Online retailers that think they are in the retail business could be headed for trouble. According to Tom Hennings, president and CEO of OrderFusion, a US-based e-commerce software vendor, business-to-consumer (B2C) selling via the Web has more in common with direct and catalogue sales than with true retailing.
Hennings said many dot-coms and brick-and-mortar stores that took to the Web have failed to understand the difference. When stocks are low at physical stores, the retailer orders in bulk from a supplier, who loads up a pallet of goods. But online retailers typically need one or two items at a time, preferably from the warehouse. This was the alleged beauty of online retailing: that it would offer a more direct, cost-effective route to the consumer.
"Warehouses and wholesalers know how to ship pallets," Hennings said, "but they have a terrible time with smaller orders. This is a problem that direct marketers solved a long time ago."
But many online retailers have not, he added. Retail success online hinges on what happens behind that fabulous Web site: logistics and fulfilment, payment systems, systems and policies to handle returns, customer service, and, running through it all, integration. Without these the site won't scale, and customers who once loved the Web store will quickly turn fickle and point their browsers elsewhere.
This problem involves multiple technology and business issues, which is why many online retailers are outsourcing logistics, fulfilment, and customer service functions.
Martin Butler, chairman of UK-based analyst Butler Group, said it makes sense for online retailers to form such partnerships with fulfilment companies. "Here in Europe there is a stronger realisation that logistics and fulfilment are the keys to making [online retailing] work," Butler said.
Martha Bennett, an analyst at Giga Information Group, said this means there is a real opportunity for direct and catalogue merchants. "One catalogue sales company in Germany has already spun off their logistics operations, and they plan to sell that service to dot-coms," Bennett said.
Bennett added that online retailers could soon face competition from this sector.
"If some of these catalogue companies decide to get serious about moving to the Web," Bennett said, "they will eat a lot of the dot-coms for lunch."
Those who have not backed up their Web sites with integrated logistics and fulfilment systems are quickly learning to regret it. "[Logistics and fulfilment] are the single most differentiating factors in determining success or failure for online retailers," said Bennett.
Bennett cited a case involving a German online drugstore, which resulted in a $300,000 box of disposable diapers. The error occurred because, after the customer placed the order, the price had to be rekeyed by hand into the order fulfilment system.
"It is incredible that this error got as far as it did," Bennett said. "The customer's account was actually debited."
Bennett said these examples show how badly some online retailers have miscalculated what it takes to do business on the Web.
"Companies are behaving as if the normal control processes don't matter online," Bennett said, "when just the opposite is true."