EconSouth (First Quarter 1999)
THE INTERNET: CHANGING BUSINESSES' APPROACH TO BUSINESS
urfin' the Internet isn't just for kicks anymore — it's big business as more and more companies catch the online technology wave and advertise and sell their products in cyberspace. But are online services, online marketing and online retailing — sometimes called e-commerce or Internet commerce — really affecting the way companies do business? Industry experts offer a resounding "yes." In fact, some online experts have gone so far as to predict that the Internet will reshape the global economy during the next five years.
Whether or not that prediction becomes a reality remains to be seen. Whatever happens, however, it is clear that the Internet is providing companies new opportunities to reach consumers and other businesses in fresh and creative ways most executives never dreamed were possible five to 10 years ago.
Where will the Internet take business?
While still in its infancy, the Internet has taken on an almost over-the-rainbow appeal to companies worldwide as they rush to market and sell products and services in cyberspace. But currently, statistics don't show that consumers are beating down the door to purchase products over the Net.
Companies engaged in online retailing represent some of the most commercially visible Internet businesses. Estimates vary for 1998 U.S. online retail sales, but firms like Forrester Research, which specializes in information-technology-related trends, generally place the figure in the $5 billion to $8 billion range. And while $8 billion may seem an impressive figure, it represents less than 1 percent of total retail sales for 1998.
Odyssey, a San Francisco marketing company, estimated in late 1998 that 88 percent of all U.S. households and nearly 57 percent of U.S. households with online access would not purchase anything over the Internet during that year. One obstacle to greater Internet sales, some experts say, may be a consumers' perception that they lack privacy and security in Internet transactions. Other factors inhibiting greater usage include limited Internet access and consumers' concerns about customer service.
But these potential obstacles have not cooled businesses' Internet infatuation. In fact, while current Internet usage and sales statistics may be a turnoff to some companies, these figures apparently highlight the seemingly limitless potential of Internet commerce to others. As a result, many companies have begun to launch not only their marketing efforts but also their sales into cyberspace. Online Christmas sales in 1998 offer additional hope for many companies. The holiday's 1998 sales — approximately $2.3 billion — exceeded many expectations and represented an increase of 77 percent over 1997.
To see how big Internet commerce and marketing are becoming, one can simply go online and find companies hawking everything from computers to hunting boots to airline tickets to automobiles to banking and financial planning services. Other companies have found that they too can better reach their business customers through the Internet.
Taking business by storm
A 1998 survey conducted by PricewaterhouseCoopers LLP found that 77 percent of the 446 product and service companies that are identified as the fastest-growing in the United States have at least one Web site. Most of these companies, 94 percent, use their Web sites to advertise their products, while 85 percent provide in-depth product or service information on their sites and 71 percent obtain new sales leads through their sites. Only 32 percent of the companies surveyed use their Web sites for online sales. However, online sales will continue to expand as use of the Internet becomes more widely accepted, according to Forrester Research. The firm predicts that Internet commerce sales worldwide may grow to as much as $3.2 trillion dollars in 2003 — representing nearly 5 percent of all global sales.
Internet sales and marketing spread to southeastern companies
While many Internet service providers, like MindSpring, based in Atlanta, and other online support businesses based in the Southeast have seen their stock prices increase phenomenally during the last few years, more traditional southeastern companies also have joined the rush to the Internet. Several southeastern companies are taking a lead in their respective industries in developing online marketing and sales efforts.
Saturn Corp., the General Motors subsidiary that produces its automobiles in Spring Hill, Tenn., rolled out a new television advertisement in the fall of 1998 that compared ordering a car online to ordering a pizza and having it delivered to your door. While cars cannot be purchased online from Saturn at this time, a consumer can visit the company's Web site (www.saturn.com) and interactively select the specific options, color, warranty and financing she wants for her own vehicle. The Web site then calculates a price for the vehicle and gives the consumer a list of Saturn retailers (dealers) in her area who will contact her if requested.
"Five years ago when we brought up our Web site, we recognized that the Internet would play a vital role in business," said Bill Betts, manager of corporate communications for Saturn. "Now we believe our site has developed into something unique in the auto industry by closely matching our Internet experience with the retail buying experience for consumers. Since Saturn has a no-haggle-pricing philosophy for our vehicles — and you can calculate that price online — we probably come closer than any other car company to matching these two experiences." A customer wanting to make a trade-in, however, still has to visit a Saturn retailer to have his car appraised.
Saturn, which bills itself as "a different kind of car company," has seen a dramatic shift in the way customers get information about their cars. "When we started Saturn in 1990, we had an 800 number that customers could call to request information on our vehicles," Betts said. "At the time, 80 percent of the information we provided to customers came from requests to this phone number. We now receive 80 percent of the requests for vehicle information over the Internet."
But Betts added that the company's Internet site, while quite successful, is not a stand-alone concept. In fact, he said, Saturn works to ensure that its television, print and Internet messages all build awareness of Saturn's products and special customer relationship. As an example of how the different media can work together, Betts pointed out that after the Saturn commercial touting the company's Web site first aired last fall, visits to the site more than doubled within days. While site usage is down slightly since that time, it remains 70 percent to 80 percent higher than before the television advertisement ran.
"We've recognized that more and more car buyers are doing their automotive research online," said Betts. He estimates that some 25 percent of all new car buyers are now doing their research online. Used car companies in the Southeast are also beginning to advertise their car inventories online.
Taking off: The travel industry online
Other industries are also reaping the rewards of the Internet. Atlanta-based Delta Air Lines has established an online flight ticketing service called SkyLinks, which can be accessed from the company's Web site (www.delta-air.com). Through SkyLinks, airline travelers can book flights, check flight arrival information and change frequent flyer account information, thus reducing paper distribution costs, the airline's second-highest expense, and the need to talk with one of the company's reservation operators in person. Both of these services are quite expensive for the company.
"We've had excellent success with our online booking product," said Kevin Dunn, Delta's product manager of e-commerce sales. As a result, he said, Delta has realized a very good return on investment since introducing its Web site in 1996.
Since then, Delta has seen its Web site's usage increase by triple digits year over year. While in 1998 SkyLinks accounted for only about 1 percent of Delta's overall ticket sales, Dunn said that it has provided a greater impact in terms of lower costs in distribution and customer service.
To attract customers to online ticketing, Delta has developed several incentives, ranging from additional frequent flyer miles to special fares and discount tickets, available only on the Internet. For example, in recent months Delta offered online ticket users $20 off any fare to Vail, Colo., and two free ski lift tickets good for two days of skiing at the resort. And on Feb. 8 Skylinks introduced weekly Web fares that allow last-minute weekend travel at significant discounts up to 40 percent to 50 percent off published rates.
To recoup some of its rising costs for traditional booking methods done through phone calls or with paperwork, Delta recently added a $2 surcharge to fares for domestic round-trip bookings, except those made on its Internet site. Within a month, however, Delta repealed the surcharge because no airlines matched it, leaving Delta with slightly higher fares.
The online potential for travel-related businesses and online travel options for consumers should continue to grow. According to Jupiter Communications, a media research firm specializing in Internet commerce, the travel industry booked $911 million in online revenue in 1997; Jupiter predicted that amount will increase to $11.7 billion in 2002. While airline travel makes up the majority of this total, the firm indicates that the airline portion of total online travel bookings will decrease from about 84 percent to approximately 59 percent during this period as other travel options such as cruises, resort packages and tours come online.
Sensing the potential, Walt Disney World in Orlando, Fla., has jumped on the online travel-booking bandwagon. Disney World's Web site (www.disney.go.com/DisneyWorld/index2.html) provides travelers with a vast array of information touting the company's Florida attractions and the option of booking vacations online. Besides tickets to Disney theme parks, the site features a variety of all-inclusive vacation packages for Walt Disney World theme parks in the Orlando area as well as Disney cruises, which were introduced in 1998.
Banking online, not in line
In addition to travel-related businesses, other industries, such as banking and financial services, are well suited to online business. In fact, the Internet has become increasingly popular with both large and small banks in the Southeast. Today many banks' Web sites allow customers to complete a variety of transactions online — paying bills, receiving and reconciling bank statements, checking balances, applying for certain types of loans, and opening checking and savings accounts.
In addition to an Internet connection, to bank online customers must have a financial software package, such as Microsoft Money or Quicken, that allows them to interface with the bank. To handle online payments, most banks use a third-party financial service provider like Check Free Corp., based in Norcross, Ga. Ironically, third-party service providers often pay the business that is owed money by cutting a paper check. The bank's account is then debited, and the bank in turn then debits the customer's account.
"Online banking is helping us reach new segments of customers who would rather bank electronically versus coming into a branch location," said Charles Bretz, senior vice president for alternative delivery at Compass Bank, based in Birmingham, Ala. Compass Bank launched its Web site (www.compassweb.com) in mid-1995 and began to offer online banking services later that year. In addition to these services, the bank offers customers online trading of stocks and securities through Compass Brokerage.
"We've had a very favorable experience with online banking and brokerage, and our customers have found banking online to be a very robust way to complete their transactions," according to Bretz. He added that online banking might in time provide savings to banks by reducing the amount of paper and postage required for checks and billing statements.
In highlighting the growth of online banking services at Compass, whose advertising slogan is "bank online, not in line," Bretz said that in 1995 all of Compass' consumer loan applications originated by customers coming into their bank branches. Today approximately 30 percent of Compass' consumer loan applications originate online or via phone through the bank's Sales Call Center, a phone center launched in 1995. All of these efforts provide customers — consumers and businesses — with more options.
Letting the customer drive the system
As more consumers and businesses go online, companies may find that the way they do business with their customers has changed, especially since consumers and businesses can now more easily comparison shop for the best pricing.
With the increased availability of product and pricing information, some products may become more like commodities and in doing so generate lower and lower prices for consumers. Still, most companies see the upside potential as being greater than the downside possibilities. But the rules of business are changing for many, including middlemen, as consumers have more say-so in the process.
"Since the Internet allows consumers to go directly to the source for getting the best prices and service, the role of intermediaries is being altered in many instances," said Dr. Frederick Riggins, a researcher in the Center for Management in Electronic Environments at the DuPree College of Management at the Georgia Institute of Technology in Atlanta. "In some industries, the Internet has created new opportunities for intermediaries by providing opportunities for them to interact with consumers. In other industries we are observing a trend toward disintermediation, where manufacturers are using their Web sites to sell directly to the customer."
United Parcel Service (UPS), the shipping giant based in Atlanta, has recognized the potential of the Internet to change business, particularly the role of intermediaries, and is adapting what it does to meet the demands of the online world.
The company has been online for several years; its Web site (www.ups.com) features products such as a document exchange program designed to securely deliver electronic documents over the Internet; a system that allows companies to connect their mainframe computers to UPS' computers to manage production cycles, fulfillment, payables and receivables; and an online package tracking system.
James P. Kelly, UPS' chairman and chief executive officer, discussed in a recent speech the company's Internet efforts and the changes the customer-driven approach is creating. According to him, moving to a customer-driven system creates a much more efficient supply chain, which has benefits not only for receivers but also for shippers. To tap into the benefits of electronic commerce, UPS has put in place a physical and virtual infrastructure that allows the company to establish direct connections with millions of customers.
UPS' investment has paid off as more than half of the company's package volume is now shipped by customers electronically connected to the company, using products like UPS' online package tracking, according to Kelly. UPS has found that these efforts have benefited business customers, who have seen their shipping volumes increase by 10 to 20 percent, a fact that the company believes will provide a more loyal customer base.
Eyes on the future
While there are many questions and uncertainties about the relationship between the Internet and business, there is little doubt that the Internet is providing a world of opportunity in increased sales and marketing of products and services.
But will the current online craze really change businesses' approach to doing business, like the transformation in the travel industry? In many ways the Internet already has changed business, and there are signs that it will continue to change the way both large companies like UPS and small companies like the sporting goods store around the corner interact with their customers, not only in the Southeast, but worldwide. As a result, companies will have to determine how the Internet fits their current business, as Saturn or Compass Bank have done, or how it could change and improve what they do.
For some, the process may be simple; for others it may involve reshaping their operations and relationships with customers. Such is the power of cyberspace.
Sure It's Great for Business, but What About Consumers?
ith all the hype about the Internet and its benefits for businesses and consumers, it's easy to lose sight of potential downsides. The Internet provides consumers more choices, more control over purchasing decisions and, in many cases, lower prices. But these features represent a mixed bag of benefits and potential problems.
"At this time, I see Internet commerce going in two possible directions for the consumer," said Suzanne E. Boas, president of Consumer Credit Counseling Service Inc. in Atlanta and a member of the Federal Reserve Bank of Atlanta's board of directors. "The Internet will help a segment of consumers in comparison shopping and deciding on the best price for a certain product. On the other side, however, because the Internet is so accessible and is perceived by many consumers as a form of entertainment, I believe it plays to the impulsive, and at times compulsive, side of consumer spending as well, much like the television home shopping phenomenon."
The Internet's easy accessibility poses some serious concerns for the consumer. "There is much less physical effort involved in shopping in front of a computer than in trudging off to a mall, so it's easy for people to just shop and shop," she continued. "Another concern is that young people, who are quite savvy when it comes to the Internet, are also a group that has typically exercised less restraint with their personal finances."
More control for better or worse
This downside of consumers' access to the Internet may be compounded by increased access to credit options. In the past, Boas said, consumers did not have such unlimited control over their finances, as banks and credit card companies set strict credit lines and limited access to credit. Today, however, because of the competitiveness of the credit market, consumers have greater access to more credit. "We've seen that when the consumer has more control over credit decisions there is a segment of the consumer market that doesn't exercise self-control," Boas said.
But not everything about the Internet raises concern for consumers, according to Boas. In fact, with the Internet, consumers are able to comparison shop for better prices more easily. Since businesses should be able to reduce overhead costs by using the Internet, consumers should see lower costs passed along to them when they shop online.
For instance, one of the hottest e-commerce segments, online travel bookings, provides a real opportunity for consumers, Boas said. "Online travel bookings represent a definite upside for consumers. If you think about airline and vacation travel bookings, that's not the type of purchase most people make impulsively. This is definitely an area where prices should come down for consumers as online service delivery expands."