This paper examines the development and challenges of online retailing, with particular attention to markets in the United States and Asia. It covers foundational concepts such as customer retention, value chain management, and CRM, before analyzing the structural and regulatory obstacles facing Asian e-commerce. The paper gives extended focus to Hong Kong, tracing how entrenched business cartels, government policy, Chinese regulatory influence, and generational attitudes toward technology have shaped — and constrained — the growth of online retail in the region. The Boston Consulting Group's Asia-Pacific data and case studies of companies such as adMart and Chinadotcom are used to illustrate broader systemic patterns.
Access to the basic necessities of life has long followed the conventional method of buying and selling. This pattern changed in the last decade with the emergence of the information technology age. When consumers gained the ability to access information instantly, technologists asked why access to products could not follow the same logic. Thus emerged the concept of online retailing.
The online market initially began with the sale of information, but today consumers can interact on the internet and purchase physical products without significant fear — at least in some parts of the world. The main concern for consumers is no longer whether their regions have internet access, but rather how quickly and efficiently online retailers can deliver products and services. As a result of this shift in expectations, many internet companies established separate divisions for online retail — commonly referred to among IT professionals simply as "retail." The online retailer is a diversified extension of e-commerce. Today, online retailers sell virtually anything feasible — from a hairpin to a car.
The competitive factor at stake here is how efficient the e-tailing system is — whether it can survive both its external and internal environment. Despite being one of the most lucrative hubs for online retail, the United States still harbors concerns about its long-term sustainability. With the Asian financial crisis, the Latin American crisis, and the September 11 attacks, the economy lurched in and out of stability. The major concern is that local markets may not be strong enough to survive on their own. Facing competition from Asian and European rivals, online retailers must gauge competitors' strengths and weaknesses before progressing further. Hong Kong is taken as a specific example of one competitive regional market.
The basic marketing concept of a business is easier to understand when the customer is placed at the center. Customer retention is a critical phenomenon for any businessperson who considers the needs of their customers. The entire selling concept depends on understanding the model of customer valuation and base. Customer "acquisition" is therefore essential to business development. There are several factors responsible for maintaining a business where customers are concerned.
Effective retention marketers pursue two objectives in any customer retention campaign: (1) holding on to the most valuable customers, and (2) attempting to make less valuable customers more valuable. To retain and increase the value of customers, businesses must design and execute marketing promotions effectively. Doing so requires knowledge of each customer's value and their likelihood of responding to a promotion, for two reasons: first, one should not waste money promoting to low-value customers from whom a profit cannot be made; second, one should not waste money promoting to customers who will not respond, as this is simply money thrown away.
How retailers go about valuing and retaining customers is equally important. Most retailers have historically relied on package programs, catalogs, and long-term relationship strategies. However, as time passes, these tactics have diminishing effect. Consumers seek new approaches. Some retailers select customers at random and provide them with added benefits. Others use catalogs to select a list of names for mailed offers, hoping to stimulate buying interest. While these tactics proved effective in the past, catalog sales no longer carry the same impact, largely because the internet has taken over this arena. As a result, retailers have had to analyze how online retailing differs from brick-and-mortar retail.
Although consumers have embraced online retailers with enthusiasm, many online retailers have struggled to meet expectations. Consumers look for product variety, timing, efficiency, quality, and on-time delivery. In the area of on-time delivery in particular, online retailers have often lagged behind their physical counterparts. Customer trend data reveals the following: customers who purchased recently were more likely to buy again; customers who purchased frequently were more likely to buy again; and customers who had spent the most money overall were more likely to continue buying — and to become even more valuable over time. As a result of poor performance in these areas during the late 1990s, many shoppers abandoned the new medium in favor of conventional retailers.
Online retailers, whose sole revenue depends on the relatively small online consumer market, came to recognize the importance of developing a value chain that would increase their efficiency in meeting consumer demands. Many adopted strategies encompassing CRM (customer relationship management) and value chain management. These tactics helped to restore consumer confidence. According to Goldman Sachs/PC Data, "online shopping survey reported that 40% of respondents said their year 2000 online shopping experience was better than the previous year, and 54% said it was the same. Five percent said that their online shopping experience was worse" [United Press International, 12-26-2000]. This survey illustrates how critically customer service shapes the consumer base for online businesses.
Where value chain and CRM are concerned, online businesses depend on them more heavily than brick-and-mortar businesses do. Amazon.com and eBay.com are two of the most important benchmarks for online transaction and retailing, and their success has been achieved largely through CRM strategy and value-added formulas.
Supply chain management emphasizes maintaining effective supplier relationships. This enables a company to concentrate on overall organizational performance through the smooth flow of products. If the front-end and back-end of a business maintain open communication, consumers at the front end do not need to bear the brunt of organizational shortcomings. The internet provides a lucrative open window for most retailers, but managing the back end remains essential. For instance, the timely delivery of goods is critical for brick-and-mortar retailers. When a consumer moves online, the risk of losing trust is even greater. The consumer demands reliability, and the only way an organization can provide it is through efficient delivery — as promised — implied through online service. According to a survey released by the Boston Consulting Group and Harris Interactive, there is "high consumer satisfaction with online shopping, but with remaining concerns about customer service and about delivery dates" [United Press International, 12-26-2000]. Consumer satisfaction must be a top priority because it is through satisfied consumers that any service is sustained. A Boston Consulting Group survey found that "79% of online holiday shoppers were either 'satisfied' or 'very satisfied' with their holiday shopping experience, with 90% indicating that the product selection online was as good as or better than it is off-line" [United Press International, 12-26-2000].
The motivations of online retailers extend beyond consumer satisfaction alone. One reason many retailers are reluctant to go online is the low profit margin on individual items. Unless a company sells in bulk, required profitability is not achieved. Retailers therefore seek alternative revenue streams, primarily through advertising.
Most online retailers depend on banner advertising and alliances with major websites to earn additional revenue. Technology companies, whose income levels are comparatively higher, have larger advertising budgets and can contribute additional funds to enhance the quality of their service. Online retailers take advantage of click-throughs, pop-up banners, visitor traffic counts, and email newsletters offering prizes and bonuses. For instance, Umax's pop-up windows featuring Cyberian Outpost logos and deals illustrate how online retailers leverage relationships with other online companies to increase sales. Cyberian Outpost also generated revenue from revenue-sharing agreements with online gaming services like Mplayer. Dialogue prompts motivate consumers to visit sites, and if visitor numbers exceed a certain threshold, the retailer earns a set quota of revenue.
Some online retailers take a different view. According to Toby Lenk of eToys, retailers cannot afford to survive on banner ads alone and must offer added services that motivate consumers to choose a particular site for all their purchasing needs. Any site not optimized for this purpose will lose consumer interest. As one industry observer noted, "Since content sites operate much like a media company does — with ad rates that are based on the number of viewers the site attracts — driving traffic is enough" [Ricadela, 1997]. Today's consumers are sophisticated enough to judge a website by its content rather than merely its visual presentation. A website that does not serve a particular consumer segment — for example, working mothers — stands to lose a significant number of purchases. Online retailing is therefore not merely about pop-up advertising or window decoration; it must fundamentally be about content.
Similar to brick-and-mortar retailers, online retailers must also maintain certain levels of marketing and advertising expenditure. The bulk of this cost is reflected in the cost-per-sale of ads. eToys, for example, allotted a 1% click-through rate to its affiliates at 80 cents per click, attracting a high rate of buyers if affiliates used its banners frequently. These affiliates were not necessarily small webmasters — large organizations such as AT&T participated as well. eToys's partner, AT&T WorldNet, featured eToys in its online mall. According to eToys marketing vice president Phil Polishook, he expected between 10 and 15 such deals by year-end. While Polishook declined to disclose exact payment figures, Lenk noted that for toy and book retailing, commission ranges ran from 5% to 12.5% [Ricadela, 1997].
Online CRM differs from its brick-and-mortar counterpart in complexity. The online retailer must maintain a highly efficient technology system to ensure that advertisements translate into click-throughs — and even then, click-throughs do not necessarily result in purchases. IT therefore plays an important role in identifying "unique visitors," those who deliberately browsed a site rather than accidentally clicked through. This matters because a random click-through may generate small affiliate revenue but does not produce a sale. Any affiliate program must therefore guarantee meaningful, targeted click-throughs through high-end technology. As one report noted, "Online retailers advertising on other sites aren't just looking for eyeballs... They also want to attract better demographics and have flexibility in banner placement. One online retailer canceled its business with a publisher out of 'frustration' with a host site that had 'no creativity or imagination' when it came to placement and use of its banner ads" [Ricadela, 1997].
This is perhaps another reason why retailers are reluctant to move online. They may be attracted to the selling potential, but they are apprehensive about the heavy investment required before profits can be realized. Demand for online retailing is increasing daily, but this does not mean that investment costs are decreasing. Technology companies continue to earn more due to the high demand in this category. Retailers, whose core business is entirely different from high-end technology, depend almost entirely on their technology partners to strategize their websites efficiently. As a result, technology companies effectively hold significant power over retailing businesses.
The argument between technologists and retailers centers on the question of compensation. As one industry figure noted, "Online retailers also can't expect the hefty fees demanded of vendors by print catalogs. Neil Farnsworth, general manager of business development for Microsoft's end-user customer unit, said he will only compensate retail sites for the cost of posting pages" [Ricadela, 1997]. While this argument has merit, retailers must acknowledge that online retailing is not simply about catalogs. It is about providing convenience, ease of accessibility, and saving time. If consumers are turned away from a favorite brand's online store during a busy season, the disappointment reflects badly on the brand itself. Online alternatives to congested physical stores could effectively double sales during peak periods.
Shop.org, a division of the National Retail Federation focused on online retailing, aimed to create stronger consumer demand and improved profit margins through a targeted growth strategy of up to 45% during 2001, amounting to $65 billion. Despite these targets, individual strategy was still deemed essential for individual retailers. Based on data from 550 retailers, 156 of which participated in a detailed survey, Shop.org's report explored "the opportunities and challenges facing online retailers of all stripes — catalog-based, web-based and store-based — and the pronounced divide that has emerged in their performance and competitive positions" [United Press International, 05-02-2001].
A persistent concern for online retailers is that consumer demand continues to grow, yet profitability remains elusive. Online retailers struggle with operational issues related to employee performance, consumer acquisition flow, and buyer conversion. According to Elaine Rubin, chairman of Shop.org, "There is a steep learning curve in becoming an online retailer — those players that were unable to excel in all facets of this complex business just didn't make it to the end of 2000" [United Press International, 05-02-2001]. Study results coupled with this assessment showed that "operating losses decreased as a percentage of revenue, from 19% in 1999 to 13%, or $5.6 billion, in 2000" [United Press International, 05-02-2001].
"Tax policy, investment barriers, and pricing advantages"
"Asia-Pacific market data and regulatory challenges"
"adMart case study, cartel dominance, and generational shift"
From the above discussion, it is clear that online retailing remains a young business model in many parts of the world. It requires not only the merging of brick-and-mortar environments with online infrastructure, but also the active cooperation of investors. Although the United States and European online retailing sectors have established themselves, their Asian counterparts are still seeking a middle ground where conventional business models can merge with newer ones. In Hong Kong, this step has been taken tentatively by the new generation of old cartel families, and similar trends are visible in Malaysia, Taiwan, and Thailand. This is why doing business online continues to be more difficult for these actors compared to their western counterparts.
Online retailing has been unable to find its niche in the region due to several compounding reasons: consumer unacceptability driven by economic and social status; the monopolistic attitudes of industrial leaders; barriers to trade entry for foreign investors; and a lack of high-end technology, which must be imported. Although Singapore, Hong Kong, and Taiwan have systems that can rival international online retailers in some respects, they have yet to improve their management structures. This area of operation will require a longer period to harmonize with the requirements of the IT age before it can align with the flow of international trade. Hong Kong's development has been particularly hindered by the cartel's own move to dominate the internet — a monopolistic structure that degrades new entrants and, because these cartels are slow to adopt new developments, further retards the progress of online retailing. E-commerce in this region, therefore, still has a long way to go.
Furthermore, the problems that western markets have grappled with — such as customer service management, inventory management, and value chain management — are still new to Asian counterparts. These are not insurmountable challenges, but the unwillingness rather than the inability of key actors to address them is the core obstacle. In the face of such an attitude, potential investors will shy away from committing funds. Retailers, for their part, argue that populations lack sufficient income to generate the large markets required. As one commentator noted, "Some of Asia's less developed countries also hope to use the Net to speed development. In Vietnam, where just 15,000 people are online, the government has slashed access charges 40% to make use more affordable. India, with its pool of talented engineers and its democratic system, hopes to become a leader of Asia's emerging Net industry" [Einhorn, 1999]. The potential and the market exist — if only officials would recognize the scale of the profit opportunity.
According to the Boston Consulting Group report, key Asia-Pacific online trends include: rapid broadening of the potential online consumer market; accelerating use of wireless internet access translating into new customers demanding new services; growing importance of integrated "clicks and mortar" business models; growth of "killer categories" with large offline revenues and strong online potential, such as online brokerage, travel, automotive, and real estate; and the emergence of e-commerce enablers such as web designers and distributors supporting online retail businesses.
Hong Kong's relative backwardness in online retail is not due to a lack of technological capability — most of the technology adopted in Hong Kong and across Asia is comparable to U.S. standards, albeit on a smaller scale. For U.S. investors, committing to the online retailing business is straightforward because profitability can be projected within a reasonable timeframe. The investors are motivated to back newer projects and compete against established online retailers. In Hong Kong and elsewhere in Asia, this culture of investment has not yet taken hold. Strategic development remains low on the priority list. Most competitors are still grappling with the challenge of competing against brick-and-mortar cartels and navigating unethical business practices. The anti-competitive attitudes of Hong Kong's entrenched business leaders remain the primary obstacle to progress in online retailing. The rapid improvement in technologies such as electronic data interchange (EDI) — which just two years earlier required a $5,000 outlay and is now accessible for approximately $100 per month — demonstrates clearly that the infrastructure potential is there. The hindrance is not capability; it is government policy and institutional resistance.
According to Jupiter Research, more than half of all consumers expect retailers to respond to email inquiries within six hours, but only 29% of online retailers actually meet that expectation. Delivery issues are the primary reason (53%) customers contact online merchants. Online retailers did not set a strong customer service precedent in the early years, leaving over 60% of consumers who shopped online during the holiday season disappointed with the level of service they received. Jupiter analysts noted that online merchants' failure to understand their own customer service limitations can have serious negative effects — for example, one-third of all online consumers who ordered out-of-stock merchandise were never notified of a revised delivery date, despite potential FTC-imposed fines for such failures [Business Wire, 12-19-2000].
In summary, the future of online retailing in Hong Kong and much of Asia is constrained not by market demand or technological capability, but by institutional, regulatory, and cultural barriers that will take sustained effort from governments, investors, and a new generation of business leaders to overcome.
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