CANADIAN INTERNET RETAILING REPORT ...neumann.hec.ca/pages/jacques.nantel/notes/309097/textes/retailing.pdf · "big-ticket" and "luxury" items more than they do with some other items,

CANADIAN INTERNET RETAILING REPORThttp://strategis.ic.gc.ca/shopping

TABLE OF CONTENTS

1.0 Introduction

2.0 Overview of Canadian Retailing

2.1 Canadian Economy 3.3 Benefits to Retailers• Population Growth • Increased Market Reach• Changes in the Canadian Population's • More Customers Driven to Existing Channels Age Structure • Improved Customer Service• Output (GDP Growth) • Enhanced Market Research• Employment • Reduced Costs• Change in Real Disposable Income • Mass Customization• Personal Savings Rate • Development of 1:1 Marketing Relationships• Interest Rates • Value-Added Applications• Inflation• Housing Statistics 3.4 Internet Retailing Developments• Consumer Expenditures • Internet Retail Spending Trends

2.2 Canadian Retail Sales Trends Internet• National Retail Sales Trends • Importance of Branding• Regional Retail Sales Trends • Retailers on the Internet• Retail Category Sales Trends• TSE Total Return Index 3.5 Lessons Learned from Canadian Internet

Retailers2.3 Canadian Consumer Attitudes • Why Establish an Internet Site?

• Fashion-Conscious Shopping • The Internet and Achieving Retailer Goals• Impulsiveness and Overspending • The Road to Internet Site Development• Brand Loyalty • Have Goals been Achieved?• Convenience versus Price Shopping • Lessons Learned• Vigilante Consumers• Consumer Confidence

3.0 Consumers and Retailers on the Internet Home

3.1 Internet Usage Statistics and User • Security Issues Characteristics • Bandwidth Issues • Growth of the Internet Worldwide • Convergence • Percentage of Canadians with Internet • Multimedia Advancements Access at Home • Potential Threat to the Role of Traditional• Demographic Characteristics of Internet Stores Users

3.2 Benefits to Consumers• Convenience• Price Competition• Selection• Customization

• Information• Entertainment

• Customer Service Level

• Successful Retail Categories Sold on the

4.0 Internet Developments

• Adoption Rate of Personal Computers in the

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1.0 INTRODUCTION

The Canadian Internet Retailing Report provides an overview of how consumers, technology enablers,and retailers are using the Internet. As much as possible, the information is presented in the broadercontext of Canadian retailing. The task of assessing the Canadian Internet retailing situation presentedboth challenges and surprises.

Some of the challenges involved dealing with the following issues: (1) the borderless nature of theInternet, making Canadian-specific measurement difficult; (2) determining who is really on the Internet,a complicated task, due to the relatively low barriers to developing an Internet presence; and (3) keepingpace with the rapidly changing technological capabilities and business applications of the Internet.

The surprises included: (1) the wide assortment of creative Internet applications used by Canadiancompanies; (2) the wealth of online information available to research markets, competitors, and generaleconomic conditions; and (3) the competitive advantages afforded by Canadian companies givenCanada's advanced technological infrastructure and highly educated workforce.

Since changes in Internet developments are occurring at an extremely rapid rate, some of the statisticsprovided here will likely be out of date by the end of 1998. We encourage you to use the links in theRetailer Resource Centre to obtain more comprehensive and current information to help you developyour Internet objectives, goals, and plans.

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SECTION 2.0 OVERVIEW OF CANADIAN RETAILING

2.1 CANADIAN ECONOMY

Population Growth

Retail spending levels are positively correlated with the size and growth of the country's population. InCanada, population growth has been moderate in recent years with the total population growing about1.0% annually from 1991 to 1996. This national growth rate is not expected to change significantly overthe next five years. It is important to realize, however, that growth rates vary significantly fromregion-to-region and city-to-city.

As the two accompanying graphs show, recent population growth rates have been much higher in BritishColumbia than in Atlantic Canada, for example. Cities such as Calgary and Vancouver are expected tolead the nation in population growth rates over the next five years, and retailers in these locales shouldexpect to experience higher sales growth as a result.

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Population Growth, Continued

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Changes in the Canadian Population's Age Structure

Of all the demographic changes expected over the next decade, changes in the relative proportions ofpeople in different age groups are expected to have the greatest impact on retailing. This graph depictsthe net change in the Canadian population within each age group that is expected to occur over the nextdecade. It demonstrates that the Canadian population is aging as a whole, with the 40+ age groupsexperiencing the greatest net increases.

For example, the 40-59 age group will have 2.4 million more people in 2006 than it has in 1996, whilethe 30-39 age group will have 400,000 fewer people. This has implications for retailers since productsor services that appeal to certain age groups will experience either increased or decreased demand as thepopulation's age structure changes. For apparel retailers in particular, the graph suggests that there willbe an overall shift away from career-driven spending demand towards replacement-driven spendingdemand due to population changes in the 40-59 age group.

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Output (GDP Growth)

Growth in Canadian retail spending is, in part, related to the overall growth in the Canadian economy.This graph shows that overall Canadian economic output (as measured by Gross Domestic Product[GDP] figures) has experienced only moderate growth over the past ten years, with negativequarter-to-quarter growth having occurred during the 1990-91 recession and for a brief period in thesecond quarter of 1995. Most economists forecast that the Canadian economy will grow steadily at arate of 0.5%-1.0% per quarter over the next five years, which, all other things being equal, implies amoderate level of growth in retail spending.

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Employment

Total employment levels have an impact on retail spending, as higher employment levels imply higheraggregate earning levels, which in turn imply higher retail spending levels. This graph shows that totalemployment growth in Canada was at a virtual standstill from 1990 through 1993, when theunemployment rate reached the 11.5% mark. Since then, the unemployment rate has crept downwardsto approximately 9.0% at the end of 1997. Most economists forecast the unemployment rate to continueto fall over the next five years, albeit slowly, and total employment to grow to more than 15 millionCanadians by the year 2000.

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Change in Real Disposable Income

Changes in real disposable income have a direct impact on retail spending, particularly when viewed overa long-term period. This graph demonstrates that Canadians have experienced virtually no net growthin real disposable income from 1990 through 1997. This helps to explain the low level of retail salesgrowth throughout much of the early 1990s. However, some economists are projecting that, due tolower tax rates and moderate growth in the Canadian economy, Canadians' real disposable incomes willexperience moderate levels of growth over the next five years. Still, it must be emphasized that thisprojected growth is approximately half the rate that was experienced during the economic boom of thelate 1980s.

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Personal Savings Rate

Since the early 1990s, Canadians' personal savings rates have plummeted, from approximately 10% ofdisposable income to close to 1.5% at the end of 1997. While some look at this as a sign that Canadiansare more confident in their own economic prospects (and hence are more comfortable with lower savingslevels), some worry that Canadians have now reached a threshold in their debt levels. As a result, someeconomists are predicting that future retail spending growth will be somewhat hampered by consumers'inability to take on greater levels of debt.

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Interest Rates

Increases in interest rates have been shown to have a negative impact on retail spending, as the cost ofborrowing or servicing debt directly impacts a consumer's ability to purchase goods or services. This isparticularly true when interest rate increases are relatively large. While interest rates affect spending on"big-ticket" and "luxury" items more than they do with some other items, they nonetheless have anoverall impact on total retail sales over the long-term.

The accompanying graph shows the Canadian quarterly prime lending rate from 1987 through 1997 andprojected through to 2002. It shows that the prime lending rate has fallen from over 14% in 1990 toapproximately 5% at the end of 1997. Many economists are predicting only moderate increases ininterest rates over the next five years, suggesting that they will remain in the 5%-7% range. Theseforecasts imply that interest rate changes are not expected to hamper retail spending over the short term.

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Inflation

Inflationary changes, as measured by changes in the Consumer Price Index (CPI), can affect consumerspending. In general, persistently low inflation can act as a chill on retail spending. This is due to the factthat consumers who expect prices to remain largely unchanged in the future have no real incentive topurchase in the present. However, persistently high inflation can also negatively affect consumerspending when prices rise so high that certain goods and services become unaffordable. Changes in theCPI have fallen dramatically in Canada over the past five years. Most economists expect the next fiveyears to remain a low inflationary time, with annual growth in the CPI in the 1.0%-2.0% range. Thissuggests that changes in the CPI over the short-term will not have a significant impact on retail spending.

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Housing Statistics

Increases in new housing starts are viewed as a precursor to increased demand for certainhousing-related retail category sales, such as major appliances, furniture and home furnishings. Typically,there is a lag of approximately six months until changes in new housing starts begin to impact spendingin these retail categories. Total new housing starts declined in Canada from the late 1980s until early1996 when a residential construction rebound occurred. This has had a positive impact on durable goodexpenditures such as major appliances and furniture. Some economists expect new housing growth toincrease steadily over the next five years, although not quite to the level of the mid-1980s.

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Consumer Expenditures

This graph compares the relative growth in consumer expenditures on broad classifications of goods:durables (e.g., major appliances, furniture) excluding automobiles, semi-durables (e.g., apparel, books),non-durables (e.g., cosmetics, flowers) excluding food and energy, and services (e.g., dry cleaning,professional services) excluding rent.

Equating 1987 consumer expenditures at an index level of 100 shows that consumer expenditures ondurable goods have grown the most over the last decade and are predicted to grow even further by theend of 1998. On the other hand, expenditure growth on non-durables and services has been moremoderate, while expenditures on semi-durables have lagged considerably.

The relatively poor growth performance of semi-durable goods has not been unnoticed by manyCanadian shopping centres, as their tenants typically are weighted heavily towards semi-durable goods(i.e., "soft goods" categories). As a result, some shopping centres in Canada have begun to strugglefinancially and have been forced to alter their tenant mixes to include higher growth product categories.

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2.2 CANADIAN RETAIL SALES TRENDS

National Retail Sales Trends

In 1997 total retail sales in Canada at all stores amounted to over $232 billion, the largest level in history.This represented a 7.2% increase from 1996, which is the largest year-over-year increase since 1988.As the graph shows, the early-to-mid 1990s were not especially high growth years for retail spendingin Canada, and many retailers struggled, and were forced to restructure or even close stores. Therefore,1998 is being watched as a critical year in Canadian retailing, with many looking to see whether thehealthy year-over-year gain posted in 1997 can be sustained over a few more years.

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Regional Retail Sales Trends

These graphs show the relative proportions of total retail sales represented by each major Canadianregion and historical sales growth percentages for each of these regions. While overall Canadian retailsales growth has slowed down over the past ten years, growth rates have varied across the differentregions. As these graphs show, retail sales growth has been significantly higher in British Columbia andthe Prairie Provinces over the past ten years. Similarly, retail sales growth over the past five years hasbeen higher in cities such as Vancouver and Winnipeg compared to major eastern Canadian cities suchas Montreal and Toronto.

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Regional Retail Sales Trends, Continued

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Retail Category Sales Trends

These graphs show the proportion of Canadian retail spending represented by each major retail categoryand the relative growth in retail sales for selected major retail categories and subcategories. Equating1985 retail sales levels for all categories at an index level of 100, the graphs demonstrate that somecategories have experienced much higher growth than others have. The major retail categories withhigher relative growth rates include the automotive, food and drug, and "other" retail categories; appareland general merchandise retail spending have grown at a slower rate.

When these broader categories are examined in greater detail, it is evident that certain subcategoriesperform quite differently than others within their broader category. For example, the "other clothing"category (which includes unisex and children's clothing) has outperformed both women's clothing andmen's clothing by a considerable margin. This is related to the aging of the population, the "Baby BoomEcho", and the shift to casual wear within the work place. Another example shows that, by the end of1996, sales at junior (or "discount") department stores had grown at a healthy rate while majordepartment stores actually experienced negative sales growth over the same period. This is largelyexplained by consumer trends towards price-conscious shopping and reflects the influence of Wal-Mart'sexpansion into the Canadian market.

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Retail Category Sales Trends, Continued

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Toronto Stock Exchange Total Return Index

This graph compares the rate of returns for the Toronto Stock Exchange 300 Index and key retail-relatedsub-indices (Merchandising, Department Stores, and Specialty Stores) from January 1993 throughDecember 1997. It shows that the overall TSE 300 Index has outperformed the Merchandising sub-indexby a ratio of almost two-to-one over this period. These sub-par returns are indicative of the challengesthat Canadian retailers have faced throughout the 1990s. The graph also shows that the Specialty Storesub-index has fared much worse than the Merchandising sub-index as a whole, providing virtually zeroreturns over this period. On the other hand, the Department Store sub-index rebounded dramaticallyduring 1997 to the point where its total return at the end of this period was equal to the overallMerchandising sub-index return.

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2.3 CANADIAN CONSUMER ATTITUDES

The J.C. Williams Group National Retail Report findings for the period 1990-1996 were reviewed toidentify major shifts in Canadian consumer attitudes. The following highlight some major changes inCanadian consumer attitudes between the 1990 and 1996 data sets.

Fashion-Conscious Shopping

Fewer Canadians appear to be interested in being stylish today. Compared to 1990, 16% fewer peoplein 1996 feel that dressing smartly is important. People's perception that they are sophisticated continuesto increase, but it appears to have less to do with how a person dresses.

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Fashion-Conscious Shopping, Continued

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Impulsiveness and Overspending

Although extravagance seemed to be declining in 1995, it returned in 1996 to a level last seen in 1990.

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Brand Loyalty

Brand loyalty continues to increase as more people agree that they will stick with a brand they like andpurchase extra of a preferred brand that is on sale. On the other hand, there has also been an increasein the number of Canadians who are willing to pass up their favourite brand when another brand is onsale. Significantly fewer people feel that premium-priced brands are worth the extra money.

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Brand Loyalty, Continued

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Brand Loyalty, Continued

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Convenience Versus Price Shopping

Since 1990 there has been more than a 10% increase in the number of consumers who are willing to payextra to save time shopping.

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Vigilante Consumers

The percentage of Canadians that will not tolerate products and services that do not meet theirexpectations remained at 25% in 1996, the same level as in 1990.

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Consumer Confidence

The Conference Board of Canada surveys Canadian consumers and businesses on a quarterly basis inorder to create indices of consumer and business confidence. One of the survey questions that they askCanadians is: "Do you think that right now is a good time or a bad time for the average person to makea major outlay for things such as a home or a car or some other major item?"

This graph shows both the percentages that indicated that it was a good time (shown as a green barabove 0%) and that indicated that it was a bad time (shown as a negative percentage red bar below 0%)for all quarters during 1987-1997. The graph indicates that consumer confidence had fallen during thelate 1980s and that it really only began to recover during 1996-1997. This helps to explain why retailspending growth was so moderate during the early-to-mid 1990s.

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SECTION 3.0 CONSUMERS AND RETAILERS ON THE INTERNET

3.1 INTERNET USAGE STATISTICS AND USER CHARACTERISTICS

Growth of the Internet Worldwide

While estimates vary, by the end of 1997 there were approximately 35-50 million Internet usersworldwide, including both consumers and business users. The rate at which the number of Internet usersis growing, on a global level, is currently estimated to be over 50% per annum. Some analysts predictthat by the year 2000 more than 150 million people will be using the Internet worldwide. Thisassumption may be quite conservative given that there were over 230 million personal computer usersworldwide at the end of 1997.

Percentage of Canadians with Internet Access at Home

Estimates on the number of Canadians who have Internet access vary depending on the surveymethodology used. Most surveys suggest that by the end of 1997 there were between 7-8 millionCanadians who had Internet access in their own homes. This translates into about one-in-four Canadiansand compares to just one-in-ten Canadians at the end of 1995. It is important to note that significantregional differences in Internet access penetration currently exist. British Columbia and Ontario had thehighest proportions of their populations with Internet access at home in 1997, while Atlantic Canada andthe province of Quebec had the lowest proportions.

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Percentage of Canadians with Internet Access at Home, Continued

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Demographic Characteristics of Internet Users

One of the reasons that retailers are so interested in using the Internet as a marketing channel is thecompelling demographic characteristics of Internet users. Internet users are, in general, above averagespenders. Personal computer ownership and usage are directly correlated with many of the determinantsof higher incomes, and higher expenditure levels. The following graphs show that Internet users tend tobe: highly educated people; 18-44 years of age; high-income earners; and white collar workers. The12-24 year old segment is also very attractive given its large size, technological sophistication, andwillingness to make Internet purchases.

Historically, male Internet users have outnumbered female Internet users. Recent surveys, however, haveshown that the gap in the relative proportions of these users has narrowed. One Canadian survey, forexample, has shown that the male/female ratio has gone from 70%/30% in 1995 to 60%/40% in 1997.As consumer acceptance of the Internet continues to grow, it is expected that the demographiccharacteristics of Internet users will more closely resemble those of the general public.

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Demographic Characteristics of Internet Users, Continued

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Demographic Characteristics of Internet Users, Continued

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3.2 BENEFITS TO CONSUMERS

Convenience

The ability to purchase products and services over the Internet provides an attractive alternative toconventional shopping practices. Internet shoppers can research and buy products and services onlineaccording to their individual schedules. The Internet offers consumers the convenience of being able toshop 24 hours a day, seven days a week, and in the privacy of their own homes, for products andservices from around the world.

Price Competition

The Internet puts comparison shopping at a consumer's fingertips. Studies have demonstrated thatproducts in certain retail categories, especially mid-to-high-priced commodity-oriented items, sell forlower prices online than in traditional stores. For example, an Internet pricing survey conducted inJanuary 1998 showed that out of 32 items, 28 were selling at a lower price, and two were selling at thesame price online, compared to selling prices at physical stores in a major US city.

Selection

Purchasing products and services over the Internet offers consumers the opportunity to find a muchbroader and deeper selection of items. For example, a well-known Internet retailer, Amazon.com, is ableto offer consumers millions of book titles by shipping directly from various publishers. By comparison,a typical retail bookstore usually stocks less than 25,000 titles at any given point in time.

Customization

Purchasing on the Internet provides consumers with the opportunity to customize products to theirindividual needs or desires. A good example is the Dell Computer Internet site that allows shoppers tocustom build their own computer hardware and software configurations. In addition to consumers beingable to select exactly what they want, retailers also benefit by custom building or ordering products, thusoptimizing their inventory management practices.

Information

Many consumers use the Internet as a source of product information before they buy, even if they don'tactually make a purchase on the Internet. The Internet provides retailers with a low-cost distributionchannel for disseminating all types of business information. As a result, Internet consumers are often ableto access information that would not otherwise be available to them.

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Entertainment

In a recent survey of consumers who have made a purchase using the Internet, 25% stated that theypurchase on the Internet because it is more fun than traditional shopping. This ranked as the fourth mostpopular reason, behind convenience, selection, and price. In addition, the use of multimedia technology,and the novelty of discovering a new way of doing things are unique qualities that make shopping on theInternet a unique experience.

Customer Service Level

The Internet serves as a communication tool between consumers and retailers, through the use of e-mail,or other online feedback mechanisms. With Internet retailing this dialogue does not need to stop at theend of the transaction or even at the time of product delivery. These feedback mechanisms allow aretailer to maintain an ongoing dialogue with consumers in order, among other things, to ensure that theyare fully satisfied with their purchase.

3.3 BENEFITS TO RETAILERS

Increased Market Reach

The Internet can offer retailers a global online marketplace that extends well beyond the traditionalgeographic markets serviced by their physical stores.

More Customers Driven to Existing Channels

The Internet can be integrated into a retailer's overall marketing strategy in a way that helps to increasecustomer traffic at existing stores.

Improved Customer Service

Use of the Internet can contribute to highly effective two-way communication between retailers andcustomers, and can serve as an extension of existing customer service programs.

Enhanced Market Research

The Internet can serve as a market research and product development tool for retailers through the useof online surveys, chat groups, and feedback forums which enable retailers to obtain data on theircustomers' preferences, ideas and attitudes.

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Reduced Costs

Depending on the nature of a retailer's existing operations, the Internet can provide retailers withpotential cost savings through lower: inventory, transaction, customer service, administration, and/orcommunication costs.

Mass Customization

The Internet can provide retailers with a more efficient and profitable means of processing orders andconfiguring products so that each product suits the specific needs of each customer. This, in turn, allowsretailers to optimize their inventory management practices.

Development of One-to-One Marketing Relationships

The Internet can enhance a retailer's ability to target customers with specific marketing messages in orderto better interact with them on an individual basis.

Value-Added Applications

One of the most powerful features of the Internet is the ability to capture information in a relationaldatabase that can be used to provide value-added services to customers. Suggestions can be made forother related products or services based on a customer's particular preferences, for example, or links canbe provided to other Internet sites that may be of interest to a customer.

3.4 INTERNET RETAILING DEVELOPMENTS

Internet Retail Spending Trends

Retailing on the Internet is still in its infancy. It currently accounts for less than 3% of total NorthAmerican retail sales. Growth rates, however, have been very encouraging. It is estimated that by theyear 2000 business-to-consumer Internet transactions worldwide will amount to approximately $20-$50billion, while business-to-business transactions will be in the $50-$150 billion range. Regardless of whichend of the range of estimates is met, the growth potential is compelling, especially when you considerthat the volume of business-to-consumer transactions was under $1 billion in 1996.

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Successful Retail Categories Sold on the Internet

Some products are better suited for selling on the Internet than others, including products that:

1. Are sold in fragmented markets and involve substantial comparison shopping;2. Have relatively low shipping costs; and,3. Do not require a physical inspection before a purchase is made.

According to Forrester Research, the retail categories that had the highest consumer Internet salesrevenues in the US during 1997 were, in order: (1) computer products; (2) travel services; (3)entertainment; (4) gifts and flowers; (5) apparel; and (6) food and drink.

The following table provides an indication of the relative potential of certain retail categories to besuccessfully sold on the Internet.

Relative Potential Selected Retail Categories

High Insurance/Financial Services

Computer Hardware/Software

Travel Services

Books, Magazines, Music/Videos

Flowers/Gifts/Greeting Cards

Office Supplies

Moderate Automobiles

Sporting Goods

Consumer Electronics/Appliances

Food and Beverages

Collectibles

Apparel/Shoes/Accessories

Health and Beauty Products

Low Toys and Games

Tools/Home Improvement Products

Home Furnishings

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Importance of Branding

As it is in traditional retailing, strong brand-name recognition will be a critical success factor forretailing on the Internet. This means that well-branded merchandise will be easier to sell through theInternet, as consumers have greater comfort levels in ordering merchandise with qualities that theyare familiar with. In addition, "store branding" is just as important for retailing on the Internet as itis with physical stores.

Retailers on the Internet

Many retailers in Canada are rapidly embracing the Internet as a new marketing channel. Althoughsimilar survey figures are not available for Canadian retailers, one US study conducted late in 1997showed that 34% of retailers surveyed currently sell or plan to sell on the Internet by the year 1999.Most major Canadian retailers have some Internet presence already, including all of the majorCanadian department stores and most national chains. For some examples of Canadian retailers onthe Internet, refer to the Internet Retailer Showcase section.

3.5 LESSONS LEARNED FROM CANADIAN INTERNET RETAILERS

Why Establish an Internet Site?

A qualitative review of the current status of Canadian retailing on the Internet yielded the followinggeneral observations.

There are basically two main reasons or objectives why Canadian retailers have decided to developan Internet site. These were to either: (1) Build a brand (brand development); or (2) Create customerintimacy (one-to-one relationship).

Based on these general objectives, each retailer developed their own set of specific goals, including:1. Trying to attract a younger customer;2. Adding stores to metropolitan areas;3. Becoming a leader in their field of expertise (or maintaining leadership); and/or4. Providing the right product at the right price (in-store).

The Internet and Achieving Retailer Goals

Most Canadian retailers interviewed had a definite objective for their Internet site. Some retailers hadcreative ideas to develop and foster one-to-one relationships with customers. For example, one mass

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merchandiser distributes coupons over the Internet. These Internet coupons are uniquely customizedto each customer's shopping habits. Therefore, the customer who has an interest in office supplies willreceive office supply coupons. Another retailer is using their Internet site as a new way of sustainingcustomer intimacy (i.e., to answer customer questions).

Other retailers were more concerned with building their brand. These retailers have opted to entertainand educate Internet users while building their brand. In fact, most retailers' initial Internet presencedid not include a product/service selling feature. In most cases, the introduction of an onlinepurchasing option was due to strong customer demand.

There were also some retailers who simply wanted to use the establishment of their Internet site asa learning experience.

The Road to Internet Site Development

Most Canadian retailers outsourced the development of their Internet site. However, the level ofexternal involvement varied. Some retailers (those with limited technological experience) decided tooutsource the entire site development and to work closely with the developer on the content. Otherretailers took a more hands-on approach and developed the strategy, concept, design, layout, etc.in-house and outsourced the programming. One retailer developed their entire site internally as all ofthe required skills were available in-house.

Have Goals Been Achieved?

Generally speaking, the majority of Canadian retailers reported that, based on feedback from sitevisitors, they have enjoyed success with their Internet ventures. A few retailers, on the other hand,said that it was too early to determine if their goals have been achieved.

Very few Canadian retailers have changed their initial Internet objectives, although a number haveslightly modified and further defined their initial objectives. Therefore, as their experience with theInternet increases, Canadian retailers' understanding and appreciation of the Internet's commercialpotential will also increase. As one retailer said, "the medium is constantly being tested".

Lessons Learned

The Canadian retailers interviewed were eager to share their experiences. Among the major lessonslearned were the need to:

- Integrate the Internet site into the overall business strategy; with its own budgets, plans,resources, etc;

- Thoroughly research Internet site developers. Know their business, their past workexperience and the commitment they will make to your business;

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- Research other sites, including the competition, to gain ideas, a new perspective and abenchmark(s) for your site;

- Install a tracking program to see who is visiting the site. This initial investment becomesfree market research;

- Install a security protocol for sites with credit card transaction capabilities;

- Constantly up-date, rework and change the Internet site. The old adage "build and theywill come" is not true of retailing on the Internet. A business must proactively attractconsumers to its site by offering something different every time consumers choose to visit;

- Pick a good domain name;

- Ensure that your business has a person who understands the basics of the Internet andcomputer technology;

- Be responsive to consumers by monitoring complaints and criticism (done throughe-mail); and

- Understand that Internet site development is a learning process and mistakes will be made.

4.0 INTERNET DEVELOPMENTS

Adoption Rate of Personal Computers in the Home

While approximately half of Canadian households owned a personal computer at the end of 1997, thiscompared to over 95% of Canadian households that owned a telephone or a television set. Part ofthe reason for this lower household penetration rate is that many Canadians cannot afford a personalcomputer. Recently, however, many computer manufacturers have begun to market computers thathave Internet capabilities at price points that are much lower than other personal computers. In time,as Internet hardware becomes more affordable, Internet-capable personal computers will achievesignificantly higher household penetration rates.

Security Issues

The number one reason consumers cite for not purchasing products or services through the Internetis that they fear that their transactions and/or personal information will not be secure (one 1997

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survey showed that 70% of consumers who have not made a purchase over the Internet areuncomfortable sending credit card numbers over the Internet). Recent Internet security enhancementfeatures have provided the potential for Internet transactions to be extremely secure, but manyconsumers still have doubts. Improving the Internet's security features is an ongoing process. As moresecurity solutions emerge and consumers' firsthand experiences with Internet shopping increase,consumer confidence in the security of the Internet is expected to rise.

Bandwidth Issues

Limited rates at which data can be transmitted to consumers through the Internet and their owncomputer modems have both been factors that have limited the functionality and appeal of someInternet applications. In addition, some believe that current telecommunication infrastructures willbe inadequate to handle the increased bandwidth demand that is predicted as a result of Internet usagegrowth. However, recent technological developments such as new data compression techniques,faster digital subscriber services (e.g., cable, ISDN, ADSL, T1) and further development of thetelecommunications backbone throughout the world suggest that the required bandwidth will beprovided as demand increases.

Convergence

Access to the Internet using new technology (e.g., television-based Internet access hardware), anduse of Internet technology to deliver information traditionally accessed through other technologies(e.g., Internet radio broadcasts or electronic publications) have both increased in the past few years.In time, the range of technology available to access content on the Internet will increase, encouraginggreater Internet usage within the general population. As a result of this convergence, consumers willhave greater interactive capabilities available to them when using all types of media.

Multimedia Advancements

As the video and audio capabilities of computers increase, and as higher speed Internet accessbecomes more publicly accessible, a number of multimedia advancements will emerge that willimprove the Internet shopping experience. Development of innovations such as virtual reality glovesthat allow consumers to "feel" product textures, the provision of full-motion or 3D video, thetransmission of higher quality sound, and improved real-time communication capabilities will all addto the Internet shopping experience.

Potential Threat to the Role of Traditional Stores

The fear among some retailers with traditional store operations is that the development of an Internetsales channel will mean that consumers will no longer have the need to come to their stores. Early

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indications, however, suggest that this may not be the case. The Hudson's Bay Company's Internetsite, for example, includes an area that allows Zellers "Club Z" loyalty card program members toredeem their accumulated points for merchandise through an online catalogue. The experience to dateis that 95% of people who redeem their points online choose to pick up their merchandise at a Zellersstore, even though home delivery is an option. It is worth noting that 40% of shopping done througha large online service provider is between the hours of 10:00 p.m. and 10:00 a.m. when traditionalstores are typically closed.

Source: Retailing on the Internet: A Guide, STRATEGIS, Industry Canada