Dont Believe The Hype by Andrew Hui

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Don’t believe the hype!

by Andrew Hui
March 21, 2000

A version of this article first appeared on Andrew Hui’s website on Dec. 24, 1999
 


 

I was watching some financial show with Garth Turner where he was interviewing this 20-something yahoo about e-retailing. This num-nut had no idea what the hell he was talking about. He kept blathering on about how e-retailing would save money by reducing rent and staffing costs. As the old (and wrong) argument goes, since a company that sells on-line uses a web site, it doesn’t need a storefront or people in the store. Therefore, it saves money and can sell for less.

Bollocks! I’ve never heard such a pile of crap. Ok, wait a second, I should be fair. I did believe it myself, but, after thinking about it, I realised that e-retailing is going to do very little. In fact, I wrote a paper about it. You can check it out at http://www.geocities.com/ahui.geo/other/essays.htm. It’s called: “Will the Internet mean the end for intermediaries?”

Basically, there are 4 reasons for why e-retailing isn’t going to make a big dent:

 

1. The “savings” aren’t real.

Sure you don’t need the store and the sales staff, but you do need a big warehouse and staff to take care of inventory. The advantage with retailing is that your staff act as sales people and inventory people. With e-retailing, you just have inventory staff. So basically, the staffing changes and rental changes are not significant.

Also, it goes down to very basic economics. It is often cheaper to ship 1000 goods to 1 location that it is to ship 1 good to 1000 locations. With the Internet, your distribution system is the latter and therefore, it is more expensive for the e-retailer to get the goods to the customer. Furthermore, since the onus is on the consumer to buy the good, the cost will be paid, in full, by the customer. That’s why most e-retailers such as Chapters Online have a $10 shipping fee.

Some argue though that I should have included the travel time and the line-ups as part of the equation in that they represent a cost savings. I would argue that the amount is so little and the expense is so hidden that it doesn’t really factor into the equation. I mean, does anyone know (or care) how much it costs to drive to the corner store?

 

2. The advertising factor

If a tree falls in a forest does it make a sound? That’s the kind of idea for e-retailing. The Internet is just so big, and competition is so fierce that it is impossible for a startup retailer to generate enough buzz to generate enough traffic. I mean, even “successful” e-retailers such as Amazon.com have yet to make a profit!

Regular stores are useful because they let people go to one place and browse. With the Internet, there aren’t enough central locations for people to go. And when there are, they will either be too big (i.e. too many affiliated retailers listed) or too expensive (the site charges too much “virtual” rent).

 

3. The human factor

Shopping is such an engrained tradition among citizens of most Western societies. Marketers have long recognized this as part of the buying process. Simply said: people like to go out and be with other people. E-retailing negates this. This is not to say that no one will be attracted to e-retailing because they don’t go out, just that there are not enough of these people right now to make it profitable.

 

4. Some goods can’t be sold on-line

Can you imagine test-driving a car on-line? Or maybe buying an engagement ring online? Generally, unless you have more money that Bill Gates, these goods need to be tested and touched before a sale is made. Commodities, on the other hand, such as pop and toilet paper, can be sold this way since they are fairly generic and low risk. But therein lies the problem. Competition will be fierce for these products, and the value-to-volume ratio is just too low to justify selling it online. Basically, there is almost no money to be made selling commoditized goods.

Anyway, I’ve bored you all enough. Those four reasons are basically why e-retailing isn’t going to revolutionize anything. As per usual, if you think I’m off the deep-end, let me know!

 

 


Andrew Hui is a 4th year Commerce student at the University of Toronto. In the future, he hopes to be one of those annoyingly young and rich owners of a dot.com business. In the meanwhile, he enjoys writing controversial and revealing rants, and sharing them with his friends in an effort to spur some intellectual or, in many cases, pseudo-intellectual discussion about a variety of topics. His objective with the rants is not to engage in serious discussion, but to spur thought and encourage people to frame their ideas and opinions in writing.
His personal website may be found here.

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