Retailers or e-tailers? They'll be the same
September 28, 1999
by Irwin Stelzer
Sunday Times (London)
September 19, 1999
"Convergence: ... movement directed toward or terminating in the same point." So says the Oxford English Dictionary. And given the multiple uses to which the word is being put in the financial and business press these days, it is good to have a precise definition in mind.
In the debate over whether Britain should scuttle its pound in favour of the euro, convergence is a key criterion. If British interest rates and other economic indicia "converge" on those in Euroland, Britain can safely join, say euroenthusiasts. But they aren't converging and they won't, say the eurosceptics, so membership is not in the cards.
"Convergence" is all the rage in the media industries, too. In this context it refers to the coming together of the telephone, television, personal computer and other gadgets into one seamless medium providing communications, entertainment and just about everything else that consumers will want to control with the touch of a button.
Less noticed is another sort of convergence, this in the retail business. For months now a debate has been raging concerning the ability of traditional "bricks and mortar" retailers to survive the competition coming from so-called e-tailers. After all, companies such as Amazon.com have proven that they can sell masses of goods to an increasing number of consumers. And look, mom, no stores.
No profits either, reply the e-doubters. Anyone can sell millions of dollars worth of merchandise at a loss. No special talent there. And no possibility of long-run survival either. E-tailing may be making the running on Wall Street and in The City, but this, too, shall pass when investors begin to make more rational comparisons between loss-making e-tailers and increasingly profitable retailers such as Wal-Mart.
What those who are posing these either/or scenarios are ignoring is convergence. E-tailers and retailers may not end up at precisely "the same point", as the OED definition suggests, but there certainly is a movement towards that same point.
Traditional retailers, some of them after an overly long wait, are learning to use the internet to supplement sales from their stores. The Economist estimates that brick-and-mortar and catalogue companies that now sell on-line account for 62% of all e-commerce. It took Barnes & Noble a while to learn to use the new distribution channel provided by the Internet to sell books, but learn it has, and Amazon.com is feeling the heat, witness its massive price cuts.
More important, just as Barnes & Noble has converged on e-tailers by jumping into e-tailing, the e-tailers have converged on the likes of Barnes & Noble by building bricks-and-mortar warehouses to increase the speed and efficiency of their delivery systems. This, of course, it was their original intention to avoid. But a funny thing happened on the way to a low-cost e-tailing future: customers want their goods, soon, in good shape, and subject to no-questions-asked return. And they want to get to their e-store easily, which more often than not means going through a portal, such as Yahoo and AOL.
So what have we? Why, an e-tailer that looks increasingly like a retailer. The customer gets to the e-tailer via a portal, which collects a commission for steering the customer to the e-tailer--much as a salesman in a bricks-and-mortar store collects a commission. The e-tailer then fills the customer's order either from his own bricks-and-mortar warehouse, or by using a distributor such as Ingram Micro, the largest distributor of computers and software in the world. Just like a retailer.
So the vaunted cost savings from e-tailing get harder to come by. True, an Amazon.com doesn't have to open new stores in order to increase its volume. But it has to take on more bodies, or pay someone else to do the hiring, in order to pull more books off of warehouse shelves. Just like any old-fashioned chain of bookstores.
And it is more rather than less likely that the convergence of retailing and e-tailing will accelerate. The Wall Street Journal reports that Consumer International, a world-wide federation of 245 consumer organizations, ran a test of the customer-friendliness of e-tailing. It ordered 151 items from Internet sites in 17 countries, and found that one in ten of the items it ordered never arrived.
Other surveys confirm that e-tailers have concentrated on the upfront end of the business--web sites and building volume--to the neglect of customer service. Many e-tailers, for example, lack an efficient system for handling customer returns. Or complaints. So e-tailers are now raiding the management suites of traditional retailers to lure people who know that you can abuse a customer once, and maybe twice, but rarely a third time.
Thanks to the better service that e-tailers are starting to offer, products that were once considered the exclusive preserve of traditional stores are starting to make a dent in the world of e-commerce. Furniture, which analysts always thought had to be sat in and experienced before it could be sold, is now being ordered on the Internet. So, too, are foodstuffs, with some analysts guessing that sales by online grocers will come close to equaling those of online booksellers in a few years.
Meanwhile, retailers have learned that they can slap a web site on their ongoing advertisements, at no added cost, and thereby add to their existing sales and distribution channels. You can go to a Macy's store; you can place an order by telephone after seeing an ad; and you can dial up the store's web site.
In short, we have convergence. E-tailers are adding distribution facilities and customer services, raising their costs and reducing their margins; retailers are adding Internet access, giving them another distribution channel at low marginal cost.
Meanwhile, the customer benefits from the increased rivalry between e-tailers and retailers. More options, more bargaining power, lower prices. Perhaps some day even in Britain, the home of the world's most supine consumers and, therefore, of some of the world's highest prices.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.