Now comes the news that Web travel sites such as Travelocity and Expedia are flying high, while Web grocery sites such as Webvan and HomeRuns.com are crashing and burning.
Although the mainstream media makes it sound as if all Internet-based ventures are coming apart, the reality is that we are increasingly witnessing widely divergent outcomes by different industries. Some are going like gangbusters, while others are languishing or fading out completely. In my previous article, I wrote about how the clothing industry is showing extremely attractive sales and margins in contrast to other industries, such as books and CDs.
Travel and groceries are a major contrast in outcomes. The travel industry is pouring money into the Internet — the major American airlines have invested an estimated $145 million into Orbitz, a new online travel agency — based on the astounding results many have achieved individually. Delta sold 13 percent of its airline tickets online last year and, in the process, saved $45 million in commissions and fees it would otherwise have paid to travel agents. It hopes to sell 30 percent of its tickets online by 2003, and save $150 million.
Existing online travel agencies such as Travelocity and Expedia are doing so well that their stocks are among the few Internet-related stocks that have shown strong gains, approximately tripling this year. Nearly 10 percent of all airline reservations last year were made online, and this year online reservations are expected to reach 14 percent, according to one estimate.
Contrast the airline experience with the grocery experience. Investors poured more than $1 billion into Webvan, which is now in the process of shutting its doors. It never came close to the breakeven point in its four years of existence.
What’s the difference between buying airline tickets and buying groceries online? A big part is the degree of change in buying habits required by consumers to switch between doing what they are used to doing to make purchases and doing the same thing online.
Airline tickets have traditionally been purchased over the phone, either from airline ticket agentsd irectly or from travel agents. You tell the agent when and where you want to go, and the agent explains the options, rules, and prices. Making the leap to purchasing tickets online has required change on the part of consumers, but not radical change. You’re still seated at a desk, only instead of talking into a phone you are typing on a keyboard and getting your answers on a screen.
The amount of change required isn’t really much different from that required to go from full-service gas stations to self-service stations. In that change, consumers also went from orally transmitting their orders to having the capability of entirely automating the process via a credit card. The key to making the change work was ensuring that the automated process worked as smoothly as, or even more smoothly than, the previous process. And even with that, it took a number of years for the transition to be accepted by the vast majority of drivers.
The process of buying groceries involves a much different and, in certain respects, more complex process than buying either airline tickets or gasoline. It entails taking a trip, usually by car, to a store. There, the consumer personally sees the items for sale, visually assesses the quality (of produce, for instance), checks date stamps (on refrigerated items and baked goods, for example), compares the ingredients of competing processed products, observes the products being priced and bagged, conducts myriad other small tasks (inquiring as to when the fish was delivered or buying a cup of coffee, for instance), and then transports the purchased products home.
Taking that process online means you can’t do many of the things you are accustomed to doing when shopping for groceries. In exchange for relinquishing those steps (whether you perceive them as positive or negative), you are supposed to save time and reduce inconvenience. But there’s a huge leap of faith required in going from purchasing groceries at the store to purchasing them online. In other words, radical changes in buying habits.
Most people don’t like to make changes in their habits, even if they are small changes. That’s why it took the banking industry more than a decade to move the vast majority of customers from teller lines to ATM machines. In the Internet era, change seems to be accepted more easily by consumers, which helps explain why the travel industry is doing so well in moving customers to handling their business online.
Radical changes, though, still seem to require radical amounts of time to complete. Groceries eventually will be purchased online in a big way. Unfortunately for today’s version of online grocery business, the main players are running out of money way ahead of the time necessary to change buying habits.
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