E-Commerce Hurting the Little Guy

A report by Forrester Research has found that despite the Internet’s promise to level playing fields of commerce, the Internet is actually accelerating the nationalization of commerce in the US.

When Internet commerce first hit the scene, it brought with it promises of enabling small businesses to expand their geographic reach and compete on equal terms with larger firms. But Forrester’s report “Local Commerce Goes National” indicates that several barriers will limit the ability of local merchants to gain access to national online audiences. As a result, local retailers will see their share of online sales decline to just 6 percent by 2003, while national players extend their offline dominance to the Internet.

“The outlook for local retailers online is dismal,” said Charlene Li, senior analyst in New Media Research at Forrester. “Offline, small, and medium-sized retailers have a 50 percent share of retail revenues. In contrast, they are barely capturing 9 percent of Web sales today. This picture is only going to get worse as the Wal-Marting of America continues.”

Large national merchants enjoy inherent advantages in technology, brand, and scale that ensure their e-commerce success, according to Forrester. Few local merchants can afford the $1 million price tag of building a full-featured e-commerce site, and local merchants also have difficulty driving traffic to their sites without a recognizable brand name. These problems result in sites that lack the scale to create an optimal merchandising environment that can fully utilize more advanced features like personalization and one-stop shopping, Forrester found.

Web superstores such as Amazon.com, CDNow, and eToys are using their wide selection and low prices in combination with advantages in technology and brand to dominate the online sales of commodity products such as books, music, and toys, Forrester found.

Similarly, large businesses are using sophisticated online ordering tools, inventory management, and promotions to wrap up the market for replenishment goods like food, health, and beauty products.

While Forrester paints a grim picture for local retailers, local service providers face better prospects for online success. Because most services require a personal transaction, only a portion of the service process, such as reservations, information, and order tracking, will go online, according to Forrester. The service transaction itself will remain offline, where location remains a competitive advantage. E-mail and affiliate marketing programs will help local providers reach the Internet audience for services.

“Virtual nationalization will have unanticipated consequences for retailers and consumers alike,” Li said. “Many local retailers will experience flat or declining revenues. Meanwhile, consumers can expect to pay more for service on the products they purchased at rock-bottom prices online.”

Forrester also found that, as a group, the local and national businesses anticipate a twofold increase in online sales by 2002 — growing from 8 percent of total revenue today to 17 percent in 2002. Both types of merchants also expect to increase their local Web advertising from 28 percent of their online budgets in 1999 to 33 percent in 2002, an 18 percent increase. Most of these additional dollars will come at the expense of radio, print, and Yellow Pages budgets.

For its report, Forrester surveyed 20 national marketers and 30 local marketers to determine how they are selling and advertising locally.