The Retail Sector and the Internet Economy

This paper explores the state of the retail sector of the U.S. economy with respect to the use and adoption of the Internet. The paper estimates that Internet-channel retail sales accounted for approximately 1% of the total retail sales in the beginning of 2000. This is approximately US$8 billion. While Internet retailers are continuing to experience significant growth, their competitors who come from the “bricks and mortar” world of physical retailing are making significant inroads to a complementary Internet and physical channel strategy. This paper examines 15 firms that participate in varying forms of electronic commerce. I identify some of the best practices of firms using the Internet effectively in their business strategy by identifying some financial and technical measures of performance. While the future of electronic commerce is certainly rosy for some retailers, I project that it is unlikely that Internet-channel retail sales will surpass more than 10% of the total retail sales in the U.S. I could make a mint Fill my pockets with more than lint I'll give you a hint It involves the "internet" Introduction The Internet has successfully moved from a “fringe technology” to the mainstream popular culture as indicated by this lyric from a recently released song. However, in such a period of excitement about a new technology, we must be careful not to forecast continued exponential growth indefinitely. At some point, the 100+% growth rates in revenue by electronic commerce (e-commerce) retailers must abate. A more difficult question is determining when the exponential growth is no longer. The factors that determine how and why e-commerce slows down may be easy if this were an ex-post exercise. However, this paper is trying to assess the best practices of Internet retailers in order to determine why they are currently experiencing exponential growth while it is happening. Furthermore, the paper then tries to project the potential scale of such best practices to determine when growth will ultimately slow down and reach a relative steady state. Fortunately, there is some indication that Internet retailers are not enjoying outrageous success as they once had. Market forces and the dwindling supply of capital have changed the “grow at any cost” mentality of some Internet retailers to be more profit driven. This shifts the advantage from companies that are still relatively new to the retail sector to the more traditional retailers who have much better revenue (and profit) prospects. 1 From “Never Do Anything,” BNL, Maroon (2000). In this paper, I will try to maintain a retail industry perspective. At times the paper will explore some firm-specific strategies or performance measures but this is done in order to extrapolate to an overall characterization of the retail sector of the U.S. economy. Part of the reason why I am examining firm performance first and then zooming out to the entire retail sector is that the effect of the Internet may be large in changing Amazon.com’s strategy, but it may have little or no effect on the macro statistics of the retail sector. The Retail Sector The retail sector of the U.S. economy can also be thought of as the business to consumer (“B2C” in Internet-speak) part of the value chain. It is the point when a firm is supplying goods to consumers who actually value consuming the product (as opposed to re-selling it). This portion of the economy makes up approximately 9% of the gross domestic product (GDP) and has been fairly constant over the past 15 years as Figure 1 shows.