs when they deposit cash or use a credit card. Technological developments in the design of vending machines may result in long-terms sales growth. New video kiosk vending machines enable consumers to see the merchandise in use and have more information about the merchandise and use their credit cards to make a purchase.