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 Mondayby The Boston ConsultingGroup.
However, the report also said that the greatest e-business opportunity belongs to traditional retailers that canestablish relationships with their customers across a number of trade channels, blurring thedistinction between online and offline stores and fundamentally altering the way people shop.
“We think the big success stories will be about the incumbent multichannelretailer that is able to leverage its existing assets and infrastructure inthe online space,” BCG manager Nina Abdelmessih told the E-Commerce Times.”The winning pure plays will be those who cross the threshold with enoughscale to have a sustainable business model.”
According to the report, traditional or incumbent retailers have been too cautious to this point, and must act now to capture the increasing shareleft 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 areuniquely positioned to gain share, increase loyalty, and secure new sourcesof profitability by giving consumers superior convenience in the form ofcoordinated online and offline offerings.”
In order to make the most of these online opportunities, the incumbents willhave to leverage their brands and customer information across integratedoffline and online channels, manage channel conflict, exploit partnershipopportunities, and use their established distribution infrastructures totheir advantage, the report said.
Despite the predicted market dominance of the brick-and-clicks, Abdelmessihsaid that certain pure plays and niche players will be able to carve outsuccessful revenue sources for themselves online.
The key to pure-play success is achieving the scale needed to reduce totalsystems costs and build competitive advantages in key areas such as brandstrength, procurement, fulfillment, customer acquisition and service, thereport said.
“The focus has been on acquiring customers at any costs, but to make theeconomics work longer term, you need scale,” Abdelmessih said. “Once you build scale, it willlower customer acquisition and retention costs, and increase revenue percustomer.”
So far, Amazon is the only pure play to have demonstrated such scale, buteven 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 smalloffline retailers, being able to achieve success on a reduced scale. The keyfor these companies is customer loyalty.
“There’s probably a format of pure play that serves a select consumer basefor a narrow product range that can make the economics work by having ahighly loyal consumer base,” Abdelmessih said. “Further cost containment can be achieved by outsourcing high-cost functions such as distribution, customer service andWeb hosting.”
According to the report, more than 20 percent of online consumers expect tomake most of their books, music and video, and computerhardware purchases online over the next five years. But some 60 percent of thosesurveyed — more than in any other category — said they may purchase travelproducts online during 2001.
However, despite the positive outlook for such discretionary items, staples such as clothing and groceries will make the largestcontribution to overall online retail growth, the report said.
These twocategories (along with one discretionary category, leisure travel) areprojected to increase by around US$30 billion each over the next fiveyears — almost double the growth of the next-largest category, health andbeauty.
Interestingly, this growth will not be driven by penetration, whichAbdelmessih said will remain relatively low, but by the sheer size of thecategories themselves.
“The grocery category is the largest market in terms of consumerexpenditure, but penetration online is only less than a percent,” Abdelmessih said. “So a smallincrement in penetration will yield significant online revenue.”