Buying the Basics on the Internet

By Stephen J. Morgan

How is e-commerce affecting the way we shop for milk and tomatoes, houses and office buildings, skirts and suits?

“Whether you sell stock or sell suits, the Internet has changed the world.” – Richard Grasso, chairman, New York Stock Exchange.

By many accounts, the selling power of the Internet is unstoppable. While books, compact discs, computers and software are among the most popular e-commerce items, increasing numbers of shoppers are also picking up cars, flowers, collectibles, expensive chocolates, greeting cards and a variety of other goods and services, from the mainstream to the offbeat.

Yet over the long run, some are wondering just how viable e-commerce will prove to be as a money-maker with a distinct appeal and advantage of its own. Stripped of the gee-whiz bells and whistles, is clicking a mouse substantially different from making a phone call to order something out of a catalog? Does e-commerce hold the potential to transcend the role of being a mere electronic catalog?

If so, then what about using the Internet to procure the basics of life — food, shelter and clothing? Is there a future for profitable e-commerce ventures in staples like milk, bread and tomatoes? Homes and apartments? Skirts, suits and underwear?

Maybe, say Wharton alumni and faculty. More than likely, they add, some e-businesses may come to occupy a small-but-comfortable niche catering to consumers who can afford the luxury of, say, having food delivered to their doors once a week. Still, e-businesses will have to overcome barriers if they are to sell to anything like a mass market, not the least of which is the fact that millions of Americans still don’t own computers. In other instances, online and offline interests may merge to build on one another’s strengths to reach new customers in different ways.

At least as far as food, shelter and clothing are concerned, the web is, for now, primarily a superb tool for disseminating information about products and for enticing existing and new customers to phone or visit a store and buy items the old-fashioned way. As for the future, it’s anyone’s guess, although some observers are clearly bullish about e-commerce’s growth potential across an array of retail businesses.

In an April 1999 report titled e-Commerce: Virtually Here, analysts at Merrill Lynch cited various forecasts showing that retail sales on the Internet could total between $35 billion and $75 billion by 2002, and $100 billion by 2003. These figures include only goods, not services such as brokerage transactions and travel reservations. Forty percent of the projected increase will come at the expense of non-Internet mail-order sales, Merrill estimates, the other 60 percent at the expense of traditional stores.

By comparison, in 1998 e-commerce sales totaled $8 billion, while total retail sales amounted to $2.7 trillion.

“We view the growth of the Internet and e-commerce as a global megatrend, along the lines of the printing press, the telephone, the computer and electricity,” the Merrill report notes. “We believe it will affect dozens of industry sectors in the world economy over the next decade.”

In the face of such predictions, we decided to ratchet down and look at how the Web has been, and could be used, to buy those three essentials — what you eat, where you live and what you wear.

e-Groceries: Bringing the Store to Your Door

One industry already affected by the Internet is groceries, a tough business where makers of consumer goods ruthlessly compete for shelf space and proprietors are happy with wafer-thin profit margins of one to two percent.

A number of e-commerce companies — some established, some new — sell groceries to customers via the Internet. They include Peapod Inc. and NetGrocer, two veteran e-grocery businesses, as well as newcomers Webvan Group Inc., Foster City, Calif., HomeGrocer.com Inc., Seattle, and two companies based near Boston, Streamline Inc. and ShopLink Inc.

Forrester Research Inc., a Cambridge, Mass., firm that analyzes e-commerce, said in a 1998 report that e-grocery sales “remain a blip on the radar screen.” But it noted that such sales could reach nearly $11 billion by 2003 — about two percent of the total amount of groceries sold through regular stores.

“Manufacturers should pay attention to this channel,” the report says. “Despite small sales, grocery producers can exploit the Net in three ways: drive offline sales with promotions, conduct research with this key consumer segment and sell a select group of products direct.”

Gerald Lohse, research director for the Wharton Forum on Electronic Commerce, a joint initiative between industry and Wharton Executive Education, has studied e-grocery businesses. He says about half of online food sales involve specialty items that have long been sold through the mail — for example, fruit and meat from companies like Harry and David and Omaha Steaks. The other 50 percent consist of full-service grocery items — ketchup, pickles, corn, eggs, beans and the like.

No national full-service grocery service exists, Lohse says. E-grocers serve regions. Ten-year-old Peapod, for instance, operates in about a half dozen metropolitan areas, and accounts for about 70 percent of the online grocery market. Webvan operates in the San Francisco area, while Streamline and ShopLink cater to consumers in Boston and environs.

Lohse says he likes Streamline’s approach. In addition to providing groceries, the company will also pick up and return dry cleaning, develop film and deliver rented videos to customers. “They put a refrigerator in your garage with a keyless entry system,” Lohse says. “You can order up to midnight and then all the stuff gets delivered” the next day, even if the customer isn’t home.

Surprisingly, he adds, fruits and vegetables are among the most popular items sold by Streamline (and other retailers), even though customers don’t get a chance to squeeze the merchandise. The reason: online customers get first crack at the best produce. Online grocers know, he says, that folks who get stuck with limp celery, rock-hard cantaloupes or brown lettuce will soon be ex-customers.

A study by Lohse and other Wharton researchers as part of the Wharton Forum on Electronic Commerce found that online grocery shopping largely appeals to two types of people: to those who are “time-starved” and are willing to pay a premium for door-to-door service and to technology-savvy folks who like new electronic gizmos and lead a “wired lifestyle.”

How are traditional grocery chains responding to the incursion by online merchants? Not with anything approaching panic, if H-E-B Inc. is typical. The privately-held, San Antonio-based firm operates 250 stores in Texas, Louisiana and Mexico. With annual sales of $7 billion, H-E-B is the tenth largest supermarket chain in the United States. Its chairman and chief executive officer is Charles C. Butt, W’59.

H-E-B uses its four-year-old web site to sell a limited number of non-perishable items like jellies, jams, coffee, honey and barbecue sauce. Customers can also click on specialty meats such as a fully cooked hickory-smoked brisket. A five-pound roast that takes 18 hours to cook costs $48.50, which includes shipping.

Beyond this effort, though, H-E-B has no plans to make a major foray into online grocery selling and delivery anytime soon because there probably isn’t a big enough market for e-groceries in much of the Lone Star state, says Scott McClelland, senior vice president, marketing.

For one thing, he says, the annual incomes of residents in the area H-E-B serves are much less than those of people in big Northern cities. Plus, “the farther south you go in our trade area, the less technology has taken hold … Modem penetration south of San Antonio is relatively low, except for Austin. The issue is, how do you lower the cost to the customer if you’re going to charge them $9.99 to deliver groceries? In some places like New York or Chicago that are highly urbanized, there’s more opportunity [to sell online].”

Another reason e-groceries may be slow to catch on in a lot of places in Texas and elsewhere is that food shopping usually isn’t a thoroughly planned event. Most people don’t know what they’re going to buy at the supermarket until they get there, says Barbara Kahn, Dorothy Silberberg Professor of Marketing at Wharton and co-author of the 1997 book Grocery Revolution: The New Focus on the Consumer.

“Sixty-six percent of grocery decisions are made in the store,” says Kahn. “When I go in, I know I’ll buy Crest toothpaste, but I don’t know what I want for dinner.”

Ultimately, McClelland says, e-grocery businesses nationwide will capture, at the outside, 10 percent of the total grocery market. What has H-E-B really excited in the field of e-commerce isn’t food but drug-store products. H-E-B operates 135 pharmacies within its grocery stores, and by next year it plans to roll out a highly automated, low-cost online operation that sells prescriptions, vitamins and the like.

Wharton’s Lohse says online grocery sales may only account for one to two percent of total grocery sales five years from now. And Lohse says that, like H-E-B, other big supermarket chains aren’t making a big push online. If they want to make an e-commerce splash, they’ll probably wait until an e-grocery company becomes successful and simply buy the firm.

Kahn agrees. “Delivery is a big issue, the cost of it. Until you get economies of scale, [online grocery selling] is not going to make sense.”

Still, Lohse contends that major consumer product companies can ill afford to ignore the Web. “A lot of companies like Kraft and Pepsi and Coke are trying to figure out how to position themselves in this market. It’s a very low-margin business, and a five percent shift in market share could have huge repercussions for these manufacturers … It’s crucial that they not stand on the sidelines.”

e-Shelter: Property Hunting on the Web

If you’re looking to buy a house, you probably do it in a way that hasn’t changed in years. You go through newspapers, read descriptions and look at pictures. You do the same thing with homes featured in the multiple listings provided by your agent. You do a lot of driving and walk in and out of dozens of houses.

Does the Internet offer a better way to house-hunt? Yes. Is it a revolutionary new way? Not really, at least not yet, says Peter Linneman, Sussman Professor of Real Estate at Wharton and a consultant to Chicago-based Equity International Growth Properties and other real estate companies.

“[People] have tried for some time to do brokering of houses and apartments on the Internet. To my knowledge they’ve been very limited in their success,” he says. The reason is obvious: no one will buy such a big-ticket item without inspecting it first-hand. “The stuff [the Internet] is good at [selling] is commodities” like books and CDs, says Linneman. “Homes aren’t commodities.”

The Web can, however, be a terrific source of information. It allows customers, especially those who wish to move to distant locations, to see more homes more quickly than they could with newspapers. Technology can also allow a person to take a 3-D “virtual tour” of a house. In addition, people can narrow their choices to residences that include specific amenities, are in a certain price range or are located in certain school districts.

One well-known real estate web site is the National Association of Realtors’ HomeStore.com Inc., which operates four sites under its umbrella. They are: Realtor.com, which has 1.3 million home listings; HomeBuilder.com, which lists more than 100,000 new homes and planned developments; SpringStreet.com, which offers more than six million apartment units; and CommercialSource.com, the association’s commercial real estate site.

Linneman believes the Web is destined for greater success in helping businesses sell commercial properties to other businesses. People on the commercial side of the industry, he says, are more savvy about the strengths and weaknesses of properties and aren’t as emotionally tied to properties as home buyers are.

“If you’re the University of Pennsylvania and you want to lease 30,000 square feet downtown, I can bring up [on a computer screen] in your office nine different buildings, different floor plans, and walk you through them,” he explains. “Business-to-business users are always going to know that there is bad space and good space in what you take. Homeowners want to know what view they’re going to have out the window.”

John Bucksbaum, a member of the Wharton Real Estate Center’s Advisory Board and CEO of Chicago-based General Growth Properties Inc., the nation’s third largest owner of shopping centers, agrees that the Internet has great potential to generate business-to-business transactions. “Surprisingly, we’ve received a number of leads that we have actually translated into actual lease deals via the corporate web site.”

The fear that the Web will replace “bricks and mortar” businesses is unfounded, he adds, as was the fear that television or videotapes would kill the movie industry. One probable scenario, he says, is that more and more e-businesses and traditional businesses will enter into partnerships to take advantage of each other’s strengths.

Such alliances are already happening. Writing in the July 29, 1999, issue of London’s Financial Times, reporter Roger Taylor notes: “Just six months ago, there seemed an unbridgeable gulf between the online and offline business worlds … But attitudes are changing fast and both sides are starting to collaborate to build the ‘clicks and mortar’ businesses that are most likely to succeed in the long run … Most traditional businesses now recognize they probably lack the skills and corporate structure needed to succeed online, while online businesses recognize that a physical presence is essential for most e-commerce. After all, a customer does have to take delivery of goods.”

Real estate companies — which historically have been local in outlook and privately held in ownership — have been as slow to recognize the value of the Internet as they have been to embrace securitization and globalization, says Jacques N. Gordon, another member of the Wharton Real Estate Center’s Advisory Board.

“But it’s now making up for lost time very, very quickly,” says Gordon, managing director, LaSalle Investment Management Inc., which has $20.5 billion in global real estate assets under management. “There’s a tremendous change going on in terms of how much information you can get online about the listing of homes.”

Gordon agrees with Linneman that there is a limit to what e-commerce can do in real estate. “You still will rely on your five senses to make your transaction,” Gordon says. “But you’re going to find that both the brokers and the consuming public will be using the Web to narrow their search and be more efficient about the very costly documentation process that goes on in the purchase, sale and financing of homes. Anyone who’s been to a closing will know what I’m talking about.”

Gordon also says the Internet will eventually be instrumental in accelerating the tedious and costly process of property appraisals.

“Lenders will increasingly accept an appraisal based as much on statistical analysis as on physical inspection,” Gordon predicts. “Lenders would make some assumptions about the law of large numbers applying to home sales to the point where you reduce your reliance on the idiosyncratic inspection of a building and rely more on industry-wide norms for certain areas.”

The appraisal industry isn’t thrilled about this possibility, Gordon says. But “they are coming to realize that they are friction in the system — friction that can be reduced if they automate the process more. You still will need a photograph [of the property] and a site plan, but your sales will be online and your architectural plans for a building will be digitized. And, presumably, the appraiser can do a report electronically and send it to the lender electronically.”

e-Clothing: Trying on a Virtual Dress in 3-D

Unlike groceries and real estate, there is a long precedent for shopping for clothes from catalogs, and the Internet is, in part, a natural extension of catalog shopping. “It makes perfect sense to sell apparel online,” says Kahn of Wharton’s marketing department.

One department store chain that has made a commitment to strengthening its e-commerce effort is Bloomingdale’s, a unit of Federated Department Stores. But Bloomingdale’s isn’t quite where it wants to be just yet, not only in terms of the amount of clothing available through its web site, but across all of its merchandise lines, says Susan Silver Miller, W’78, vice president, shopping services.

“Bloomingdale’s has recognized how important it is to participate online and ultimately become e-commerce enabled,” not just an information supplier about the store’s merchandise, she says. “We don’t view [the Internet] as something that will threaten our core business. We think of it as a terrific vehicle to let people know about Bloomingdale’s … We ask customers to do profiles so we can understand what they want on our site. We’ve also done some research and focus groups to find out who among our existing customer base have visited the web site and what they like and don’t like. We’re interested in learning more.”

At the moment, she says, customers can order a limited number of clothing items and other products over the company’s web site. Each order is downloaded by a personal shopper at a Bloomingdale’s store, packed and mailed out. If an article of clothing isn’t available in the customer’s first choice of color, the personal shopper can e-mail the customer, describing the colors that are in stock. The company currently has no group of employees or warehouses solely dedicated to fulfilling e-commerce sales. “We are not where other companies are in investing in [the Internet] as a new business,” she says.

But Miller says Bloomingdale’s has the wherewithal to take e-commerce a step further. In March, Federated bought Fingerhut Corp., a catalog company known for its top-notch systems and technology to fulfill customer orders. That know-how could be made available to Bloomingdale’s, Macy’s and other stores owned by Federated.

“Why should we reinvent something when it’s there to be had?” Miller says. “Federated has a strong strategic commitment to embrace [the Internet as a distribution channel]. If the back operations aren’t there to support sales and deal with complaints, I think [a web site] is doing more harm than good.”

In addition, there are some inherent limitations as to how much Bloomingdale’s can sell online. Using the Internet to buy the kind of high-end apparel for which Bloomingdale’s is famous isn’t as simple as breezily buying a sweater or rugby shirt online from L.L. Bean.

For one thing, Miller notes, “a lot of the customers who buy the most expensive merchandise we carry are not computer literate people.” What’s more, many Bloomingdale’s customers don’t want to buy high-fashion items online, only to have to worry about getting them altered later.

That problem, however, may one day be solved. Len Lodish, Samuel R. Harrell Professor of Marketing at Wharton, says consumers eventually will be able to have 3-D pictures taken of themselves with digital photo equipment. A picture will be kept on file on the Web and the customer will be able to “try on” different garments to see how they look and to ensure a proper fit. Several of Lodish’s former students are working on such a system now.

“That technology exists,” Lodish says. “It’s still expensive, but it’s just a matter of time.”

Lodish says the Internet also holds great promise in the areas of “data mining” (obtaining information on customer needs and preferences), in a variety of business-to-business transactions and in augmenting retail catalog sales of clothes and other goods. In Lodish’s view, using the Web as a tool to complement catalogs is no small matter. “What the ’Net does is make catalogs more current. Companies can close out [merchandise] and change prices more quickly.”

Indeed, the possibilities seem endless. General Growth Properties’ Bucksbaum describes an alliance with an outfit called CoolSavings.com, the Web’s largest dispenser of discount coupons, through which General Growth Properties is generating traffic for stores in its malls. In exchange for providing CoolSavings with information about themselves, computer users receive electronic coupons via e-mail, which can be printed out and applied to various products sold at the stores in the malls.

At the moment, the process is “a little bit hit or miss,” Bucksbaum says. But, as time goes on, the company intends to tailor the coupon-distribution process to people’s interests and buying habits. “If you’re somebody who wears Air Jordans, we could [provide] discount coupons when the latest model of Air Jordans came in, instead of a coupon for earrings at Claire’s Boutique,” Bucksbaum says.

“This is an overused term,” Bucksbaum continues, “but the Internet has caused a paradigm shift to occur in all industries. We’re just at the beginning of [e-commerce]. It’s going to change more and more as time goes on. But I don’t believe [e-commerce] is the demise of any business, as long as the business is willing to recognize the change that’s occurring and change along with it. We look on it as an opportunity that’s going to enhance retailers’ sales.”

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