Weighing up the future of e-commerce

Last year's dotcom fallout devastated business-to-consumer (B2C) e-commerce and shattered retailers' confidence online. Computerworld reporter Aimee McClinchy goes behind the scenes and asks if there's a future for local B2C e-commerce.

Last year’s dotcom fallout devastated business-to-consumer (B2C) e-commerce and shattered retailers’ confidence online. Computerworld reporter Aimee McClinchy goes behind the scenes and asks if there's a future for local B2C e-commerce and whether e-tailers and established retailers are starting to get it.

How many companies can say they learned the lessons from the ongoing dot-com and see a way forward for B2C?

Since April last year and well into the new year, newspaper headlines have screamed out lists of "pure play" dotcoms gone bad and websites posting ever-increasing lists of B2C layoffs and shutdowns. The headlines and scepticism increased over the Christmas break as ventures backed by major, "offline" organisations such as Walt Disney and brokerages like Schwab also admitted they had got it wrong online and reported huge drops in profits in their December quarter results.

Here, New Zealand Herald publisher Wilson & Horton axed around 10 jobs at its interactive division. Web portal E-Force closed its online operations and announced a group financial restructuring in the week after Christmas. Only two months earlier, broker DF Mainland had listed it as a "buy" stock when it dropped from its high of 48c to 10c: but, its report shows, only after downplaying E-Force’s B2C side and highlighting its planned focus shift to B2B.

Reading between the lines

So what really went wrong? The few able to get their hands on detailed reports such as DF Mainland's may have a few more clues than most - but such reports are only written about companies listed on the stock exchange, and not widely distributed. For the most part, media stories quote analysts who speak in general terms of "flawed business models" and companies 'ignoring old business rules".

But those involved in such B2C ventures spoken to by Computerworld are more specific.

"They [dotcom managers] were inexperienced and didn't have an understanding of distribution," says John Hayson, chief executive of Renaissance's e-commerce subsidiary Conduit.

"They had no after-sales service and were just a transaction place," says Electronic Business Association of New Zealand chairman Mark Jeffries.

Matthew Darby, chief executive and founder of e-commerce developer eStarOnline, points his finger at the US financial community, saying they "have a lot to answer for. They just got greedy. If the financial markets hadn't gotten so sky high, you wouldn't have had all those players wanting to get in. And with so many players in such a little time, every time that will cause casualties. For many B2Cs, they just couldn't their branding out there – there was too much noise."

Other players blame failed technology, "third party" fulfillment organisations for not delivering speed or order accuracy, or a lack of audience analysis and value in the business proposition from the start.

Middleware company BEA Asia Pacific head Matt McLaughlin says dotcoms forgot how hard it is to get customers. To many advertisers, websites were seen as a channel to a more random and potentially less important audience. As Ebanz's Jeffries points out, those easily "churned" from someone else to you, are also those more likely to move on again.

George Bell, chairman of Excite@Home, told e-Company magazine his biggest mistake was "spending money on unmeasured marketing to grow the brand". Toys'R'Us says its biggest mistake was running television advertising in 1999 when the company couldn't even handle the demand.

But perhaps one of the most clear cut reasons, one that began to come to light over Christmas with the quarter-end disclosures of major retailers and the ensuing job cuts, was high overheads. B2Cs had overspent on people and property – typically inner-city, flashy premises.

In the trendy suburb of Pyrmont, Sydney, there was a reported pre-Christmas rash of subleasing as dotcoms folded and moved out of long-term leases. Real estate agents also pointed out landlords skeptical of such company’s ability to pay rent in the first place had charged larger than normal bonds and demanded many pay rent up to 12 months in advance.

Apportioning blame

Such a continuing overhead burden of leases was one of the factors blamed in the closure of E-Force's portal and in the group's financial restructuring proposal in late December.

E-Force, which backdoor-listed through former forestry company Paynter Timber, was headquartered in one of Christchurch's only high rises with a plan by founder Mark Fulton to aggregate an online community of buyers who would then benefit from bulk buying opportunities. Several of its early promotions included giving away iMacs and a VW Beetle.

Today, current chief executive Bill Farmer says the head lease rentals entered into by E-Force Group several years ago are significantly above market value, and along with other related costs, substantially exceed income from the company's sub-tenants.

But Farmer, who became chief executive when the B2B company he founded was acquired by E-Force last year, also points out that the company's financial difficulties were due to continuing losses from the portal itself.

"The major factor was the ongoing inability to generate sufficient revenue to cover expenditure," he says. "The portal developed a good membership base, but could not deliver sufficient savings on product to entice them to purchase through the portal. On the direct mail front, while demographic information attained [from the members] was good, we were always at risk of annoying the members by repeated mailings."

E-Force now plans to use Farmer’s company, Product Sourcing International, which produces an in-house proprietary logistics software package, to help finance the restructuring. Farmer has overseen management changes and staff cutbacks from the B2C business, only keeping on several developers to build a web-end for PSI. Fulton left as part of the changes, while chairman Richmond Paynter has also resigned, turning back to overseeing the Paynter Group and property deals such as selling sections at the Ballantyne Golf and Retirement Resort, near Katikati.

E-Force is now based out of PSI's offices in Glenfield, Auckland and has employed a senior, retail-heavy management team.

As to the overall downturn in the B2C market, Farmer says the investing public simply realised it couldn't go on losing money forever.

B2C can't be undone

B2C won't fade away, despite being dismissed by some – it exists because the internet exists.

Consumers also want to, and are, buying online. Kiwis spent $242 million on internet shopping in the past year, a figure the government says will reach billions by 2004.

And they want to visit local sites. Monitoring service Hitwise found 37% of all local traffic going to shopping and classified sites in December went to local sites – a marked upward swing from the year before.

But the consensus seems to be that there is little room for “pure plays”. For instance, e-tailer Beauty Direct says it has realised a retail presence is “strategically important” to suppliers in deciding who they will chose to support.

E-Force’s Farmer says established retailers will be the ones to survive "mainly because of the confidence of being able to go down the road to the existing store if something goes wrong, combined with the comfort of having purchased from the retailer before."

Consolidation is part of the next phase, as Ernst & Young's Australia-based e-commerce partner Mark Runnalls noted in a study done in January: “The most successful players are likely to merge or form alliances with traditional players.” In New Zealand, one example of this has been publisher IT Media taking in Wilson Neil as a major shareholder and acquiring e-tailer Flying Pig and music e-tailer CD Star.

So does Flying Pig’s grouping indicate New Zealand e-tailers and established retailers are starting to get it?

Yes, if slowly.

While CNN’s Asia Pacific unit head Bruce Dover recently criticised his rivals down under for “sitting on their hands waiting to see what happens next”, others say the B2C market in New Zealand can no longer be described as in "a holding pattern". They say it is more in a low-key, phase one-rollout stage of the second generation.

Industry leaders say most retailers and e-tailers have “taken a step back” and are today looking at "getting their house in order" – that is, many of them are looking at what efficiencies or savings B2B initiatives can bring – before taking on new or improved B2C projects.

The country’s quandary may be illustrated by the strife that advertising agency Brave New World has found itself in. It recently had to lay off nine design staff, saying print markets "are depressed" – with one example being that annual reports are being published online – but simultaneously pointing out how "slow and conservative" local companies are proving about going online.

Others say the next stage of B2C will be soon be sped up by the introduction of interactive TV. “Interactive TV is going to make a big difference in B2C and if that comes in June [as rumoured] people need to start thinking,” says Terabyte Interactive managing director David Crown. “If it is low cost, people will turn to it, and when there’s that sense of immediacy and ways that make it easy, that’s when B2C will really happen.”

Getting it

Some industries are already showing promise.

BEA’s McLaughlin says airlines are "absolutely getting it, and banking is starting to".

AC Nielsen.online managing director John Laroche points to local fast moving consumer goods (FMCG) industries as those grasping the concept – like branded grocery goods, pharmacies and groceries.

B2C pioneer Woolworths is still servicing hundreds of customers four years after starting, and dairy industry site RD1.com, an online site backed by the 20-something strong AnchorMart rural store chain, is meeting its transactions targets.

Real estate companies say they are making sales online, despite the earlier troubles of Realenz.

But as chairman of an association with 150 corporate members, Ebanz’s Jeffries is perhaps more measured. He says "everybody is still wringing their hands" about the issue. "But it is fair to say the majority of them will have some eggs in that basket.”

The country's biggest retailer, The Warehouse, has finally begun to roll out its delayed e-commerce strategy, with information chief Neville Brown recently telling Computerworld it has started running a prototype with a few selected corporate users for its "blue stores" – that is, selling stationary and related goods. It will "perhaps" move on to the red stores.

Another major retailer group, Flying Pig's former cornerstone shareholder Pacific Retail Group (PRG), has a corporate information-only website but no e-commerce site. With new faces at the helm – former PRG head Stefan Preston was also Flying Pig’s founder, and once planned to integrate the two – a new plan is slowly forming. New boss Peter Halkett said late last year that the group plans to woo internet shoppers through store-specific websites linked to its brands of Bond & Bond, Noel Leeming and Computer City by mid year.

In its half-year results in December, PRG chairman Maurice Kidd said the group had initiated a number of long-term projects to further improve performance – systems management, distribution and logistics initiatives – in other words, efficiency before e-commerce.

Says Jeffries: "To deny B2C's potential would be to deny the power of TV when it first started. There's got to be a future for B2C. The problem with New Zealand is the 'C' bit it so small."

Kate Delhagen, chairman of US-based association Shop.org, a division of the national retail federation, agrees there's a future, soon. "It's encouraging to see a majority of online retailers continue to focus on improving businesses processes to make themselves stronger," she says.

"The ongoing dotcom market correction is far from having a negative effect on online retailing as a whole – it has actually led online retailers to renew their focus on customers service, cost reduction and profitability."

Venture capitalist and Technology New Zealand advisory committee member director John Cunningham says survival will always come back to adding value in your supply chain – that is, taking a component like warehousing out.

"Most B2Cs have been adding distribution or "the last mile" to their processes and it’s the addition of the last mile that’s still the problem and that hasn't been solved yet," he says.

For eStarOnline’s Darby, survival won't be “about the best price but the most convenient and the best brands.”

"In the same way that you wouldn’t spend $1 million on opening a corner dairy, don't try to be the big boy on day one," Farmer advises.

"Next, forget the hype; identify niche markets and mix old economy business principles with new."

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