On a cold Friday morning in 1979, Michael Aldrich was preparing to drive to the market for groceries. Amidst the sharp rise in transportation costs, his weekly shopping trips were inconvenient and expensive. Why didn’t supermarkets deliver these products to Aldrich’s house?
Forty years ago, although the retail business market was attractive, a viable infrastructure for “participative” information sharing between retailers and customers was unavailable. Besides, this was before the invention of the advanced IBM personal computer or the internet. Frustrated by the status quo, Aldrich — an employee of a leading computer and television maker — successfully created a TV prototype that would connect to the computer at the supermarket and enable transactions from the comfort of his home. This basic model would serve as the foundation of present-day e-commerce.
The letter ‘e’ in e-commerce stands for electronic. Simply put, e-commerce refers to an exchange of products and services over the internet. These transactions can take place via phones, computers and TVs. It isn’t easy to imagine a world today without the convenience of e-commerce. If you’re reading this, there is a high possibility of you having engaged in online transactions. But how is e-commerce different from traditional retail?
There are three critical differences in business scope, information availability and mode of communication between traditional retail and e-commerce. Buyers have been accustomed to visiting brick-and-mortar stores to inspect products physically before a purchase. Since these transactions either take place in-person or, in rare instances, over the phone or mail, the sellers’ businesses are limited by the geographical area they can serve. This practice also limits the types and number of products available to customers since they can only purchase the goods available in their vicinity. E-commerce transactions have diluted the limitations of geographical proximity. Since transactions take place over the internet, sellers can reach a wider audience and more customers. Concurrently, they can specifically target niche customers that may not reside close to their businesses. From the buyers’ perspective, the cost and the need for travel are eliminated.
The second key difference between the two forms of commerce is the degree of information available. In a physical store, sellers can provide limited information to customers. Through the World-Wide-Web, buyers can easily compare products across companies and choose the ones that specifically address their needs. They are also able to access reviews about products that can help them make more informed purchasing decisions. Retailers, too, can take advantage of this information availability by choosing the best inputs for their products or services.
It seems that multi-channel businesses will replace traditional stores unless these stores embrace and take advantage of new technologies.
Lastly, through digital platforms, retailers can learn about the specific preferences of their customers. This knowledge can help retailers create targetted communication for their customers and recommend related products. Due to these differences, some experts consider e-commerce to be the holy grail of retail. What does this mean for traditional retail?
For decades, the traditional retail market has been battling rising costs, supply and demand imbalances and greater customer demands. E-commerce comprehensively solves these issues and provides added benefits for both retailers and customers. Naturally, both transacting parties are adopting e-commerce. As advancements in information and communication technologies take place, the costs of adopting e-commerce are declining. These reduced costs enable small businesses and established companies alike to expand the scope of their operations. Increasingly, e-commerce is becoming a key strategic pillar for many companies. Retailers relying solely on traditional commerce are either dying out or are forced to adopt online platforms as e-commerce pulls volumes from their physical stores.
Some businesses do not have physical branches and exist entirely online to serve their customers. Examples of this include fin-tech companies that conduct all of their financial processes through mobile applications or websites. Other companies have adopted a dual retail model. Nike, for instance, has retail branches in several countries and dedicated websites that facilitate online transactions. These dual models are part of a strategy by businesses to reach customers through several channels. Customers today want the benefits of online shopping, such as broader product selection and rich product information, and physical retail, such as personal service and in-person product experience. In response, many companies are adopting omni-channels to serve increasingly diverse customer needs. Traditional retailers will have to face this reality at some point. E-commerce technologies are becoming more accessible, and creating an omni-channel strategy seems to be the only way to prevent being phased out entirely by online stores.
Like most new technologies, e-commerce has certain limitations. Customers are understandably concerned about online security, intellectual property, privacy issues and financial fraud. Like most technologies, e-commerce is iteratively becoming more robust. With better control mechanisms, customers will, unsurprisingly, shift to online stores for most of their needs. Alternatively, on its own, the traditional store does not seem to be having the desired effect on customers.
Shifting to a different business model is a tall order for any organisation. On a fundamental level, it requires re-conceptualising demand and supply creation for the product or service. However, it seems that multi-channel businesses will replace traditional stores unless these stores embrace and take advantage of new technologies.
The writer is a graduate of LUMS and works at a leading conglomerate company in Pakistan