Digital Darwinism

Is e-tail the death of retail as we know it?
Magazine Contributor
15 min read

This story appears in the February 1999 issue of Entrepreneur. Subscribe »

Every important invention, from the refrigerator to the railroad, has caused economic pain for some. The refrigerator decimated an entire industry built around harvesting ice from the Northern states; the railroad spelled the end for many lake transportation companies. The late economist Joseph Schumpeter pointed to the inevitable "creative destruction" left in the wake of these revolutionary inventions.

As the next millennium approaches, yet another groundbreaking invention has left some businesses startlingly vulnerable: the Internet. With the Web dominating the future of commerce, traditional businesses will need to struggle to adapt, transform and compete against their swift-footed Internet competitors -- or possibly face their death.

"The biggest challenge facing small businesses in the new digital age is not technology but a combination of inertia and a lack of marketing clout," says Geoffrey Ramsey, a statistics analyst at eMarketer, a New York City company that tracks Internet marketing trends, research news and statistics online.

"Small businesses, defined as those with fewer than 100 employees, represent 98 percent of all business enterprises. Yet small businesses are way behind when it comes to getting online and setting up a cybershop," Ramsey says.

This inertia, coupled with the relative ease with which firms can go global simply by building a Web site, may spell the end for some traditional businesses, which typically tie up financial capital in floor inventories, storefronts on expensive real estate and complicated delivery systems. The difference in overhead costs between traditional businesses and pared-down Net-based enterprises is one of the areas that online firms seek to exploit.

But it's not just the difference in costs that gives online firms an advantage. Many also save time--the most precious resource to today's consumers. According to a recent AC Nielson survey, Americans average 159 shopping trips per year, which translates to about 60 hours of travel time according to eMarketer. "Given the time pressures of balancing work, household duties, child care and social activities, it's not hard to see why the Internet, with its convenience advantages, will increasingly become the smart way to shop," Ramsey notes. Understanding how people choose to balance their time and money is critical for small businesses seeking to understand the impact of the Net on their companies in the coming years.

Even if your company is one of the rare businesses that doesn't need a Web site, you still must assess your vulnerabilities to Web-based competition if you want an accurate prognosis for your business's long-term survival. Here are the compelling statistics:

  • According to the National Retail Federation, 26 percent of retailers had an Internet site in 1998, up from 20 percent in 1997 and only 8 percent in 1996.
  • EMarketer predicts a continuing explosion in the number of Internet users worldwide: They will nearly quintuple over the next five years, from 44.4 million in 1997 to 228 million in 2002. This represents an average annual growth rate of 103 percent. In the United States alone, Ramsey sees the number of Internet users growing from 28 million in 1997 to 85 million in 2002, a 61 percent average annual growth rate.
  • Consumer purchases over the Internet will rise from $4.5 billion in 1998 to $35.3 billion by 2002, according to eMarketer.

Clearly, this is the direction markets are going. It all boils down to one indisputable fact: Your competition is everywhere. Yes, everywhere. From sleek Web-based enterprises to smart traditional businesses that have built a strong presence on the Net, from businesses down the street to companies across the globe, competitors are eyeing your customers like never before.

To determine whether your company is likely to face aggressive competition from online firms in the coming millennium, consider the following questions and tips on how to shield yourself from competitors and provide more opportunities for your business by rethinking your Web-site strategies.

1. Is your company giving away a lot of free information that must be covered by overhead expenses? Can other companies "piggyback" on your investment?

Some traditional stores have showroom floors where customers can see and experience what they're buying. A stereo store is a good example. Customers can gain a lot of "free" information by sitting in a plushly built sound room and listening to dozens of different stereo speakers. But part of the speakers' price must cover the overhead expense of the showroom. Ironically, then, this information is free to the customer only if the customer decides not to buy the speakers. Other examples include sporting-goods stores, furniture stores and photography stores. The customer can swing a golf club, sit in an armchair or look through a camera at a nearby mall--and then order the identical goods at a lower price over the Internet.

Internet suppliers' lower overhead costs and typically slim margins mean businesses can pass the savings on to the buyer. The only edges that traditional stores have are convenience, lack of shipping expenses, the promise of better service and, perhaps, customer loyalty.

"Commodities are the products most at risk here, particularly when the customer feels little or no loyalty toward the store [selling them]," says Maria LaTour Kadison, a senior analyst at Forrester Research in Cambridge, Massachusetts. Expect customers' loyalty to fade in direct proportion to the savings they can get by shopping on the Web.

The challenge for businesses selling these types of products is to find a way to get customers to pay for information or services. One solution that may come of age in the next century is to charge individuals for the information they now get for free. For example, if traditional stereo stores collapse, sound room centers might become a viable business of the future, allowing people to learn about and fully appreciate the products they want before buying them over the Internet. That way, the cost of the information is paid for by the people who benefit from it.

Kadison offers an option that is more practical in today's environment. "Traditional firms can meet the challenge by improving and emphasizing friendly customer service and hand-holding where necessary to create customer loyalty," she says. "The Internet, by nature, is much more impersonal, and traditional firms can capitalize on this."

2. Will customers wait for your product?

Part of the Internet's attraction is that companies can be located in rural, low-rent areas to cut their products' prices. But remember, the Internet doesn't always save people time. For consumers who need an item quickly, this method of buying poses a serious risk: shipping delays. This, in addition to the idea of shipping costs (even if the product itself is lower-priced) can drive people to the store rather than to the computer. If you have a splitting headache at 3 a.m., it's a no-brainer to decide whether to order aspirin over the Web for 30 percent in savings or to drive to the nearest convenience store. In addition, Kadison points out, companies that sell perishables, such as fresh-baked goods, or other items that don't ship well shouldn't be afraid of Internet competitors.

So immediate gratification does play a role. Saving time is relatively more important for inexpensive products, while saving money is relatively more important for expensive ones. Thus, stores with high-priced commodity items are most at risk, particularly those selling products that customers are willing to wait a few days for.

3. Does it somehow enhance a product's value to be sold through your business, and does this extra value exceed the savings from shopping on the Internet?

A firm that sells a product with no identifying personal stamp on it is deeply threatened by Internet competition. Travel agencies clearly face this challenge, as do insurance companies and banks. The commodities they sell--plane tickets, insurance plans and checking accounts--are typically offered in packages identical to those available from other agents or sellers; the consumer is most concerned with price and will switch from one seller to another to save money.

"What traditional travel agencies need to do is establish a niche market and compete on things other than price," Kadison says. "The Internet will force companies to focus on creating more value."

For example, it will no longer be enough for travel agencies to sell tickets over the phone. Increasingly, they'll be called on to handle complicated transactions or create bookings that require advance planning, or knowledge of the carriers or sponsoring hotels.

Anne Baskett, owner of Daly Travel Services Inc. in San Francisco, has already seen a change in her business. "During the last six months, simple ticketing for airline fares through our agency has dropped by 3 to 4 percent," she says. Baskett suspects her company is losing individuals who don't fly frequently and who haven't built up relationships with travel agents. "The whole process of buying tickets through the Internet has become more robotic, but more user-friendly," Baskett says. "By the millennium, I think we'll be out of simple ticketing altogether and only doing service transactions."

Baskett is upbeat about the future, though. "We have to change with the times, and that means becoming more technical and more customer-friendly," she says. "At the same time, we need to [help simplify] complicated transactions and think more about savings for the customer."

Some businesses already have a strong personal stamp, and these will succeed in spite of Internet competitors. Artists, specialty shops selling hard-to-find items, and skilled carpenters have little to fear, because their products aren't standardized and are strongly identified with the businesses' owners.

Here's another key point that might make you nervous: Your Web competitor might steal away your customers by selling a product you don't even consider a substitute. Take coffee shops, for example. Most coffee shop owners think about their competition on terms of neighboring coffee shops. But remember the product being sold: coffee. The reason customers pay $2.50 for a cup of coffee is for the value added by the shop, which typically includes the ambiance and friendly conversation. But some people might trade off that experience for price, say, if they could make that same cup of coffee in their homes for 20 cents.

Adam Teitelbaum, 39, owner of Adam's Organic Coffees in San Francisco, sells his specialty coffees by advertising over the Internet and is rated one of the "top coffee Web sites" by Infoseek, an Internet search engine. "E-commerce is here to stay," Teitelbaum says, although he admits, "It will probably never completely replace the ritual of going out for coffee." The relatively low cost of displaying information on the Web gives Teitelbaum a chance to educate customers about the advantages of organic coffees, something he says would be too expensive to do at a retail outlet. Currently, the company does about 5 to 7 percent of its sales over the Internet, Teitelbaum estimates, but he's convinced that sales will continue to grow. "I'm now investing in a secure server that will allow people to directly order my coffee through the Web site," he adds.

The bottom line is that human behavior changes when costs change--remember how we thought watching tapes on the VCR could never replace going out to the movies?--and the value that your business adds to the product must beat the savings that can be had from ordering online. Competitors that you never dreamed would affect your business are now a potential threat.

4. Is your product information itself? If so, how easily can it be guarded or replicated?

Some companies used to make money by selling information that consumers had difficulty accessing. That's quickly changing. For example, in the past, few people had access to the wealth of financial information that is now available to anyone over the Internet, and stockbrokers were able to capitalize on that. Now, a growing number of individual investors are buying and selling stocks over the Internet, using companies such as Ameritrade, and bypassing their brokers altogether.

It's not enough anymore for a broker to pass along information; the information must be analyzed and distilled so it saves consumers the time required to do it themselves. Companies whose stock in trade is information that's simple to acquire and understand are in serious trouble.

On the other hand, some products are difficult to understand or use without a business's on-site help. Ordering an automobile muffler from an Internet firm might save some money, but most customers don't want to learn how to install it, or do it themselves. Those companies that deal with products that involve specialized help and information are better protected from Web competitors.

Craig Richardson has published articles in The Wall Street Journal and other economics journals, and is an assistant professor of economics at Salem College in Winston-Salem, North Carolina.

Your Ally, Not Your Enemy

After carefully analyzing your business, whether you don't feel the heat of Internet competitors breathing down your neck, or you do--and we've put you in a panic--it's a good idea to re-evaluate your marketing strategy on a regular basis. A business unaffected by the Web even six months ago may now be in competition with a company that has found a way to do business better online. And even if most of your products or services can't be provided online, as with car repair, tailoring or painting, a Web presence can get your name out there and offer information to people who may eventually become customers. (See "No Fear," below.)

"Smaller businesses should band together and create local sites for greater visibility," advises Kate Doyle, former analyst for Jupiter Communications. "The companies should complement one another, rather than go head to head against each other."

And don't lose sight of what's most important on a Web site: content. "You can have the best Web-site designers and invest money in fabulous technology. But if you don't build a marketing plan for your customers to visit--and come back time and time again--you will ultimately fail," says eMarketer's Ramsey.

Tom Williams, 65, owner of Venture Press, a publishing company, and PubMart, a how-to Web site for entrepreneurial publishers, both located in Coral Springs, Florida, has sold books for years through traditional bookstore outlets, which he describes as "death on the small publisher." The growth of desktop publishers offering services through the Web during the past few years put even more pressure on his firm.

Williams took a hard look at the cost of a Web site and realized it made sense. With the advent of his site last April, he's been able to more directly reach niche markets and retain most of his sales. He says he is now "well into the black" with this investment.

Yet there is a saving grace for entrepreneurs who feel uncomfortable because of their lack of a Web site. As Kadison observes, the Internet's greatest asset is also its greatest liability. The ease of entry into the Internet market means your greatest hurdle will be getting traffic to your store, considering most users visit fewer than 10 Web sites on a daily basis, according to eMarketer. In addition, many companies forget that their sites must be maintained and that monthly expenses add up quickly. "The Internet isn't as easy as it looks," Kadison says.

"Make no mistake," Ramsey adds, "the Internet is a very different way of doing business. Small businesses that are quick to try, learn and adapt will be the most successful. By going through the inevitable failures, these companies will learn what works and what doesn't, and they'll have a much richer understanding of the Web and how net users shop and buy online."

The coming millennium will indeed be transformative in terms of how we shop and what we buy. By reacting positively to the inherent destructive qualities of change, small, traditional businesses can harness the wave of innovation rather than be crushed beneath it.

Did You Know...?

  • Average Online expenditure by individual Internet buyers was $227 in 1998 and is projected to be $427 in 2002.
  • The number of people who made at least one purchase on the Internet in a given year leapt from 6.8 million in 1997 to 16.8 million in 1998. It is projected to climb to 63.7 million by 2002.

source: emarketer

No Fear

Mari Trosclair, 43, owner of by word of mouth catering in the tiny coastal town of Oriental, North Carolina (population: 800), has good reason not to worry about Internet competition. She's in a remote location, and her mouth-watering cuisine and exemplary service have a signature quality that is known for miles around. In addition, her menu is unique for her area. (Unlike Trosclair, her competitors aren't shipping in grilled swordfish from New Jersey.)

But her business's location was making it difficult to relay information to a multitude of people. So Trosclair decided to develop a Web site for her company. "I use it as one leg on the table of my marketing/advertising plan," she says. "If someone sees my card or Yellow Pages ad, they also see my Web site address. At the Web site, they're able to get much more information than they ever could in a print ad."

She contends that not being afraid of competition from the Net doesn't have to mean not participating in it. Indeed, as a marketing strategy, it's only helped business.

"The information and skills someone needs to go into business are out there," says Trosclair. "The factors that make a difference in real competition--the management team, people skills, capitalization and product, can't be stolen from my Web page."

Contact Sources

Adam's Organic Coffees, (800)339-ADAM,

by word of mouth catering, (877) 274-5685,

Daly Travel Services Inc., (415) 989-0170,

eMarketer, (212) 677-7137,

Forrester Research, (617) 497-7090,



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