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Multi-channel e-tailing rewrites US retail rulebook

The rise of online retailing is inexorable. As with the rest of the world, it has wrought revolutionary changes across the US retail sector over recent years, with the multi-channel model becoming its latest manifestation. Now global suppliers can capitalise on the online shopping boom either by selling directly to US consumers as bespoke e-tailers or by drop-shipping orders received via third-party e-tailers. Not only do these multi-channel capabilities boost online sales, but they also help bring new products to the attention of major retailers.

The level of US online retail sales – according to Forrester, a Massachusetts-based technology and market research firm – will reach US$370 billion by 2017. With the figure for 2013 estimated at US$262 billion, this represents a 9% compound annual growth rate (CAGR) over the next four years. The online share of the overall retail market sector is also expected to increase, moving from 8% to 10% during that period.

US online retail sales

Chart: US online retail
Source: Forrester Research

Why and what to buy online

It is easy to provide many reasons as to why consumers increasingly prefer to buy online. The most pertinent ones, however, are convenience, variety and the better value represented by online prices. Additionally, the acquisition of discreet requirements, second-hand merchandise and gift items is also seen as better suited to the online environment than to in situ purchases.

The proliferation of smartphones and tablets has greatly extended the online dwell time of many consumers. This sees buyers use mobile devices not only to complete transactions, but also to research items, find stores, compare prices, as well as to read and write product reviews.

All of this contributes to one of the most distinctive attributes of online consumers – they tend to be noticeably better informed than the average high-street consumer who simply walks into a store to make a purchase. With a vast range of product reviews and digital information immediately available to them, the decision-making process of online shoppers is very different to that of their walk-in counterparts. Inevitably, their enhanced product and market awareness extends to heightened price sensitivity, with cost comparisons easily available online.

In its earliest days, online shopping flourished with regard to relatively small and inexpensive items. It developed a particular strength when it came to digital media products, such as e-books, MP3s and downloadable movies. This new generation of digital products was simple to organise, transport and maintain, making them ideal for online purchase and actual delivery.

Increasingly, consumers are now upping their online purchases from “low-consideration” goods to “high-touch, high-consideration” items, notably apparel, furniture and appliances. Currently, consumer electronics are among the most popular products sold online. According to Euromonitor International, consumer electronics and video games hardware accounted for 18.3% of all retail sales in 2012, followed by apparel (17.8%) and media products (11.4%). The online purchase of larger consumer appliances, such as refrigerators and dishwashers, is now expected to grow by 27.3% per annum over the next five years, establishing this trade in larger electrical items as the fastest growing sector.

Internet retailing by category in the US

Table: Internet retailing by category in the US
Source: Euromonitor International

Despite the success of the sector, online shopping still needs to address a number of challenges in order to ensure its future growth. One of the biggest issues for digital purchasers is how to buy clothes that fit. This is a problem that e-tailers and manufacturers have been keen to resolve, with many hopeful that a range of solutions is now available. One researcher working for Intel, the California-based, high-tech company, for instance, has designed an electronic ‘mirror’ that shows how specified clothing items would appear on the purchaser. The buyer simply stands in front of an LCD monitor, while parametric technology simulates body type and the fit of the fabrics based on weight, height and a range of other specified measurements.

The “disintermediation” opportunities now emerging

Online retailing has allowed global manufacturers and suppliers to bypass the middlemen in standard supply chain models and sell directly to consumers. This can be facilitated either by signing up to an existing platform as a third-party seller or by establishing a proprietary online store. Both options, however, require the utilisation of a considerable level of resource. Maintaining any online presence inevitably involves uploading product information, sourcing product photos, handling customer enquiries, and a host of other daily tasks.

Amazon and eBay are two of the largest and most well-known digital marketplaces. Amazon, the largest online retailer in the US, began as an online bookstore, but soon diversified into media products, electronics, apparel, furniture, food, toys, and jewellery. Its Amazon Marketplace facility allows third-party sellers to offer new and used items alongside Amazon’s own offerings. This allows such third parties direct access to Amazon’s platform and payment facilities, including the “Fulfillment by Amazon” service that lets sellers store their products in Amazon’s fulfillment centres, from where items can then be subsequently shipped and handled.

Amazon’s major rival, eBay, is an online auction and shopping website that connects consumers and businesses and allows them to buy-and-sell a wide variety of goods and services on a global basis. In addition to its auction-style selling, the website also offers a “Buy It Now” facility for standard shopping purposes. Essentially, eBay is a massive digital market, providing sellers with the tools to feature their brands while also providing the facility to sell non-standard items.

Further price and handling information is available for interested suppliers on the two websites. Information is also provided on a number of tax and relevant products requirements issues.

Interested parties may also explore a number of other lesser-known online platforms and alternative business models, such as group buying or flash sales. There are a considerable number of smaller e-commerce sites, for instance, dedicated to selling fashion items, such as jewellery, T-shirts, handbags or clothing accessories, which are also ideal for promoting smaller, designer labels. These platforms have a distinct niche position in the market as they can offer a much wider range of products than comparable physical stores. As they tend to specialise in low-weight items, they can offer competitive shipping rates.

At the opposite end of the spectrum from these niche players are the store-based retailers – notably Walmart – who have markedly increased their investment in their own online sales platforms. This has seen many of them adopt sophisticated merchandising, marketing and fulfilment strategies, enabling them to leverage their physical advantages, while catering to a more ‘connected’ customer base.

Top 20 most popular online retailers in the US

Table: Top 20 most popular online retailers in the US
Note: See http://www.stores.org/2013/Favorite-50-List for the full list
Source: Stores Magazine, National Retail Federation, September 2013

The new model of retail logistics

The development of e-commerce has had a significant impact on the retail logistics sector. This has seen a move away from the conventional retailing supply chain, where customers would buy at a retailer’s location. Traditionally, the in-store inventory would then be replenished from a regional distribution centre (RDC) where goods from a wide range of suppliers were stored.

As e-tailers now ship directly to consumers, they have assumed the role of the conventional RDCs and frequently maintain large and extensive warehouses. These warehouses tend to be located outside metropolitan areas from where a vast number of small parcels are shipped via vans and trucks to individual online buyers. This spatially disaggregates retailing distribution. A number of logistics companies, however, have managed to create economies of scale through the consistent consolidation of loads.

As it now stands, there are two standard models of handling warehousing, distribution and returns – owning a warehouse or outsourcing to a third-party service provider. The cost of owning a warehouse can represent a huge financial burden for small to medium-sized operations. The more economical route is to contract out the services to a full-service, third-party logistics (3PL) provider. This can provide a small company with the same shipping platform as the largest US companies at a fraction of their costs. E-tailers tend to use 3PLs until the scale of their businesses reaches a point where operating their own warehouses becomes more cost-effective. In fact, businesses can use any 3PL to fulfil their online orders, including those provided by Amazon.

Chart: Conventional and e-commerce retail logistics
Source: http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/ecommercelog.html

Ship or drop-ship?

Online purchases can be delivered to consumers in four different ways:

  • Downloads: This is the method often used for digital media products, such as  software, music, movies or images.
  • Shipping: The product is simply shipped to the customer’s address.
  • Drop-shipping: The received order is passed to the manufacturer or to a third-party  distributor, who ships the item directly to the consumer, bypassing the retailer’s  physical location, saving time, money and space.
  • In-store pick-up: The customer orders online, then finds a local store using locator  software and picks up the product from the most convenient store.

E-tailers, in general, do not own physical stores. This means the physical delivery of online purchases usually takes the form of shipping or, less commonly, drop-shipping. Drop-shipping essentially means that e-tailers do not have to hold the items in stock. When orders come in, they simply ask their suppliers to dispatch the items. For e-tailers, the main advantage of drop-shipping is that they can expand the range of goods available on their sites more cheaply than by ordering and storing the stock themselves. The chosen suppliers, however, have to be very reliable. On the other hand, suppliers who do not want to invest in setting up and managing their own online stores may consider the drop-shipping option more suitable for their businesses.

Recommendations

Global suppliers can penetrate the US market either by becoming e-tailers or by adopting the drop-shipping model. In fact, any effort made to establish online operations may not only generate sales, but may also succeed in securing the attention of major retailers. Suppliers may appoint a US-based 3PL to warehouse and fulfil their Amazon or other e-tailer orders, then approach the big box retailers with samples distributed by that 3PL. A US-based 3PL eliminates the problems of replenishment, fulfilment and US-based returns, while the major retailers also tend to have a distinct preference for those suppliers with their own US distribution centres.

In terms of small volume sourcing from Asia, many US e-tailers are already adopting the drop-shipping model via, for example, Alibaba. As Hong Kong’s air-freight service is quick, reliable and competitively priced, suppliers based in the city may gain considerable market share through efficient customer service and faster fulfilment of orders.

Overall, the development of multi-channel retailing is a key trend in the US. It is highly likely that, sooner or later, all retailers will have their own dedicated online presence. This would offer better economies of scale as it would be possible to warehouse quantities more efficiently and cost-effectively than at a physical store location. Even though many conventional retailers are investing in means to optimise their inventory levels and integrate more effectively with suppliers in order to minimise their safety stock level, it will still remain difficult to compete. Compared to physical stores, online retailers are far better at managing their inventories on a just-in-time basis, allowing them considerable cost savings.

In general, it is recommended that suppliers build effective relationships with target e-tailers via email, exhibiting at trade shows, and through visits to their regional sourcing offices. They should also upgrade and review their supply chain operations in order to meet the just-in-time delivery requirements of many retailing operations. On a purely practical level, given that online orders are often delivered in small packages, suppliers should try to minimise the weight and packaging of their products so as to better facilitate shipping, while ensuring that sufficient transportation and handling protection is provided for any particularly fragile products.

Content provided by Picture: Wenda Ma
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