The latest comprehensive statistics
indicated that the online retail industry had grown by 15% to reach revenues of
$38.3 billion (Datamonitor, 2011). This industry is forecasted to experience
remarkable growth rates with the revenues expected to reach the $66 billion
mark by 2015: a 72% increase over the 2010 figures (Retail Futures, 2011). The
UK online retail sector is estimated to account for about 23.5% of the European
online retail industry and this makes it one of the most vibrant industries in
the region. France and Germany follow closely with their sector revenues for
2010 being $21.5 billion and $15.7 billion respectively ()Datamonitor, 2011.
Electronics products constitute the most commonly traded products in this
industry with other products including cosmetics, groceries, general apparel
and others (Retail Futures, 2011). An overall assessment reveals that the level
of market rivalry in the industry is high when the number of competitors and
the low level of consumer switching costs are considered. However, the
forecasted growth rates as well as the presence of differentiation avenues
dampen this rivalry significantly.
The industry’s profitability is mainly
hinged on its ability to move large volumes of sales with relatively low
capital inputs (Nielson, 2008). This low capital outlays allow them to pass the
low cost benefits to the end consumers by offering very competitive prices and
this in turn attracts large volumes of shoppers who are out to make savings by
taking advantage of the best deals available in the market.
The level of competition on the other
hand is influenced by the ease with which potential entrants can set up
operations (Johnson, Scholes and Whittington, 2008). In this industry such
costs are very low. However, there is a huge potential for differentiation with
brilliant strategists always at liberty to embrace differentiation in a manner
that sets their online retail operations above the rest of the market
(Datamonitor, 2011). Differentiation can relate to the specificity of the
products on offer, the provision of selected shopping baskets at a great
discount, the uniqueness of the shopping process, or even the delivery service
specifications (Johnson, Scholes and Whittington, 2008). With online retail, it
is possible for business executives to embrace the blue ocean strategy and
create demand in sectors that are yet to be explored in the economy.
The legal provisions available also
influence the level of profitability and competition in the economy. The legal
costs of setting up operations are relatively lenient and this provides ease of
entry to additional competitors (Datamonitor, 2011). The legal frameworks are
also useful in increasing the market confidence in online transactions by
providing mechanisms through which offenders can be decisively held responsible
in case of fraud. These legal frameworks have indeed been a major contributing
factor to the growing popularity of the sector.
The presence of enabling infrastructure
also helps in attracting consumers to the industry and by extension
contributing to the profitability of the sector. The cost of electronic
transactions is increasingly low with most fees being within affordability
limits of most consumers (Office of Fair Trading, 2010). In other words, the
cost of transaction is seldom enough to offset the price difference between the
online retail offers and the traditional shopping malls. Consumers therefore
find it increasingly easy to opt for online retail as a source of their
products.
The determination of the attractiveness
of an industry is necessary to enable businesses intending to venture into such
an industry to determine their chances of success (Hitt, Duane and Robert,
2001). Where an industry is found to be unattractive, business managers are
advised to avoid it unless they have a good strategy for overcoming any of the
handicaps identified. The best model for analysing industry attractiveness is
the porter’s five forces analysis which makes a comparison of the prevailing
factors among the different segments of an industry (Hitt, Duane and Robert,
2001). The attractiveness is as analysed below.
The main players in this industry are
the retailers offering products for sale online with the leading players being
Amazon.com Inc, Home Retail Group plc, Tesco plc, and Wal-Mart (Davis, 2011). Despite
the presence of a few large multinationals that operate at countrywide and
global scales, the industry remains largely fragmented with many of the players
being small businesses targeting defined localities. There is a rapid growth in
the number of competitors with many new entrants getting into the market and
existing market suppliers diversifying into offering online retail portfolios
(Davis, 2011). This heightens rivalry significantly. The fact that most of
these players target the same market segments also heightens competition.
However, the rivalry is lowered by the low switching costs where a market
player can leave the industry without incurring heavy losses. This is due to
the low investment amounts required in the industry. The industry is also
characterised by a rapid growth of customers as more and more consumers in the
UK opt to turn to online retailers to secure the best deals (Nielson, 2011).
This growing market helps in lowering the market rivalry. The rivalry is
further lowered by the fact that the level of differentiation is high with many
online retailers being able to carve out a niche for themselves based on the
uniqueness of their products and services as well as the uniqueness of the
business processes. The overall assessment of the market rivalry therefore puts
the level at the level of moderate.
There has been a surge in the number of
consumers turning to online retail and this presence of large number of buyers
decreases the buyer power (Datamonitor, 2011). This surge can easily be
explained by the changing economic fortunes that have seen the disposable
income levels among consumers reduce significantly. As a result, consumers are
constantly on the lookout for the best deals and this makes them turn to the
convenience of the internet where vast amounts of information can be collected
at the click of a button (Global Agricultural Information Network, 2011). On
the other hand, the price sensitivity of these buyers increases the buyer power
marginally as industry players are constantly under threat of losing market share
to competitors who offer better deals to the market. The threat of backward
integration among the buyers is low as most buyers are ordinary consumers who
in most cases have little or no intention of venturing into the fields in
question hence lowering buyer power (Rigby, 2010). However, the presence of
information over the internet makes the buyers more knowledgeable and this
improves on the level of buyer power. The overall assessment of the buyer power
is therefore moderate.
The main suppliers in the industry
include ICT systems providers and the suppliers of the goods that are intended
for sale online (Datamonitor, 2011). An average online retailer is spoilt for
choice when it comes to choosing which supplier to procure materials from.
Suppliers are therefore many and in many cases chasing after a considerably low
number of buyers and this lowers the supplier power significantly. However,
there are specialist commodities such as books, DVDs and other specialised
equipment which can only be supplied by a limited number of suppliers
(Datamonitor, 2011). Such specialised suppliers wield immense power. However,
such suppliers are a vast minority and they are not likely to significantly
influence the level of supplier power in the sector. On the other hand, the
threat of forward integration is incredibly high. With the support of low entry
costs, suppliers can easily opt to offer their products online to the end
consumers and this significantly raises the supplier power considerably. The
overall supplier power is therefore moderate.
3.4 Threat of entry
The entry into the sector can be done by
two different kinds of organisations: existing businesses which may opt to
diversify into online retail; and entirely new businesses whose primary focus
is to be online retailers (Office of Fair Trading, 2010). Online retail
businesses serve large markets and this enables them to turnover large volumes
hence allowing them the economies of scale. When this factor is combined with
the low costs of operation, it allows online retailers to significantly lower
their prices. Companies without absolute cost advantages may therefore find it
difficult to penetrate the market as online shoppers are extremely sensitive to
price differences. On the other hand, the fixed costs for starting an online
retail business are very low; and the legal requirements are equally lenient
with most businessmen able to meet the set thresholds without strain (Office of
Fair Trading, 2010). Most suppliers are also easily accessible and this allows
new entrants to build their product portfolios with remarkable ease. On the
other hand, the sensitivity of consumers to the security of online transactions
make most consumers predisposed to conducting business with organisations that already
have a strong brand in the market. However, this factor alone is not enough to
dampen the threat of entry with many new comers finding creative ways of
assuring clients of the security of their transaction systems. The threat of
entry is therefore very high.
The main substitutes to the online
retail market are the traditional brick and mortar shopping as well as the
catalogue retail systems (Nielson, 2008). Surveys indicate that the vast
majority of consumers still prefer the traditional shopping styles with the
volumes controlled by the traditional shopping models remaining over 100 times
higher than the online retail volumes (Nielson, 2008). However, growth
statistics indicate that the online sector is growing at least twice as fast as
the traditional models. The main reason why consumers may prefer the
traditional models is the security of the transactions hence heightening the
threat of substitutes. The payments are made physically with little opportunity
for fraud and theft of a customer’s money (Rigby, 2011). However, with the
economic conditions being experienced in the UK, consumers are more inclined to
making more cost effective purchases and they therefore turn to online
retailers to take advantage of the deals offered. The overall threat of
substitution is therefore moderate.
From the assessments above, the market
rivalry, supplier power, buyer power and threat of substitutes are all
moderate. The threat of entry is however very high. The overall assessment in
light of the observations is that the industry is moderately attractive. This
implies that new entrants have a reasonable chance of success with the
application of brilliant strategies.
One factor of the macro environment that
could easily alter the basis of competition in the online retail sector is
changes in the legal requirements. The government may opt to alter online
retail requirements due to the high risk posed to consumers’ money. Online
transactions have always attracted intelligent fraudsters capable of hacking
into online systems and conducting unauthorised transactions using clients’
credit cards (Nag, Hambrick and Chen, 2007). This is a risk that the government
would need to deal with should fraudsters devise ways that make it difficult
for detection. One of the likely moves would probably be to heighten
requirements to include large investments that would be used to make refunds to
customers affected due to the retailers’ system weaknesses (Nielson, 2008).
Such a move would effectively reduce threat of entry and get many retailers to
stop operations hence lowering the level of competition among the existing
retailers.
Economic conditions could also
significantly alter the basis for competition. As it currently stands,
competition is mainly based on price and this is motivated by the hard economic
times that have seen consumers have lower disposable incomes (Datamonitor,
2011). If the situation were to change significantly, consumers would be less
concerned about price and start concentrating on aspects such as convenience,
speed of delivery, quality assurance, and others.
Actions by traditional retailers could
also affect the industry’s profitability. If they were to opt to embrace cost
cutting measures and reduce their prices significantly, there would be fewer
incentives for consumers to opt for online retail offers.
Customers who opt for online retail are
mainly people looking to make savings by using the best deals available. These
consumers are adequately informed and can easily spot good deals with little
effort (Datamonitor, 2011). Retailers with absolute cost advantages therefore
tend to have a significant strategic advantage in the market by being able to
significantly reduce their prices.
The other reason for use of this
shopping model is the convenience offered. Shoppers enjoy the convenience of
acquiring products from the comfort of their homes and services (Davis, 2011).
Retailers who can actualise their delivery processes by ensuring swift
deliveries could enjoy a competitive advantage in the market. Most shoppers who
buy products physically tend to prefer immediate acquisition of what they have
paid for. The only way that online retailers can reach them is by ensuring
super-fast delivery systems and the retailer who can achieve that would have a
competitive advantage in the sector.
The other common attribute of online
shopping is the fact that it leaves a trail that can inform the retailers of
the product preferences of their clients (Johnson, Scholes and Whittington,
2008). Retailers can therefore come up with good intelligence systems that
enable them to do targeted marketing that is likely to be very effective. The
competitive advantage would be realised by the systems’ ability to anticipate
product needs and bring communicate to the client in time before they opt to
search for them from competitors.
The best way to improve the
profitability of the sector is to find ways of attracting more consumers into
it. Even though the sector is on a steady growth, the absolute figures remain
significantly low. With strategies to increase volumes, larger numbers of
transaction could be realised hence higher profits for the industry. Given that
over 90% of the population in the UK have access to the internet, this would be
a comparatively achievable goal (Datamonitor, 2011). Cooperation among the
industry players would be necessary with provisions for self regulation of
industries done to ensure that the risk of fraud is significantly reduced.
This strategy would however be difficult
to implement given the large number of players involved. With the market
largely fragmented, it would be difficult getting a consensus on a common
approach, especially in view of the fact that the proposed approaches could
favour some retailers more than others.
The online retail industry in the UK is
vibrant and is expected to grow with estimations being that revenues from the
sector will surpass the $72 billion mark by 2015 (Datamonitor, 2011). This
growth is supported by changing social preferences where more consumers are
attracted to the levels of convenience offered with many more impressed by the
low prices offered by online retailers. An analysis of the industry’s
attractiveness reveals that the sector is moderately attractive meaning that
prospects for growth among current and incoming players are reasonably
impressive. This industry however faces stiff competition from the traditional
shopping systems which continue to command larger sales volumes with analysts
holding the view that these traditional systems will never really be fully
replaced by online retail business.
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