Small Guys Find Tough Going Online
By George Anderson
Increased competition, comparison-shopping sites and high marketing costs are all working against the small guy online. And, as if that was not enough good news, Patti Freeman, an analyst with JupiterResearch, said, “It’s only going to become harder to stay profitable or at least keep your margins where they are.”
The key, say merchants competing in the online space, is to find niches to exploit.
Illuminations, a candle and home decor retailer with 42 stores, has a significant presence in three states with large Latino populations – California, Florida and Texas. The company recently launched a Spanish-language web site to target this important demographic segment of its business.
Clay Lingo, vice president of Illuminations, said the company is looking to not only increase online sales with its Spanish-language site but also to drive additional store traffic.
Mr. Lingo is hoping to take advantage of a growing trend that has seen consumers researching products online before going to stores to make a purchase. According to the Santa Rosa Press Democrat, the number of retail transactions that are influenced by the internet was $464 billion last year. That number is expected to more than double by 2010 to $955 billion.
Moderator’s Comment: What do you see as the biggest challenges facing online retailers moving forward in terms of
competition, cost to acquire customers, size of the market, etc.? –
George Anderson – Moderator
There really are two basic online strategies — go broad like Amazon.com, eBags, eBay, etc. or go deep into a niche. If that’s true, than it would seem that the go broad folks are really in a worse position since they have to hold (or be able to access) a much broader range of inventory and order complexity than their niche brethren.
In many ways this problem is no different than trying to maintain a small independent bricks and mortar retail business. The first problem is making sure people know where you are and what you are. The second problem is ensuring that your products are obviously different/better in a significant way. Cyberspace is so big that it’s easy to get lost especially with all the big companies hogging the place (including the price comparison sites). I have no easy suggestions on how to get into people’s faces, other than saying that it needs to include an element of offline promotion, but it’s the path I would suggest niche retailers seek first and foremost. Once you get them there, you have to concentrate on the wow factor but that won’t help at all until people stroll through your virtual door.
I think a well thought out partnering strategy can minimize risk of holding inventory, to a great extent. Neither Amazon nor eBay (nor Yahoo) maintain inventory. They charge others for rights to use their network. Granted, replicating Amazon or Yahoo will take a prohibitively large initial capital outlay — and odds of success are probably not good.
No reason, though, why the strategy of a network aggregator can’t be replicated on a smaller level. Additionally, smaller players can (and should) use eBay and Amazon in addition to their own affiliate sites, and their own sites.
Sales online are likely to be profitable if (1) you have exclusive items with excellent margins or (2) extremely low operating costs or (3) extremely low marketing costs. Otherwise, the Darwinian margin destruction and ever-escalating customer acquisition costs will make profits unlikely.
Once upon a time, online was the best place to set up a little shop and make a decent living. In some ways, paid search is the biggest obstacle to that now. The search engines used to make it possible for a niche retailer to stand out and get traffic. If your niche is profitable, however, the big sites are going to buy all that search traffic.
Shopping aggregators like Yahoo! Shopping were also great places for small retailers, and probably still are, but not as much as in the past. Amazon and eBay also continue to provide aggregation for smaller retailers online.
I agree, Bernice: similar problems in many ways. Besides drawing traffic or clicks, it is also difficult to show just how you are different in ways significant to the customer on a website — and, even more important, to actually BE different. So many product differentiation schemes are already taken. Same with service and delivery schemes.
But then I keep coming back to the common horrors of internet transactions: in clothing and shoes, you can’t try it on first or see how the color will look on you; there is a problem with the order and a live customer service person is nowhere in sight; the $40 item isn’t really what you thought it would be, so you want to send it back — but then you have already paid a $10 shipping and “handling” fee, and it will cost $8 to ship it back, plus a stop at the shipper on the way home from work; you really need the item tomorrow, but the shipping charges will be $35. I suppose most of us have their own list.
It all reminds me of the retail world in general: lots of medium and big players doing a weak job of serving their customers, both in core products and services, and in customer services. All the obstacles everyone has already mentioned are quite significant, and have bricks-and-mortar correlates. But yet there are SO many unmet needs, both online and bricks-and-mortar.
Not much question the online market is growing and I think in 10 to 15 years it may be the largest market. This will be due to the Baby Boomers getting too old to drive their cars. The real problem is creating a brand and building trust with consumers. It is no different than opening a store, but now you are operating nationwide, not just down the street. Customer acquisition costs killed many of the early online companies. Longer term, I think the specialist with a truly unique product line will be the winner, not mass retailing.