This study investigates the evolution of e-commerce, with particular focus on the food retailing industry. Comparative studies are carried out between Netflix and Blockbuster, the aim being to demonstrate that e-commerce can be an effective way of doing business compared to traditional brick and mortar operations. Line graphs are used as the primary means of instrumentation, on the basis of which the analysis of data is also carried out. This comparison sets the stage for the evaluation of the two whole foods companies Whole Foods Market and TraderJoes which both specialize in the sale of health food products. While the former has an e-commerce system, the latter does not have such a system. It is through this method of comparison that this study will be able to show the advantages of E-commerce food retailing vs. traditional methods of retail. Finally the study compares the evolution of online food retailing and the traditional retail market, and delves into how online retailing has started to mirror the development path of traditional retailing due to the creation of internet superstores which have started to dominate the internet sales landscape.
Acknowledgements
My utmost gratitude to God for seeing-me-through my MSc programme. I would like to thank my supervisor, Dr. Keith Patrick, for his support throughout the writing of this report. Further, I am deeply indebted to my parents, Mr. and Mrs. Adeyelu, for their support and prayers throughout my MSc programme. To my siblings, Tayo, Dayo and Sarah, you guys are the best family ever. Special thanks to my fianc, Kayode, for the all-important role-played throughout my programme.
Chapter 1 Introduction
Traditionally the buying and selling of products and services has always occurred either through a face to face transaction, a letter of intent or even a simple phone call where a person places an order and pays upon delivery (Crespo 2009). Due to advances in technology where the scale and scope of the retail industry has come to encompass a global marketplace, the traditional processes through which exchange transactions have always followed has started to change. The internet has brought an unprecedented level of interconnectivity on a global scale through which more and more transactions such as banking and even retail are conducted online (Crespo 2009). Sites such as Amazon.com, Ebay, Craigslist and numerous other online retail suppliers are able to sell items such as computers, books, desks, clothing and even furniture online all of which are growing indicators of a shift in consumer preferences from buying their wants and needs through traditional stores to picking the convenience of the internet for all their shopping needs (Gregg 2009). As a result numerous companies have shifted various levels of their retail operations to online stores in order to compete with their rivals and take advantage of this growing trend (Gregg 2009). This trend has not been limited to small scale online retail transactions.
Even wholesale suppliers of basic raw materials ranging from building supplies to chemicals as well as numerous other materials have started selling their products online and making them readily available in bulk shipments (Hashim 2009). The food retail industry in particular has been quick to capitalize on this growing trend with products and services ranging from buying groceries online, ordering from fast food restaurants through their local websites to even sourcing raw materials for food processing from numerous suppliers with online stores. This particular nature of the online food retailing industry has not been limited to deliveries and processes limited within the borders of states (in the case of the U.S.) or countries but rather is a global phenomena wherein individuals and businesses can order numerous types of food products in individual and bulk shipments from anywhere in the world and expect it to be delivered on their doorstep within the specified time (Lacharite 2009). It is due to this trend that the numerous online food retailers are able to reach a much larger consumer base compared to what they were capable of doing before resulting in a larger profit margin for their business. Evidence of this shift into online retail transactions can be seen in online movie rental companies such as Netflix.com which started in the late 1990s and currently dominates the movie rental company in the U.S. which was previously monopolized by movie rental giant Blockbuster.
At the turn of the century, most firms were reluctant to change their business models from that of traditional retail services to online transactions due to the uncertainty of the technology at the time. The eventual such seller sites such as Amazon.com and EBay provided enough impetus for companies to enact changes in their marketing strategies and methods of sale. While some large scale retailers such as Wal-Mart have developed similar online retailing systems comparable to Amazon.com other retailers such as Costco have focused more on product presentation rather than outright sales. This divergence in larger retailers is actually also noticeable in smaller retailers such as the health food stores Whole Foods and Trader Joes both of which have internet platforms for their products. Whole Foods has created an online Ecommerce platform for their website similar to that of Wal-Mart while at the same time presenting various recipes, information presentations as well as numerous site graphics all used to draw customers into the E-commerce aspect of the site in order for them to buy the companys products. Not to be outdone, Trader Joes also has a similar online platform for its products replete with graphics and information. However, instead of having an online E-commerce platform for sales, the Trader Joe website has none. At this point an interesting debate arises as to just how effective an online E-commerce platform would have in overall company sales as compared to a company without one.
Chapter 2 Literature of the Study
What is E-Commerce
E- Commerce, an abbreviation of the term electronic commerce, is a way in which business transactions such as the buying and selling of products is conducted over the internet. Due to the rapid proliferation of the internet, thousands of users are being added to the online browsing population on a daily basis, dramatically expanding the breadth and depth of the internet (Lacharite 2009). With estimates placing the number of users in the hundreds of millions, companies have started to capitalize on this trend by moving traditional operations such as advertising and retail to online media in order to attract customers to their products. Originally E- commerce was limited to operations such as electronic data exchanges, electronic funds transfers as well as ordinary bank to bank communications (Lacharite 2009). It wasnt meant as a means of purchase but rather as a means to which banks could easily and effectively communicate with one another in order to facilitate the transfer of funds from one country to another. Another original purpose of the original system was its use as a means to send invoices and purchase orders between businesses in order to better facilitate customer transactions in order for products to be delivered from one location to the other for the convenience of the customer (Leader-Chive 2008). With the advent of credit cards, ATMs and the rise in the popularity of the internet following the creation of the Windows 95 operating system and the changeover from slow dial up connections to faster broadband systems the concept of E-commerce as a means of direct customer selling took off. Sites such as EBay and Amazon.com were the vanguards of an online sales industry that resulted in a plethora of websites all dedicated to buying or selling products in one form or another (Leader-Chive 2008).
E-commerce Method of Retail (Teach 2010)
Advantages of Online Retail
When dealing with online retail operations it must be noted that such methods of selling to customers does not suffer from the regular limitations that normally affects in-store selling. One aspect of regular retail stores and outlets is that they require employees in the form of cashiers, stock clerks, baggers, store managers and an assortment of other personnel within the store that enables a store to operate and give a customer a pleasant shopping experience (Ramaswami 2009). With an online store a company is able to save money on employee salaries, benefits and bonuses since the entire process has been automated using computers resulting in the potential for a greater product to profit ratio due to the lower costs involved in operations. In fact most online retail stores employ skeleton crews of website editors, procurement specialists and online marketers which enable the company to run a website with fewer employees needed yet are able to display their products in a much more efficient and attractive way than in a store and are able reach a much larger market due to online marketing campaigns (Ramaswami 2009). Another problem attached with in-store retail is the fact that utilities such as electricity and rent come into play when taking into account the cost of running such an establishment. With online retailing most of the framework of a site is either run off servers which requires much less electricity than a retail outlet and there is no rent involved. The only cost involved in such a venture would have to be the cost of the domain name or in the case of rented online capacity the cost of cyberspace which is actually negligible considering the fact that the cost of putting up an online retail store today is equivalent to only a quarter of a single employees salary in most retail outlets in the U.S (Okonkwo 2009). Finally and one of the most important factors is that a website unlike a store never closes, it is open 24 hours a day 7 days a week and is capable of catering to a global consumer base unlike an ordinary corporate retail store that can only accommodate customers within the immediate area (Okonkwo 2009).
Previous state of the food retail industry
The traditional makeup of the food retail industry has always been to use a process of supply chains, factories and stores in order to deliver a finished product to a customer (Rasheed 2009). The process starts when a company either in the form of a grocery store chain or a fast food chain sources the raw products needed for operations through wholesale bulk purchases from a supplier and afterwards either repacks it for sale in the case of grocery stores or has the food undergo further processing until it is ready for immediate consumption in the case of restaurants. The costs involved in such a process for both types of food retail outlet involves the price of the raw product, the price of delivery, the price of utilities within the store, employee salaries and bonuses as well as miscellaneous costs in the form of repairs and store promotions (Rasheed 2009). One factor that must be taken into account is that the food retail industry unlike other industries constituting electronics, chemicals and labor has one major problem in that the products produced, sold and distributed has a set shelf life that severely limits the amount of time that a product can be sold. While it may be true that electronics, software, chemicals and other such products do have a period in which they either break down or become obsolete they have the ability to stay on shelves for a much longer rate and still have value as compared to food products that will eventually expire and not be worth anything at all. Thus unlike other industries food retailing involves a constant race against the clock in order to sell products to consumers within the limited time allotted to them. One problem with this method is that the fickleness of consumers leads to situations wherein products that are sourced and made are at times not even bought by consumers who at that particular time preferred a different type of product (Stewart 2009). While this is easily offset by catering to a larger customer base within an area there are times in which consumers choose different products other than that of the company resulting in a significant level of loss when the unconsumed products pass their period of expiration and become useless (Stewart 2009). Other methods attempted by the industry to prevent profit loss due to unconsumed products is to use statistics to determine the amount of food necessary to be produced or obtained versus the amount of customers that come in on a regular basis. While this has proven to be effective in limiting loss it also results in a food retail outlet limiting the possibility for more profit.
In a perfect situation food retailers are able to source as much raw materials from suppliers and are able to sell all the products to consumers before they pass their point of expiration. Unfortunately the perfect possible situation cannot exist due to factors such as consumer preferences, the limited number of consumers present in a given location, area rivalry as well as miscellaneous other situations that prevent the sale of food products. The food retail industry is actually one of the few industries that experience significant levels of loss when products go unsold, with this in mind companies usually attempt methods to draw in customers either by using advertisements or special promotions to draw consumers in (Wang 2009). While this method may be useful in drawing in customers other food retail outlets would also be doing the same thing at the same time resulting in a split customer base with restaurants competing with each other in order to draw in customers. The one major problem with the traditional food retail industry is that it is unable to fully utilize its capability to deliver products to consumers resulting in loss for the company when products expire.
Food retail outlets use a process of sourcing products depending on statistical calculations indicating the amount that would be consumed for the day (Wang 2009). The main problem with this method is that it cannot foresee changes in customer demand based on repeated consumption of a product nor can it anticipate sudden shifts in the market that arises as a result of either changes in a rivals marketing plan or some method of outside influence that changes consumer demand (Green 2009). When the financial crisis hit the U.S restaurants all over the country felt the effect due to the sudden drop in consumer demand for their products. The current system of sourcing depending on estimation while effective in saving money still has gaps which results in financial loss when unforeseen incidents occur. The best way to counteract this was to develop a strategy of food retailing wherein instead of processing or removing food from cold storage in a method that estimates their usage for the day a more effective method was to find a way to effectively increase a food retailers customer base beyond the average daily visitors (Buenstorf 2009). The result of this was the development of the concept of home food delivery wherein a customer orders food by dialing a number, informing the representative on the other end what they want and paying for the finished product once it arrives. It was through this method that numerous food retailers were able to expand their consumer base beyond the areas that the retail outlet was located in resulting in a faster level of food distribution which meant that more food products did not expire and go unsold. One unfortunate consequence with all trends is that there comes a time when market saturation occurs wherein consumers have so many home delivery options to choose from that they can call a different restaurant each day and have a different kind of meal to keep thing new (Buenstorf 2009). This meant that food retailers found themselves right back where they started from resulting in a need to find a different method of reaching out to consumers in order to avoid profit loss due to product expiry and constant competition.
Chapter 3 Methodology
Problem Statement
What has been presented in this study so far have been details pertaining to the evolution of the online retail industry and how food retailing has changed to cope with this growing trend in order to reach a larger consumer base and thus create more revenue for the company. One problem though is that while this study may have elaborated on the usefulness of online retailing and how online businesses have flourished as a result, the study has yet to present conclusive evidence that online food retailing would cause a company to gain more profits rather than sticking to traditional methods (Weill and Vitale, 2001).
In order to prove this point this study will attempt to create a comparison between a case wherein an online retail company actually outclassed and earned more than a regular retail .company in the same type of business and compare it to another case wherein two food retailers one with an online E-commerce system on its website and the other with just a normal website. This is done in order to show that an E-commerce system on a food retailers website is a viable means of gaining more profit for the company rather than having a traditional store (Tobin, 2001).
Design of the Study
The overall design of the study focuses on the use of graphs obtained from numerous online sources which pertain to either the number of visitors to a website, stock data pertaining to the companies stock prices and volume of purchases for the past year as well as an examination of any relevant data pertaining to company performance. The cases used in the study will focus on companies that come from the same type of retail industry this is to ensure that the data obtained from the results will not clash with any perceived advantages that one particular type of retail industry has over the other (Tobin, 2001). The total number of companies to be used in this study shall be limited to four companies all of which are located primarily within the U.S. Another factor that was chosen was that the data that should be gathered has to be from last year this is to ensure that there would be enough data present through research that would be able to back up any claims that would be presented. Another factor that is present is that the companies used for comparison shall constitute the video rental retail industry and the health food retail industry (Whole Foods, 2010 TraderJoes, 2010 Netflix, 2010 Blockbuster, 2010).
These factors were chosen due to the nature of recent news pertaining to the successes of online video retailing versus regular video retailing and the fact that by choosing one particular industry in food retailing this would help show a better picture of the advantages of online retailing versus traditional methods (Tobin, 2001).
Uniqueness of the Study
What this study is trying to achieve is to show that it is possible to measure how effective an E-commerce function is on a food retailers website as compared to another food retailer who has a website yet doesnt have an E-commerce function. It is assumed by this study that consumer behavior in online sales would have a significant level of impact on a companys revenue so much so that it would reflect in a companys performance and create a situation that would encourage investors to invest in the company when they see high levels of sales caused by E-commerce sales (Stokes, 2007 Lee, 2006). As such by measuring web analytic data which shows the amount of visitors to a site in a given month and by comparing the web data with records of stock purchases in the company it is assumed by this study that the amount of E-commerce sales will directly reflect in the amount of stocks traded as investors see higher levels of company performance through data obtained by them. It is assumed that a high number of site visits in a given period would equate into a considerable number of sales which will show as a sudden increase in stock price and volume traded (Stokes, 2007 Lee, 2006).
Problem to be investigated
The problem to be investigated in this study is to see if online food retailing is a viable and effective way of selling food. In order to prove this what this study will do is present readers with viable data collected from reputable sources which show the viability of E-commerce in food retailing. Another problem that this study will attempt to analyze is what will the evolution of E-commerce in food retailing lead up to While it is true that online food sales is merely following a trend in retailing the question remains if what happened in the current food retail industry will also happen to the online food retailing industry wherein large corporations have eclipsed the smaller ones resulting in the consolidation of sales into superstores or in the case of the internet online super shops (Farah 2009).
Instrumentation to be used
The type of instrumentation to be used are line graphs and charts obtained from online financial websites and website research companies. The reason for using line graphs is that they are able to present information related to changes overtime better than a bar graph could and as a result would be more readily understood by anyone that reads this paper (Larson, Hostetler, and Edwards, 2007 Tobin, 2001).
How the instrumentation will be used
The performance of both companies will be mapped on the same set of X and Y axes. The variable on the X axis will be time, showing the change in value of the firms bottom-line as measured by stock values for eight years (from 2002 to 2009). The variable on the Y axis will be the growth in the share value of the two firms under study over this time period. This will be measured in percentage terms (Larson, Hostetler, and Edwards, 2007).
Mapping the two curves on the same set of axis gives us performance graphs that allow for the comparative performance of the two, just by looking at the slope of the graphs. The slope of the graphs tells us whether the firm is growing or not, and at what rate it is growing or declining. When we compare Netflixs slope at a particular time period with that of Blockbuster Inc at the same time period, it is possible to tell whether either of the two firms are growing value or losing value, and which is growing or losing value comparative to or faster than the other (Larson, Hostetler, and Edwards, 2007).
To distinguish the two graphs, they will be mapped using different colors. Netflixs graph will be drawn using the blue color, while Blockbuster Inc will be drawn using the orange color. For example, in 2003, we see Blockbusters value declining at a rate of almost 100, while that of Netfli8x at the same point is growing at a rate of about 70. We can also look at the general growth in value of the two firms over the entire time period (Larson, Hostetler, and Edwards, 2007).
Validity and Reliability of testing method
The information that will be gathered from this study will be from reputable stock market websites as well as well known internet data companies. By gathering the data obtained from these sources this study will be able to present data that has the backing of valid companies and as such its validity is unassailable. The testing method itself consists of nothing more than a comparison of the data with no need for manipulation in anyway creating a result that merely reflects facts as the way they are instead of computing the data and creating an output that may or may not present the data accurately (Tobin, 2001).
Population and Sample
The first half of this study involves an examination of two movie rental retailers within the U.S. Netflix and Blockbuster. The reason these two retailers were chosen as a method of comparison between food retailers is that the basis of this study is to show that online food retailing is a viable method of selling products and as such it must first be proven than E-commerce itself is a viable method of earning a profit thus two companies not related to food retailing were chosen to show this. Netflix primarily uses E-commerce while Blockbuster on the other hand has used retail outlets for nearly 2 decades (Netflix, 2010 Blockbuster, 2010). With this in mind the study will use the data collected between the two in order to show if the assumptions of this study about E-commerce are correct. Once this has been proven it must then be shown that online food retailing is also a viable method of selling to customers thus what this study chose as its second population sample are two companies Whole Foods Market and TraderJoes both originating from the health food retail industry.
Both retailers, like Netflix and Blockbuster, are competing for the same market thus any advantages that one company gains would enable it to overtake the other and increase its market share and revenue (Whole Foods, 2010 TraderJoes, 2010 Palmeri, 2008 Kowitt, 2010). TraderJoes follows the traditional method of food retailing while having a website that primarily displays and described its products without actually selling anything online. WholeFoods on the other hand has similar features on its site however it also has an online E-commerce portion which enables it to sell its products online and have them delivered to consumers (Whole Foods, 2010 TraderJoes, 2010 Palmeri, 2008 Kowitt, 2010). It is the assumption of this study that by comparing these two food retailers, with one adopting an E-commerce framework and the other choosing to stick to traditional retail methods, a probable result would be obtained which shows how effective online food retailing is.
Data Collection
The method of data collection is a simple one wherein all information that is to be used in this study is to be collected from relevant academic journals, online or printed news articles as well as a variety of websites. This study does not have the need to interact with any information from people via surveys or questionnaires since the data that is needed is not relevant to the personal opinion of people but rather the applicability of spending habits from the general internet populace and how this reflects into the revenue of a company that uses an E-commerce framework to gain more sales through an online medium (Tobin, 2001).
Significance of the Study
Pointing out a growing trend for companies to take advantage of If this study is able to satisfactorily show that online food retailing is a viable method of selling products through a company website then it may lead to other companies attempting to do the same which be advantageous for a consumers since they wouldnt have to travel to get their favorite products (Stokes, 2007).
To prove that companies with E-commerce systems on their websites are able to accumulate large amounts of revenue It is one of the assumptions of this study that companies with E-commerce systems on their sites are able to earn the same amount of revenue or even more compared to companies in the same industry who dont have a similar system on their company website. In order to prove this what this study will do is compare and contrast cases of companies in similar industries in order to show that companys with E-commerce systems on their sites are able to do just as well or even better than their counterparts (Stokes, 2007).
Show the relation between site visits and profits Another aspect of this study is that it will also try to show the relation between the amount of site visits and purchases on an online food retailing website in order to show incontrovertible evidence that E-commerce food retailing is profitable for the company (Stokes, 2007).
Show that online E-commerce is a relatively inexpensive way of doing business What this study would also like to do is prove to regular food retailers that E-commerce in online food sales is a relatively inexpensive measure for them to gain even more profit since the cost of implementing such a system is low and the end result is able to readily pay for itself (De Tereville, Shapiro, and Hameri, 2003).
Limitation of the Study
Multinational corporations that span numerous countries were not chosen due to the diverse nature of their retail operations which cannot be covered by the nature of this study due to the limited amount of time and pages that have been allocated for its completion (Robbin and Coulter). Another factor to consider is that these companies have a diverse international consumer base with different methods of retailing depending on the areas involved (Robbin and Coulter). As such using a company that uses an online food retail system that spans several countries would create a distinct difficulty in accumulating information since what the researcher would have to do is examine each and everyone one of the websites that pertain to a companies international operations and compare the number of visits to the site to data obtained regarding the companys performance (Tobin, 2001).
It was determined that such an endeavor would go beyond what was needed and as such was merely limited to 4 local companies within the U.S. Another limitation is that the span of the investigation shall only constitute one year starting early 2009 to June 2010, this to ensure that the study has a significant amount of research that can be exploited and that it is close enough to still be considered relevant data.
Can it be replicated
The data used in the comparison of cases is readily available online and the data is from reputable journal articles. The data used in the study are publicly available stock quotes as well as internet analytics data which can be obtained through numerous analytic sites for free. All of the sites mentioned in this study can be easily accessed by any computer with internet access and the data can be easily compared. All corporations mentioned in this study have their company data available online through either their company website or online industry related news articles (Whole Foods, 2010 TraderJoes, 2010 Netflix, 2010 Blockbuster, 2010). As such there is no aspect of this study which cannot be replicated by another researcher that will attempt to do so.
Research Methods
The study was carried out in two parts. The first part involves an examination of two firms, Netflix and Blockbuster. One of these firms, Netflix, is primarily an online retailer while the other, Blockbuster, is primarily a brick and mortar retailer. The performance of the two firms is compared, using stock prices as a proxy for measuring firm performance (Lee, 2006). The aim is to show that firms deploying e-commerce systems can be as effective (if not more effective) than brick and mortar retailers.
Having established the viability of e-commerce as an effective means of trading, the study proceeds to the second part, which specifically focuses on the whole foods market. Two whole foods firms, Trader Joes and Whole Foods, are the focus here (Whole Foods, 2010 TraderJoes, 2010).
Using models such as the funnel analysis which establishes a positive relationship between the number of visitors to a site and conversion (for example, sales), web analytic data are used to make inferences on the performance of the two organizations (Stokes, 2007).
Chapter 4 Discussion
Theoretical Framework behind Human Online Purchases
Human Cognition
The study of human cognition suggests that there are three methods of human cognition that are used as way to adequately process information and as a result changes or improves a persons views about a certain idea or object (Kim and Lennon 2008). The first proponent is the process of verbal coding which asserts that the process of verbal coding is vital to perceptual processing and that visual information as a whole is more clearly identified by naming it. On the other hand the second approach of imagery coding asserts that both visual and verbal information are stored more efficiently as nonverbal images (Kim and Lennon 2008). The third method to this approach is the dual coding theory which suggests that visual information and imagery processing are superior to their verbal counterparts. Dual coding theory places an emphasis on the picture superiority effect in that dual coding theory assumes that while verbal information is sequentially processed visual information on the other hand is simultaneously processed as images and verbal traces which through the process of coding redundancy, meaning two codes are far better than one, creates the case of the superiority of visual stimuli to that of a verbal one (Kim and Lennon 2008).
The problem with the initial theory behind dual coding is that while it does present valid arguments as to the superiority of imagery it does not take into account factors such as a virtual environment wherein information is more valued than visual stimulus. The fact remains that the virtual environment of the internet is geared more towards information processing rather than visual representations as evidenced by the numerous product reviews, critics as well as promotions that focus nearly entirely on verbal cues to stimulate buying behavior rather than through sheer visual representation (Kim and Lennon 2008). While dual coding theory is applicable to situations existing outside of the virtual environment of the internet the fact remains that in terms of overall cognition verbal coding is a far better tool than visual representation when it comes to factors such as online sales. The fact remains that a majority of the information available online is in the form of verbal stimulus due to the fact that people use the internet as a means of attaining information. While there is the saying that a picture is worth a thousand words the fact remains that for online users it seems to be apparent that pictures take a backstage to verbal representation (Stokes, 2007 (Kim and Lennon 2008).
Comparison between Online retailer versus Store Retailer
Case of Netflix versus Blockbuster
In order to better understand how effective online retailing versus traditional retail services really is, this study will present an in-depth examination of two of the most well known retail companies in the U.S. These are Netflix and Blockbuster. The aim is to illustrate the fact that online retailing can be more effective when compared to traditional retailing methods. The case of Netflix versus Blockbuster shall be the control set in this paper which shall be used as a basis for the next sample in this study of online food retailers versus traditional store retailers. This is done in order to properly show that any data obtained which shows how effective online food retailing is would not be considered an isolated case in that it can be used an effective means of gaining a larger percentage of a consumer base (COBB 2009).
Blockbuster and Netflix
Blockbuster is a chain DVD, Blu-ray and video game rental stores with well over 3,750 stores scattered throughout the U.S. (Blockbuster 1999). The business model of Blockbuster centers around the renting of DVDs, Blu-ray discs and video game CDs at a fixed monthly rate with 60 of the rental earnings going to the company and 40 going to the company or studio that made the game or movie. It grew exponentially from the early 1990s to dominate the American movievideo game rental industry. One problem that arose was that while Blockbuster had few rivals in the rental industry due to its overwhelming market share which could even be considered as a monopoly, it did not expand its process of operations beyond its original store retail model. It was due to this stagnancy in the methods of operations that another company, Netflix, was actually able to catch up and take away the vast market share of Blockbuster (Netflix, 2010 Blockbuster, 2010).
Netflix is an online DVD and Blu-ray movie rental company that has a business model which revolves almost entirely around online retailing. The process behind Netflix is that a customer pays a flat monthly fee for a set of DVDs or Blu-ray discs that they receive individually in the mail (The Associated 2009).
Once the customer is done with one CD they just mail it in a prepaid mailing pouch that the company has provided and as soon as the company receives the CD they send in the new one via mail and the customer receives it within 1 to 2 days. As of 2009 Netflix had more than 10 million subscribers to its services with more being added per day. The company started to surpass Blockbuster a few years after the year 2000 and the company just started growing exponentially from there on out (Fritz 2004). The secret behind its success is that around the same time that internet connections started to become faster around 1997 Netflix established itself in 1999 in order to capitalize on the growing shift of consumers from established retail outlets to online purchases. This is due to the fact that with faster internet speeds websites started to display more content, had better graphics and as a result an internet culture started to grow in number till the number of users was in the hundreds of millions (Ozok 2009).
Netflix took advantage of the growing trend in internet transactions by presenting people with a way in which they could conveniently pay for their movie rentals through online payment tools and could expect to have the CD on their doorstep within one to two days (Conlin 2007). It was this convenience that originally drew people to Netflix and continues to draw them to this day. The effect on Blockbuster was that due to a sudden loss of their market share of consumers to Netflix Blockbuster had to close several hundred of its outlets around the U.S. because they initially were unable to compete with the price of rental available on Netflix (Conlin, 2007).
Since Netflix is based entirely through an online medium, it doesnt have to deal with issues such as store rent, regular employee salaries, security and utilities such as electricity. The entire process is largely automated through computer programs housed on a company server. The number of employees needed for such a method of operation is relatively fewer resulting in a overall low cost of operation which the company used to its advantage by offering a comparatively lower rate than its rival with a better level of convenience (Swan 2009).
Based on the graph above it becomes obvious that as of 2003 the share prices of Blockbuster stock went into the negative range at 97.01 of it stock price in 2002 while at the same time Netflix gained 444.16 in stock value since 2003 (Agmon, 2010).
This data and that of internet service providers which state that the rise in internet usage began in 1997 due to the advent of broadband internet connections it can be said that the reason why the video rental retailer Blockbuster had a negative share growth was due to its inability to foresee and adapt to the growing trend in internet usage which resulted in it losing its near monopoly during the early 1990s as a result of the advent of
the Netflix video rental service (Agmon, 2010).
Chapter 4 Analysis
As mentioned in the section on instrumentation, by looking at the slopes of the two graphs of the two firms which have been depicted on the same set of axes, it is possible to evaluate the performance of one organization against the other.
From the line graph, we extrapolate the following information
In 2002, the two firms values were almost equal. The graph curves downward for both firms, showing a negative slope and a decline in value of just under 100 for both.
In 2003, we see Netflixs value running ahead of that of Blockbuster. While Netflixs curve tends upward with a rising slope for a growth of about 50, that of Blockbuster shows a decline. The graph continues to curve downwards, and the slope of the curve shows a decline in growth of negative 70.
In 2004, the same trend is sustained. While Netflixs value continues to dwindle, that of Blockbuster continues on an upward trajectory. Netflixs growth is positive, ranging from between 20 and 300. On the other hand, Blockbusters is still declining, touching a low of negative 100 at one point in the year.
In 2005, Netflixs stock value rises and hovers at around the positive 200 mark for much of the year. On the other hand, Blockbusters stays broadly at the negative .100 mark. This performance for Blockbuster will be broadly sustained over the coming years so that by 2009, Blockbusters value will still be declining at a negative rate of 100. on the other hand, Netflixs would continue on a sustained upward growth momentum so that by 2009, it would close with a positive growth value of 400.
Summarizing the results for the time period as a whole, we see Blockbusters value losing up to 100 of its value between 2002 and 2009, while on the other hand we see Netflixs value growing by as much as 400.
Overall, Netflix has experienced a growth in value of 400 over the period, while Blockbuster has in the same period experienced a decline in value of 100.
Various studies have analyzed the causal relationship between a firms profitability and share prices. The vast majority of the studies indicate the existence of a positive and substantial relationship between these two variables, so that as a firms profitability increases, its stock prices also go up. According to Al-Tamimi (2007), company fundamentals (including profitability) have a significant and positive relationship with the firms share price. Hartono (2004) finds a substantial albeit indirect (through the mediating factor of earnings per share and dividends per share) between a firms profitability and share value. Other studies which have found the existence of such a relationship include those of Docking and Koch (2005) and Lee (2006). The basic underpinning of the argument is that the increase and fall in the share price is mostly driven by speculation - the stock investors expectation that the share prices will rise. When company fundamentals such as profits are right, the firm can set aside dividends for the shareholders, thereby making the stocks more attractive and triggering a rise in their vale. On the other hand, a firm which underperforms financially cannot set aside part of their profits (they are making losses, actually to pay shareholders. They can only do so by raiding their reserves, which again may lead to cash flow problems. As a result, there is no expectation of dividends and this depresses the share prices (Lee, 2006).
In our study, we have aimed to evaluate the link between profitability and e-commerce capabilities. We find the existence of a unique variable between Netflix and Blockbuster which is that while Netflix is an online retailer, Blockbuster is a brick and mortar operation. From the analysis above, we find that Netflix substantially outperforms Blockbuster. Based on our initial hypothesis, we affirm that e-commerce is a substantial driver of growth and profitability in a firm, and that this explains the difference between the two firms performance (Netflix, 2010 Blockbuster, 2010). E-commerce may be said to improve a companys stock value by increasing its profitability. This can be achieved in a number of ways
Cost savings arising from the disintermediation of the supply chain. This enables the operator to distribute goods more directly without the help of market intermediaries such as wholesalers and retailers and thus helps to cut down on distribution costs. These cost savings translate into a lower cost structure that boosts profitability and eventually stock values (De Tereville, Shapiro, and Hameri, 2003).
Efficiencies arising from the integration of the supply chain result in more output in less time and with fewer people (De Tereville, Shapiro, and Hameri, 2003).
More revenue - the internet reaches virtually any corner of the world. It is available twenty four hours, every day. It substantially expands a firms market beyond its domestic geographical territory, enabling it to get international customers without setting up Greenfield operations. This expands its markets, and correspondingly, revenues (Stokes, 2007).
Automation of processes leads to fewer employees (thus saving employee overhead costs, eliminating human error, and increasing efficiency) which reduces overall costs and increases profitability (De Tereville, Shapiro, and Hameri, 2003).
Therefore, it can be concluded that as a result of the benefits of e-commerce as enumerated above, Netflix is able to enjoy more cost savings and earn high revenues, which has been responsible for its good performance compared to Blockbuster, which is a brick and mortar operation. This leads us to affirm our hypothesis that e-commerce capabilities enhance firm profitability. This is in line with the transaction cost theory (Groenewegen, 1996 Nickels et al, 2002), which in this case provides that Netflix is able to perform well in the market because of its lower transaction costs, which have been enabled by the adoption and effective implementation of e-commerce capabilities.
In the music industry, the traditional business model of selling music CDs through brick and mortar stores in high street locations is fast becoming anachronistic thanks to the emergence of the e-commerce model (Plummer, 2010). This can be best illustrated by looking at HMV, one of the leading retailers of music CDs in the UK, and Tesco, another leading retailer. In his model of competition, Porter (2008) has enumerated three generic strategies which firms can deploy to gain competitive advantage. These include the differentiation, overall low cost leadership, and niche focus strategies. One impact of the rapid advance of internet technology especially on the music industry has been the disintermediation of the distribution channel. With fast internet connections, a consumer can be able to download thousands of digital music files at the touch of a button (with the cost per download being less than a dollar), thus voiding the need for elaborate distribution channels which have been a big cost driver for music retailers. Retailers who have been able to adapt to this trend such as Tesco or the French retailer Fnac have been able to significantly reduce their costs, and have gained overall low cost leadership advantages. With an overall low cost leadership advantage, they are able to compete on the basis of price which then becomes their basis of sustainable competitive advantage (Plummer, 2010 2011).
HMV has been competing primarily based on the old business model, maintaining a nationwide chain of CD stores in high street locations. It has a total of 285 stores in the UK and in Ireland, a significant number of which are now faced with threat of closure due to their inability to compete arising out of the new business model that has been triggered by developments in internet technology. Incidentally, these stores are too many in comparison to those operated by some of its peers who also seem to be doing better. Its sales have been declining by more than 10, and the value of its shares has also been declining. In contrast, Tesco has had an online sales platform since 1994, and has been able to leverage on its e-commerce capabilities to further buttress its traditional price-leader strategy. The main difference between the poorly performing HMV and the high-flying Tesco is that the latter operates an online portal through which digital downloads of music can be made by customers at a relatively low price. Given that the advances in internet technology are driving traditional brick and mortar music retailers out of business, HMV is shifting its strategy to incorporate a website through which digital music can be bought. In so doing, it may be able to lower its cost structure to such a level that will permit it to compete against its rivals. As this example illustrates, e-commerce can be a significant cost-reduction driver, and a source of competitive advantage and that to remain competitive, business organizations have no alternative but to embrace e-commerce (Plummer, 2010 2011).
Online Food Retailing
Viability of Online Food Retail Vs. Traditional Store Retail
The Case of Whole Foods Market Inc. and TraderJoes Inc.
Using case studies of Whole Foods and Trader Joes, this study investigated the degree of effectiveness of online food retailing vis--vis that of traditional food retailing. The two firms which form the subject of this study both deal in the same line of food retailing, that is, both firms are health food retailers. However, while one uses an online sales website, the other uses traditional methods of retailing (brick and mortar retailing) and its website is merely used to display its products on its site for customers to buy them offline (Whole Foods, 2010 TraderJoes, 2010).
What are health food retailers
Health food retailers differ from traditional retailers such as Walmart and Kmart due to the type of products they sell which target a health conscious consumer base. In most groceries the products available range from healthy options such as fresh fruits and vegetables to supposedly unhealthy food options such as food containing monosodium glutamate, preservatives, high amounts of sodium and copious amounts of transfats, regular fats and other artificial chemicals (Danny 2009). On the other hand health food retailers primarily contain products which have been specially made to be organic in that they contain no preservatives, were made without the use of excessive use of chemicals and that they are a healthier option to eat as compared to other kinds of food available. Such retailers came about as a result of a health conscious public that was looking for healthier options than those available at their regular grocery stores. As a result numerous health food retailers appeared located in nearly all states within the U.S. catering to this new public trend. Two of the largest retailers in this industry are Whole Foods Market Inc. and Trader Joes both of which have locations in nearly all the same areas (Danny, 2009 Whole Foods, 2010 TraderJoes, 2010).
Whole Foods and Trader Joes
Whole Foods and Trader Joes have nearly the same market share. Additionally, they have almost identical store locations. Trader Joes however has a total of 340 stores and Whole Foods has only 279 stores. Yet despite this disparity in the number of stores Whole Foods and TraderJoes have exactly the same revenue of 8 billion respectively (Whole Foods, 2010 TraderJoes, 2010). Additionally, Trader Joes was started in 1958, more than two decades earlier than Whole Foods which was started in 1980. Yet, in spite of possessing these early mover advantages, Trader Joes has not been able to generate more per year revenues than its erstwhile rival, Whole Foods. While it is true that factors such as customer preference, location and overall quality of products and selection comes to mind what must be taken into consideration is that both stores pride themselves in being able to deliver fresh, high quality health foods which meet pre-determined high standards hence the fact that groceries bought at either one of these stores is more expensive than regular products (Whole Foods, 2010 TraderJoes, 2010). It was assumed by this study that both stores produce the same amount of products and that both spend roughly the same amount of dollars on advertising. Taking this into account, it was determined that since the similarity in income was neither due to the quality of the products sold nor to the selection (since both stores had similar product lines related to healthy living) or due to advertising then another factor must have been at play which resulted in higher profits for Whole Foods despite having fewer locations.
Another factor that was considered was the size of the store itself but this idea did not seem to hold as much credence since the size of a store did not automatically mean that profits would increase accordingly. Not only that but the sizes of most Whole Food and TraderJoes stores vary depending on the area they are in and estimated store sizes are apparently the same so the size of the store didnt seem to be a factor (Whole Foods, 2010 TraderJoes, 2010).Another reason might be due to the fact that WholeFoods was able to source its products at a cheaper rate than TraderJoes which actually might be a contributing factor yet that data could not be obtained due to company policies regarding the dispersion of trade secrets. Earlier in this study the case of Netflix vs. Blockbuster was examined wherein a relatively new company was able to surpass and dominate a well established company through the use of online retailing as a means of connecting with a consumer base. With this example in mind what this study sought to do was examine the websites of WholeFoods Market and TraderJoes to see if a similar method of operation was at work which would explain the similar levels of income despite Whole Foods having fewer locations. What was discovered by this study was that upon examination of both company websites was that TraderJoes did indeed have an attractive site which showcased the products available throughout its locations however one problem was that although the site has descriptions of the products and was able to portray them in way in which they would entice a customer to buy them there was no way in which such products could be purchased from the website itself. When examining the website of WholeFoods Market what was found was that the site had a viable e-commerce system in place on the site wherein customers could make purchases via an online system and have the product delivered to their homes (Whole Foods, 2010 TraderJoes, 2010).
Analysis
Examination of the web analytics of the two firms can provide an explanation of why Whole Foods has roughly the same revenues as TraderJoes in spite of the fact that it has fewer stores, and started out more than two decades after TraderJoes had already been established (that is, lacks the first mover advantages associated with TraderJoes). In particular, the number of visitors to the two sites, as well as the number of unique visitors to both sites can be compared and useful inferences made. This is based on the funnel model, which asserts that the higher the number of visitors, the higher the conversion and therefore the higher the sales revenues.
The funnel analysis or click path analysis method can be depicted as shown in the diagram below (Stokes, 2007)
In the first stage, the prospective customers (comprising of 100 of all users visiting the site) make an online search for the food products they require. Those proceeding to the second stage are fewer, say 80 of all those who opened the site in the first place. In the second stage, they check out the prices and features of the various products available. Those proceeding to the third stage are fewer, about 30 of all those who originally opened the site. In this stage, they select the actual product they are interested in and move it to the checkout area. Those moving to the fourth stage are even much fewer, something like 6. In this stage, they enter their personal information on a purchase form, make the payments, and confirm purchase of the product (Stokes, 2007).
The higher the number of visitors to the website, the higher the conversion is (Stokes, 2007). In our case, the desired conversion is a sale.
These comparisons are made on the basis of the two graphs relating to the two firms as presented below
Web Analytics of Whole Foods Website Compared to TraderJoes Website (Wholefoods and Trader Joes 2010)
After obtaining the site analytics data of Wholefoodsmarket.com and Traderjoes.com the data was then set into a line graph in order to create an accurate representation of the difference between the two sites. The study used data obtained over the course of one year in order to properly gauge the number of visitors with the results showed that from June 2009 to April 2010 the average number of visitors on a monthly basis to Wholefoodsmarket.com was approximately 902, 261 while for traderjoes.com it was 443,426. This shows that there is nearly a 458, 835 difference between the two. (Stewart 2009).
Looking at the Trader Joes and Whole Foods sites in light of this model, we find that in the Whole Foods site, the customers have an opportunity to proceed to the last stage of the funnel or click path. That is, they are able to enter their personal details, make payments, and confirm the purchase. In the case of the Trader Joes site however, the funnel path is incomplete since the prospective buyers do not have an opportunity to move the products to the checkout area, pay for them, and confirm purchases. It therefore follows that by virtue of having the facility that allows the buyers to pay for the products online, Whole Foods has more revenues given that its conversion process is complete, compared to Trader Joes. This explains why, in spite of having fewer brick and mortar stores, its sales are high. This, again, is in line with the transaction cost theory (Groenewegen, 1996 Nickels et al, 2002). Whole Foods, thanks to its e-commerce capabilities, can be able to perform well in the market compared to its rivals such as TraderJoes thanks to the lower transaction costs (Groenewegen, 1996 Nickels et al, 2002), which it has and which have been facilitated by the use of e-commerce.
Since the reach of Whole Foods site is neither fettered by spatial or geographic considerations, the firm can reach a lot more people, and it does not matter that Trader Joes has more brick and mortar stores. This again goes to demonstrate that e-commerce capabilities can yield significantly higher revenues relative to firms with no e-commerce capabilities, and higher revenues necessarily translate to the potential of higher profitability (Stokes, 2007).
Stock Data of Whole Foods Market from August 2009 to Present (Wholefoods Market 2010)
In addition to the web analytics of the two firms, the stock value of the whole foods market was mapped against the number of visitors to the websites of the food companies. As the two graphs above show, the number of visitors is positively related to the stock value. It is reasonable to theorize, on the strength of these findings, that as more sales occur as a result of E-commerce the overall performance of the company improves and this improvement is then reflected in the stock prices and volume of trades. If this method of comparison is shown to be accurate it would be incontrovertible evidence that the reason people visit the Whole Foods Market website is to purchase items then as result it would prove the hypothesis of this study that through online retailing companies are able to perform and sell their products even better than regular retailing operations due to a greater consumer base because of the proliferation of internet users.
Chapter 5 Results
Higher sales, holding all the other factors equal, should translate to more profitability and should result into higher stock values, which is in line with the studies carried out by Al-Tamimi (2007), Hartono (2004) Docking and Koch (2005) and Lee (2006). This therefore should explain why when the graph indicating the amount of people visiting the Whole Foods Market website was aligned with the graph indicating sudden rises in stock prices and volumes of trading it is seen that every time there is a rise in the number of users visiting the site in a given month there is also a significant raise in the price of stocks and the volume of stocks traded.
For example on the month of August the number of visitors to the site rose to nearly 1.2 million while at the same time the stock price of Whole Foods Market Inc. increased to 25 - 28 dollars a share while the amount of stock traded reached 15 - 20 million for the entire month. On November the amount of visitors to the website rose to roughly 1.5 million while at the same time stock prices rose from 30 35 dollars a share with trades reaching another 15- 20 million in volume several times greater than in previous months. The same incident happened again in March wherein a sudden increase in the amount of visitors to the site seemed to result in yet another increase in the volume of stocks traded in the company with the value of the stock reaching 34 - 36 dollars a share. Based on this data it can no longer be deemed a coincidence that the market share just coincidentally rose at the same time as the number of visitors to the site since it happened 3 times in a row with steady results. As such it can be said that there is some factor at work that connects the number of people viewing the site with the dramatic rise in the volume of stock processed and the sudden increase in stock prices. Since Whole Foods has an E-commerce system on its site it can be assumed that the increased number of visitors to the company website is indicative of an increased number of people buying products off of the website which increased the companys earnings for the month which directly translated into higher volumes of stock purchases and an increased stock price as investors noticed better performances from the company in terms of overall sales.
Theoretical Framework Examination of Study Results
Consumer behavior has always been dictated by what affects the senses and such external stimuli has always been used by advertisers and marketers alike in order to draw customers into purchasing certain products. The basis of the web platforms developed by both Trader Joes and Whole Foods was to encourage consumer behavior through the use of both visual and verbal cues in order to stimulate consumer behavior towards a certain end. While Trader Joes was able to successfully portray its products the fact remains that they did not take advantage of the immediate consumer reaction that their visual and verbal cues caused while on the other hand Whole foods was able to do so through its E-commerce platform which resulted in more sales for the company.
Chapter 6
Where is Online Food Retail Headed
When trying to understand where online food retail is headed one must take into consideration the fact that the business model itself took advantage of the growing trend in internet usage in order to gain consumers and increase profit in a relatively inexpensive manner (Li 2009). As such if this type of behavior continues it is likely that E-commerce in food retailing will follow trends in the online retail industry (Moe 2009). When most people hear the term outsourcing they immediately start to think of cheap products being produced in China or customer service calls being directed to locations such as India or the Philippines (Moe 2009). While these are valid descriptions of how outsourcing works the original concept which was developed in the U.S. didnt involve transferring services from one country to another in order to make a profit over the relatively cheaper labor but rather it involved have select parts of a corporate business structure being transferred to a different company that is willing to do the work for less however that company would still be in the U.S (Rhee 2009). For example one of the largest outsourcing companies in the world to date is Convergys they save money for their clients by assuming the roles of a particular companys HR, I.T. or even their customer service department (Treiblmaier 2008). They are able to deliver low cost solutions since with the advent of high speed internet connections and cloud computing where company systems and databases are increasingly being placed online sometimes it doesnt matter where a person has to be in order to do a job since they can do as is easily in Texas even if the main headquarters of the company is located in New York since the internet itself is not limited to location (Treiblmaier 2008).
What happens in the case of business outsourcing and Convergys is that Convergys is granted access to the companys online systems and databases in order for a certain aspect of a companys operations to be done. For example in the case of the contract between ATT Mobility and Convergys all calls going towards ATT are routed to their main server after which the calls are divided by the system and sent via the internet to different Convergys centers where the calls are accepted by representatives using VOIP phones bought from either Nextel or Avaya and are a connected to the ATT Mobility network (Treiblmaier 2008). The way in which Convergys makes money by providing the same amount of employees and framework that the company would have otherwise have had if that particular department was not outsourced is by placing their centers in relatively inexpensive locations such as Cedar Rapids or in Pharr, Texas where the price of utilities, building costs and even wages are relatively lower than in other locations (Treiblmaier 2008). In the realm of online food retailing selling a product through a company website is just the start of the retailing process. Growing trends in online food retailing have led to the outsourcing and consolidation of products from different companies into one main website (Dou 2010). Sites such as Amazon.com and Ebay.com offer food producers the ability to sell their products through their site which guarantees far more product visibility than through a regular company owned site (Dou 2010).
Relevance of Outsourcing to this study
While brick and mortar operations which have no e-commerce capabilities may actually outsource some or all of their non-core functions, it is those which have e-commerce capabilities which derive the most benefits in terms of cost savings, efficiency, timely deliveries, and reliability (De Treville, Shapiro, and Hameri, 2003).
For example, firms high in e-commerce capability deploy such technologies as EDI (Electronic Data Interchange) and electronic transfer of funds (EFT), among others. Procurement of supplies, parts and components from third party contractors can be done online, saving a lot of time and money and cutting out a lot of paperwork. These technologies allow for the integration of the supply chain, from the supplier to the customer, and therefore facilitate collaboration across the chain (De Treville, Shapiro, and Hameri, 2003). Parts, components, and finished products can be tracked across the supply chain, helping to improve customer relationship management, trace defects in products, and confirm delivery, and so on. This helps save costs and increase efficiency, and therefore yields more benefits for firms that have e-commerce capabilities than those without, notwithstanding that both are outsourcing some or all of their non-core functions. As can be seen, e-commerce helps facilitate outsourcing, which has in recent times become a source of competitive advantage, and therefore, can help explain why and how firms with e-commerce capabilities should outperform those without (De Treville, Shapiro, and Hameri, 2003).
Social Networking
Another aspect of online food retailing is the use of online social networking as a means for small independent companies or even individuals to sell products that they have made to the people included in their friends list. Sites such as Facebook.com, Multiply and Myspace have evolved beyond their original concept of a way for friends to stay in contact with one another to a way in which individuals and small retailers are able to market and sell their products. Most of these transactions usually consist of small deliveries which are made to order and usually paid through Paypal or cash on delivery (Clemons 2009).
Relevance of social networking to the study
Social networking is part of social media, which forms a substantial part of e-marketing. According to Gilin (2007) social media is deployed by firms for purposes of promoting their goods and services, to manage their reputations, for marketing research purposes, as well as to manage customer relationships. According to Stokes (2007, p.123), The realm of social media is about collaboration, users generating content, sharing and, most of all, it is about connecting.
For example, social networking sites collect a lot of personal information from users of such sites. These include demographic information such as age, gender, personal likes, and so on. According to Kotler (2003), firms segment their markets on the basis of various criteria, one of which is demographic. With such information gleaned from social networking sites, firms are able to segment their markets (for example demographically or behaviorally) and to more accurately target their product offerings. Furthermore, Stokes (2007) points out that organizations create profiles for their brands in much the same way that individuals create their profiles on social networking sites such as Facebook. Through these profiles, they are able to attract fans, which is useful for product promotion purposes. One other way through which firms have made a lot of capital from the use of social media is through applications. A good example is the numerous applications which a number of rims created in Facebook in 2007 and which substantially helped market their products (Stokes, 2007). Through social networking sites, quite a number of users voice their frustrations or views about certain products, brands, or organizations. This therefore enables organizations to learn how their customers view their products or brands and to engage in reputation management activities with a view of correcting any negative impressions or grievances. This is part of Web PR. Social networking sites also help brands connect with their fans, and to increase sales by making more friends (Stokes, 2007).
As this illustrates, firms with e-commerce capabilities are likely to deploy the various facets of e-marketing such as social networking, compared to those without such capabilities, and this is likely to contribute to higher sales, better reputations, and a more targeted offering. Firms relying only on offline business models are likely not to enjoy these potential benefits and will therefore under perform in these areas compared to the firms with e-commerce capabilities. This therefore shows the relevance of social networking to the study that is, it has marketing and PR applications which can potentially increase revenues and lead to a better brand perception and can be used to explain why those firms with e-commerce capabilities actually outperform those without such capabilities.
Chapter 7 Conclusion and recommendations, ideas for future research, limitations of this research
This study has attempted to evaluate the link between profitability and e-commerce capabilities. We find the existence of a unique variable between Netflix and Blockbuster which is that while Netflix is an online retailer, Blockbuster is a brick and mortar operation. From the analysis, we find that Netflix substantially outperforms Blockbuster. Based on our initial hypothesis, we affirm that e-commerce is a substantial driver of growth and profitability in a firm, and that this explains the difference between the two firms performance. E-commerce may be said to improve a companys stock value by increasing its profitability. These results are again replicated in the main study that involves TraderJoes and Whole Foods, with Whole Foods having sales that are equal to those of TraderJoes in spite of having fewer stores and lacking early mover advantages. This has been attributed to its possession of e-commerce capabilities compared to TraderJoes which has no such capabilities. This growth in value and profitability in the organization as a result of e-commerce can be achieved in a number of ways
Cost savings arising from the disintermediation of the supply chain. This enables the operator to distribute goods more directly without the help of market intermediaries such as wholesalers and retailers and thus helps to cut down on distribution costs. These cost savings translate into a lower cost structure that boosts profitability and eventually stock values.
Efficiencies arising from the integration of the supply chain result in more output in less time and with fewer people.
More revenue - the internet reaches virtually any corner of the world. It is available twenty four hours, every day. It substantially expands a firms market beyond its domestic geographical territory, enabling it to get international customers without setting up Greenfield operations. This expands its markets, and correspondingly, revenues.
Automation of processes leads to fewer employees (thus saving employee overhead costs, eliminating human error, and increasing efficiency) which reduces overall costs and increases profitability.
Therefore, it can be concluded that as a result of the benefits of e-commerce as enumerated above, Netflix is able to enjoy more cost savings and earn high revenues, which has been responsible for its good performance compared to Blockbuster, which is a brick and mortar operation. This leads us to affirm our hypothesis that e-commerce capabilities enhance firm profitability. In the same vein, Whole Foods is able to generate 8billion in annual revenues, more or less what TraderJoes does, in spite of having fewer stores and no early mover advantages.
As mentioned in the preceding sections, rapid technological advances have given way to wireless technologies and to the development of mobile devices such as mobile phones, handheld computers, handheld devices such as smartphones, and laptops. This has introduced the concept of m-commerce (mobile commerce). To be effective, organizations such as TraderJoes need to adapt their traditional e-commerce systems to fit in with the emerging wireless and mobile technologies. In this regard, they need to
Work closely with payment solution companies to ensure that mobile devices such as mobile phones can support credit card transactions. Such transactions should also be secure. This will enable the customers not just to shop for products using the mobile devices, but to also be able to complete transactions by being able to pay for the products ordered via their mobile devices.
Exploit location-based services as well as GPS-enabled mobile devices in order to lure on-the-go consumers to get into the organizations brick and mortar stores. The firms should ensure that such mobile consumers are able to undertake searches related to products, prices, and stores, and to have a feel of the products right on their mobile phones or other mobile devices. Additionally, the firms should deliver promotions and advertisements to their target consumers right through their mobile devices. Promotions can be targeted at consumers who are close to the stores.
Given that most consumers tend to close their purchases based on the last minute research conducted while in-store (increasingly, they are relying more on their smartphones as opposed to smart tags or sales attendants), retail organizations such as TraderJoes need to synchronize the mobile shopping tools with in-store execution. Mobile sites should be customized to a users location and offering, and complete harmonization should be made between prices, selection, and promotion.
Develop applications which support as many mobile devices as possible, mobile sites, and ensure that the content is as mobile-friendly as possible. The mobile site should enable the customers to view all the products offered by the ropganization right from their mobile appliances, browse any reviews of the products that may be available, as well as to be able to access a store locator. In addition, it is recommended that such sites should have a shopping cart. With credit card transactions enabled, the customer will be able to complete the transaction via the mobile device.
Firms which already have a website should also consider leveraging existing applications to their mobile sites. This will not only help them save time, but will also help them save costs since new code will not have to be written. Using tactics such as auto-directing customers to the firms site can help enhance customer convenience since they will not have to type the sites full URL in order to access it. With mobile devices, convenience is king.
Usability as well as security issues will also have to be tackled by the organizations if their m-commerce strategies are to really take off. The mobiledevices should be made part of the firms cross-channel strategy, integrating with its website, abd offline operations.
In spite of establishing the efficacy of e-commerce in driving sales and profitability, this study had a number of weaknesses. First, it assumes that the only explanation between the differences in growth and value for the firms studied is purely due to e-commerce. The possession of e-commerce capabilities is not the only determinant of company growth. Profit can be enhanced or reduced by many factors including factors in the external environment (such as prevailing economic conditions), among others. Thus, even without e-commerce capabilities, we may find a number of factors either enhancing or reducing firm growth. While acknowledging that the possession of e-commerce capabilities can substantially enhance firm profitability, this study made no attempt to control for such variables. Therefore, while e-commerce may contribute to firm profitability, the nature of its real contribution in this case remains at best tenuous as long as the impact of the other variables has not been properly ascertained. This is an area where future researchers can and should look into.
Secondly, the comparison of Netflix and Blockbuster was based on stock prices, with stock prices being used as a proxy measure for profitability. While many research studies have established the existence of a positive and substantial relationship between firm profitability and share prices, share prices are influenced by many factors. Sometimes, market sentiment is not based on actual profitability level of the firm and it is actually possible to find loss-making firms having high and rising share prices. As such, it is not strictly true that the high stock prices are solely due to profitability, an assumption the study makes. Future studies may be interested in using the actual profit levels rather than using stock prices as a proxy measure for profitability. In the same breath, the number of visitors was used as a proxy measure for revenues in the case of TraderJoes and Whole Foods. While as demonstrated by the funnel model the number of visitors to a site is positively related to revenues (since it determines conversions such as sales), the study makes the assumption that conversion need necessarily be online. As a matter of fact, it can be offline, as in the office model, where the customers are able to view catalogues of products on offer but have to order for them offline (ecommerce, nd). Therefore, the absence of a functionality through which the prospects can order for the goods may dissuade many from buying, but a number of them will go to the offline stores to buy as a result of the information in the website. This also needs to be considered.
Taking the findings of the study to be a fairly accurate representation of the reality, notwithstanding these weaknesses, it is recommended that firms enhance their e-commerce capabilities and that those without e-commerce capabilities should consider implementing them as a matter of strategic import. Such capabilities are likely to lower costs (for example through the disintermediation of the distribution channels), increased efficiency, and higher revenues all of which will contribute to better firm performance as the study demonstrates. Given the increase in cases of internet fraud, security, privacy, and trust are other areas which firms need to seriously look into. The rapid growth of wireless technology (e.g. PDAs and mobile phone) should offer customers the ability to order for goods and services on the go, potentially expanding the online market, and this is an area that firms keen to bring in the extra dollar should tap into.
