Chapter 11 e Commerce Retailing and Services PDF

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CHAP TE R

11

E-commerce Retailing and Services LEARNING OBJECTIVES After reading this chapter, you will be able to: ■ ■ ■ ■ ■ ■ ■ ■

Understand the environment in which the online retail sector operates today. Explain how to analyze the economic viability of an online firm. Identify the challenges faced by the different types of online retailers. Describe the major features of the online service sector. Discuss the trends taking place in the online financial services industry. Describe the major trends in the online travel services industry today. Identify current trends in the online career services industry. Understand the business models of on-demand service companies.

S ouq.c om : The Amazon of the Middle East

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hen Souq.com was launched in 2005, e-commerce in the Middle East and North Africa (MENA) region was in its infancy. With no local roadmap to follow, its original parent company Maktoob, a 1998 Internet pioneer that provided the first free Arabic-supported e-mail service, chat, greeting cards, and content channels, opted to follow the successful auction format forged ten years earlier in the West by eBay. A souq, or souk, is a traditional Arab marketplace at which a wide range of products from wood carvings and rugs to spices and food are exchanged through a bargaining process between buyer and seller. In spite of the apropos name, Dubai-based Souq struggled to thrive, especially after Maktoob was purchased by Yahoo in 2009 and Souq was left to fend for itself. Transactions between Gulf States with different currencies, laws, and regulations complicated trans-country shipping, often necessitating bank accounts in each country and requiring local business partners. Inventory management was also a challenge. And customers were reluctant to use online payment systems, preferring cash on delivery (COD) to entering credit card details online. These problems have plagued MENA retail and service e-commerce, and while more consumers in the region than ever are using online payment systems for ecommerce, a full 50% of purchases are still made using COD. Though Souq initially pursued a model akin to eBay, it soon began cultivating relationships with small businesses, encouraging them to enter online retailing in the cost-effective atmosphere of an online marketplace. Through trial and error, Souq discovered that the “Buy-It-Now” model was superior to the auction format in nations where auctions were not culturally accepted. Now considered the Amazon of the Middle East, Souq has outperformed its peers in both securing investors and encouraging entrepreneurs to launch their businesses through its site. Meanwhile, its original parent company Maktoob ceased operations in 2014. In 2011, Souq fully switched to the fixed-price model. Souq also revamped its website in 2012, prioritizing improvements to usability and search. Souq also added fulfillment centers and warehouses, hired delivery and warehouse personnel trained in modernized logistics systems, and updated its data storage systems to bolster security.

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SOURCES: “Saudi Sovereign Wealth Fund Launches Noon, Middle East’s Take on Amazon,” by Angela Gonzalez-Rodriguez, Fashionunited.in, December 15, 2016; “Souq.com to Offer Same Day Delivery Across GCC by H1,” Arabiansupplychain.com, December 14, 2016; “Amazon Purchase of Souq.com Would Be Great News for UAE Residents,” by Peter Nowak, Thenational.ae, November 30, 2016; “Bumper ‘White Friday’ Weekend for Souq. com with Surge in Online Shopping,” by Andrew Scott, Thenational.ae, November 27, 2016; “Amazon Is Said to Be Discussing a $1 Billion Purchase of Dubai’s Souq.com,” by Feliz Solomon, Fortune, November 25, 2016; “Souq CEO Not Worried by $1bn Rival Noon.com as Sales Weekend Approaches,” by Robert Anderson, Gulfbusiness.com, November 16, 2016; “Dubai’s Souq.com Said to Plan Stake Sale at $1.2 Billion Value,” by Dinesh Nair, Arif Sharif, and Archana Narayanan, Bloomberg.com, September 7, 2016; “Souq.com and MasterCard Partner to Offer a World-Class Payment Experience for Customers,” Mastercard.com, April 11, 2016; “The Middle East’s First Unicorn: Souq.com’s CEO on Leadership, Timing, and Coping with Rejection,” by Elizabeth MacBride, Forbes, March 25, 2016; “Souq, Amazon of the Middle East, Raises $275M From Tiger and More at a $1B Valuation,” by Ingrid Lunden, TechCrunch, February 29, 2016; “Souq, Online

E-commerce Ret ailing and Services

The Egypt-based Fawry electronic bill payment service helped overcome consumer reluctance to shop online. Buyers can go to an ATM, post office, or one of 3,000 authorized retailers including grocery stores and pharmacies to pay for online purchases. If the customer does not have a bank account, as is common in the region, cash can be deposited into the Fawry network at the local corner store. Souq now also owns its own payment service, Payfort, which it hopes to expand into offline payments and point-of-sale services akin to Square. The company also partnered with MasterCard in 2016 to provide improved payment options for its customers. E-commerce in the MENA region is still dominated by men, and Souq has made attracting female customers a priority. To that end, Souq purchased Sukar.com, a highfashion flash sales site, in 2012 to bolster its burgeoning fashion division. Sukar benefitted from the use of Souq’s logistics and delivery systems while Souq gained customer service and fashion expertise and reinforced its position as the leading e-commerce site in the region. While women have lagged behind men as e-commerce consumers in the MENA region, increased Internet access at home and increased mobile device usage has led to a growth in e-commerce purchases by women. The integration of Sukar with Souq and the launch of Souq Fashion positioned Souq to capitalize on this budding market segment. While in the West around 11% to 15% of fashion sales are derived from e-commerce, in the MENA region only a meager 1% of the $30 billion in fashion purchases are online. Supported by the new website design and advised by stylists for prominent stars including Jennifer Lopez and Rihanna, Souq Fashion provides the traditional counterpart to the daily flash sale specials offered on Sukar. High fashion from over 80 designers, including Arabic luminaries such as Dina JSR, Ronald Abdala, and Dima Ayad, are offered at reasonable price points with the additional benefit of advice from stylists. All of these improving conditions, investments, acquisitions, and upgrades have generated significant interest in Souq from investors. In 2012, South African media group Naspers and New York hedge fund Tiger Global Management purchased a stake in Souq worth an estimated $40 million, with Naspers providing additional funding in 2014 and Tiger in 2015. In 2016, Souq completed its largest round of funding to date, raising more than $275 million from a combination of Tiger, Naspers, and a slew of other high-powered investors. The 2016 round of funding was the largest ever raised in the Middle East and gave Souq a valuation of over $1 billion, making it the first company from the MENA region to achieve the “unicorn” designation for companies worth a billion or more. Later in 2016, Souq began making plans to sell a 30% stake in the company at a valuation of $1.2 billion, but many reports have indicated that Amazon might not only be interested in that stake, but also in purchasing the entirety of Souq for upwards of $1 billion. This would give Amazon the ability to use Souq’s local infrastructure to sell to MENA customers without being forced to ship items from overseas as well as a huge new base of customers to market its Amazon Prime video streaming service. With the influx of cash, Souq has continued to expand its operations in the United Arab Emirates (UAE), Saudi Arabia, and Egypt. It currently features approximately 2 million products. Souq has continued its support for and expansion of its network of 70,000 entrepreneurial sellers such as KAF, a weaving company; NAS, a design-printed T-shirts

Souq.com: The Amazon of

t he Middle East

company; the Joud Store, a company that creates home accessories, mugs, coaster-art and trays from tiles; and Skinzo, a laptop covers company. The company also announced same-day delivery for the first time in 2016, initially available only in Dubai, but with plans to expand the service to other major regional sities like Abu Dhabi, Riyadh, and Cairo. Souq has embraced mobile technology and social media as it attempts to increase its worldwide visibility and bolster its branding and marketing efforts. Souq’s Facebook page has over 8.2 million likes, and the company maintains multiple active Twitter accounts focused on different areas of operation, like the UAE and Egypt, with flash deals and other useful information. In 2015, Souq launched its app for the Windows 10 operating system, featuring different catalogs for each of Souq’s major markets and special deals exclusive to app users. In 2016, mobile customers represented more than half of all traffic on Souq.com and made 70% of purchases in Saudi Arabia, and closer to 60% in other markets of operation, justifying Souq’s emphasis on strengthening its mobile platform. Souq has worked to improve its visibility in the MENA region. In 2013, Souq unveiled its first regional advertising campaigns across its major market segments, displaying colorful characters interrupted by Souq deliveries. Souq established Egypt’s first Internet-based youth commerce training academy and has also entered agreements with universities like the Canadian University of Dubai to promote entrepreneurship and help a new wave of young people in the MENA region develop tech skills. Souq has even launched its own hardware, including the QTAB tablet computer, aimed at Arabic consumers. Given that online purchasing represents a much smaller fraction of total purchases in the MENA region than it does in the rest of the world, still checking in at about 1–2% compared to the mid- to high teens in England, Souq’s potential for growth in 2016 and beyond remains strong—e-commerce is growing approximately 60% every year in the Middle East, indicating that the region is destined to catch up quickly. Souq has even outpaced those figures, growing ten-fold in the last three years and with expectations of growing 30% to 40% in 2017. On ”White Friday,” Souq’s version of America’s Black Friday shopping period, Souq reported sales of more than 1.2 million units in 2016, more than double the 600,000 units it sold in 2015, with 50% of those sales coming from Souq’s mobile app. However, Souq is not the only company targeting this growing market. Other competitors include Noon, a Saudi-backed e-commerce startup that emphatically announced its arrival with initial funding of $1 billion in late 2016; Rocket Internetbacked MENA e-tailer Namshi, which posted improved results in 2016; and a slew of other hopefuls including Wadi.com and JadoPado. This is a growing market with room for multiple winners, and Souq is well positioned to be a force in e-commerce despite its growing competition.

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Retailer in Middle East, Gets a $275 Million Boost,” by Sara Hamdan, New York Times, February 29, 2016; “Souq.com: Riding High on the E-Commerce Wave,” by Dina al-Wakeel, Venturemagazine. me, January 28, 2016; “Souq.com Traffic Surges on Rise in Smartphone Use,” by Andrew Scott, Thenational.ae, October 15, 2015; “Souq.com Chief Explains One of Dubai’s Biggest Online Success Stories,” by Jessica Hill, Thenational.ae, October 7, 2015; “Tiger-backed Souq.com Said Worth $1 Billion in Fundraising,” by Dinesh Nair, Matthew Martin, and Arif Sharif, Bloomberg.com, April 14, 2015; “Ronaldo Mouchawar: How I Created Souq. com,” by Ed Attwood, Arabianbusiness.com, April 5, 2014; “Souq. com, Dubai-based E-commerce Site, Raises $75 Million,” by Rory Jones, Wall Street Journal, March 24, 2014; “Souq.com Launches Low-cost QTAB Tablet in UAE,” telecompaper.com, September 30, 2013; “After Many Slip-Ups, Mideast E-Commerce Gains Its Footing,” by Sara Hamdan, New York Times, November 7, 2012; “South Africa’s Naspers Swoops on Middle East with Souq.com Buy,” by Lance Harris, Zdnet.com, October 31, 2012; “Souq Fashion Launches to Boost High-End Online Retail in the Arab World,” by Rania Habib, Wamda.com, October 23, 2012; “Souq in Egypt: Not Relinquishing Its Crown Anytime Soon,” by Omar Aysha, Wamda. com, October 18, 2012; “Why Middle East E-Commerce Site Souq.com Acquired Sister Site Sukar.com,” by Nina Curley, Wamda.com, April 29, 2012; “How to Launch an E-commerce Business,” Wamda.com, April 14, 2011; “Refocus of Souq.com Will End Auction Service,” by David George-Cosh, Thenational.ae, January 2, 2011.

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E-commerce Ret ailing and Services

he opening case illustrates some of the difficulties that a pure-play startup retail company such as Souq faces, particularly when starting out in a part of the world, such as the Middle East and North Africa, that has not already embraced e-commerce. Pure-play start-up companies often have razor-thin profit margins, lack a physical store network to bolster sales to the non-Internet audience, and are often based on unproven business assumptions that, in the long term, may not bear out. In contrast, large offline retailers have established brand names, a huge real estate investment, a loyal customer base, and established inventory control and fulfillment systems. In Souq’s case, it originally adopted a business model based on the assumption that C2C auctions would find ready acceptance in its marketspace, when in fact they did not. Luckily for Souq, it was able to successfully transition to a B2C model and take advantage of some of the benefits that this model offers. For instance, a pure-play B2C company can simplify the existing industry supply chain and instead develop a Web-based distribution system that may be more efficient than traditional retail outlets. As with retail goods, the promise of online service providers is that they can deliver superior-quality service and greater convenience to millions of consumers at a lower cost than established bricks-and-mortar service providers and still make a respectable return on invested capital. The service sector is one of the most natural avenues for e-commerce because so much of the value in services is based on collecting, storing, and exchanging information—something for which the Web is ideally suited. And, in fact, online services have been extraordinarily successful in attracting banking, brokerage, travel, and job-hunting customers. The quality and amount of information online to support consumer decisions in finance, travel, and career placement is extraordinary, especially when compared to what was available to consumers before e-commerce. The online service sector—like online retail—has established a significant beachhead and now plays a large role in consumer time on the Internet. In areas such as brokerage, banking, and travel, online services are an extraordinary success story and have transformed their industries. In Sections 11.5–11.7 of this chapter, we take a close look at three of the most successful online services: financial services (including insurance and real estate), travel services, and career services. In Section 11.8, we examine the new on-demand services companies, such as Uber, Airbnb, and a whole host of others, that have rocketed to prominence in the last several years. Using a business model that is both local and mobile, this new type of service company provides a platform for consumers to connect with providers who can provide on-demand services, such as transportation, short-term room rental, grocery shopping, and more.

T

11.1

THE ONLINE RETAIL SECTOR

Table 11.1 summarizes some of these leading trends in online retailing for 2016–2017. Perhaps the most important theme in online retailing is the effort by retailers—both

The Online Ret ail

TABLE 11.1

WHAT’S NEW IN ONLINE RETAIL 2016–2017

• Retail mobile e-commerce is exploding, increasing to expected €70 billion in the EU-5 in 2016. • Social networks such as Facebook, Twitter, Pinterest, and Instagram, together with online retailers, continue to try to understand how best to facilitate social e-commerce, with the introduction of Buy buttons on Facebook, Instagram, and Pinterest. • Local e-commerce, headlined by new local on-demand service companies such as Uber, skyrockets to over $40 billion in the United States. • The number of online buyers continues to increase, to over 1.6 billion worldwide in 2016. • Online retailers remain generally profitable by focusing on revenue growth, increasing the size of average purchase amounts, and improving efficiency of operations. • Online retail remains the fastest growing retail channel. • Shopping and buying online has become a normal, mainstream, everyday experience. Almost all Internet users worldwide are now online buyers or shoppers. • The selection of goods for purchase online continues to increase to include luxury goods, such as jewelry, gourmet groceries, furniture, and wine, as customer trust and experience increase. • Informational shopping for big-ticket items such as cars and appliances continues to expand rapidly to include nearly all retail goods (both durables and non-durables). • Specialty retail sites show rapid growth in online retail as they develop customized retail goods and customer online configuration of goods. • Online retailers place an increased emphasis on providing an improved “shopping experience,” including ease of navigation and use, online inventory updates, interactive tools, customer feedback and ratings, and social shopping opportunities. • Online retailers increase the use of interactive marketing technologies and techniques such as blogs, user-generated content, and video that exploit the dominance of broadband connections and offer features such as zoom, color switch, product configuration, and virtual simulations of households and businesses. • Retailers are increasingly becoming omni-channel retailers, integrating the multiple retail channels provided by physical stores, the Web, and the mobile platform. • New virtual merchants such as Birchbox, Naturebox, and others emerge that are using a new subscription-based revenue model for retail. • Big data and powerful analytic programs begin to be used for predictive marketing by both large and small retailers.

offline and online—to integrate their operations so they can serve customers in the various ways they want to be served. By any measure, the size of the global retail market is huge: around €21 trillion in 2016. Retail sales in Asia-Pacific account for about 41% of that total, with North America accounting for about 24%, and Western Europe 17%.

THE RETAIL INDUSTRY The retail industry is composed of many different types of firms. Figure 11.1 illustrates the major segments of the U.S. retail industry: durable goods, general merchandise, food and beverage, specialty stores, gasoline and fuel, mail order/telephone order (MOTO), and online retail firms. Each of these segments offers opportunities for online retail,

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FIGURE 11.1

COMPOSITION OF THE U.S. RETAIL INDUSTRY

The retail industry can be grouped into seven major segments. SOURCE: Based on data from U.S. Census Bureau, 2012.

and yet in each segment, the uses of the Internet may differ. Some eating and drinking establishments use the Web and mobile apps to inform people of their physical locations and menus, while others offer delivery via online orders. Retailers of durable goods typically use the online channel primarily as an informational tool rather than as a direct purchasing tool, although this has begun to change. The MOTO sector is the most similar to the online retail sales sector. In the abs...