Publication Date: January 3, 1997

Retail Industry Finding Its Niche on the Web

By Ken Shulman

The film is Marathon Man. A diabolic Lawrence Olivier is drilling without Novocain into the healthy teeth of Dustin Hoffman. After each interval of excruciating pain, Olivier asks his hapless victim one simple question that Hoffman cannot answer. It is the same question that retailers contemplating a move to electronic commerce ask themselves each day about the Internet: Is it safe?

"Security is not a technical issue. It is essentially a business issue," says Rik Drummond, an electronic messaging and commerce consultant working as The Drummond Group out of Fort Worth, Texas. "There has been a lot of press about how the Internet is not very secure. But from a business standpoint, if you conduct your electronic commerce in a proper fashion, it is secure enough to justify the downside risk. It is a simple example of a business trade-off. How much risk are you willing to take to generate new or expanded business?"

While it may not be necessary to grind one's teeth down to the gums, the question of security for Internet transactions is a valid one. Banks and other large financial institutions have been conducting electronic commerce for more than a decade. But retail stores and catalog houses have been far slower in embracing this new form of business. According to a study by Forrester Research Inc. in Cambridge, Mass., 1996 online revenues for retail topped out at $518 million. The figure is expected to grow to $6.58 billion by the end of the century. But even then this represents a very small slice of the retail pie.

Part of the reserve does center on security. The Internet is a relatively new environment. How can merchants be certain that their transactions are not monitored, and that their client lists are not stolen by a competitor? And consumers, many of whom would not think twice about giving their credit card numbers over the phone -- or of handing their credit card to a waiter or sales clerk who disappears with it for 30 seconds -- are still extremely reluctant to transmit account information over the Web.

"In theory, the potential for credit card fraud is much greater in electronic commerce than it is in standard commerce," admits Drummond. "A dishonest merchant can perhaps steal 40 or 50 cards over a month. With the Web, the opportunity exists for a particularly able thief to harvest credit card numbers by the millions."

Addressing Security Concerns

Despite such reservations, Internet providers, high-tech companies and communications corporations are all moving decisively to offer their clients services that will enable them to conduct efficient and secure transactions over the Internet. Companies like British Telecom, IBM and MCI all offer some form of electronic shopping capability to their customers.

On October 8, 1996, AT&T announced the inauguration of what it calls "a cyber-soup-to-nuts solution" for safe buying and selling on the Internet. The AT&T SecureBuy Service is designed to create a network of merchants and consumers whose transactions are conducted and safeguarded by the AT&T system.

Along with encryption via the secure socket layer (SSL) protocol, the AT&T SecureBuy Service uses a transaction processing technology called OM-Transact that it purchased from Open Market in Cambridge, Mass. The technology enables the placement of orders, authorizes and processes credit card purchases, calculates sales tax and shipping charges, creates digital receipts, creates statements that list and track purchases, and generates management reports that monitor electronic commerce. Both consumers and merchants can set purchase limits and include additional security barriers. The AT&T service costs between $395 and $495 per month for merchants, along with a one-time registration fee.

"We bring a large measure of security into this program," says Wendi Makouji, a spokesperson at AT&T. "Merchant sites are enabled for transactions behind our firewalls. And our buyers are registered with AT&T. Their credit card and personal information is entered only once and then relayed by HTTP (hypertext transfer protocol) to our server. The merchant never sees the purchaser's credit card number. He only receives a confirmation code from us. Another thing we bring to this is name recognition. Our market studies have shown that consumers have a higher comfort level venturing into a new space like this with a company like AT&T."

Concerns about the security of retail on the Internet do not end with credit card fraud. There is also a risk that an unscrupulous competitor can hack his way into a rival system, either to steal that rival's database or to sabotage his pricing or ordering database. "The biggest risk to merchants in electronic commerce is a business risk, and not a financial one," says Michael Gero, service line manager for electronic stores at BBN Planet, an Internet access and networking services company based in Cambridge, Mass. "If someone hacks the terms and description of a rival company's product so that the consumer thinks he can buy a brand-new Lexus for $3,500, it could become a business nightmare."

Yet Gero, like most Internet professionals, believes that the security tools available today can make Internet retail commerce as safe or safer then any other form of consumer commerce. "We feel that at the retail level, the nature of the infrastructure will provide sufficient protection," he explains. "The operative word is sufficient. The consumer is responsible for only $50 of purchases if his credit card is stolen. The banks feel pretty comfortable with that. We, too, can keep our risks low enough to make Internet retail viable."

Advantages to an Online Market

The Internet may well be safe enough for most forms of retail. And the advantages of having a transaction be digital from the start are obvious to anyone who has had to enter handwritten information into a computer database. In addition, the costs of creating an online catalog are only a fraction of what it costs organizations like L.L. Bean or J. Crew to print and post their seasonal literature. An online catalog can also be modified or updated on an hourly basis, enabling merchants to work in yield management. But with the virtual marketplace still in its infancy, no one seems certain what products or services are best suited to be sold over the Web. A 1996 AC Nielsen survey showed that the majority of Internet users are younger males with above-average household incomes, education and professional levels.

"Males tend to shop and compare," says Drummond. "If a man wants something, he'll look at three or four options, and then he'll evaluate and make his choice. It's not really shopping. It's information shopping."

There are also some niche markets that do not wholly correspond to the AC Nielsen profile. Ri Regina of Dayton, Ohio, hosts a Web site called Buy It Online; the site, which offers over 7,000 retail listings ranging from florists to dentists to private detectives, has averaged 40,000 visits per month since its inception in May 1995. Based on the e-mail she receives from people visiting her site, Regina estimates that over 60 percent of her online shoppers are women. And, surprisingly, almost 60 percent of her shopper traffic originates from outside the United States.

"One industry that I've noticed doing very well on the Internet is the gifts industry," says Regina, who also puts out a weekly newsletter on electronic commerce. "The companies selling packaged Caribbean spice sauces, chocolates, baskets of salsa, vinegars and oils, pasta and the like. These are the kind of products you don't find in a supermarket. And they are just going crazy over the Internet."

Not all areas of retail are innately suited for the Internet. It is hard to imagine ordering a hand-tailored suit over the Web, or any item that requires a high degree of customization. Price -- at least at the high end of the market -- does not seem to be much of an issue, as demonstrated by the more than 30 Web sites that offer artworks and expensive antiques for sale. In fact, it is often the less expensive item that doesn't fit into the electronic marketplace as current Internet transaction costs make the sale of such items unprofitable.

Julio Gomez, a senior analyst at Forrester Research, believes that the items that currently dominate online commerce are not necessarily those that will dominate electronic commerce in the future. "Right now, people tend to buy computer products, CDs, and books over the Web," says Gomez. "But these items do not represent the true promise of Internet commerce. In the near future, Internet commerce will come to be associated with the kinds of things we used to think could not be bought and sold over the 'Net, products such as cars, travel, insurance and homes. You may not be able to buy a house over the Internet. But you can conduct about 85 percent of your information gathering, such as research on the neighborhood, its school system, median home prices, recent sales, on the Web. These are all things that used to depend on an expensive, commission-based sales network."

The future may hold real visions of "virtual" shopping, with consumers able to procure almost any item with a few deft strokes at the computer keyboard. Yet there will always be some retail transactions that just would not make sense over the Web. "Take Pizza Hut, for example," says Gero of BBN Planet. "This is a company that offers a transaction that my household is very familiar with. We already have an efficient vehicle for that transaction. The telephone. We call up, order a large pepperoni and mushroom, and pick it up in about 10 minutes. I imagine that we could dial up our Internet provider, access their home page, put in our order. But by that time, we could already be eating our pizza. It has to make sense for a customer to enter into a retail transaction over the 'Net. In this case, and in many others, it doesn't."

Ken Shulman writes from Cambridge, Mass.

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Rik Drummond is a featured speaker at DCI's Internet Expo. For details on this event, please see our online brochure.

For more information on the topics of Internet security and electronic transactions, please see our archived articles Security Expert Says Internet Is Safe for Commerce and Wells Fargo: Pulling the Team Ahead With Internet Banking.

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