The trouble with B2C

The business-to-consumer sector has undergone a total transformation and the bricks-and-mortar companies that were once chided...

The business-to-consumer sector has undergone a total transformation and the bricks-and-mortar companies that were once chided for their apathy are now emerging as clear market leaders.

And the dotcoms who were once praised for their innovative approach to business are now eager to build up alliances with established high-street stores. This month's special report also looks at some lesser known success stories and outlines the necessary business components to have any chance of longevity in the B2C arena.

Winning formulas

Why has the business-to-consumer market had such a bad press, when there are some clear winners? asks Christopher Field

With one dotcom going bust every 15 minutes, no-one wants to talk about the business-to-consumer (B2C) space, or rather, they only want to talk about how it's all gone horribly wrong. From living in denial for around six months as the first dotcoms crashed or filed for protection from their creditors, the industry and its watchers are now prepared publicly to purge themselves of the guilt they feel at spending so much money on a giant bubble.

However, most have quickly come out of the Christmas period with renewed optimism, even if it is tempered by experience. B2C, we are led to believe, is here to stay, it will grow and there is money to be made. The on-line market continues to grow, measured by value of sales, number of buyers, number of repeat buyers, growth in new territories and by the number of new transaction websites. So, by anyone's reckoning, on-line retailing is in good health. But the growth attributed to pure on-line retailers, while there is growth, is now reckoned to be overstated, with real growth accruing to traditional high-street retailers.

Those still bruised by the whole experience want to talk only about the business-to-business (B2B) space, saying that companies have the resources, the infrastructure and the commercial imperatives to ensure that it works. But this is little consolation to those B2C companies who rely on the B2B supply chain to fulfil customer orders. While the B2B market is bursting at the seams with new technology that can connect the various players, the fact remains that most dependent B2C companies are still making a loss on each transaction.

The problem, therefore, with B2C is that there are as few certainties as ever. The single biggest killer of dotcom retailers has been huge marketing costs. Traditional off-line advertising has simply failed to hit the mark with on-line consumers, according to a survey by Internet consultancy, Rare Medium. Of the 1,000 on-line consumers it spoke to, only 8% of respondents had visited a new site after viewing off-line advertising.

Problems with online retail

Analysts concluded long ago that the problem with many on-line retailers is that they don't know the first principles of retailing. The B2C pioneers tended to have technology rather than commercial experience - and it showed in the way that websites were designed; and the difficulties for consumers in navigating, paying and getting help. Cynics would say that little has changed except, of course, the consumers themselves who are now wiser about the pros and cons of shopping online.

Blaming dotcoms for a lack of retail experience is simplistic, particularly considering that early attempts by real retailers fell flat. Sainsbury's foray into on-line wine selling in 1995 was a disaster and Argos made the headlines when its site took three months to sell one beach ball and a couple of electric carving knives, all to the same buyer in Japan.

With time has come experience, but uncertainty prevails. Despite recruiting one of the leading lights in UK retailing in the form of Allan Leighton, former CEO of Asda, as director and shareholder, has seen its share price continue to fall as investors continue to worry about the company's cash burn-rate and its low rate of converting browsers to buyers. They are also worried that the airlines have caught up with their game and, far from being prepared to offload their spare capacity to the likes of Expedia, Lastminute, eBookers and Easyjet, some airlines are thought to be gradually starving these dotcoms of fares.

Airline tickets have been a success, other items less so. Five years ago, when only techies used the Internet, it was comfortably assumed that the only goods that would work selling online would be software, CDs and flowers (presumably sent by shy computer programmers to their girlfriends). The figures bore this out, although the volumes were tiny by comparison with today's figures. Then, everyone agreed that food and any other goods that people needed to touch and see would not sell online, but, today, Tesco is the world's largest on-line grocer and is estimated to be turning over £200m, around 0.4% of total turnover.

Successful models

CDs remain popular, but the growth is almost certainly in downloading music direct from the Net, whatever restrictions are put on outfits such as online music site Napster, which now accounts for 4% of US Internet traffic.

Clothing has not been all that successful, as found out to its cost last summer, but there is a view that certain items which require little thought will succeed in the on-line channel. Fashion chain Kookai, runs a small Web shop, which is popular with customers wanting to buy branded T-shirts. IT Manager Peter Mila, explains, "While the volume of orders remains low, Kookai will not commit resources to building a system that may be leading edge but will also be so expensive that margins will be destroyed. Orders are therefore currently handled off line and then matched to stock availability through our stores' merchandising system."

Cars have not been a success either. Internet car sellers quickly lost their initial advantage - the fact that they could bypass the law that still requires manufacturers to sell through national dealers, and simply import cheap cars from the Continent - because manufacturers cut their prices and importers shifted their attention away from the Internet to newspaper advertising.

Real-world purchases

The lesson seems to be that few consumers will shift their entire traditional purchasing to the Internet for any groups of physical items. Where they will go online is for purchases that cannot be made easily in the real world - such as gambling, because the Internet circumvents national legislation; and shares, because real-world brokers charge prohibitive fees to the day trader and small investor.

After the high profiles of 2000, the world of B2C is slowly starting to mature. It is ultimately an impossible exercise to determine what device or network consumers will use to shop, because the decision to shop is increasingly spread across many channels. Web browsing is often the precursor to a sale made on the high street and, as Forrester has found, multi-channel shoppers buy more than single channel shoppers.

An understanding of how customers behave through channels both on- and offline is critical. So, when a customer uses an Internet kiosk, as used by Gap and the Our Price format owned by Virgin under the V.Shop name, it is important that the kiosk is fully integrated into the sales network. At Virgin for instance, the kiosk displays the same browser as and is linked to the store point of sale network so that teenagers, most of whom tend not to have credit cards, can order online and pay in cash at the checkout. As Kevin O'Brien, head of IT at Virgin Entertainment Group, "The technology behind this is fairly straightforward but the change in thinking is radical; on and off-line shopping must be integrated and customer-centric."

In fact, identifying and reaching the right customers is now seen as the way forward for dot-com retailers. The gender split is now nearly 50/50, just in favour of men, and the typical shopper still seems to be upscale and free-spending. Getting more detailed information is more difficult, in fact, it now appears that winning a customer can cost two to three times as much as it does in the real world, so the old claim that Internet prices should be cheap because order fulfilment is cheap, have proved to be nonsense.

Cracking the on-line market

Although the Internet seems an ideal channel for getting information about consumers, most of whom will share personal information that they would withhold from high-street retailers, few on-line retailers have cracked the on-line marketing and relationship management conundrum, other than by throwing money at it. Market research company Jupiter has found that 76% of retailers are unable to track customers across channels.

Meanwhile, the high-street retailers are taking centre stage, setting the agenda and demonstrating that for the retail and marketing experience, deep pockets and time are all that's required for B2C success. The greatest worry now is that, the innovation and excitement that the pioneers brought with them will be lost as the search for profit takes over.

Shop until you drop: What is the best medium for B2C?

There is no more certainty when it comes to the channels consumers use to make on-line purchases. IBM has predicted that by 2003 over 50% of on-line shopping will not be done via a PC. Forrester disagrees and says that the PC will be the main device until 2005; but Forrester is reading the US market where mobile phones have not been as successful as in the UK. Wireless application protocol services have been oversold, but there is interest among consumers in shopping via other devices. And with the advent of digital television, on-line shopping will move further away from the PC, particularly in those families who do not and probably will not ever have a PC at home.

The advantage of digital television is that the Internet connection will probably be higher speed than that through the public service telephone network. Consumers generally say they like the Internet but want it faster and to stay up more reliably. Much is therefore expected of broadband connection through cable, satellite and, once BT loses its monopoly over local exchanges, via the telephone line.

However, few agree that broadband will be the saviour of B2C. Jon Moore, business development director of telco software company, Jacobs Rimell, says, "Porn, video conferencing, messaging and web publishing will drive the adoption of broadband, not shopping." David Rundish, vice-president Internet research at JP Morgan, adds, "The killer apps for consumers will be education, gaming and home working. Internet will probably get into the home via the Sony Playstation not the PC."

Brand building: e-tail view

Carol Dukes is the co-founder and CEO of alternative health and beauty website, With a 12.5% stake from Kingfisher, parent company of Superdrug and continual winners of various portals' website-of-the-month contests, the company has risen to prominence almost overnight. "And we will not be running out of cash by spending it all on advertising," says Dukes.

Unlike, which went pan-European from day one, thinknatural is taking things one step at a time. It started in the UK two years ago and is just about to open in Germany, one of the largest health and beauty markets in Europe. It is also using the Kingfisher connection to create a presence on the high street; its own-brand products will soon be for sale in Superdrug outlets, a perfect fit for Superdrug which is trying to beat the supermarket discounters by going upmarket and exclusive. is also insulated from the vagaries of on-line shopping by being strongly into mail order.

Crisis: consultants' view

According to James Ensor, managing director of retail consultancy, Strategic Vision, the B2C sector gets lots of good press but, he adds, "The dream is overblown and the hard facts are showing everyone that there is no pot of gold at the end of the rainbow. The customers are still there, the sales are rising, the problem is that they are simply not profitable." His worry is that the B2C crisis may have a knock-on effect in the B2B world. "Auctions seem to be a popular way to do business in both B2C and B2B but, if established relationships suffer, there may be a backlash."

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