Report: More Than One Path to E-tail Bliss

Pure plays that have already achieved significant scale, and niche players that have already built loyal customer bases, are likely to achieve success in the next stage of e-commerce evolution, according to a report released Monday by The Boston Consulting Group.

However, the report also said that the greatest e-business opportunity belongs to traditional retailers that can establish relationships with their customers across a number of trade channels, blurring the distinction between online and offline stores and fundamentally altering the way people shop.

"We think the big success stories will be about the incumbent multichannel retailer that is able to leverage its existing assets and infrastructure in the online space," BCG manager Nina Abdelmessih told the E-Commerce Times. "The winning pure plays will be those who cross the threshold with enough scale to have a sustainable business model."

Early Bird

According to the report, traditional or incumbent retailers have been too cautious to this point, and must act now to capture the increasing share left over from the faltering pure plays.

"The offline channel offers retailers the benefits of physical locations, functioning logistics systems, and well-known brands," the report said. "Incumbents are uniquely positioned to gain share, increase loyalty, and secure new sources of profitability by giving consumers superior convenience in the form of coordinated online and offline offerings."

In order to make the most of these online opportunities, the incumbents will have to leverage their brands and customer information across integrated offline and online channels, manage channel conflict, exploit partnership opportunities, and use their established distribution infrastructures to their advantage, the report said.

Bigger, Better

Despite the predicted market dominance of the brick-and-clicks, Abdelmessih said that certain pure plays and niche players will be able to carve out successful revenue sources for themselves online.

The key to pure-play success is achieving the scale needed to reduce total systems costs and build competitive advantages in key areas such as brand strength, procurement, fulfillment, customer acquisition and service, the report said.

"The focus has been on acquiring customers at any costs, but to make the economics work longer term, you need scale," Abdelmessih said. "Once you build scale, it will lower customer acquisition and retention costs, and increase revenue per customer."

So far, Amazon is the only pure play to have demonstrated such scale, but even Amazon's long-term success is still unproven, the report said.

Test of Loyalty

Abdelmessih also saw niche e-tailers, such as pure-play startups or small offline retailers, being able to achieve success on a reduced scale. The key for these companies is customer loyalty.

"There's probably a format of pure play that serves a select consumer base for a narrow product range that can make the economics work by having a highly loyal consumer base," Abdelmessih said. "Further cost containment can be achieved by outsourcing high-cost functions such as distribution, customer service and Web hosting."

Basic Needs

According to the report, more than 20 percent of online consumers expect to make most of their books, music and video, and computer hardware purchases online over the next five years. But some 60 percent of those surveyed -- more than in any other category -- said they may purchase travel products online during 2001.

However, despite the positive outlook for such discretionary items, staples such as clothing and groceries will make the largest contribution to overall online retail growth, the report said.

These two categories (along with one discretionary category, leisure travel) are projected to increase by around US$30 billion each over the next five years -- almost double the growth of the next-largest category, health and beauty.

Ripple Effect

Interestingly, this growth will not be driven by penetration, which Abdelmessih said will remain relatively low, but by the sheer size of the categories themselves.

"The grocery category is the largest market in terms of consumer expenditure, but penetration online is only less than a percent," Abdelmessih said. "So a small increment in penetration will yield significant online revenue."