Where Is Retail E-Commerce Going? Part 1: 10 E-Commerce Trends That Affect Your Business

When commercial use of the Internet took off in 1995, most big retailers didn't get it. Small entrepreneurs jumped in and established online stores, and gradually began to carve out profitable businesses. You can read profiles of 23 of these early successes in Jaclyn Easton's excellent book StrikingItRich.com (CommerceNet Press, 1998).

However, the playing field is changing rapidly and tilting more towards larger businesses. What caused new sites in 1995 and 1996 to become successful may not work today. These are 10 important e-commerce trends that I believe will effect businesses on the Web, both large and small.

1. Online Purchasing Increases

Online sales during Christmas 1998 were a wake-up call. Once, people avoided Web sales fearful of credit card fraud, but I believe the press coverage of Christmas buying on the Internet has changed that perception for good. Researchers had to double their sales projections midway through the season. And though online sales were just a tiny fraction of total retail sales in the US, suddenly online stores became legitimate. Nearly half of Internet users are now willing to use their credit cards to make online purchases. This new buying spree is driving most of the other e-commerce trends.

2. Large Retailers Move Online

Many large retailers and mail order houses have set up an online presence. Those that aren't on the Internet will be soon. Whereas small businesses once had the Internet to themselves, now they must compete for their very survival.

Perhaps you've heard, "Nobody is making money online." That's definitely NOT true of many small businesses -- they can't afford that luxury. But it probably IS true of large traditional retailers. It's not that they don't know how to make money -- they surely do. But they are reinvesting profits in order to make major capital investments in infrastructure and expansion. Many of them have had a small presence on the Web for a couple of years in order to learn to do business online. Now they're ready to invest heavily, believing that e-sales are coming rapidly.

One of the big issues for retailers is learning quickly to conduct an efficient mail order operation. Their warehouse systems have been structured geographically for truck distribution to retail stores. Now they must restructure or build new distribution systems to accommodate product fulfillment by mail, UPS, or FedEx. To conduct business on the scale they want to, setting up these new systems to be efficient is very expensive.

Even if the company had a strong mail order business in the past, it is expensive to hook up their website ordering system so that it connects seamlessly with existing inventory and fulfillment systems.

For many large retailers this is a time of negative cash flow for their online businesses. But don't be fooled. When these investments and systems are finished, some of these companies be difficult for small operators to compete with.

3. Retail Web Sectors Are Staked Out

A second major trend is an intense competition to stake out major retail sectors on the Web ahead of others. It's like the Oklahoma Land Rush of 1893 all over again. With all that bare land, it's a rush to grab the best parcels. The theory is that the first company to dominate a field will gain the first-to-arrive advantage. Once you're Number One, competitors will have to spend a great deal of money to try to displace you from that spot. So this is a time-is-of-the-essence effort.

The company to watch is Amazon.com. In the past few months they've expanded their books-only operation into gifts, CDs, video, and pets. Then they acquired a slice of Drugstore.com (http://drugstore.com) attempting to capture the pharmacy and health products market before large retail chains, such as RiteAid. Next, they announced Amazon.com Auctions (http://auctions.amazon.com) to compete with eBay.

In order to do this, Amazon.com is foregoing profits for the present in order to gain a long-term advantage. And so far, at least, investors are going along with the strategy. At some point, they'll be expected to make a profit, but in the expansion stage, they're being given quite a bit of latitude. After a steep dip in late February 1999, AMZN Stock is at an all-time high in mid-April 1999. Yes, whatever goes up must/may come down, but it's a wild ride. (See a simple explanation of the strategy: James J. Cramer, "Long-Term Carping," Time, April 12, 1999, p. 101.)

The result of this sector-grabbing mania is to stimulate intense competition by the brick-and-mortar industry leaders. In this kind of war, small business sites can't compete. They need to move to the edges where the mortal combat isn't so fierce.

4. Small Business Merchants Are Aggregated

We're seeing sites like Yahoo! Store (http://store.yahoo.com) aggregate thousands of small merchants. Attractions include a higher chance of listing in Yahoo's index, possible inclusion of some products in Yahoo's shopping searches, superior statistics, a basic associate program capability, easy sign-ups for merchant credit card accounts, and mailing list software for newsletters or discussion lists. As the aggregators offer more and more features to small businesses, we'll see more small merchants moving this direction. While standalone stores have much more control of their destiny, they will need to continuously improve to keep up with advantages enjoyed by aggregated e-commerce sites.

5. E-Commerce Becomes Easier and More Deceptive

Pioneers remember how difficult it used to be to put together all the pieces of an e-commerce site. IBM HomePage Creator, Yahoo! Store, and iCat Online Commerce, have made set-up easier. While many of the resulting "cookie cutter" sites leave a lot to be desired, they are attracting many small merchants.

The result of this new-found ease will be an increasing rush of new small businesses to the Web to take advantage of this "easy" marketplace. But most of these new businesses will fail. Many will perceive e-commerce as easy -- hey, set-up is easy -- and fail to make the required investment of time, planning, and money necessary to promote and improve their online businesses.

6. Affiliate Programs Become Retail Standard

Associate programs are emerging as one of the must-have systems for funneling shoppers to an online store. Since merchants pay out only when a purchase is made, affiliate programs are often only 10% of the cost of banner advertising. While associate programs are attractive, they are difficult for small businesses to administer. Fortunately, several companies have sprung up to handle nearly all the administration and hassle of such programs -- for a cut of the total sale. These include Commission Junction (http://www.cj.com/go.asp?69320), BeFree (http://www.befree.com), LinkShare (http://www.linkshare.com), and Nexchange (http://www.nexchange.com).

7. SET Stalls

One trend that we expected, but hasn't materialized, is the transition to the SET protocol that Visa, MasterCard, and others have promoted. For now, it has stalled, and Secure Sockets Layer (SSL) is becoming more and more accepted as the security standard. If SET is eventually adopted, it'll probably take a couple of years before it is widely available in both web browsers and in online store software. When it does arrive, however, merchants will be under a lot of pressure to make it available to shoppers.

8. Shopping Agents Increase Price Competition

An emerging trend is the use of shopping agents to help shoppers find the best prices for the products they are seeking. These agents earn their money by cutting revenue-sharing deals with merchants. The agent owners in turn contract with large portal sites for a prominent and visible position. But several of these shopping agents have now been acquired this past year by portal sites. At press time, two independent shopping agents include MySimon (http://www.mysimon.com) and BottomDollar (http://www.bottomdollar.com). The effect of shopping agents is to drive traffic to sites that sign with the agents, and to drive prices down.

9. Auctions Push Prices Down

In the days when purchases were made in brick-and-mortar stores, geography limited the size of the marketplace in which a store had to compete. Nor was it easy to find the lowest price for a particular item without a lot of telephoning or flipping through ads in the Sunday paper.

The Internet has changed all that. The final trend I see is auction sites such as eBay (http://www.ebay.com) exerting a downward pressure on prices. Auctions along with shopping agents make it easy for shoppers to price shop on the Internet. Unless companies work very hard to keep prices low, they will lose out on sales to sites with steeper discounts.

Auctions are also becoming places where some small businesses are doing their sales in lieu of their own sites. For example, antique furniture companies will get more exposure for their high ticket items on eBay.com than they would on their own company's website, though sometimes arrangement is made for payment via the seller's website. The market is huge. eBay.com, for example, had 6 million visitors last month compared to Amazon.com's 8 million. Of course, many of those are repeat visitors, but this represents a growing phenomenon in online sales.

10. Nations Move Rapidly to E-Commerce

For several years the commercial potential of the Internet was mined mainly by Americans. No longer. Several countries of Europe have nearly caught up in e-commerce and may soon challenge the US on its own turf. While Asia and India still have a ways to go, we're seeing a strong movement to the Internet. The effect of this trend is a rapidly growing number of Internet users worldwide -- good news for online businesses. However, US sites will need to compete much more deliberately to increase their marketshare in the global Internet market.

Read Next: Part 2: 10 Essential Small Business Strategies