We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Thoughts on the online retail business, and why Britain leads the world.

This week’s Economist has an article on online retailing in the UK. The basic gist of the story is simply that in the last six months it has really taken off. Online sales in November-December were 60 percent greater than in the lead in to Christmas 2002. Forrester Research forecasts that 5.7% of the British retail market will be online sales in 2004, compared to 5.6% in the US. (Actually, the difference is greater than this, as the US number includes travel and auctions, and the British number does not).

This is entirely consistent with my own impressions of the situation, and indeed my own behaviour in the last six months. I have been buying certain things (most prominently books) online for quite a few years now, but the number and more importantly the diversity of the things I have been buying has exploded in the last twelve months. Okay, my personal tastes in shopping perhaps aren’t that of the average consumer – I buy too many electronic products, no doubt – but I have found that the number of websites I can find selling almost any of the things I want to buy has increased enormously.

Whereas in the insane dot com boom years there were lots of large capitalised businesses without that good an idea of their business model and with few customers, a second wave of internet retailers seem to have come into being that are small, focused, and lean. For electronics there suddenly seem to be lots of little garage based stores, selling a good selection of one very specialist type of product. The credit card handling is outsourced to a company that specialises in handling credit card transactions for small internet retailers, off the shelf software is used to run the website and keep track of inventory, suppliers have to be found, orders have to be packed and presumably the post office has to be asked to send a truck round once a day to collect the filled orders. No expensive retail premises have to be rented, and there are no losses to shoplifting. The honesty of such retailers is generally not an issue. The level of consumer protection given to credit card holders is such that the retailer will be dropped instantly by the company to which it outsources its credit card processing if it fails to deliver what it promises. And in any event other web sites exist that provide feedback on online retailers.

What does all this mean? Well, when I wanted a new memory card for my digital camera, I discovered that I could buy it for less than £30 from a small internet retailer, when from a typical high street electronics chain (you know the one) it would have cost £69.99. When the difference in price is that great, there is no way I am going to buy it on the high street. High street stores will often offer competitive prices for very popular products, particularly when they hold a sale, but for anything more obscure the prices are high and the selection of goods is generally poor. Plus they try to make up the low margins on such products by selling very high margin and overpriced cables and other accessories along with their cheaper products. Internet retailers don’t seem to be able to get away with this trick. The level of competition is too high and there is too much transparency.

Now that is small internet retailers: more competition, more transparent markets, and lower prices. What of bigger companies? These seem to be doing well too. Let’s look first at the largest: Amazon. The nature of this company has changed considerably in the last couple of years as well. Most simply, Amazon have increased the range of goods they sell, although they are more competitive in some sectors than others. (In electronics their prices are often excellent, whereas their DVD prices seem less competitive). Amazon retain their traditional advantage of selling virtually every book, CD, and DVD in print, and they have expanded even further by stocking a larger range of imported (usually American) editions of books and DVDs as well. However, there has been an even more important change than this.

A few years ago, Amazon started listing used books on their website. Initially, this didn’t work very well compared to specialists such as Abebooks, but ultimately they ended up with a situation where used booksellers could list their books on Amazon next to the same new book on Amazon. But why stop with used books? This has since evolved to a situation where new books from other sellers are advertised on the same page as the same book directly from Amazon. And of course it has also evolved into far more fields than simply books. There are now lots of products being offered by other sellers on Amazon. This has dramatically improved availability. In a lot of instances when a product is out of print or out of stock, there will still be a seller or two advertising on Amazon who has one or two available, even if Amazon themselves do not. (Before Christmas, i was able to find an otherwise unavailable toy for the spoiled son of a friend of mine this way). American retailers are advertising lots of products on Amazon UK that are not otherwise available in the UK (and are undercutting Amazon US’s shipping charges in the process).

What does Amazon get out of this? Well, for one thing, it is good for Amazon’s brand. Lots more goods appear to be available from Amazon, and fewer goods appear to be out of stock for people who want to buy them. (I suspect that many buyers are only barely aware that they are not buying directly from Amazon). This makes Amazon more likely to be the first stop for people buying all manner of goods.

Secondly, of course, it means that Amazon is at least partly evolving from being a retailer into being a broker, bringing together buyers and sellers. Amazon provides the credit card handling facilities, and provides a guarantee of sorts to the buyer. (They state to customers that the quality of service received from third party sellers should be the same as received directly from Amazon. I would assume that sellers that don’t provide this are not permitted to sell using Amazon for very long). In return they charge a commission. This is probably more profitable than providing goods directly, as they have nothing further to do once they have provided this broking service. Third party sales require nothing in the way of logistics. One of the most profitable internet companies has long been internet auction company eBay, which is essentially providing a broking service. In recent years, more and more of eBay’s business has become retailers selling things at fixed or quasi-fixed prices, rather than auctions directly. Amazon’s third party sales appears to have evolved into much the same thing. Many many organisations tried to steal eBay’s business by copying their business model more directly, but eBay’s first mover advantage turned out to be too large. But now, Amazon has evolved into something quite similar. Which is interesting, and I think a very good sign with respect to future profitability of the company.

But the trend is interesting. There are lots of small players. There is lots of competition between these small players. There is lots of specialisation amongst these small players. The big players are turning more into brokers, guarantors, hosting services, etc. A lot of the actual buying and selling is better down by small specialists (or individual people) than large organisations.

And all this is very good for British consumers. Almost uniquely so. Britain has high rates of computer ownership, and internet usage. Most British people have credit cards. Britain has a traditional retail sector with notoriously high prices and low levels of competition, which can be relatively easily undercut in terms of price. However, this lack of competition largely comes from real estate and planning related issues, but other obstacles to setting up a business are relatively low. Britain has a reasonably large but dense population, so the distances over which purchases have to be delivered are relatively small. Many British people (especially in London) do not have cars, and are used to having to have goods delivered already. For British people who do have cars, the cost of using them is sufficiently high that shopping around in bricks and mortar stores is expensive and, given the levels of traffic congestion, time consuming. All this means that internet retailers are relatively more attractive to British consumers than they are, say, in the USA.

Business sections of British newspapers have also been stating one interesting thing post-Christmas. Most traditional retailers did badly in the run up to Christmas. It didn’t seem to be so much that people were spending less, but that they were far more concerned with value for money than was the case in the past. The fashion industry did badly, and although what may be called the “gadget industry” did well in terms of sales, they did relatively badly in terms of margins and profits. The general press has blamed this partly on the fact that supermarkets (particularly the stunningly efficient Tesco) have been selling a much greater range of goods than in the past, which has meant that competition has increased in a whole range of areas, but the other key factor seems to clearly be that the higher efficiency of the internet retailing sector is having an impact. It may well be that the traditional inefficient British high street is going to really find itself in trouble, and much sooner than it expected.

Obviously some market segments are more vulnerable to this than others. For a lot of goods, customers want to handle merchandise and see what it looks and feels like, how big it is, and various other things about it before buying. But if the difference price is great enough, customers will go online for most things (particularly in an age of mass customisation). Occasionally somebody who is a little overenthusiastic about buying things over the internet will miscalculate (such as Gabriel Syme did with his new refrigerator, which is somewhat larger than he realised when he ordered it over the internet) but people will get better at this sort of thing. It may be that in some cases shops will evolve into showrooms specifically designed for looking and not buying, as already happens in parts of the automobile industry for instance.

But the basic trend is overwhelmingly good. It is much easier to compare goods and prices from a large number of sources. Retail markets are becoming much, much more efficient. It is happening much faster than most people realised. Especially in Britain.

21 comments to Thoughts on the online retail business, and why Britain leads the world.

  • Brock

    Your observations are spot on with regards to Amazon. I read a recent interview with Jeff Bezos and he said two things:

    1) Logistics & book selling are receding in importance, while creating a “online sales platform” which any retailer can sync with is the future.

    2) Ebay is his #1 and only forseable competitor.

    In other words, what you said 🙂

    Both companies are creating an informal network of individual actors to create “peer-to-peer” retailing (is that a new term?). This network is highly fluid and will always seek out the lowest price.

  • observa

    One fightback for the bookstore I heard recently was the development of on-site machines that would produce any book immediately from an online data bank. No costly print overruns or out of date books. A bit like the small photographic mini-lab boom.

  • Julian Morrison

    “For a lot of goods, customers want to handle merchandise and see what it looks and feels like, how big it is, and various other things about it before buying.”

    I admit to shopping the high-street to eyeball the goods, then buying my preference online.

    I expect this annoys high-street retailers.

  • Jeff

    I think this is one of the most fascinating developments in business. I read an article in Business Week magazine about business trends about two months ago and this was one of them. They profiled a guy from California who sells books through Amazon. Started out part-time and has grown very fast and it is now a fulltime job. One of his key advantages is to use a Palm that is programmed to go online to find current prices for books on Amazon. He gos to book fairs or wherever books are sold and enters the ISBN number, gets a price and decides if he can sell the book at a profit. I think he averages around 20-30% gross over what he pays. Amazon is encouraging programming developments to assist sellers in getting information about products on its site. Very interesting read.

  • Tim Haas

    Here’s the link to the piece Jeff mentioned:

    Business Week

  • Ray

    As a Yank, this all seems to tie into the whole idea of a “Wal-Mart Economy” in some way to me. Technology (internet, computer inventory tracking, warehouse stores, etc) is giving consumers more options of where to buy and it’s all moving towards one thing: lower prices for the consumer. At the cost of outsourcing jobs or shifting them to lower paying ones, high street shops closing, and much wailing from the status quo. Some of those wails should be listened to, but in the end it’s all about lower prices which is a very hard trend to stop. Telling people they should pay more money for stuff so someone else can have a high paying job just doesn’t work well.

  • bear, the (one each)

    Another Yank here. My main reason for shopping on line is: you can hardly find a local shop that will acknowledge your very presence, much less your desire to buy something. If you DO get acknowledged, the “salesman” doesn’t know a damned thing about the product.

    I MIGHT research manufacturer’s sites on line, find what I need to know, then walk into the local store with a good price, point to it, and say “I want one”. I am doing that very thing with a keyboard I am buying so I can learn music. That way: I know what I got, and the donut-chewing drone behind the counter can get back to shooting the breeze with the “regulars” who hang around the store, and I have what I want.

  • Patrick Donnelly

    All I know is that when I was in Britain this summer, the gulf between retail and online prices was enormous. It’s a little smaller in the US.

  • observa’s comment about the on-site printing kiosks may be a short term win for the local smaller stores, but I can’t see that advantage lasting very long. If binding services are included, I can see that online sellers would be able to offer a greater selection of tangible things, different quality covers and papers, different form factors, etc. that the local stores can’t match because of the physical inventory required and smaller throughput. If binding services like this aren’t available, I’d see online retailers doing them first, again nullifying the advantage. And with 2-day shipping being extremely low priced, I don’t see much of a delay from taking the time and going to the store.

  • pedro

    Let’s face it, most high streets across the country are hell on earth on saturday and sunday. The internet is surely more ‘leisurely’. No pushchairs, no grannies, no big issue sellers; a cup of tea by my side, stereo on. It can’t be beaten.

  • Tom P

    Online shopping is the way to go. Pricing is good and if I want to shop at 3am in my underwear with bed head, no problem. No fighting for parking spaces, easy to compare prices from different retailers, etc…

  • Sherri

    Greetings:
    Another Yank here. I must say that I agree with your observations about online retailing. Here’s one good example: If I wanted to buy any of your Barbour products here in New York City, I would pay nearly three times what they cost in Britain. That is why I have been ordering wax jackets, gloves, and a rather good duffle coat from British online retailers, in spite of the exchange rate. Believe it or not, I STILL come out ahead, saving hundreds of dollars by shopping with you. PLUS I get the quality I want.

  • Great design makeover. It has really consistent look and feel. Some may not like the cinema noir atmosphere. But no one can deny Samizdata has a distinctive look now.

  • Hi, I’m a foreign student in the UK and my experience corroborates your account of Amazon’s policy regarding third-party sales.

    I ordered a book from a third party vendor which was never delivered . . . and after getting nowhere with abebooks’ customer service (which essentially brokered the deal on Amazon’s platform), I shot off a strongly worded email to the folks at Amazon – who promptly got my money refunded, plus an apology from the third party seller. Relatively quick and painless seeing that emails cost nothing.

  • I forget to add:

    Quick and painless as opposed to being put on hold or the phone, or going down to a brick and mortar shop to get the shit sorted out.

    I also like the cine-noir look, btw.

  • I’ve taken to buying textbooks second-hand via half.com (which is part of eBay), and there also seem to be many people there who are using the site as a way to run a very small business, which might not necessarily have been feasible if they had to deal with taking credit card payments etc. themselves.

  • Old Grouch

    Before getting too self-congratulatory, you might want to check this out:

    ” The music industry has forced a leading internet retailer to stop importing bargain CDs from Asia to the UK in a deal that will add £2 to the cost of chart titles.

    CD Wow!, one of the few successful dotcom companies, yesterday reached an agreement with the British Phonographic Institute (BPI) to avoid months of legal battles. The move, which came days before the pair were due to meet in court, is a blow for consumers, who will no longer be able to buy the latest top 40 hit for £8.99.” — “Music industry halts cheap internet CDs” The Independent 22 January 2004

    Note especially that CD Wow! is located in Hong Kong.

  • HitNRun

    There are only two concrete advantages left for physical retailers over cyber retailers. (Yank here)

    One, instant gratification, and there’s not much the cybermerchants can do about that. If I want a book, and I don’t want to either pay 11$ for shipping (and I still won’t get it until tomorrow) or wait a week, the bookstore can’t be beat. Now if it’s a rare book, that’s a different story, (no pun intended) but for most items physical retail can give you the exact product in the exact condition you can see and touch, immediately.

    Two, kids. Children are huge spenders in our market because most of them have decent money (or access to Parents who will buy for them) almost none of them have self control. I remember when I was a teenager, surfing online retailers on this device called a “dial-up” and wishing I had a credit card. The solution would be for cybermerchants to sell physical gift-card style credit in their stores that works online, or for major Credit Card companies to start sponsoring gift cards that work online. I’ve seen small examples of this so far- a mall gift certificate I got this Christmas claims it works anywhere Visa does- but there’s a lot of room for growth here. This would tap the virtually untouched markets of prodigal kids and people who don’t use or trust credit or debit.

  • In my 18 months in Ireland, I made heavy use of Tesco’s online shopping system. This is one area where UK retailers are definitely ahead.

    Granted, the shopping experience around here is nicer. But I still miss the convenience. Was worth the 7.62 euro they charged. To me at least.

  • ed

    Interesting.

    Though I’d question why 5.7% of the UK market is somehow bigger than 5.6% of the American market.

    Really the biggest change that’s going to come to brick & mortar vs. online is the advent of the true e-book. There’s some technology that could be used to make one posted on /.
    (
    Slashdot
    and 5″ rollable display
    and the maker
    Polymer Vision
    and a WMV movie of the prototype display
    )

    This specific implementation uses Xerox’s E-Ink. The nicest aspect of this technology is that it doesn’t require power to maintain a specific image. The only time power is required, and it’s pretty minimal at that, is when the image changes. So, if implemented as an e-book reader, you could scroll to a specific page, put it down and pick it up again much later, just how much later is something I don’t know, and pick it up right where you left off. I believe the time can be measured in days at least and perhaps weeks or more. From what articles I read the E-Ink retains it’s current charge but I assume that there’s always some leakage which would degrade the image over time.

    In addition there are many other devices that are literally coming down the pike. Other implementations will use OLED (Organic Light Emitting Diode) and LEP (Light Emitting Polymer) which would all have largley the same properties of thinness, rollability and low power usage. However these other technologies aren’t capable of maintaining an image without power consumption. though they are not restricted to monochrome which E-Ink is.

    *shrug* as always there are tradeoffs and YMMV.

    Yet the implementation of these technologies will advent the age of true e-books and mobile libraries. It would simplicity itself to mount an e-book to a wi-fi or cell phone and dowload books from an online store or even a library. It would also be extremely simple to have sales kiosks available that would sell books, movies, music and other sources of information and entertainment.

    IMHO the real key to future domination of sales, B&M or online, is ubiquity. Sales will go to whomever is capable of offering saleable material in the simplest and easiest form. Additionally I believe the current model of selling books will ultimately be replaced with a rental model with a low per-day or per-week charge. Or even a model where membership, plus a monthly fee, in a book club allows for the downloading of any book in the club’s inventory.

    Consider also the integration of county, state and federal libraries in this model. Libraries could easily organize themselves as book clubs, whereby the monthly fees allow these libraries to acquire additional private funding, and enable them to participate in the rental model.

    Fact is that many people like collecting books, but few people have the space to store them. And inevitably such collections, while a treasure, are difficult to catalog and books are often misplaced. Additionally a $1 per week charge to read a book isn’t too fay beyond the pale. Considering that a good book will often cost at least, and I am being charitable here, $25 USD, the cost of renting an e-book for a few weeks is definitely a winner. For those that want to permanently add a book to their collection a one-time fee might be possible, but I think that option will only realistically be offered by book clubs.

    sigh. I tend to purge a torrent of words don’t I. sorry. :/

    Oh well. To summarize: I think y’all haven’t seen nothin’ yet. When really useful physical e-books become available it will again shakeup the entire world of B&M vs. online sales.

    ed

  • i love this sit mugu man keep ,i done land here ooooooo.