Why old retail model won’t work on the Net

So long as e-tailers fail to find a profitable and reliable way of fulfilling customers’ orders, they are destined to follow in Boo.com’s footsteps, says Alan Mitchell

The job of any consumer-facing Internet player is to lead a value revolution on consumers’ behalf: to save them time and money, or to provide them with richer, more relevant information, entertainment and experiences.

Boo.com spent a million pounds a week doing neither. Its over-fancy website was, literally, a waste of time. It didn’t offer any price advantage – until it got desperate. A picture of a revolving shoe doesn’t compare with the experience of trying it on. Boo.com was so focused on building a global brand that it forgot the customer.

Some of Boo.com’s mistakes were silly. But it won’t be the only e-tailer to be booed off stage by consumers. In fact, the real question is, will any e-tailers not be? Their dilemma is important. It sums up the real challenge of the Internet.

The Net is all about information processing efficiencies. But we humans are physical sensuous beings with physical sensuous needs. Aside from a small number of purely digitisable products, such as music, most of the things we value and most of the things we do in life involve both matter and information processing. Shopping is one of them.

Many core shopping activities are highly information intensive: searching, comparing, choosing and transacting. But many others – such as storing, displaying, transporting, packing and unpacking – are determinedly physical. Its very material. And retailing as we know it is built around the requirements of efficient material-handling.

Traditional retailers work to a buy-then-sell mode. Having purchased some stock, commercial success depends on how quickly and efficiently they can move it through their logistics systems to the check-out – and realise cash. Retailers’ primary use of information is to improve their stock handling: to speed its movement through the supply chain, to reduce the amount of stock being held in warehouses, to make sure the right stock gets to the right outlets at the right time. In other words, their entire business is built around matter-handling priorities.

The whole point of going online, however, is to exploit the information-processing potential of the Internet. This drives the e-tailer in some very different directions. No physical retailer can change his store layout to suit each individual customer. But freed from these physical constraints, e-tailers can use transaction histories to customise their websites to create millions of different “my stores” for different customers: stores that reflect their shopping habits and priorities.

Also, once you are free from physical shelf-space constraints, a natural thing to do is offer shoppers an infinite range (assuming you have a search mechanism that finds what they want, quickly). Ideally, you would do both. Amazon, for example, is good at offering an “infinite” range while welcoming customers individually, by name, and pointing them first of all to personalised purchasing recommendations.

Information-driven customer benefits such as these point to a different mode of operation. Rather than having pre-purchased inventory, why not flip over to a sell-then-buy mode, where you don’t order any stock from any supplier until you know a customer has ordered it? This has massive potential benefits for managing risk, stock, and cashflow. Couple these benefits with the huge savings on the money you don’t have to spend on stores, rents, rates and shop assistants and you should be well placed to leading value revolution on behalf of your customers.

Except for one thing. Having put information-processing at the heart of your business, you then need to build physical fulfilment processes around it. Instead of efficiently passing aggregated bundles of stock from one centralised funnel to another centralised funnel – as traditional retailers do – your fulfilment system has to cope with sourcing large numbers of disaggregated items of stock from a wider range of disparate suppliers, and sending them, not to a couple of hundred stores, but to a million and one different customer homes. This is a far more complex, expensive operation with rich opportunities for errors.

Result: what you gain on the information-processing swings you lose on the matter-processing roundabouts. The potential benefits of the ideal information-driven e-tail model are cancelled out by extra back-office costs.

And half-way houses – reducing the range you offer online, keeping to a buy-then-sell mode, or setting up your own centralised warehouses – don’t work out any better.

Customers, of course, couldn’t really care about any of this. But they care about value for time and value for money. And because of these conflicts in operating logic, it’s still not clear whether any e-tailer handling physical goods can profitably outperform the traditional retail model. Even the best among them, such as Amazon, are still losing money.

And there’s another thing: buying power. There are some interesting new business models out there – such as Mercata in the US and Letsbuyit in the UK – which aggregate consumers into buying clubs to negotiate better prices with suppliers. Nice idea, but because they are start-ups, they don’t have critical mass. Compared with good old-fashioned high-street retailers, their buying power is minuscule. Traditional players win again.

Will it always be this way? Perhaps not. It takes time to gain critical mass. And future technological developments may add value to e-tailing – as the Internet spreads from its current base in the PC to become an integral part of people’s daily lives, and as broadband comes on stream (Boo.com might have fared much better if it had). But there’s another way of looking at it. As long as motor cars were seen as horseless carriages they remained stuck on the fringes of personal transport.

The breakthrough only came when the Model T Ford rode in on the back of a revolutionary business model based on mass production. At the moment, we still tend to see e-tailing as shopless retailing. Most e-tailers are trying to graft tomorrows technologies onto yesterday’s business models. The graft isn’t taking. When it comes to consumer-facing e-commerce, the Model T Ford has yet to be invented.

Alan Mitchell

asmitchell@aol.com

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