An Internet Retail Boom To Pressure Vendors

Broadband will let customers be more demanding—and force sellers to improve service.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

March 4, 2003

Retail sales on the Internet will more than double by 2007 to nearly $220 billion from $95 billion this year, but the growing online pie won't mean a cakewalk for vendors. The profile of the average Web-based consumer is changing quickly, challenging sellers to keep pace. Customers will be increasingly frugal, demand more up-front information about products and expect personalized, prompt service. Companies that fail to deliver will lose out.

Explosive growth of the Internet's reach—from about 29 million households in 2000 to 43 million this year and 63 million by 2007—is driving the change in Web demographics and habits. The average age of cybershoppers will rise to 48 by 2005 from 44 last year. Meanwhile, consumers' ability to comparison shop online will be aided by the expansion of broadband—high-speed Internet connection that obliterates the frustrating "world wide wait" for pages to load.

In the early phase of Internet retailing, the typical buyer was a 20- or 30-something with a topflight college degree, a BMW and a six-figure income who was usually ready to make purchases without too much haggling. But now, "the average household income of our typical cybershopper has fallen to about $55,000...and Web buyers are more concerned with their wallets than the early adopters," says Christopher Kelley, an analyst with Forrester Research, an Internet business consulting firm.

Online sales also are gradually shifting away from today's mainstays—books, music, computers and videos—to apparel, home furnishings including crafts, gardening supplies, health and beauty aids, jewelry, toys, the whole range of consumer electronics and travel services. Even so, it won't be enough to simply offer expanded merchandise selections.

"With every store just one click away from other stores, retailers must differentiate their brand through the services they offer and availability of products," notes Elaine Rubin, chairman of Shop.org, an online retail trade group. Online retailers need to offer functions allowing shoppers to zoom in on products and get a 360-degree view. Cyberhelpers, such as those offered by Finali, will go a long way to personalizing service. They use software to conjure up the image of a real person who helps shoppers through the buying process. Companies such as Mind/Share, Informative and others can help personalization efforts.

"It will be more important than ever to have a call center staffed by real people who can help consumers when the automated helper cannot," contends Rubin. Another must: Online tools that let shoppers determine the stores nearest their homes and whether products are in stock NOW. Within a couple of years, most consumers will demand the option to buy online or pick up products the same day in stores. Kelley adds that the rising number of empty-nesters is going to expect reliable wrapping, gift card and mailing services because "they'll only buy a product if they can send it as a gift to a family member or friends in another state."

Personalization will move to a higher level by mid-decade with the development of technologies that will become de rigueur for online sellers. "By linking databases for all consumer transactions, retailers will know enough about consumer preferences to customize Web site offerings to individuals, make suggestions about product purchases and tailor [online] promotions to them," Rubin says. As broadband access grows, shoppers will be able to "try on" apparel, using a cybermodel of themselves, to make sure items fit just right.

By around the end of 2004, online retailers had better get ready to jump the next techno-hurdle—the convergence of Net commerce with television. "With Internet access built into TVs and [with] two-way interactivity, a consumer watching a commercial for The Gap, for example, will be able to click on the ad, get more information and then buy apparel directly," Rubin observes. Tests of this technology are under way in Europe, and the system is set for U.S. introduction in about 18 months. "This has been talked about for 20 years, but in another five, it will be a reality just about everywhere," she adds.