New markets needed for Internet shopping

The role of interactive retail technology is small but growing rapidly. By Luca Newbold. Luca Newbold is a Business Analyst at DataMonitor

Cutting out the middleman is a way for manufacturers and service providers to improve margins, get closer to the final consumer and have control over the sales of the products. This, however, is likely to meet strong opposition from retailers. Direct selling by manufacturers is more feasible for those who do not rely on retailers for a large proportion of their sales. Examples are companies such as Amstrad, Daewoo, and several regional breweries (microbreweries).

One of the lessons learned by companies in the past is that change never comes as fast as it is expected, and when it does occur, it is so overwhelming that few are well positioned to take advantage of it immediately. It is perhaps then surprising that in the past those manufacturers that have been the first to invest in the latest technology have usually lost out. The reason for this has been that the cost of technology, often barely out of its experimental stage, is considerable. But this may change.

Being first will allow early adopting companies to learn more about their customers, and information of this type will be of much greater significance than it was in the past. Companies that follow will pay a greater price in terms of time and cost to acquire the same information.

An important issue when considering the potential for these new technologies is whether the take up will be from users of current home shopping methods, or from a market of new users. This is particularly important as the typical home shopper at the moment is generally not an Internet user and does not own a PC. If people with access to interactive technologies are not likely to want home shopping services then it does not make sense to offer them.

In countries where the Internet and on-line services are relatively new, such as the UK, the market for on-line shopping is small, and also quite specialised. This means that the market which can be targeted through on-line services is very limited and is not a representative sample of the population. Mass retailers, such as Tesco and Argos, which have set up on-line shopping sites, have had very slow sales. This can be partially attributed to the difference between the traditional customer base of such retailers and the average user of the Internet.

Smaller, specialised retailers have had greater success due, in large part, to having a customer base familiar with computers and technology. Even in the US, shopping on the Internet is most successful with products such as computer peripherals and other computer-related goods. Netscape, the Internet access provider, has sold many Netscape items, such as T-shirts, through its shopping page.

The Internet has many different uses for retailers, and all of these are seen as increasing in importance over the next two years. Currently, the most important use for the Internet is in allowing retailers to establish an on-line presence and so help them build up experience for the future. It is likely that companies which establish a presence now, and learn the best ways of marketing themselves and their products, will be the companies which will be in the best position to take advantage when the Internet grows.

One of the greatest barriers to using the Internet for commerce is the perceived lack of transaction security. Because the Internet is an open, public network, all electronic messages sent through it are easily interceptable. So it is important that confidential information, such as credit card details, is either difficult to intercept or is transmitted in such a way that even if seized it is impossible to decipher.

The price of a home PC with multimedia capability is another limiting factor in Internet uptake, and one of the major advantages cited in favour of Internet “boxes” is that they will be cheap enough to attract people who would not consider spending a lot of money on a computer. If machines are made available for about 300, it is possible that an entirely new market will materialise. However, it is most likely that those people who are already familiar with the technology, for example through using them at work, will buy them.

The German market is the largest in Europe at the moment for Internet shopping, and this situation is forecast to continue until 2000. Germany is the largest country in Europe, and one of the most advanced with regard to computer technology. The UK and France will also be major markets and the increase in the number of users will be rapid.

The value of European Internet shopping in 1995 – less than 3m – is negligible compared with other shopping channels. This is reflected in the lack of success, so far, for retailers on the Internet. The market is forecast to rise to a value of almost 1.25bn by 2000, representing a compound annual growth rate of 236 per cent.

The total European Internet shopping market predicted in 2000 is still small compared with total mail order but bear in mind that Internet shopping is not just another method of home shopping, but an entirely new distribution channel. Users of on-line shopping are not simply traditional users of home shopping, who tend to be lower income groups in Europe, but more affluent computer users.

The use of CD-Roms in retail is currently quite limited, mainly due to the small market that can be targeted. Their use is expected to grow over the next five years, although there is a division in opinion as to how the market will develop. Some see their importance growing, albeit slowly. Others think that after growing for a couple of years, the importance of CD-Roms will diminish.

In 1995, the percentage of homes in Europe equipped with CD-Rom drives was low. The UK was the highest with a penetration rate of just over four per cent. Datamonitor forecasts that penetration will increase significantly up to 2000, with almost one quarter of UK homes having a CD-Rom drive by then. This means that the vast majority of homes equipped with PCs will also have a CD-Rom drive, because most new computers will be equipped with a CD drive as standard.

The role of interactive technology in retail in the UK is still small, but growing rapidly. The Internet will be the main way of reaching into consumers homes in the near future, although interactive television will become increasingly important. Interactive technology in stores will also be a means of retailers gaining competitive advantage, by providing consumers with the information they require.

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