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Online retail needs clear strategy (in South Africa)

by Arthur Goldstuck

It is in its relationship to physical retail that online retail is revealed in all its immaturity…

(Excerpted from “The Goldstuck Report: Online Retail in South Africa, 2002” – see below)

The total retail market in South Africa was worth R173-billion in 2000 and R188-billion in 2001. Given an online retail market of R84-million for 2000 and R162-million for 2001, online retail accounted for less than 0,05% of total retail sales in 2000 (0,047%) and less than 0,1% last year and (0,086%).

By contrast, the total online retail market in the United States was worth $32,6 billion in 2001, out of a total retail market worth $3,167-trillion. Online retail thus accounted for 1,0 percent of total sale. In 2000, online retail reached $27,3 billion, accounting for 0,9 percent of total sales.

Contrasting these proportions, it is clear that online retail is still at a very early stage of its market penetration, and remains deeply immature in its implementation in South Africa.

Strategic implications

The early years of online retail in South Africa, from 1996 to 2001, saw annual doubling or more of total sales, or more than 100% growth every year.

This large percentage growth was premised entirely on the low base off which the market has grown. As online retailers reach the majority of their potential online customers who have a propensity to purchase online, the growth pattern will change. From the total being made up largely of one-off purchases in the early years as users began to experiment with online transactions, the numbers in the future will be made up largely of repeat purchases by regular customers.

In other words, online retailers will rely increasingly on generating additional sales from the same customers, rather than attracting new customers. This has vast implications in terms of customer retention and customer satisfaction strategy.

Without a customer satisfaction policy, online retailers will not be able to generate loyalty and attract repeat purchasing. And without a customer retention strategy, online retailers will simply lose any market share they might gain initially through the sheer strength of their online presence.

This means that, for individual retailers, sales growth will be based on a combination of their own marketing spend and their investment in customer retention. Without a clearly defined strategy directing this expenditure, however, level of investment will have little impact on level of sales growth.

The corollary to this finding is that strategies should not be based specifically on growing online market share in terms of value of purchases, as the online market represents an aggregation of widely divergent rates of success. A high proportion of online turnover represents turnover from loss-making operations.

Particularly in the light of the relatively low level of online retail sales, growth strategy should be focused on:

a) Internal strategy – i.e. growing the retailer’s own sales effectiveness, rather than focusing on what other retailers are doing;

b) Traditional strategy – i.e. growing sales in line with physical market trends and demands, rather than focusing only on online sales trends.

Arthur Goldstuck is editor of The Big Change and author of more than a dozen books on the Internet and urban legends. He runs the independent research and strategy consultancy, World Wide Worx, and led the research for “The Goldstuck Report: Online Retail in South Africa”.

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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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