A version of this article first appeared in Customer strategy, a magazine published 10 times a year in London by TBC Research. Through its comprehensive portfolio of magazines, events and research, TBC Research is dedicated to helping senior business professionals make more informed technology decisions.
Analysts have warned against being tied into a model that could ultimately prove to be very expensive, as Laura Ashley last month announced moves to embrace an e-commerce operation by adopting a profit-sharing agreement with a technology provider.
Meanwhile, the decision of Somerfield, the struggling supermarket group, to ditch its online shopping operation, 24-7, which was available through interactive television channel Open TV, also served as a warning for companies which consider e-commerce a mere extension of their physical presence.
Only last year, Laura Ashley was clawing its way back from the abyss of bankruptcy, but its latest move into e-commerce reflects its faith in a market which has been dented by some well-publicised dot com crashes in recent months. The retailer's confidence was endorsed by AMR Research in a survey that reveals 38 percent of pure play Internet retailers in the U.S. are profitable and that 72 percent of mail order operations also run profitable Internet operations.
The deal that Laura Ashley has struck with Blueberry.Net includes the building of an e-commerce platform and integration into back-end systems in return for a percentage of profits if and when the operation becomes successful. Its existing fulfilment service, used for its mail order operations, will service the Web venture.
Several years ago, Blueberry was scoffed at in Silicon Valley when it unveiled its business model, but an increasing number of vendors are now making similar moves. The company charges 70 percent of the total cost for building the systems and foregoes its 30 percent profit for a percentage of either margin, revenue or profits, typically over a five-year period. A slice of equity investment is an alternative option.
One of the attractions for clients is Blueberry's ability to provide logistic and fulfilment capabilities for deliveries and returns via a third party. But analysts pointed out that agreeing to a profit-sharing agreement could prove to be more expensive than paying for the upfront costs. "The very fact that the vendor is taking the risk means it will expect to take a higher return. It's a better way to spread the costs, but you need to look closely and examine the deal," said one pundit.
Another potential bone of contention is the issue of intellectual property rights. A contractual clause states that business intelligence information gleaned from transactions over the Web belongs to the provider. Although the information is shared with the client, Simon Boon, a business intelligence analyst, believes clients need to keep hold of such information themselves: "The only thing that Laura Ashley, or any company launching an e-commerce operation, will possess is the strength of its brand, and business intelligence is a tool to galvanise this brand and make it stronger."
Profit sharing may become increasingly popular as more vendors tout the option around the market, but if a well-defined business plan is not in place, even the most technologically advanced sites could falter. According to AMR Research, 36 per cent fail in the first three years due to "fuzzy business models, naivety, low brand equity, inane marketing noise, greed, youthful exuberance and an overabundance of money chasing a scarcity of good ideas."
The shock of Somerfield's decision to ditch its online shopping operation has been lessened by similar well-documented failures in recent months. But John von Spreckelsen, the recently appointed executive chairman, admitted the service "has not been growing and represents a significant distraction to management at a time when its focus has to be on the core business."
Somerfield revealed a steep decline in fourth quarter sales last month, but reports have emerged that 24-7 was losing £1 million a month and at one point delivery depots were handling as few as 15 orders a week. The company declined to comment.
Compared to the stores, the product range was limited, prices were slightly higher, and to get a free delivery, orders had to be higher than £80. "It is just bonkers," said Piers Hogarth-Scott, chief executive of Blueberry.Net, who added that the attraction of the Internet was supposed to be cheap prices and convenience.
However, von Spreckelsen said: "We may well have a fresh look at the role of e-commerce food retailing in the future". But it could be on a different technology platform. Open TV is proud of the fact that it currently has over 3 million households subscribing and predicts that one in four UK households will subscribe by next year, but because its technology is proprietary it excludes e-commerce operations that are built to Web standards because a major technology rebuild would be required