Internet now home of the category killers
The Internet is having an increasingly significant impact on Australian retailers, but its effect is largely hidden, as Simon van Wyk writes.
The term “category killers” is used to describe store chains such as Bunnings (and its predecessors BBC and HardwareHouse), OfficeWorks and Borders, because they set up in towns, shopping strips and malls, sell only items in one category and kill off smaller speciality and variety stories who can’t compete on range and price.
When Collins Booksellers declared bankruptcy recently, media reports placed a fair bit of the blame for its demise on Borders’ doorstep. Much less prominence was given to another category killer that was arguably more responsible than Borders for the death of Collins - Amazon.
If you’ve ever bought anything online, chances are you’ve bought something from Amazon. They’re the first and still the most innovative online retailer. Amazon will turn over an estimated US$8 billion in 2005, much of that in international sales. Although firm figures on sales in Australia aren’t available, if you estimate that Australian sales are in line with our proportion of the world economy – about 1% - that means Australians are sending more than US$80 million ($100 million) a year over to Seattle instead of spending it in this country. That’s approaching the total annual sales of the surviving big chains, Angus & Robertson and Dymocks.
Because Internet sites don’t have shopfronts and don’t advertise on TV or via letterbox drops, their effect on Australian retailing isn’t obvious. The impact of the Internet on the music industry hit the headlines because “shock, horror“ people were exchanging commercial goods with no money changing hands. Meanwhile, the trend towards purchasing software and downloading it directly from the Internet has been a logical but largely unreported trend that has had a strong effect on Australian re-sellers.
A chemist bypass
The development of Internet category killers has also moved in some unexpected directions, such as pharmaceutical sales. More than US$160 billion a year is being spent by consumers on filling prescriptions in the US alone, and a growing proportion of those sales are through online pharmacies. In the final quarter of 2004, more than 17 million people visited online pharmacies, according to a report from marketing consultancy comScore, up 14% on the same quarter a year earlier.
You would think that prescription medications would be a hard sell over the Internet, with concerns over product quality, security, etc. Surprisingly, price is a driving factor that is overcoming those concerns for an increasing number of customers.
Among those who actually purchased drugs online, comScore found that more than 60% reported doing so because they saved money, while 45% of online pharmacy visitors said they visited online pharmacies to compare prices. Two-thirds of respondents said online pharmacies provide healthy competition to regular pharmacies.
The safety of drugs purchased online was a concern to 54% of respondents. However, 61% said they didn’t tell their doctors about their online drug purchase. Only 33% were concerned about the lack of direct communication with a pharmacist.
One of the pharmaceutical industry’s fastest growing segments is so-called re-importation sites, which allow people to buy essential pharmaceuticals at lower prices from foreign countries. The issue has become a political hot button in the US, because brand-name drugs purchased in Canada can typically cost 30% to 70% less than the same drugs purchased in the US. Canada’s Internet pharmacy industry more than doubled its sales to the United States in 2003, according to the first published study of annual growth in the cross-border trade.
Figures released show that the business of selling drugs to Americans over the Internet was worth at least US$566 million for wholesalers in 2003, up from US$251 million in 2002. By the middle of last year there were reported to be at least 3,000 different Internet pharmacy sites. The most-visited sites are based in Canada, canadapharmacy.com and legalmedsonline.com.
In Australia, the charge is being led by companies like ePharmacy, a Brisbane-based operation competing in both the online mail order market and the bricks-and-mortar pharmacy superstore arena. It sells more than 7,000 pharmacy products online, and while annual sales figures aren’t available, ePharmacy employs more than 70 people to run its online operations and three distribution centres, which double as warehouse outlet stores. Other big players include Pharmacy Online, Pharmacy Direct and HomePharmacy.
Not acting on impulse
Another Internet-driven trend is a move away from making impulse purchase decisions. An online shopping report released in May by ScanAlert revealed that people often spend several days digitally window shopping before making a purchase. The extent to which digital window shopping has become commonplace was shown by data tracking the buying behaviour of more than 8 million online shoppers who visited 140 Web sites between June 2004 and March 2005.
The average time delay between a consumer’s first visit to a Web site and their first purchase was just over 19 hours, with more than 20% of shoppers delaying their buy decision for more than three days.
About one-third (35%) of shoppers took more than 12 hours to make a buy decision. Twenty-one percent took more than three days, with 14% of these “cautious shoppers” taking more than one week to decide where to buy.
Buying delays ranged from less than nine hours for infant products up to nearly 60 hours for consumer electronic goods. Fifty percent of those surveyed took more than one hour from first visit to purchase, while 28% took more than one day and 4% took more than two weeks.
“Consumers abandon shopping carts with an ease that frustrates and often confuses online retailers,” noted report author Ken Leonard, CEO, ScanAlert. “Retailers must understand, however, that almost half of all online purchases are from shoppers who leave a site after the first visit, and return - even days later - to buy.”
ScanAlert reported that today’s online shoppers typically visit many sites, loading items into shopping carts as a convenient way to compare total costs, including shipping charges. The return-to-buy decision seems to be based on price/availability and safety/trust. The delay varied from site to site depending on customer demographics, brand recognition, the number of competitors online, and average product price.
Two key recommendations from the report were to create a comfort zone for comparison shoppers, and to move the focus from shopping cart abandonment to site abandonment. Site designers need to make the shopping experience more informative, and the sense of safety more memorable, in order to influence those who abandon their carts not to completely abandon the site later when it comes to deciding where to buy.
“Shopping cart abandonment is simply the act of moving on to the next comparison,” Leonard said. “Carts must therefore become convenient shopping tools - encouraging shoppers to return and buy. Saved search functionality, where returning purchasers can easily pick up where they left off, is critical to saving more of these types of purchases.”
Of course, the bad news for traditional retailers not taking advantage of the Internet is that as shopping cart technology design improves, the influence of this hidden category killer will become even stronger.