E-Tailing or Retailing?

Acknowledgements

I would like to express my gratitude to those, whose help and support has proved to be fundamental in the completion of this dissertation.

My first thanks goes to my tutor David Jones, who professionally offered support throughout the entire work and helped channelling my efforts in the right direction.

Secondly, I would like to thank Andrew Bunney for kindly dedicating some of his time for my questionnaire.

Finally, thanks to Jayne Poole, whose research method’s lectures created a sound base in the early stages and eased the writing of this dissertation.

Thanks to you all, without your co-operation, the realisation of this work could have not been possible.

E-TAILING OR RETAILING?

The distribution of books

1. ABSTRACT

Already in 1996, when the full impact of the Internet was not yet acknowledged, Landow recognises the immense consequences the Internet and electronic technology will have on the whole of the book trade in his essay “ We are already beyond the book”. In this point his essay agrees with the original generic idea of my chosen subject topic (the impact of the Internet on the book trade).

At a later point, Sevedjedal (2000) states the following:

“Technological changes seem to hold the promise that the industry of literature can be organized in new ways, leapfrogging middlemen and reducing cost at one fell swoop (…). There are now booksellers working on the Internet selling books by direct mail.”

These quotes reflect the view that the Internet has an impact on the traditional bookseller. The purpose of this research was to investigate the nature of the impact the Internet is having on the book trade. Hence, the existing markets and its potential for e-tailing and retailing and the major differences of e-tailing and retailing have been investigated. To what extend does the book as a product differ to other products and is this difference the reason why the book is one of the most popular products to be sold over the Internet ?

Further, this research contains findings about the competition between e-tailers and retailers in terms of price and customer service. Creating a questionnaire in form of a web site, opinions, attitudes and behaviours of potential readers and Internet users where explored. A final objective was to provide a framework for the successful combination of e-tail and retail businesses.

2. Introduction

Traditional retailers have reached a point where they can no longer ignore the importance of online retailing and the exponential growth of e-tailers. Former loyal customers are switching to Internet-based competitors, offering round-the clock purchasing facilities and customised products and services. Both e-tailers and retailers are trying to meet the emerging challenges by expanding their business models. It is possibly desirable to create a multi-channel business model with multiple points of contact with the customer, which includes both physical and online presence. This paper examines strengths and weaknesses of each player, especially relating to the book trade.

Within this area I have chosen to focus on the distribution of books from three different perspectives:

The Retailer- The E-tailer- The Reader

The Retailer

The task of a Retail bookseller is to provide exposure, display, marketing assistance (organised readings), archiving (having in stock for immediate delivery), selling (offering discounts) and advising (resolving which is the best book for customers on a given subject).

I am going to research those activities and different strategies further in order to investigate the role of the bookseller as a retailer. Of importance will be the current state of the book selling market in the UK. Another objective of research is the identify the relative strengths and weaknesses of retailers. This task can be achieved by consulting secondary literature.

The E-tailer

According to a survey by Mintel (1998), online book purchasing represents 6% of the total UK market and this market has a high potential of growth. Forecasts, also by Mintel, predict that by 2004 the market share of online book selling will be set at 14%.

The book market is a mature market but because of the Internet it still shows growth potential.

I am going to research what the strategies in relation to book e-tailing are, in close regard to several players within the online book trade. Secondary literature provides information about the current state of book e-tailing in the UK. Further, I am going to identify the relative strengths and weaknesses of e-tailing and what impact e-tailers have on retailing

Reader

Here, my objective is to provide evidence what elements influence the reader to purchase their books online or in the book shop. In order to research this topic, I am going to conduct a survey by distributing a questionnaire. In order to gain access to readers who purchase their books in book shops and over the Internet I have chosen to conduct an Internet survey by establishing a questionnaire in form of a web site.

3. LITERATURE REVIEW

The literature review is divided into three main parts. The first part of the literature review is concerned with aspects of the book trade and characteristics of the book, which distinguishes it from other products. Essentially, one needs to find the reason why the book is sold more than other products over the internet. The second part contains theory and findings relating to e-commerce and its characteristics, which will provide an insight into the nature of the Internet and e-tailing. The third part of the literature review provides findings and theory about the combined business models of retailing and e-tailing.

3.1. Retailing

In order to understand the potential impact of the Internet on retail, it is necessary first to understand how Internet retailing differs from conventional forms of retailing. As Brown (1986) has noted there is no generally accepted classification of different types of retailing in the literature. However, products can be categorised and the different categories result in different types of retailing.

3.1.1. The traditional retail model

At first a general traditional retail model needs to be presented:

illustration not visible in this excerpt

Figure 1: Store Retail Model (Chen and Leteney, 2000)

The retail store model is one that has been well tried and proven over a long time, possibly since the beginnings of commerce. In this model the retailer provides a service to customers by (1) displaying the products, (2) providing information and advice on the product and (3) having the item in stock, which is possibly the most important factor. Critical success factors of this type of retail marketing have been identified by Conan et al. in 1993 and these include: store location, store atmosphere, store layout and merchandise presentation, high inventory levels, wide product range and knowledgeable, helpful sales people.

3.1.2. The strengths of an established retailer

According to Enders et al. (2000) those are as follows:

- Existing brand name: As many physical retailers have been in business for years, customers are familiar with the brand name. The physical presence of a store provides the customer with a sense of security.
- Existing customer base: Physical retailers have built up customer databases containing detailed buying patterns and socio-demographic information. As a result of loyalty schemes and other promotional efforts, many retailers have also built up large databases containing customer likes and dislikes.
- Existing supplier contacts: Because of their large sales volumes, large retailers can leverage their purchasing power vis-à-vis their suppliers to bargain for low prices.
- Existing distribution system: Retailers have an existing distribution infrastructure and a large network of physical contact points with their customers. A distribution network can consist of stores, warehouses and delivery trucks, which are all integrated and have proven their reliability over the years.
- Existing store: The possibly most important advantage of physical retailers is the physical shopping experience they can offer to their customers. When they walk into a store, customers have the opportunity to touch, feel, and try out the products and receive personal face-to-face advice from sales staff.

3.1.3 Weaknesses of the physical retail model

Enders et al. (2000) further identify several drawbacks, which occur regarding retailing.

Firstly, there is high investment in physical infrastructure required to access new markets and expand geographically. Bricks and Mortar retailers need to build or lease infrastructure, generally in prime downtown areas or shopping centres where retail space is expensive.

A second disadvantage is the limited opening hours and days. Government and union regulations exist in many countries preventing retail stores from operating around the clock or at weekends. Furthermore, even it were legally possible, it would not be economically viable to open a store during little frequented late evening and night hours.

3.1.4. Book Retailing

In the following section aspects of the book retail sector will be presented, which differentiate the book industry to other industries. Those differences might result in an explanation why the book is one of the first products to be sold on the Internet.

One area where book retailing differs to other types of retailing is in terms of store and location.

According to Waterstone (1996) book shops have advantages over other retailers in terms of occupancy costs, as bookshops are still well-visited by customers even if they are not located in the high street, which reduces one of the disadvantages of book retailing as mentioned in the previous section.

Book retailer can use shop space more effectively than other retailers because it can add to the charm and appeal of offering when one has to go up or downstairs or to the smallest corner to find a desired book. The principle behind this is that store space should be kept to the minimum (Waterstone, 1996).

Baverstock (1993) puts further emphasis on the unimportance of the retail location by stating that the more creative the product, the more likely it is to be product rather than outlet driven. The book is a creative product, where the name of the creator is more significant to the buyer than where one buys it. In comparison with other industries, the back list occupies a crucial place in the book trade. The publisher “General house” claimed that each year 75-80 % of the turnover generated in a book shop is from titles published longer than a year ago. A medium- sized book shop will stock 18000 titles but have access to half a million. The book trade’s emphasis on wide availability is unusual in retailing, as is the degree of co-operation among stockists. In other retail buying sectors such as clothes or jewellery, buyers deal in specialised markets. They attempt to predict taste and buying patterns to satiate public demand with an identifiable range of products and if the customer does not like what is on offer, there is no question of ordering something else. By contrast, the bookseller’s job of maintaining adequate stock from the huge number of products available and providing scope for the possible interests of the impulse buyer, yet tying up as little capital as possible, is a difficult balancing act.

Another area, which differentiates the retailing of books to other products is the actual nature of the book as a product.

Books have different levels of standardisation, product differentiation and asset specificity, compared to other products. Because different editions of books (e.g. hard cover, paperback, audio, large print) have different ISBN numbers, books are highly standardised. The term “asset specificity” describes the degree to which a product is targeted to certain customers. If asset specificity is low, the product has a broad appeal. Books, sold through retail channels have low asset specificity.(OECD, 1998)

Li and Gery (2000) categorise books as a homogenous shopping good and those are defined as follows: Shopping goods are products consumers buy only after they gather substantial information and compare choices. Those are further divided into homogeneous goods and heterogeneous goods. Books fall into the first category which is characterised as largely similar in attributes and quality but different enough in price to warrant shopping comparisons. Other products in this category are CD’s and airline tickets. There is a degree of uncertainty or risk associated with them that maybe primarily functional, given the differences in competing brands in terms of key attributes and quality. With the capability to provide many product choices and all sorts of information about competing offerings, the Internet fits well with consumer’s purchasing behaviour for shopping goods Search engines, like Yahoo, help finding the addresses of those vendors and shopping agents help comparing prices. Those are mainly helpful when consumer buy homogenous shopping goods .

3.1.5. Competition within the retail market

According to Mintel (1999), after years of increasing sales, between 1998 and 1999 retail sales increases slowed down as new competitors such as the internet and supermarkets entered the market.

The UK book trade remains diverse (Schlesinger, 1999) According to survey by KPMG, 70 % of retail book sales come from just 25 retailers, which reflects a large degree of concentration at the peak of the retail community. Therefore, 30% of sales come from more than 3000 smaller accounts. The book industry is equally effected by mergers and acquisitions than any other industry.

The changes in ownership in recent years indicate an increased concentration. This reflects a trend seen within several industries and is due to the increased competition also resulting from a higher extend of globalisation.

Schlesinger (1999) divided the retail sector into four groups in order of turnover: The super league includes companies such as the HMV media group, where Waterstones and Dillons are incorporated, WH Smith, Blackwell and Ottakars, who all report turnover above £ 50m.

The HMV media group was formed in spring 1998 after Waterstone was de-emerged from the WH Smith group. Dillons and EMI where acquired from the EMI group. The outcome of those actions is the highest position in the market and the WH Smith group losing its market leadership (Mintel 1999). Than the majors, such as Borders and Hammicks are following with turnovers between £ 29m and £ 40m. Further, there are the medium-sized businesses like John Smith & Son with sales between £ 10m and £ 20m. At the bottom of the summit one can find the small chains like Bookland & Co and Methvens, who record sales between £ 3m and £ 7m. In recent years the number of medium sized businesses has been reduced. Those businesses have either been acquired by larger companies or they have grown organically and moved into the next category, such as Ottakars and Borders. This indicates that medium-sized businesses are the most vulnerable in the book trade. In fact, there exists a “duopoly” between WH Smith and Waterstones/ Dillons but this trend will spread more evenly if the plans for further organic growth by Borders and Ottakars are going to materialise (Schlesinger, 1999).

3.1.5.1. Price versus Service

“In the book world, price can be as powerful a weapon as it is in any other business.”(Evans, 1990)

“Books are still different, but they are also different from what they were. Today the question is whether we are using price maintenance optimally in a market-place where the most serious competition is not between publisher or between bookseller and bookseller, but between books and other commodities.” (Graham, 1990)

One of the major challenges, which the book trade had to face in the 90’s, was the collapse of the Net Book Agreement (NBA).

The time after the collapse of the NBA has been described as a period of innovation and change. Competition intensified across the sector, which put pressure on companies to lower their prices (Mintel 1999). Innovation relating to customer service and offerings occurs as companies can only compete against each other to a certain extend over the price.

Waterstone (1996) claims, that a pro-active marketing approach with late opening hours, gift wrapping, Sunday trading, subsidiary services, delivery or book search for out-of print editions is essential. Branch promotions should have an author led character including signings, readings and debates. With a local marketing activity approach, such as bonding with local schools and local associations, customer loyalty and local franchises can be established.

Mintel (1999) has also made this prediction; one key challenge for the industry is the more demanding customer. Book Stores need to offer higher levels of service and they constantly need to reinvent themselves. In particular, the move from the bookstore to an entertainment center is described in the Mintel (1999) survey.

This trend of the book market to move to large superstore concepts including espresso bars and an extended range of products such as music and videos seems to have helped Borders to grow organically in the past.

3.2. E-TAILING

As already mentioned the main objective of this research is to discover the nature of the impact of the Internet on the traditional bookseller. Therefore issues relating to the Internet thus e-commerce will be discussed in the following chapters.

3.2.1. The e-tail market

The year 1999 was one of explosive growth for e-commerce in Europe. Revenue from European e-commerce sales grew 200 percent, compared to 145 per cent for the US (IDC, 2000). The Boston Consulting group (2000) predicted that the European online market would be worth over 45 billion Euro’s by 2002. Jupiter Communications (1999) expects the upward growth trend for the number of Europeans buying online to continue exponentially, from 13.5 % of the online population at present to 43% by the year 2003. Historically, European Internet penetration and therefore e-commerce has lagged behind that of the US for many reasons, including the high connection costs resulting from the slow deregulation of the European telecommunications industry, restrictive European trade and legal regulations, and language and cultural differences across Europe.

3.2.2. The e-tail model

A definition of e-commerce is as follows:

“Commerce is the process flow associated with a commercial relationship or transaction, including activities such as purchasing, marketing, sales and customer support. E-commerce is the same process, enabled by the use of communications and information technology. (Nissen 1997).

In some cases an Internet retailer may combine these technologies with elements of traditional stores. In other cases the new technologies are used to replace elements of stores.(Chen, Leteney, 2000)

A graphic illustration of the e-tail process can be seen in the following:

illustration not visible in this excerpt

(Fig. 2 Internet Retail Model Source: Chen and Leteney, 2000)

As can be seen in the graphic, a large element of the commerce process is information exchange. The Internet adds value to the process of commerce in the following way:

⇒ interactivity/ individualism
⇒ immediacy of access
⇒ fall in transaction costs
⇒ multimedia form of offers

(Alba et al.1997

3.2.3. The strengths of e-tailer start-ups

According to Enders et al. (2000) those are the following:

- Wide reach: Using the Internet, online retailers create a platform for advertising and selling their merchandise potentially to the whole Internet community, which provides them with a much wider reach than physical retailers.
- Exhaustive product selection: Because of the digital nature of the business, which provides virtually unlimited storing capacity, it is possible to offer a large selection of products. To facilitate the selection process, online stores typically offer a number of search options and possibilities for customised web-sites.
- Few infrastructure requirements: Offering a wide range of products does not require nearly as much physical infrastructure as is the case with traditional retailers, since information is stored electronically.
- Unlimited opening hours: Online stores are also not restricted by limited opening hours, instead, customers can access retailing web sites in their own time
- High degree of scalability: In order to respond to increasing client numbers and expand into new markets, an e-tailer only needs to add computer servers to the computer infrastructure.

(Chen, Leteney, 2000) add that another benefit offered by the Internet is ease of communication. However, this benefit can have a reverse outcome. As with all retail businesses, customer service is a key success factor and one of the difficulties with Internet Retail is that the experience can appear remote and impersonal.

3.2.3.1. The dis-intermediation of intermediaries

A common believe of e-commerce is that it will cut out certain elements of the value chain. This is illustrated in the following graph:

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(Fig. 3 The dis-intermediation of intermediaries Source: EEC Report 2000)

Dis-intermediation means that the wholesale and the retail intermediary of the value chain will be replaced by an electronic trade system. This concept has been praised as the major advantage of e-tailing over retailing as it presumably reduces costs and logistical efforts. For example there is one electronic trade system rather than many stores across a wide geographic area.

However, according to Rayport and Sviokla (1995) there will occur a proliferation of channels and new opportunities for different kinds of organisations to add digital value. In other words, it results in “re-intermediation” of channels with new players and new configurations, thus a new network of actors (Sarker et al., 1996).

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