The Combination of Mortar, Brick and the Internet Do Best on the Web Christopher Grosso, John McPherson, and Christiana Shi wrote about "What's Working Online" in a recent McKinsey
Quarterly report. The McKinsey study found that direct retailers with physical stores captured 52 percent of Internet sales in 2003, while those without stores garnered just 31 percent. Online
retailing, says the report, generated $90 billion in revenues for US retailers in 2004, compared with just $8 billion in 1998.
The writers identified and defined four classes of
retailers taking advantage of the Interenet:
Retailers without stores who do well as either "efficiency machines" are sellers of relatively low-margin products like CDs, books, or
computers, because the Web provides the global reach these companies need to gain scale. Efficiency machines invest heavily in brand marketing, innovative Web sites, and highly efficient sourcing and
fulfillment processes. These investments create massive fixed costs, so efficiency machines must generate annual revenues of at least $750 million to be profitable. Of the top 100 direct retailers,
only 7 are efficiency machines, yet they account for a quarter of total online revenues.
Retailers without stores who do well as "niche leaders," sell higher-priced, higher-margin
products primarily through catalogs and over the Internet. Niche leaders build a loyal customer base by offering quality merchandise, exceptional service, or both. Niche leaders are too small to
afford expensive brand marketing and must rely instead on targeted online or direct-mail campaigns. The 28 niche leaders studied generated nearly $15 billion in revenues and account for 6 percent of
total online revenues.
Store-based retailers who do well as "traffic drivers" are retailers with relatively low margins and large scale succeed who use the Internet both to draw
customers to their physical stores and to offer shoppers a wider selection of goods and greater convenience. Although stores generate most of the sales for traffic drivers, these retailers are so big
that their Web-based sales are still impressive, accounting for 35 percent of total online revenues.
Store-based retailers who do well as "Triple-play" retailers use stores, catalogs,
and the Internet to maximize their share of customer spending. These merchants sell relatively high-margin products (home goods or apparel, for instance) while striving to tailor their channels to
complement one another fully. Catalogs attract new customers, drive repeat business, and coordinate product lines; the Web offers convenience, product information, and quick updates for pricing or
promotions; stores, by contrast, allow shoppers to handle and test goods before they buy them. Triple-play retailers generated nearly $6 billion in 2003, some 17 percent of total online revenues.
Read the complete study analysis and report.