Electronic business (e-business) is a general concept covering any form of business transaction or information exchange executed using information and communication technologies (Whiteley, 2000). E-business may take place between firms (B2B), between firms and their customers (B2C), or between firms and the government (B2G). According to Whiteley (2000), e-business operations can be grouped into three categories.
– Electronic markets: In this category information and communications technology are utilized to present a variety of offerings available in a market segment so that the purchaser are able to compare prices. A common example of this is the airline booking system.
– Electronic Data Interchange (EDI): EDI provides a standardized system for coding trade transactions so that they can be communicated directly from one computer system to another without the need for printed invoice. Firms that make a large number of regular transactions use EDI. Supermarket chains extensively use EDI to communicate with suppliers.
– Internet business: Information and communication technologies can also be used to advertise and make one-off sales of goods and services. This use of e-business is characterized by the commercial use of the Internet. The Internet can for example be used to purchase a computer or set up a subscription to a magazine that is then delivered to your door. It should however be noted that the Internet is not the only technology used for this type of service, and this is not the only use of the Internet in e-business.
Internet penetration can be measured by how many private households that has access to the Internet. The figure below illustrates that Internet penetration in EU households increased from about 18% in March 2000, to 36% in June 2001, and in June 2002 it stands at 40% (Eurobarometer). This means the rapid take-up during 2000 and early 2001 may have reached an area of stability. The slowdown in Internet take-up may be explained by the fact that Internet connections are linked to the availability of Personal Computers, which sets an upper ceiling to penetration. Internet through TV sets and mobile devices remains marginal but may grow rapidly in future. The EU countries with the highest penetration levels have reached internet penetration rates of around 60% of households. Further growth in these countries will be limited as the markets are reaching their saturation point.
We have now established the Internet usage in the EU. For e-business companies it is perhaps more interesting to look at how often people purchase products or services on the Internet. The table below states that the percentage of people in the EU buying products or services on the internet has not changed much during the last year. If the results are grouped into regions, the UK is the only Member State to have passed the 50% threshold of internet users (currently 55%) who have bought something on the Internet. Purchases made through the Internet involve only a minority of Internet users in the rest of the Member States, even in countries with the longest Internet experience.
For your private use do you buy products or services through the Internet?
Basis: all Internet users in 15 Member States
Effects on costs and intermediaries
Some of the gains from e-business activity as opposed to high-street retailing are lower overhead costs, and less use of intermediaries. These gains should not be exaggerated, because there are big offsetting costs. Running and servicing a website to ensure that it is reliable is expensive. Logistics and distribution are so critical to the success of an e-business firm that it often has to spend heavily on them. There are also big marketing expenses. Ideally, transaction costs should be lower for an e-business compared to other types of firms. When the Internet was a new phenomenon some people thought it was a good thing because it would get rid of the intermediaries and dramatically reduce transaction costs.
This would bring savings to both manufacturers and consumers at the expense of those in-between. What is happening is that the Internet is changing the role and function of intermediaries, not eliminating them. Evans & Wurster (1999) argues that the new role of the intermediaries will be as “navigators” that will represent customers seeking to get the best out of the web. Intermediaries will not disappear, because going directly to the supplier does not necessarily equal better service, price, and priority. Anderson & Anderson (2002) claims that the assumption that the Internet would allow suppliers to reach costumers by a more direct route was based on an incomplete understanding of distribution.
Effects on consumers and value generation
E-business generates value to the customer in a number of ways. The customer can do the shopping from their home or work, which is convenient and time saving. An Internet site is available 24 hours a day from anywhere in the world, this adds convenience to the shopper. Since the Internet is a worldwide phenomenon, the potential number of shops available is consequently huge. Greater choice is one of the biggest plus points for e-businesses compared with the physical world. Price comparisons have become far easier, so now it is just a matter of clicking, not walking. The search costs involved with shopping are as a result reduced. “This suggests that the Internet could be a strong price deflation mechanism because it is harder to raise your prices when your customers instantly compare them with everyone else’s” (Economist, 24.02.2002).
Consumers are often advised against giving their credit-card numbers freely over the Internet, and this remains one of the most-cited reasons for not buying products online. Security must be a top priority of e-business. Some well-publicized network security breaches of last year have raised users’ expectations that data will be protected during an electronic transaction. Fulfilling this expectation will be critical in the continued growth of e-business, particularly in B2C transactions. Below there is a figure pointing out how many online shoppers that are experiencing credit card troubles. For UK the number is 3.3 %, but the EU average is 1.4 %. We should take into consideration that more people are shopping online in the UK, and that a fault is more likely to appear when a site is experiencing heavy traffic. Nevertheless, the fact that the UK number is over twice as big as EU average should encourage firms to invest more in Internet security.
Effects of e-business on economy
In the decades to come, exploiting the full potential of developments could have profound impacts in individual sectors of the economy as well as for macroeconomic performance and economic policies. At the aggregate level, productivity and economic growth could rise, at least for some time, as a result of more efficient management of supply and distribution, lower transaction costs, low barriers to entry and improved access to information. In the business-to-business context, higher efficiency can be gained from B2B e-commerce and B2B exchanges via lower procurement cost and better supply chain management. Many companies claim that putting their supply chains online has led, or will lead, to major cost savings. According to Goldman Sachs (2000) study these gains range from between 2 and 40 percent of total input cost depending on the industry which may subsequently reduce the price in the overall economy.
Since B2B are responsible for over 90% of online transactions, its contribution to the economy cannot be underestimated. In 1999, B2B in the UK generated around ï¿½2.8 billion. In comparison in 2002 the revenue is expected to be around ten times that, at ï¿½28 billion, 4% of GDP.
The development of e-commerce is likely to have both direct and indirect impacts on labour markets as well as composition of employment. The rapid growth in e-business, in particular e-commerce, should boost the demands for jobs in e-business. Although the direct employment consequences of e-commerce may not be large it is likely to drive widespread changes in labour market shifting the composition of workers required to produce and deliver a service.
For example, a retail sale via the Internet probably does not require the same density of sales staff, but may actually more people with IT skills to develop program and software. Certain jobs, especially those involved transfer of information from one party to another such as travel agent, insurance and stockbrokers may be come less common. Therefore it is imperative that workers update their skills in order to survive in this environment. In addition, although the current economic climate has meant that job opportunities are limited, there is still a shortage of IT professionals in certain areas of the sector, and this situation is likely to continue in the foreseeable future.
Effects of e-business on retail sector
In the retail sector, e-business has had great impact on the value chain. It has made a great difference in terms of shelf life of products and stock rotation time. It also highlighted the relevance of inter-business exchanges. In fact, retailers, beside their relationship with suppliers and consumers, have significant impact on inter company exchanges through CEDI (centre of distribution). In essence, retail companies will want to rationalize and reduce costs of supply and management of the supply chain, starting with purchasing cost. They will also want to differentiate their own offers from the competitors, exploiting customer relation management techniques as to communication, sales and customers’ loyalty (e-business Watch 2000).
E-business has also made a positive impact on procurement cost. B2B purchase and sale of supplies and services over the Internet, if carefully planned and implemented, could provide advantage for the participants. Other types of advantages also exist, not all of which are quantifiable. There include improvement of the relationship to suppliers and internal business process. In a sense, online procurement impacts the standardization of processes and operations.
E-business is also expected to influence sales in the sector. However, companies have always been able to experience with customer relationships, brand reliability and physical channels logistical supports, which are relevant strengths, compared to online retailers. As a consequence, e-commerce is unlikely to develop significantly as an independent channel, but more probably as an important opportunity of communication and improvement of interaction, and therefore of knowledge of the customers and their expectations.
Impact on competition
The most obvious advantage of doing business using the Internet is that it offers the ability to reduce barriers to entry and make markets more contestable in other parts of the economy. The open and interoperable standards of the Internet, could limit opportunities to dominate markets by expanding the size of the market. By exposing firms to global competition, implementation of product market reforms may take place. The consumer can also benefit from more powerful price search and comparison tools, which reduce search costs and increases the flow of information. The Internet might thus effectively shift power from producers to consumers and make it harder for firms to maintain higher prices.
The Internet has also meant that it is easier for businesses to achieve economies of scale and scope. A website can be used to cover the globe, once it is set up, it is eminently scalable. Similarly, it is far easier for a website that is successful at selling one product to branch to others. Therefore the web allows customer aggregation and auctions to be done in ways that are impossible in the physical world. All these things imply that businesses with the most resources could force out of business its competitors. In addition, high marketing cost to develop visibility and a brand name may deter start-up companies. Overall, these factors lead to a greater concentration in certain industries.
Current Market Conditions
The market for internet shopping in the UK for groceries is currently very small. However, compared to the EU market, it is very large, the average EU online retailing (e-tailing) market was estimated at 0.2% of total retail market. The UK figure was 0.4% of total market in the year 2000 (BCG). It is the second highest market after Sweden in the EU for retail products online and the UK market has the world’s largest e-tailer, ‘the company’ (Tesco). At the moment ‘the company’ has annualized turnover of some ï¿½125m, by far the largest, Peapod, the largest US company has only around ï¿½43m. However, it should be noted that in the US there are literally hundreds of e-tailers, in the UK there are only a few. That said the UK market is still in its infancy.
Internet users and growth potential
As mentioned previously, currently around 55% of UK internet users have bought goods online, and of those, most are “occasionally” or “rarely” buyers, so the aim will be to target these individuals to encourage them to become frequent buyers online. The small percentage of buyers who purchase online frequently can also be targeted so that ‘the company’ can gain more online consumers. The prize can be potentially huge, the “share of stomach”1, as some call it. This is the amount of income per household that is spent on groceries and it is huge. The Economist has estimated that in the last financial year, some ï¿½105b was spent in the total retail market, amounting to some 15% of GDP.
There is also good news for the e-tailing sector in Europe as a whole; in 1999 the online revenue of retailers grew by 200%, growing faster than the 145% growth enjoyed by their US counterparts. This trend is likely to be sustained over the medium to long-term as more and more of the population are getting internet access nowadays.
Credit Card Penetration
Although the credit card penetration is very low for Europe as a whole. In the UK there is a different story, there are some 59 million cards owned by consumers according to a new survey by the BBC. The credit card debt has increased by 16% in the last year to ï¿½43.7b at the end of July of this year, this is from around 164m transactions and the average card holder owes around ï¿½1400. So clearly, consumers are not afraid to spend money that they do not have at the moment and simply put it onto their credit cards. This provides ‘the company’ with an opportunity to target credit card holders with their e-tailing business.
In the current economic environment, the UK population are having less and less time to spend shopping for anything including groceries, so the answer may be for ‘the company’ to set up a more extensive online system to provide grocery shopping and other goods to provide for consumers. Current population trends suggests that people are working longer and longer hours, so by providing a good level of service to consumers should be a priority for ‘the company’.
However, there are some problems faced by e-tailers, consumer confidence. When consumers buy groceries such as fresh fruit, they like to feel the fruit and examine the product before they put it into their shopping basket or trolley. Buying a melon is particularly problematic if the consumer cannot feel the melon online, so will consumers be willing to assign the task of picking a melon to a total stranger?
More research into this would be necessary. Another problem is that fresh fruits are easily damaged in transit and are also perishable. ‘The company’ has foreseen this problem such that they will refund the product if it is delivered in unsatisfactory condition, will this policy be costly to implement if the growth in online grocery purchasing were to increase dramatically? Again further research into this area should be undertaken, such as a Cost-Benefit Analysis.
In conclusion, the market for online retailing is expected to grow strongly in the medium to long term as more and more people are becoming computer literate. However, the low confidence in security of making online payments by consumers seems to be the main potential problem.
Key facts of the company
“Think small” in distribution
Tescoï¿½s e-business distribution strategy differs from its market rivals. The company supplies the shoppers with groceries off the shelves of its existing stores. Tesco decided not to invest in separate warehouses like Sainsbury’s and Asda (owned by Wal-Mart) in Britain. Both companies use depot-based systems to distribute the online ordered groceries. Tesco managers claimed, the demand do not require the construction of warehouses (until 5000 orders per week it is impossible to reach economies of scale). Behind this position stands Tescoï¿½s e-business conviction, that online grocery shopping represented a niche trend rather than a mass market. The strategy seems to be successful. A number of companies in the world are now moving towards this business model. Especially online grocers in the USA reject the warehouse approach after the failure of e-grocer Webvan in 2001.
“Think big” in the range of products
Tesco offered apart from grocery products a broad range of non-grocery products like books, videos, CDs, clothing, electrical products, wine and even banking services on the Net. The company diversified into nonfood products and online services in order to raise the low margins from selling food. Nevertheless, not all products and services contribute to profit.
Tesco follows with the expansion strategy exactly the success model of the world leading e-tailor Amazon. The main difference: Amazon developed a book business and then diversified into a whole load of other services, including groceries. Tesco is doing the exact opposite.
Tescoï¿½s e-business success
Tesco is today the worlds leading e-grocer and the number one in UK. Nick Jones from the Internet consultancy Juniper Communications describes Tescoï¿½s strength with the following words: “When dot-coms of any type in the U.K. ask me whom they should watch, I tell them they should be worried if Tesco decides to move into their space.” So, what is the secret of Tescoï¿½s e-business success? Some reasons are:
* Tesco is the number 1 grocery chain in the UK and the company is high profitable in the traditional retail business (one of the key problems in Europe’s grocery business!). Finance restrictions do not exist.
* Tesco has a very strong brand. For the e-business activities the company must not build a brand or a customer base as many new players in the market.
* Tesco.com combines the online grocery business with selling of books, CDs, videos, clothing or electrical products (economies of scope). Tesco aims to reap in the future nearly 50 percent of its online sales from products other than groceries.
* Tesco use the existing distribution structure to fulfill Internet orders (more to the so called store picking approach above). There were no cost extensive investments into new logistic (responsible for the cash burning of some market infants). Tesco can also use its own stores to advertise its webpage for free.
* Tesco introduced in the mid-1990s electronic shopping. It followed its reputation, to be the most innovative company in the UK retail market (early introduction of a loyalty scheme or the combination of financial services with groceries). Therefore the company is able to exploit the advantages of being the first mover.
* Tesco made small steps in the internet business. Just a few supermarkets offered the e-shopping-service in the beginning. Grocery home-shopping started furthermore without ambitious home delivery.
==> STRENGTH IN THE CONVENTIONAL BUSINESS
==> STRONG BRAND
==> BROAD ONLINE PRODUCT RANGE
==> USE OF THE EXISTING STRUCTURE FOR E-BUSINESS
==> FIRST MOVER ADVANTAGE
==> GRADUAL APPROACH
Market of e-grocers
Experts agree that the complexities of designing, implementing and maintaining a home shopping infrastructure have deterred many traditional grocers to date from investing in this business opportunity2. As competitive pressures mount from start-ups, traditional food retailers understand they must “get into the game” or lose market share. Therefore, the market will become more competitive and all retailers are supposed to spread out this alternative service for their customers via online to compete with rivals in the business.
Customers & Customer Relationships
Technology enhancements will make a personal, accurate and reliable online shopping experience, and build trust between the customer and food retailer, increase repeat orders and boost sales. Not only personalisation of the shopping experience, but also speed and convenience will play major roles in broad scale adoption of online grocery shopping therefore, entering shopping orders must fit easily and seamlessly into consumers’ lifestyles.
Due to the highly competitive market of e-grocery, will drive down prices for consumers. To gain competitive advantages and compete with other rivals, the consumers can benefit from low price products, effective and user-friendly websites, and also efficient management and services. Moreover, apart from the convenience of online shopping, a technological factor which puts new tools into the hands of shoppers will generate a more personalized service by analysing each customer’s buying habits and drawing their attention to goods or offers in which they may be interested in3.
Besides, the report finds customers happy with online shopping, with more than 90% of people asked rating the experience good or acceptable. This can confirm the idea that the internet groceries market is an important sector of retailing and indicate that the growth of market will continue increasing in the future.
There are some e-challenges for the successful company. In speaking about challenges the following points are important to mention:
Experts see in e-grocery just a migration from the supermarket to the Internet with the result that the profit margins in the stores decrease. Therefore the main question is: can the online channel attract additional business? An ABN Amro-study found that 50% of the online sales were incremental, while the other 50% was cannibalisation of current customer purchases moving online from offline4. Nevertheless, empirical results are poor and positive future scenarios not predictable.
* Limited target groups
An unlimited growth of e-grocery to assume is not realistic. There are a lot of limitations like: mainly well educated urbanities (mostly no time) use the e-business service; only PC user have the chance to order; customer need a credit card; many people having low confidence in the internet payment systems.
* High logistic costs
E-grocery and in particular home delivery require complex logistics. Companies sell a broad range of goods. Often deliveries include time critical fresh products and sometimes are the customers out and you cannot deliver. That does not make it easier to make a profit.
* Strength of the non-grocery segment
Tesco had a late market arrival in some non-grocery fields like phones or books. It must compete with better positioned companies. The main future question seems to be: Is the non-grocery part in the e-business concept profitable enough to support the weak grocery product margins? Tesco is optimistic; it holds the position that grocery is a much better relationship-building service than any other services.
Apart from these points, Tesco have the leading position in e-grocery market in the UK, and that is a good starting point. However, some researches have found that the market share of online food covered only 1-2% of the UK’s total grocery trade. Hence, we have to accept that the growth of this e-business will be limited in a small number of market shares. This is because despite its convenience, online shopping will never entirely replace the physical experience of going to a store or ordering from a catalogue. There are consumers who already know and trust the bricks-and-mortar Tesco more than they would an unproven internet pure play. Moreover, grocery shopping is a community act providing the socialising needs for people. Although online shopping cannot replace the traditional bricks-to-mortar shopping, this selling channel will help retailers enhance customer reach and company revenues alike.
Anderson, P. & Anderson, E., The New E-Commerce Intermediaries, MIT Sloan Management Review, Summer 2002
Boston Consulting Group, (2000), “The State of Online Retailing in the UK”
Cherian George, Online shoppers wonï¿½t give up their offline habits, Stanford Report October 23, 2002
Credit card debt reaches new heights
Lori Enos, Europeans Embracing Net Grocers, E-Commerce Times June 27, 2000
The lesson from online grocery
Roberto Ferrari, Tesco leads the way in e-retailing
Economist, 24.02.2000, Define and Sell
Evans, P &Wurster, T (1999), Blown to Bits, Harvard Business School Press.
Financial Times (Online Edition) “TESCO: Food e-tailers in search of a recipe”
Graphs from Eurobarometer: http://europa.eu.int/information_society/eeurope/ benchmarking/list/2002/internet_users_june2002/since_lisbon/index_en.htm
Online groceries give it another try
Tesco: loyalty goes online
Richard Tomlinson, “England’s Tesco thinks groceries are the perfect launch pad for a European e-tailing empire. Amazon disagrees.”
UK tops grocery retail league
Susanna Voyle, TESCO: Food e-tailers in search of a recipe. http://specials.ft.com/ln/specials/sp7f5e.htm
Whiteley, D (2000), E-commerce, McGraw Hill, London
Why Tesco Clicks (and Bricks) with U.K. Customers
Deniz Eylem Yoruk and Slavo Radosevic, International Expansion and Buyer-driven Commodity Chain: The case of TESCO, University College London Paper, November 2000
The Growth in Internet Shopping
Net move as Tesco booms
“ICT & e-business in the Telecommunications and Computer services Sector” -The European e-business Market Watch, Newsletter No.6/July 2002
“ICT & e-business Retail Sector” -The European e-business Market Watch, Newsletter No.12/October 2002
“E-commerce Survey”- Ivan D.Kulis 15 July 1999
“Results of the open consultation on the e-economy”, April 2002
Kay, J (1995), “Foundations of Corporate Success” Oxford University Press
1 Taken from Financial Times (online)
2 Online Groceries in 2003 @ www.highpoint.com
3 Why Tesco Clicks With UK Customers @ www.crmguru.com/cntent/features/1to1/2001_03_14.html
4 ABN Amro Food and Drug Retailers Sector Research, May 23, 2000