Rise of the online retailer

Over the years the Internet has made conducting business easier, faster and less hassle. Online payments are becoming more secure, and the end user is becoming more trusting and accepting of online e-commerce, through advancements with Bpay and secure SSL encryption.

However, the general consensus in Australia towards online retail has always been that you simply cannot trust online shops. CRN’s sister publication PC Authority magazine’s Reliability and Service Awards proved that theory wrong.
If you combined the reliability and service ratings of the online shops with those of regular ‘bricks and mortar’ stores, the winning bricks and mortar shop, Jaycar, finished 15th overall. Harvey Norman finished 36th out of 37 with ‘average’ results.

The joint winning shops in PC Authority’s Online Retailer award – PlusCorp.com.au, Secret.com.au and MegaPC.com.au – all saw 92 percent or more of their customers ‘satisfied’ or ‘very satisfied’ with customer service, delivery accuracy and value for money.

These results showed online stores in Australia are far more mature than many people give them credit for.

Garrison Huang, managing director at computer accessories online retailer Anyware, says there are most definitely more online retailers these days.
While the distributor has not undertaken a fine analysis of online resellers versus traditional resellers, Huang believes there is a clear trend that online retailers are starting to make a big impact.

“We have seen more purchases from online retailers. Some of them are doing very good jobs in customer services and retentions,” he says.

“Among our customers, we have pure online retailers and also online retailers with a shop front. One would say that there are more and more pure online retailers
than before.”

Gaining the customer’s trust

Online retailers believe the increase in online sales is due to people getting used to purchasing online, especially as an more people have computers in their homes then ever before.

Nigel Fernandes, managing director of computer hardware online retailer PlusCorp.com.au, says with the improvement of Internet technologies, such as high-speed broadband and enhanced payment security by the banks and freight companies, customers have been able to invest their trust in online shopping.
“As new technologies are embraced and customers are offered easy track-and-trace functionality on their websites, it becomes easier for customers to invest in online stores,” he says. “As the Internet further develops, retailers wishing to stay at the forefront will need to follow suit and stay ahead of the competition.”

David Papp, managing director of another online retailer MegaPC.com.au, believes retailers are beginning to enjoy a good reputation by keeping customers happy consistently. For an online shop, the reputation exists in the form of customer testimonials on independent websites. Nevertheless, there are still people who prefer to buy from a physical shop, even if buying online, rather than a home/garage online shop, especially if it doesn’t list a physical address and phone number.

Online retail in general has had a lot more mainstream exposure over the past two years, particularly with companies like Dealdirect.com.au and OO.com.au appearing in mainstream media like Today Tonight, A Current Affair and BRW. There are also subsidiaries of these companies advertising on morning TV infomercials – the ones that promote those fantastic super-duper vacuum cleaners and never-to-miss offers.

In the past these infomercials have sold only over the phone; this has changed now where they are only selling online.

Brendan Tully, owner of IT retailer Nintek.com.au, says these are just a few media forums where online retailers are popping up and this is generating attention from markets that would not necessarily think about shopping online, such as the mum and dad-style shopper that has no interest in electronics or buying music online but can certainly see the benefit in purchasing furniture or pet food online.

“I think consumers are now seeing real benefits and savings to shopping online, not just fiscal savings but time savings and just the pure convenience of it. I think the booming Australian economy has also seen a lot of professionals become even more time poor, with online retail a solution for their time constraints,” Tully says.

PlusCorp’s Fernandes says the reputation of online stores can be helped via medium forums as well as through government endorsements. PlusCorp is a ‘Federal Government Endorsed Supplier’, as well as a ‘QLD GITC Supplier’.

“We partner directly with Intel, AMD, Microsoft and other vendors. Having these associations gives us a heads-up against online retailers who are notorious for bad service. Also customers can find out if an online retailer is legitimate through forums such as www.whirlpool.net.au or www.overclockers.com.au,” Fernandes says.

Competition tightens

In the past few years it has certainly become much simpler and quicker to set up an online shop than setting up a physical shop. However, it is like any business – just having a shop front or a website is far from enough.

First of all, marketing is a major challenge. No-one will browse your website just because you have one. It is like all business, you must have a thorough understanding of the total business, including the technology, logistics, consumer behaviours, finance and so on.

Nintek’s Tully says the face of online retail has changed over the years and it has become a lot more competitive with a lot more players in the market.
“I think this has a lot to do with lower costs to entry, more so now than ever. There’s a lot more off-the-shelf shop front packages that look very professional and polished that take very little time to put together,” he says.

“Around two to three years ago, there was a lot less choice in software and back then you’d still need a graphics guy to polish the site to make it look professional. That said, a lot of packages still look very much like they were made on an assembly line with very little style, user features or unique feel to them – if you’ve visited one you’ve visited them all.”

Tully believes the industry would be hard pressed to find a site that was generating $10 million in revenue per year that wasn’t running on a custom-built system. Marketing online is very cheap, unlike conventional retail advertising. For a few hundred dollars a month online retailers can get a very prominent banner on a tech forum or tech website and very quickly gain exposure for their business.

Online strategy

Viktoria Kulikova, national marketing manager at Altech, says online retailers have more aggressive buying habits, which can lower the profit margin and cause price erosion.

Anyware’s Huang believes online retailers are facing the danger of ever-shrinking margins simply because price transparency is a norm on the Internet.

These retailers must find ways to differentiate, he believes.

Price search engines such as www.pricewatch.com.au and www.staticice.com.au give consumers total ease to compare prices, according to Fernandes, and savvy Internet retailers soon learn who to avoid and who to trust.

“As margins decline, the Internet allows retailers to have a store open 24x7. In fact for the past two years we have stopped weekend trading and simply service customers via the Internet. We also reply to email 16 hours a day, and many orders and deals are done at night via email,” Fernandes says.

Picking an innovative and unique product at the right price point is the key to making an online shop front work. Net users are bombarded with advertising everywhere online so if the banner does not stand out or is not relevant to the market it will be ignored. There are a lot more players in online computer retail who a very technically focused as opposed to sales and marketing focused.

“A lot of these guys are more of the ‘work from home’ or ‘one-man band’ type retailers,” says Tully. “At the core, they can really only compete on price and to some degree can offer personalised service but in the long run a business selling at 1 to 2 percent margin will not survive as the business grows.

“I think the computer industry in general has seen sales, particularly retail sales, flatten out ... I’d say this is due to several factors surrounding the IT industry as a whole,” he says.

Tully believes when once a storefront expands from its home base and grows overheads and get bigger this is impossible to maintain. If all an online retailer can do is compete on price then it is inevitable that the market will find a way to defeat them.

“I think a lot of the little stores are too tech focused and don’t know much about sales and marketing – again, a core strategy in selling because being cheaper than everyone else is not a real strategy at all,” he says.

Tully believes it is wrong to say online retail does not require much manpower.

There are different expenses associated with an online retail store and a physical retail store but he would not say it is cheaper to run an online store than a shop front.

“It is a lot more complex than most people think; our site is custom written and has been constantly updated and developed over the past six years by an in-house programmer,” Fernandes says.

MegaPC’s Papp says a good reputation is earned primarily by good communication, speedy delivery and looking after the customers when they have problems with their hardware.

However, starting an online store that is also profitable is far from easy, which is why most new online stores fail within a couple of years.

“My advice to anyone thinking of setting up an online store is to skip the difficult stage of starting up and simply buy an existing online store that already has a customer base,” Papp says.

Online versus bricks and mortar

In the competition between online and a physical shop front, Anyware’s Huang says online retailers are in a better position to offer discount prices due to their lower overheads.

“One must understand many of the online retailers don’t even carry stock. They use suppliers’ warehouses as their own warehouse.

“If it was a physical store, it would be terrible for a shop front not to have anything on the shelves,” he says.

There is a general consensus that an online store can be more efficient than a regular retail store as by its very nature it captures a national, even global, market, although it lacks the potential for customers to look and feel the products.

Once again, selling online requires a completely different strategy from selling regular retail. Businesses that are very successful like Harvey Norman and Dick Smith may not see any benefit in selling online.

Every company has limited resources, even massive companies like Harvey Norman or the Coles Myer group.

“If they can get a better return on investing their resources in the physical retail stores then why would they bother selling online?” says Fernandes.
He believes the main difference between an online store and physical shop front is that one offers you the flexibility of online shopping at your leisure 24x7 and a lot of people prefer shopping that way.MegaPC’s Papp says he can see things from both sides, as an online and physical retailer, most of its customers find the product they want on its website, order it, and either pick it up or get it delivered.

“If we sold through printed advertising, we would only be selling to those people who can walk into the shop and pick up the product. At least two-thirds of our customers are interstate, so we’re making our products available to all of Australia through our website,” he says.

“To attempt to advertise to such a broad audience through printed material would be far too costly.”

Fernandes believes while consumers are happy to buy online, having a bricks and mortar presence where they can either collect from or drop off returns certainly offers them more security.

Altech’s Kulikova says at this point in time mass merchant retailers only have a Web presence to drive people to the stores. If these merchants were to set up a website they would compete against themselves with the online store up against the retailers’ store front.

Fernandes says at the moment Harvey Norman’s model works for the retailer, but as you now look at the huge online US-based sites, they are totally Web-focused, and he can see this further developing in Australia.

“Why else would Coles Myer buy Harris Technology?”

Papp believes that mass merchant retailers are missing out on potential business because of their lack of online facility, especially over important holiday seasons like Christmas. He says physical shops should also have an online presence, with a successful formula of combining the two methods of selling.

“Even if they don’t offer online ordering, they should at least have an online product catalogue, preferably showing stock levels at each individual store. One retailer that has online ordering is Officeworks and as far as I know it’s working well for them,” Papp says.

Problems for online retailers

Having an online store is not without its problems. Online retailers have to be extra vigilant as word of mouth is a powerful medium in making or breaking an online store.

For Tully, warranty returns, particularly when it comes to enthusiast products, can become a major issue with customers. Many products are designed for ‘over-clocking’ but their warranty terms and conditions state that ‘over-clocking’ voids the warranty. “This in itself is a legal minefield. There are issues with the level of knowledge the customer has,” Tully says.

Both Papp and Fernandes believe credit card fraud is a major crippler to an online retailer. The online retailers devote a lot of resources to verifying all credit card sales because banks only offer the consumer total security.

Future of Internet shopping

While it is too early in the retail game to tell whether or not online retailing will win out against traditional stores, it is like other businesses: consolidation will occur, it is just a matter of time.
Huang believes that at end of the day, “some smart sites will win over the others”.

Papp feels online computer hardware stores will remain “specialty shops” for a few more years at least. That means they will have to provide pre-sales advice and post-sales support to the customer.

“Therefore, online stores should not be considered as ‘website only’ operations in the sense that they have no personal communication with their customers,” Papp says.

Altech’s Kulikova says over the course of the next couple of years the distributor will see more business from online retailers. She says there will be “more distribution going towards online stores”.

As for Tully, he reiterates that people are increasingly more time poor and do not want to waste their free time shopping. He believes saving time and money
as a real benefit.

“I think we’ll see this ring true with growth in online retail where commodities such a groceries are concerned.

“I don’t ever see how online retail will surpass physical stores but I think we will see a lot of the bigger players make moves to stamp out all the little one-man band online retailers that have sprung up over the past 12 to 18 months.