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Why online retail must boom

by Arthur Goldstuck

Next week sees the release of the 2002 Online Retail in South Africa report, which will reveal how South African e-tailers managed to double their online turnover from 2000 to 2001, and will probably increase it by 50% again this year.

How can this be possible, given the crash in dot.com businesses worldwide and the disfavour into which online only operators have fallen?

The reason is simple: South Africa was so far behind the world in bringing compelling online retail options to market, that when the rest of the world was caught up in the online retail race, South Africa was only just arriving at the starting line.

Out of this understanding flows almost everything else that is needed to understand the present supposed e-tailing boom.

* Firstly, there is no boom in the sense of a hugely profitable market or easy opportunities to make money. There is a boom only in the sense that proportionate growth of online sales is huge. In rand terms, those sales are in fact very small.

The total online retail market in South Africa for 2001 was double that of the year 2000. That may come as a surprise, until one looks at what was really achieved online in 2000: a mere R80-million in retail sales. The total retail market in South Africa amounted to R200-billion. Talk about a drop in the ocean!

The far higher projections we have seen for online sales in the past have included all consumer transactions generated by the Web, including car and house sales where actual payment was fulfilled offline, and shares and policies, which made up for the bulk of the numbers. These all disappear from the picture when we focus only on retail, which is loosely defined as products that are usually bought from stores.

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Secondly, as small as the sales levels are, they are also growing off an extremely low base, so that they will grow dramatically, from a percentage point of view, for several more years. In other words, online retail will appear to boom in South Africa for the foreseeable future.
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Thirdly, it is only in the past year that major retailers have come to understand that their online efforts must be integrated into their offline infrastructure. That includes branding and marketing; a reality that Woolworth’s, for example, learned to its own severe cost – around R40-million sunk into the near-defunct inthebag brand.

By extending marketing of physical brands and products to a company’s online presence, it is able to reap the benefits of a powerful brand in an environment where trust is still a key factor in consumers’ decision to purchase. In 2002, that is becoming the dominant approach to bricks and mortar retail, and the results are likely to reveal themselves not only in online sales, but also in return on investment.

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Finally, online retailers are finally beginning to understand that it is usually not cheaper to sell online. You may not need physical buildings, but a busy web site with large transaction levels is often extremely expensive to maintain. As consumer activity increases, so do consumer expectations, and therefore the cost of meeting those expectations. Several retailers could have built several physical stores for the same money that went into their online presence.

Once this cost of doing business online is fully understood, not to mention its effect felt on the bottom line. The weaker operators and those with little strategic understanding of online retail will fall by the wayside. The stronger will not only survive, but they will prosper – as long as they stick to the principle of integrated sales and marketing strategy.

The bottom line is that the boom will continue, but it must be understood for what it is, and not as a justification for throwing money down the drain.

* “The Goldstuck Report: Online Retail in South Africa” will be officially released in a presentation at the Brainstorm Conference at Computer Faire in Midrand on Friday, May 24. A summary will appear in The Big Change.

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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