E-Commerce  
Opportunity
by. J. Carlton Collins, CPA

Take a deep breadth. Do you smell that? That smell my friend, is the smell of opportunity. Today the Internet offers more opportunity than any other time in our history, including the Industrial Revolution. Why do I think so? Consider:

The Internet now enables virtually anybody to start a new business with virtually no overhead costs. For example, suppose you and I had wanted to launch a new magazine business back in 1990 - "The Trout Fisherman". We would have developed and written our first issue and printed 50,000 copies for a cost of $90,000. Then we needed to somehow distribute that magazine. Our options are to use the U. S. Mail, or set up a fleet of couriers to deliver our magazines. Or maybe we needed to develop a distribution channel into stores across America. Whatever method we used to distribute our magazine, it would have been costly - probably 50 cents per magazine at best. But wait, we're not making any money. We need subscribers. We invest $100,000 to launch a marketing campaign aimed at attracting paying readers. Unfortunately, there is little demand for our efforts, and our business never takes off. We lose a quarter of a million dollars in just a few months time, not to mention a lot of lost work.

Now fast forward to today. You and I could develop and write our first issue of "The Trout Fisherman" and post it to a web site in a matter of days. Our web site cost would probably be just $10 per month. We submit our web site to the some of the popular search engines and people around the world start finding our web site. They find that it is well written, and full of good content. They bookmark our web site and keep coming back. Within a few months, we have an impressive list of readers. OK, ok. We haven't made any money off our web site - but we haven't lost any either. This is the key point. Now we shift gears and start selling fishing gear on line. Our web orders are automatically forwarded to another company who handles fulfillment, and we pocket a small profit on each sale. We start selling maps to well stocked fishing holes on line - the reader submits their credit card and the map is e-mailed to them. T-shirt and cap sales bearing our logo start moving as well. Fulfillment is carried out by another company. Fishing companies start paying us to advertise on our web site. Based on our recognition, fishing companies pay us to speak at their conferences for a fee. We receive endorsement contracts and our empire continues to grow. 

In this case we can see several clear differences between the process of launching a new magazine in 1990 and launching one today. To recap:

1. Today, launching a web magazine has virtually no financial risk. 

2. With a web magazine, there are no printing costs, and no distribution costs. 

3. A web magazine is instantly accessible to millions of people around the world.

4. Today the web makes automatic order receipt and forwarding to fulfillment companies a real possibility. 

This my friends is what I call opportunity...unprecedented opportunity!

Still not convinced? Maybe you think that a magazine might have a good chance, but that other companies who do business via the web are doomed. After all, print media is ideally suited for the web. Well, you are a skeptic and I appreciate that. Let me attempt to sway you further over to my point of view. Let's take you to the complete opposite side of the spectrum. Let's assume for example that you are launching a new grocery store. Consider these two examples:

• The process of launching a typical retail grocery store is rather expensive. It typically starts with the purchase or lease of prime commercial real estate property. Here in the suburbs of Atlanta, the typical grocery store sits on roughly 12 acres of land costing $300,000 per acre or $3.6 million. Leasing that same real estate runs approximately $8.00 to $12.00 per square foot for stores which typically run from 60,000 to 85,000 square feet which translates to $480,000 to $1,020,000 per year in lease fees. These rates reflect favorable pricing afforded to grocery stores which are considered to be an anchor for most shopping centers. From here, the grocery store expends fees for a paved parking lot, cash registers, customer shopping carts, attractive flooring, fancy lighting, decorations, etc. The costs are staggering and the overhead associated with the typical grocery store today must be recaptured through higher product prices. The grocery store then serves the immediate community which is usually a couple of miles or so.
  

• By comparison, today a company could erect a cinder block building in a industrial park setting located 15 miles outside of town. We will call it Billy Bob's Grocery Store". The building may have a dirt road and unpaved parking. The building provides concrete floors and ordinary lighting. There are no decorations and cash registers are basic. The cost of such a facility here in Atlanta presently runs about $90,000 to $120,000 a year. A web site could then be established listing all of the products. Users need only log on, and click a check mark next to the items they wish to purchase. In a matter of minutes, the order is entered, and within a time period specified by the customer - a pizza hut type delivery person shows up to deliver the groceries. In this case, there is an extra $10 delivery fee; however, because Billy Bob's Grocery store has dramatically lower overhead costs, their prices are dramatically lower as well, and you save $24 compared to the retail store down the road.

In comparing these two models, there are some important differences to note as follows:

1. Billy Bob's overhead is much smaller, other things being equal, Billy Bob's prices can be much lower.

2. Billy Bob's can serve a larger market covering a 15 to 20 mile radius, instead of the 2 mile radius covered by many traditional retail grocery stores.

3. Billy Bob's customers save time. Five minutes on the web versus 1 hour in the store is a major time savings. The customer also saves gasoline, does not risk having a head on collision, does not risk being mugged in the parking lot, and does not succumb to impulse buying when they walk down the candy aisle. (Grocery stores have all kinds of tricks designed to make you buy more products, or more expensive products. For example, the more expensive, higher profit items are at eye level. Workers pass out free samples of food for you to taste. These techniques obviously work, because they keep doing them.) 

4. Maybe you wouldn't purchase 100% of your groceries from a web store, but maybe you would have dog food, canned drinks, soups and canned foods, and common staple goods delivered by Billy Bob. You might still visit you local grocery store for broccoli and meat so that you can pick it out yourself. In this case, Billy Bob's allows you to save money on the items you purchase there, and it reduces your shopping time in the retail store.

At this point, you are probably thinking "Carlton, if this is such a great idea, then why have other online grocery stores such as WebVan and  Peapod lost money and gone out of business?" Do not worry, I have the answer for you. Peapod embraced the web model only to the extent that customers could place orders over the web. However, they did not embrace the most important part of the model, which is to avoid the high cost of overhead. Here in Atlanta, Peapod contracted with Brunos - the most expensive grocery store chain in Atlanta to fulfill their web orders. As a result, their prices were actually higher than the local grocery store and the added delivery fee inflated those prices higher still. Instead of saving money and time, Peapod only allowed you to save time. I am sorry, but web shoppers like myself have come to expect lower prices via the Internet. Webvan's troubles were related to growing too fast, technical problems, and a botched merger with Homer Grocer. Webvan's CEO Robert Swan claimed that the Webvan model could have worked, however the company simply ran out of start up capital. (They started with $1.2 billion).

Conclusion

I believe that the the Internet offers the greatest opportunity our world has every seen for both big companies and common people to launch new businesses. The cost of establishing a web store is extremely small and due to the power of the web, goods and services are instantly available to millions of prospective consumers. These factors are the foundation which will fuel wide spread web commerce for years to come. As high speed internet access becomes more prevalent, web businesses will experience greater successes.

- END - 

I highly recommend that you read my related article - I believe in e-commerce which is located here: http://www.accountingsoftwareadvisor.com/ec/ecommerce.htm 

Footnotes

(1) The Industry Standard July 23, 2001 printed a good article on the demise of Webvan - you can read it here: http://www.thestandard.com/article/0,1902,27911,00.html

M030602

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