Description
This study explores the effects of information and communication technology (ICT) and ebusiness on the retail industry. The objectives of the study are to illustrate how companies in this industry use ICT for conducting business; to assess the effects of this development for firms and for the industry as a whole and to supply implications for policy.
ICT and e-Business Impact in the
Retail Industry
Study report
No. 04/2008
This report was prepared by empirica on behalf of the European Commission,
Enterprise & Industry Directorate General, in the context of the "Sectoral e-Business
Watch" programme. The Sectoral e-Business Watch is implemented by empirica
GmbH in cooperation with Altran Group, Databank Consulting, DIW Berlin, IDC
EMEA, Ipsos, GOPA-Cartermill and Rambøll Management based on a service
contract with the European Commission.
European Commission, DG Enterprise & Industry
e-Mail: [email protected],
[email protected]
I I m mp pa ac ct t S St tu ud dy y N No o. . 0 04 4/ / 2 20 00 08 8
I I C CT T a an nd d e e- -B Bu us si in ne es ss s I I m mp pa ac ct t
i in n t th he e R Re et ta ai il l I I n nd du us st tr ry y
A Sectoral e-Business Watch study by
empirica GmbH
F Fi in na al l R Re ep po or rt t
Version 4.0
September 2008
e-Business in the Retail Sector
2
About the Sectoral e-Business Watch and this report
The European Commission, Enterprise & Industry Directorate General, launched the Sectoral e-
Business Watch (SeBW) to study and assess the impact of ICT on enterprises, industries and the
economy in general across different sectors of the economy in the enlarged European Union, EEA
and Accession countries. SeBW continues the successful work of the e-Business W@tch which,
since January 2002, has analysed e-business developments and impacts in manufacturing,
construction, financial and service sectors. All results are available on the internet and can be
accessed or ordered via the Europa server or directly at the SeBW website
(www.europa.eu.int/comm/enterprise/ict/policy/watch/index.htm, www.ebusiness-watch.org).
This document is a final report of a Sector Impact Study, focusing on electronic business in the
retail industry. The study describes how companies use ICT for conducting business, and, above
all, assesses implications thereof for firms and for the industry as a whole. The elaborations are
based on an international survey of enterprises on their ICT use, econometric analyses, expert
interviews and case studies.
Disclaimer
Neither the European Commission nor any person acting on behalf of the Commission is
responsible for the use which might be made of the following information. The views expressed in
this report are those of the authors and do not necessarily reflect those of the European
Commission. Nothing in this report implies or expresses a warranty of any kind. Results from this
report should only be used as guidelines as part of an overall strategy. For detailed advice on
corporate planning, business processes and management, technology integration and legal or tax
issues, the services of a professional should be obtained.
Acknowledgements
This report was prepared by empirica GmbH on behalf of the European Commission, Enterprise &
Industry Directorate General. The main author was Maria Woerndl. The study is a deliverable of the
Sectoral e-Business Watch, which is implemented by empirica GmbH in cooperation with Altran
Group, Databank Consulting, DIW Berlin, IDC EMEA, Ipsos, GOPA-Cartermill and Rambøll
Management, based on a service contract with the European Commission (principal contact and
coordination: Dr. Hasan Alkas).
The SeBW would like to thank Paul Brackel (Consultant), Enrico Colla (Negocia), Cécile Grégoire,
(EuroCommerce) and Kai Hudetz (ECC Handel) who were members of the Advisory Board in
2007/2008, for their valued feed-back, comments and contributions to this study.
Contact
For further information about this Sector Study or the Sectoral e-Business Watch, please contact:
empirica
Gesellschaft für
Kommunikations- und
Technologieforschung mbH
Oxfordstr. 2, 53111 Bonn,
Germany
[email protected]
Sectoral e-Business Watch
c/o empirica GmbH
Oxfordstr. 2, 53111 Bonn,
Germany
[email protected]
European Commission
Enterprise & Industry Directorate-
General
ICT for Competitiveness and
Innovation
[email protected]
Rights Restrictions
Material from this report can be freely used or reprinted but not commercially resold and, if quoted,
the exact source must be clearly acknowledged.
Bonn / Brussels, September 2008
e-Business in the Retail Sector
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Table of Contents
Executive Summary ................................................................................................... 5
1 Introduction................................................................................................... 9
1.1 The Sectoral e-Business Watch......................................................................................... 10
1.2 ICT and e-Business – key terms and concepts .................................................................. 13
1.3 Study objectives and methodology..................................................................................... 18
2 Context and background............................................................................. 22
2.1 Sector definition – scope of the study................................................................................. 22
2.2 Industry background.......................................................................................................... 24
2.3 Trends and challenges ...................................................................................................... 25
2.3.1 Macro-economic developments slowing down retail sales ................................................................ 26
2.3.2 Increasing concentration and strong competition.............................................................................. 27
2.3.3 Changing consumer preferences..................................................................................................... 28
3 Deployment of ICT and e-business applications in the retail sector ......... 30
3.1 The state-of-play in 2003/04 – review of an earlier retail sector study................................. 31
3.2 ICT infrastructure, networks, expenditure and skills............................................................ 33
3.3 The upstream supply chain: e-procurement ....................................................................... 41
3.3.1 Introduction to upstream supply chain issues ................................................................................... 41
3.3.2 Findings about e-procurement ......................................................................................................... 42
3.4 The internal supply chain: in-house electronic operations................................................... 49
3.4.1 Introduction to internal operations.................................................................................................... 49
3.4.2 Findings about internal e-operations................................................................................................ 50
3.5 The downstream supply chain: electronic marketing and sales........................................... 58
3.5.1 Introduction to downstream supply chain issues............................................................................... 58
3.5.2 Findings about electronic sales........................................................................................................ 59
3.5.3 Findings about electronic marketing................................................................................................. 67
3.5.4 Electronic support of logistics and distribution .................................................................................. 69
3.6 Barriers and drivers of e-business use............................................................................... 69
3.7 Overall differences between size classes, countries, sub-sectors and industries ................ 74
3.8 Summary of the state of play of ICT and e-business in retail .............................................. 78
4 Drivers and impacts of ICT adoption........................................................... 80
4.1 Conceptual framework: the structure – conduct – performance paradigm........................... 80
4.2 ICT and productivity........................................................................................................... 82
4.2.1 Background and hypotheses ........................................................................................................... 82
4.2.2 ICT impact on value added growth .................................................................................................. 85
4.2.3 ICT impact on labour productivity growth ......................................................................................... 88
4.2.4 Conclusions: Minor ICT impact on growth of value added and labour productivity ............................. 94
e-Business in the Retail Sector
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4.3 ICT and innovation ............................................................................................................ 96
4.3.1 Survey findings about ICT and innovation........................................................................................ 96
4.3.2 Links between skills, e-collaboration and ICT-enabled innovation ................................................... 100
4.3.3 ICT innovation, firm performance and organisational change.......................................................... 103
4.3.4 Overview of results on ICT and innovation..................................................................................... 107
4.4 ICT and market structure................................................................................................. 107
4.4.1 Survey findings on ICT and competition......................................................................................... 108
4.4.2 Market structure and ICT diffusion................................................................................................. 110
4.4.3 ICT impact on market structure...................................................................................................... 111
4.4.4 Overview of results on ICT and market structure............................................................................ 113
4.5 ICT and the retail sector’s value chain ............................................................................. 113
4.6 Summary of impact analysis............................................................................................ 115
5 Case studies.............................................................................................. 118
5.1 Mercator, Slovenia........................................................................................................... 121
5.2 Globus, Germany ............................................................................................................ 130
5.3 Brookland Plus Products/Dirk van den Broek, Netherlands .............................................. 137
5.4 AMJG Comunicações, Portugal ....................................................................................... 145
5.5 Casino Group, France ..................................................................................................... 150
5.6 4fitness, Germany ........................................................................................................... 156
5.7 Fleria Floral Creations, Greece........................................................................................ 163
5.8 Smart Supermarket, Malta............................................................................................... 168
5.9 EMPiK, Poland................................................................................................................ 174
5.10 Cyprus-PC.com, Cyprus.................................................................................................. 182
6 Conclusions: outlook and policy implications .......................................... 188
6.1 Outlook on further developments expected...................................................................... 188
6.2 Policy implications........................................................................................................... 189
6.2.1 Introduction to policy implications .................................................................................................. 189
6.2.2 Suggested political activities.......................................................................................................... 190
References ............................................................................................................. 194
Annex I: The e-Business Survey 2007 – methodology report ................................ 197
Annex II: Econometric analysis methodology ....................................................... 203
e-Business in the Retail Sector
5
Executive Summary
Key findings
Increase of e-business use 2003- 2007: as of
2007, firms representing more than half of the
industry’s employment procure electronically,
intense use of in-house e-business solutions is
rare, and more than one third sell
electronically. The share of firms with e-sales
activities doubled between 2003 and 2007.
Digital divide owing to firm size continues
to exist: retail SMEs lag behind large retailers
in ICT uptake – overall, e-business activities
tend to often increase with firm size.
e-Commerce environment less vibrant in
the EU than in the US: EU retailers tend to
use less e-business processes than US
retailers. There are also signs that the e-
business ecosystem differs notably between
the EU and the US (e.g. barriers to and drivers
for e-business differ).
Level of e-business use similar across
retail industry sub-sectors: the three retail
industry sub-sectors, non-food, food and other
retail, show no significant differences in ICT
uptake and e-business use.
ICT capital investments alone are
insufficient: without changes to the business
and especially business processes re-
engineering, there is little return from
investments in ICT.
ICT drive innovation: in the retail industry,
ICT mainly drive process innovation but the
use for product and service innovation is larger
than in other industries.
Objectives
This study explores the effects of information
and communication technology (ICT) and e-
business on the retail industry. The objectives
of the study are to illustrate how companies in
this industry use ICT for conducting business;
to assess the effects of this development for
firms and for the industry as a whole and to
supply implications for policy. The analysis is
based on an international survey covering
seven European Union (EU) Member States
and the USA. Additionally, ten case studies,
illustrating various issues, were conducted. An
econometric analysis of ICT impacts, an
evaluation of recent literature as well as
secondary data sources complete the report.
The retail industry covers business activities of
NACE Rev. 2 Division 47: ‘retail trade, except
of motor vehicles and motorcycles; repair of
personal and household goods’ (section 2.1).
The retail sector is studied through the lens of
supply chain management, divided into three
elements: the upstream supply chain (supplier
relationships), in-house supply chain (internal
e-operations) and downstream supply chain (e-
sales and marketing).
Retailing – a diversified industry
Retailing activities form one of the most
important industry sectors in the EU in terms of
numbers of enterprises and employment: in
2004, the industry comprised of approximately
17 million firms that employed 3.74 million
people in EU-27. Employment and turnover is
concentrated on large and small firms;
medium-sized firms are less important. The
retail industry covers a very wide array of
enterprises in terms of firm size, business
models and goods on sale. Two types of retail
trade activities are particularly important in the
EU: the sale of non-food items in store
accounting for 50% of turnover of the retail
sector and the sale of food items in store
accounting for 44%. The remaining categories,
retail sales not in-store and repair of personal
and household goods, accounted for together
6% of turnover. These patterns are usually
repeated across Member States (Section 2.2).
Trends and challenges: macro-
economic developments uncertain
Retail industry performance is heavily
dependent on macro-economic developments.
In late 2007, the economic environment for
e-Business in the Retail Sector
6
retail has turned to become less favourable:
there is uncertainty about the prospects for
economic growth, mainly due to the turmoil in
financial markets and rising cost for energy
and food. Private consumption continues to
show signs of weakness in early 2008.
Concentration processes have been taking
place in retail in the past decades, driving out
smaller players and leaving a smaller number
of large chains to fight for profit margins. Large
enterprises from outside Europe are seeking to
enter new markets in Europe which is further
increasing competition.
Regarding customers, there are at least three
trends: demographic changes towards a larger
share of older people with particular
consumption needs, customers who are
increasingly well-informed about products and
share such information with other customers,
and consumers demanding sustainable
products. Retailers need to adapt to these
trends with appropriate strategies and
operations (Section 2.3).
General increase of ICT and e-
business use since 2003
Compared to the 2003 e-Business Watch retail
industry findings, the 2007 results indicate that
ICT and e-business use have become more
prevalent in retail firms of all size classes.
Nevertheless, the use of e-business in the
retail sector was found to be still below the
average adoption rates in other sectors. The
2007 study also confirmed the 2003 conclusion
that the main e-business opportunities in the
retail industry, similarly as in other sectors, are
efficiency and productivity gains and, thus,
cost savings (Section 3.2).
The quality of SMEs' internet access has
significantly improved between 2003 and 2007.
However, there is scope for further
improvement as only about 45% of the sector's
firms weighted by employment are connected
via broadband (>2 Mbit/s). Diffusion of internal
W-LANs has been fast. More than 50% of
large retailers operate a W-LAN, and 35-40%
of small and medium-sized retailers. While only
about 10% of all retail companies employ ICT
specialists, even among large retailers only
about 50% do. Many companies completely
outsource ICT services to external service
providers. The attitude towards ICT
investments and budgets is more positive than
a couple of years ago. A third of retailers plan
to increase their ICT budgets, only few expect
budget cuts for the forthcoming financial
period.
Electronic procurement prevalent
The function of upstream supply chain
management (SCM) is to design and manage
the processes, information and material flows
between retailers and their suppliers. SCM is
of utmost importance to retailers, as it is both a
major cost driver and opportunity for
competitive advantage. Case studies
demonstrate that ICT have a high potential in
this context, not only to cut costs, but also to
improve service levels for customers.
However, companies have to balance
availability with inventory levels and associated
costs. Key findings about e-procurement and
SCM include:
e-Procurement: Retailers representing more
than 50% of the sector's employment order at
least some of their goods online. The Sectoral
e-Business Watch estimates the total share of
goods ordered online ( in those companies that
procure online) at about 25-30%the average
share of goods procured online has increased
by 10-15 percentage points compared to 2003.
SCM systems: Advanced software systems
specifically for SCM are still not widely diffused
(about 20% of retail companies); however,
adoption has seen a dynamic development
among large retail firms, where it has
increased from 7% to 35%.
Different levels of integration: The digital
integration between retailers and
manufacturers can evolve on a step-by-step
basis. Simple applications such as e-invoicing
are widely used already. Advanced forms such
as sharing information about inventory levels
online are only used by some companies.
Benefits also for small firms: Case studies
show that even small companies can gain
e-Business in the Retail Sector
7
significantly from ICT-enabled improvements in
their supply chain. However, the potential
benefits differ between segments and retail
business models.
Internal e-business systems:
intense e-business and RFID rare
Internal e-business operations can significantly
enhance workflows and business processes
and thus increase productivity. However,
companies representing almost half of the
industry’s employment said that they only
conduct some processes by e-business. 22%
even said “none”; a “good deal” was stated by
20%, and in 11% most processes are
conducted electronically. As regards particular
systems, firms representing 60% of
employment reported to have a software
application to manage the placing or receipt of
orders, 59% a bar-coding system, 51% a
warehouse or depot management system, and
16% an ERP system. RFID is not yet very
common in the retail industry. Retail firms
representing 8% of employment reported to
use this technology, and RFID use is very rare
in micro and small retail firms.
Electronic sales and distribution
doubled since 2003
Retailers representing 38% of the industry’s
employment stated that they sell goods
“through the internet or other computer-
mediated networks”. Almost half of the large
retail firms (45%) and 35% of the medium-
sized ones sell online, but only 24% of the
small retailers and 26% of the micro retailers
do so. The share of companies that sells
online doubled from 19% (employment-
weighted) in 2003 to 38% in 2007. There was
an apparent increase in all size classes. There
has also been an increase in the amount of
sales conducted online. Compared to the
figures about general sales areas, it appears
that online sales helps to extend the
geographic focus slightly from regional to
national sales while the international focus
remains on the same low level. The e-
Business Survey 2007 also found that retailers
representing 20% of the industry’s employment
use a CRM system, an increase from 8% in
2003.
Micro and small firms lag behind
medium-sized and large ones
Micro, small- and medium-sized firms lag
behind large firms in almost all indicators of
ICT and e-business use presented in this
report. Exceptions include the level of internet
access which is close to 100% in SMEs, the
average share of employees with internet
access which is higher in SMEs than in large
firms, and the practice of sending electronic
invoices to customers which is on the same
level in all size classes. Nevertheless it is
notable that micro and small firms have been
increasing their ICT adoption in recent years
(Chapter 3). The gap between SMEs and large
firms is most pronounced for internal e-
operations, followed by ICT infrastructure. As
regards e-sales, the usage gap is between
large and medium-sized firms on the one hand
as well as micro and small firms on the other.
In e-procurement, SMEs are almost on the
same level as large firms.
e-Commerce environment less
vibrant in the EU than in the US
Overall, the e-commerce environment is less
vibrant in the EU than in the US: across the
majority of variables, EU retail firms lag behind
US retailers. In some cases, the differences
are large, for example for placing online ads on
other companies’ websites (43% in the US
versus 16% in the EU) and for options offered
to pay online (higher percentages in the US for
all options). Exceptions include the share of
firms with internet access, the average share
of employees with internet access, and the use
of internal systems for which the levels are
similar or even higher in the EU. Surprisingly,
the overall importance of e-business stated by
the firms is very similar between EU-7 and US
retailers. The reason may be that US retailers
answered the question about e-business
importance with a higher reference level in
mind.
e-Business in the Retail Sector
8
Results of an econometric
analysis of ICT impacts
Productivity: ICT-capital investments have
not been key drivers in the growth of real value
added in European retailing. Total Factor
Productivity, which includes for example
organisational changes, was found to account
for much stronger contributions. As regards
labour productivity, intermediate inputs
intensity were found to be the main
components. This may predominantly be due
to outsourcing activity. ICT capital investments
as well as the employment of a large share of
medium-skilled workers play a positive but
minor role in labour productivity growth.
Overall, the findings indicate that ICT capital
investments alone are insufficient to increase
labour productivity significantly. It may be
necessary to also invest into organisational
changes and training (Section 4.2).
Innovation: In the retail industry, the e-
Business Survey 2007 found the impact of ICT
to be mainly on process innovation but it also
plays an important role in product and service
innovation. An econometric analysis found,
firstly, that employing people with a university
degree as well as employing IT practitioners
significantly increases retail firms’ propensity to
use ICT to develop new products and services.
Secondly, the use of applications and practices
that support the electronic exchange of
information between companies positively
affects the likelihood of conducting ICT-
enabled innovations. The analysis also found
that ICT-enabled innovation is positively
related with turnover increase irrespective of
firm size and age. Secondly, ICT software is an
important driver of organisational changes,
while hardware apparently is not (Section 4.3).
Market structure: The relevance of increasing
market competition for the intensity of ICT
adoption was confirmed. Findings also indicate
that ICT and e-business can be used to open
up new markets, to cross boundaries of
industries and markets and to increase the
number of customers (Section 4.4).
Value chains: The econometric analysis found
that ICT intensity indeed increased the
propensity to outsource business activities
(Section 4.5).
Policy implications
Barriers for increased uptake of e-business in
retail can be found along the complete value
chain. Consequently, policy makers should
seek to promote e-business along the whole
retail value chain and business ecosystem.
Promote SCM among SMEs: Policy makers
may support supply chain development in retail
through e-business use. While the European
Commission should have a focus on cross-
border activities, Member States may naturally
promote national or regional activities. A sector
focus facilitates such policy initiatives as it
drives the involvement of experts and
associations with sector background.
Promoting e-business on a regional level:
Since retailers are generally rooted in the local
and regional economy, support to e-business
should predominantly take place at the local
and regional level. Retailing associations or
chambers of commerce could take a leading
role in promoting the adoption and extension of
e-business practices in retail.
Foster dissemination of e-business
knowledge: Many retail firms consider ICT as
a cost factor rather than an investment in
benefits. Improved awareness and knowledge
about the effects of e-business would be
important. Key findings from this report which
are of interest for retailers include e.g. that ICT
investment should be complemented by
organisational changes, employee training and
rooting ICT in the company’s strategy.
Dissemination activities about e-business in
the retail industry could be improved.
Promote e-ordering by consumers: The low
level of e-sales penetration in the EU may also
be due to a relatively low affinity towards
ordering over the internet on the part of
consumers. They may have security concerns,
they may find online shops too complicated,
and they may require enhanced personal
communication. Policy makers can promote
examples of secure, simple and personal e-
sales practice among consumers and retailers.
e-Business in the Retail Sector
9
1 Introduction
This study focuses on the adoption and implications of e-business practice in the retail
industry. It describes how companies in this sector use information and communications
technology (ICT) for conducting business, assesses the impact of ICT for firm
performance in a context of global competition, and points at possible implications for
policy. The analysis is based on literature, interviews with industry representatives and
experts, company case studies and a telephone survey among decision-makers in
European enterprises from the retail industries. The study takes into account results of
earlier sector studies on the retail industry, published by e-Business W@tch in 2003 and
2004
1
.
Study structure
This report is structured into six main sections. Chapter 1 explains the background and
context why the study is being conducted: it introduces the Sectoral e-Business Watch
(SebW) program of the European Commission, a conceptual framework for the analysis
of e-business, and the specific methodology used for the study. Chapter 2 provides some
general information and key figures about the retail industry in Europe. Chapter 3
analyses the current state-of-play in e-business in this industry, focusing on specific ICT-
related issues that are considered to be particularly relevant to the sector. Chapter 4
assesses the impact of the developments described in chapter 3 on work processes and
employment, innovation and productivity, and – at sector level – on value chain
characteristics. Chapter 5 presents company case studies. These have been selected as
practical examples and evidence for the issues discussed in chapters 3 and 4. The final
chapter 6 summarises key findings and draws conclusions on policy implications that
could arise from the developments observed.
Combining descriptive and analytical approaches
The study approach is exploratory, descriptive and explanatory, applying a broad
methodological basis: a qualitative case study approach (Chapter 5) is combined with a
descriptive presentation of quantitative survey data (Chapter 3) and an economic
analysis of ICT adoption and its impacts (Chapter 4). This threefold approach is meant to
produce an in-depth understanding of current e-business practice in the industry, while
also assessing the economic effects of this practice, for instance on firm productivity and
innovation. While the results from these different approaches are presented like self-
sustained pieces of research in separate chapters, they are intertwined and cross-
referenced.
1
The previous study report on the retail industry is available at the Sectoral e-Business Watch
website athttp://www.ebusiness-watch.org/studies/on_sectors.htm.
e-Business in the Retail Sector
10
1.1 The Sectoral e-Business Watch
Mission and objectives
The "Sectoral e-Business Watch" (SeBW) studies the adoption, implications and impact
of electronic business practices in different sectors of the European economy. It
continues activities of the preceding "e-Business W@tch" which was launched by the
European Commission, Directorate-General (DG) Enterprise and Industry, in late 2001, to
support policy in the fields of ICT and e-business. The SeBW is based on a Framework
Contract and Specific Contract between DG Enterprise and Industry and empirica GmbH,
running until September 2008, with two extensions of up to 16 months possible.
In ICT-related fields, DG Enterprise and Industry has a twofold mission: "to enhance the
competitiveness of the ICT sector, and to facilitate the efficient uptake of ICT for
European enterprises in general." The services of the SeBW are expected to contribute to
these goals. This mission can be broken down into the following main objectives:
to assess the impact of ICT on enterprises, industries and the economy in
general, including the impacts on productivity and growth, and the role of ICT for
innovation and organisational changes;
to highlight barriers for ICT uptake, i.e. issues that are hindering a faster and/or
more effective use of ICT by enterprises in Europe;
to identify and discuss policy challenges stemming from the observed develop-
ments, notably at the European level;
to engage in dialogue with stakeholders from industry and policy institutions,
providing a forum for debating relevant issues.
By delivering evidence on ICT uptake and impact, the SeBW aims to support informed
policy decision-making in these fields in several policy domains including innovation,
competition and structural policy.
Policy context
The initial e-Business W@tch program was rooted in the eEurope Action Plans of 2002
and 2005. The aim of the eEurope 2005 Action Plan was "to promote take-up of e-
business with the aim of increasing the competitiveness of European enterprises and
raising productivity and growth through investment in information and communication
technologies, human resources (notably e-skills) and new business models".
2
The i2010 policy
3
, a follow-up to eEurope, also stresses the critical role of ICT for
productivity and innovation, stating that "… the adoption and skilful application of ICT is
one of the largest contributors to productivity and growth throughout the economy,
leading to business innovations in key sectors" (p. 6). The Communication anticipates "a
new era of e-business solutions", based on integrated ICT systems and tools, which will
lead to an increased business use of ICT. However, it also warns that businesses "still
face a lack of interoperability, reliability and security", which could hamper the realisation
of productivity gains (p. 7).
2
"eEurope 2005: An information society for all". Communication from the Commission,
COM(2002) 263 final, 28 May 2002, chapter 3.1.2.
3
"i2010 – A European Information Society for growth and employment." Communication from the
Commission, COM(2005) 229 final.
e-Business in the Retail Sector
11
In February 2005, the European Commission proposed a new start for the Lisbon
Strategy. While it recommended changes in the governance structures, i.e. the way
objectives are to be addressed, the overall focus on growth and jobs remained
unchanged. Some of the policy areas of the renewed Lisbon objectives address ICT-
related issues. Central Policy Area No. 6 deals with facilitating ICT uptake across the
European economy. Policy-makers in this area will require thorough analysis of ICT
uptake based on accurate and detailed information on the most recent developments.
Such evidence-based analysis is also needed when targeting individual sectors to fully
exploit the technological advantages, in alignment with Central Policy Area No. 7
“Contributing to a strong European industrial base”. Furthermore, Guideline No. 9,
addressed to Member States, encouraging the widespread use of ICT,
4
can be effectively
addressed only if actions are based on understanding of the potential for and probable
effectiveness of interventions.
"ICT are an important tool …"
"More efforts are needed to improve business processes in European
enterprises if the Lisbon targets of competitiveness are to be realised.
European companies, under the pressure of their main international
competitors, need to find new opportunities to reduce costs and improve
performance, internally and in relation to trading partners. ICT are an
important tool to increase companies’ competitiveness, but their adoption is
not enough; they have to be fully integrated into business processes."
Source: European Commission (2005): Information Society Benchmarking
Report
In 2005, taking globalisation and intense international competition into consideration, the
European Commission launched a new industrial policy
5
with the aim to create better
framework conditions for manufacturing industries in the coming years. Some of the
policy strands described have direct links to ICT usage, recognising the importance of
ICT for innovation, competitiveness and growth.
The SeBW is one of the policy instruments used by DG Enterprise and Industry to
support the implementation of the industrial policy and related programmes. Its activities
are complementary to other related policy programmes in the field of ICT, such as:
the e-Business Support Network (eBSN), a European network of e-business policy
makers and business support organisations,
the eSkills Forum, a task force established in 2003 to assess the demand and
supply of ICT and e-business skills and to develop policy recommendations,
the ICT Task Force, a group whose work is to draw together and integrate various
activities aiming to strengthen Europe's ICT sector, and
4
"Working Together for Growth and Jobs: a New Start for the Lisbon Strategy", Communication,
COM (2005) 24, Brussels, 02.02.2005. Available athttp://europa.eu.int/growthandjobs/pdf/COM2005_024_en.pdf.
5
"Implementing the Community Lisbon Programme: A Policy Framework to Strengthen EU
Manufacturing - towards a more integrated approach for Industrial Policy." Communication from
the Commission, COM(2005) 474 final, 5.10.2005
e-Business in the Retail Sector
12
activities in the areas of ICT standardisation, as part of the general
standardisation activities of the Commission.
6
In parallel to the work of the SeBW, the "Sectoral Innovation Watch" (see www.europe-
innova.org) analyses innovation performance and challenges across different EU sectors
from an economic perspective. Studies cover, inter alia, the following sectors: chemical,
automotive, aerospace, food, ICT, textiles, machinery and equipment.
Scope of the programme
Since 2001, the SeBW and its predecessor "e-Business W@tch" have published e-
business studies on about 25 sectors
7
of the European economy, annual comprehensive
synthesis reports about the state-of-play in e-business in the European Union, statistical
pocketbooks and studies on specific ICT issues. All publications can be downloaded from
the program's website at www.ebusiness-watch.org. In 2007/08, the main studies of the
SeBW focus on the following 10 sectors and specific topics:
Exhibit 1.1-1: Sectors and specific topics covered by the SeBW
No. Sector / topic in focus NACE Rev. 1.1 Reference to earlier
studies by SeBW
1 Chemical, rubber and plastics 24, 25 2004, 2003
2 Steel 27.1-3, 27.51+52 --
3 Furniture 36.12-14 --
4 Retail 52 2004, 2003
5 Transport and logistics services 60, 63 (parts thereof) --
6 Banking 65.1 2003
7 RFID adoption and implications (several sectors) --
8 Intellectual property rights for
ICT-producing SMEs
30.01+02, 32.1-3, 33.2+3;
64.2; 72 (parts thereof)
--
9 Impact of ICT and e-business on
energy use
--
10 Economic impact and drivers of
ICT adoption
--
Source: Sectoral e-Business Watch 2007/2008
The SeBW presents a 'wide-angle' perspective on the adoption and use of ICT in the
sectors studied. Studies assess how ICTs are having an influence on business
processes, notably by enabling electronic data exchanges between a company and its
customers, suppliers, service providers and business partners. (The underlying
conceptual framework is explained in more detail in the following section.) In addition, the
studies also provide some background information on the respective sectors, including
a briefing on current trends. Readers, however, should not mistakenly consider this part
as the main topic of the analysis. The introduction to the sector is neither intended, nor
could it be a substitute for more detailed industrial analysis.
6
The 2006 ICT Standardisation Work Programme complements the Commission's "Action Plan
for European Standardisation" of 2005 by dealing more in detail with ICT matters.
7
see overview at www.ebusiness-watch.org/studies/on_sectors.htm.
e-Business in the Retail Sector
13
1.2 ICT and e-Business – key terms and concepts
A definition of ICT
This study examines the use of information and communication technology (ICT) in
European businesses. ICT is an umbrella term that encompasses a wide array of
systems, devices and services used for data processing (the information side of ICT) as
well as telecommunications equipment and services for data transmission and
communication (the communication side). The European Information Technology
Observatory (2007) structures the ICT market into four segments with an estimated total
market value of about € 670 billion in 2007 (Exhibit 1.2-1).
Exhibit 1.2-1: The EU ICT market according to EITO (2007)
Market
segment
Products / services included (examples)
Market value for
EU (2007)
(EITO estimate)
ICT equipment Computer hardware, end-user communications
equipment (such as mobile phones), office equipment
(such as copiers) and data communications and network
equipment (such as switching and routing equipment,
cellular mobile infrastructure)
€159 billion
Software
products
System and application software €76 billion
IT services Consulting, implementation and operations management €140 billion
Carrier
services
Fixed voice telephone and data services, mobile
telephone services, cable TV
€293 billion
Source: EITO 2007
In its widest sense, 'e-business' refers to the application of these technologies in business
processes, including primary functions (such as production, inbound and outbound
logistics or sales), and support functions (such as administration, controlling, procurement
and human resources management). Companies in all sectors use ICT, but they do so in
different ways. This calls for a sectoral approach in studies of ICT usage and impact.
The following section introduces a wider framework for the discussion of e-business
developments that will be used in the following analysis of the retail industry.
Gaining momentum after a phase of disappointment
When the bust phase of the previous economic cycle – commonly referred to as the 'new
economy' – started in 2001, the former internet hype was suddenly replaced by a
widespread disappointment with e-business strategies. Companies adopted a more
reserved and sceptical attitude towards investing in ICT. Nevertheless, ICT has proved to
be the key technology of the past decade (OECD 2004, p. 8), and the evolutionary
development of e-business has certainly not come to an end. The maturity of ICT-based
data exchanges between businesses and their suppliers and customers, fostered by
progress in the definition and acceptance of standards, has substantially increased
across sectors and regions over the past five years. In parallel, recent trends such as
"Web 2.0" and social networking are widely discussed in terms of their business
implications and it is widely recognised that 'e'-elements have become an essential
component of modern business exchanges. In short, e-business has regained
momentum as a topic for enterprise strategy both for large multinationals and SMEs.
e-Business in the Retail Sector
14
"Measurement of e-business is of particular interest to policy makers
because of the potential productivity impacts of ICT use on business
functions. However, the ongoing challenges in this measurement field are
significant and include problems associated with measuring a subject which
is both complex and changing rapidly."
OECD (2005): ICT use by businesses. Revised OECD model survey, p. 17
Companies use ICT in their business processes mainly for three purposes: to reduce
costs, to better serve the customer, and to support growth (e.g. by increasing their market
reach). In essence, all e-business projects in companies explicitly or implicitly address
one or several of these objectives. In almost every case, introducing e-business can be
regarded as an ICT-enabled process innovation. Understanding one's business pro-
cesses and having a clear vision of how they could be improved (be it to save costs or to
improve service quality) are therefore critical requirements for firms to effectively use ICT.
The increasing competitive pressure on companies, many of which operate in a global
economy, has been a strong driver for ICT adoption. Firms are constantly searching for
opportunities to cut costs and ICT holds great promise in this respect as it increases the
efficiency of a firm’s business processes, both internally and between trading partners
in the value chain. While cutting costs continues to motivate e-business activity,
innovative firms have discovered and begun to exploit the potential of ICT for delivering
against key business objectives. They have integrated ICT into their production
processes and quality management and, most recently, in marketing and customer
services. These last sectors are widely considered key to improve competitiveness in the
current phase of development of European economies. Competing in mature markets
requires not only optimised cost structures, maximal efficiency, and products or services
of excellent quality but also the ability to communicate effectively and cooperate with
business partners and potential customers.
A definition of e-business
As part of this maturing process, electronic business has progressed from a specific to a
very broad topic. A central element is certainly the use of ICT to accomplish business
transactions, i.e. exchanges between a company and its suppliers or customers. These
can be other companies ('B2B' – business-to-business), consumers ('B2C' – business-to-
consumers), or governments ('B2G' – business-to-government). In the broad sense,
transactions include commercial as well as other exchanges such as sending tax return
forms to the tax authorities.
If transactions are conducted electronically ('e-transactions'), they constitute e-
commerce. Transactions can be broken down into different phases and related
business processes, each of which can be relevant for e-commerce (see Exhibit A.V-2).
The pre-sale (or pre-purchase) phase includes the presentation of (or request for)
information on the offer, and negotiations over the price. The sale / purchase phase
covers the ordering, invoicing, payment and delivery processes. Finally, the after sale /
purchase phase covers all processes after the product or service has been delivered to
the buyer, such as after sales customer services (e.g. repair, updates).
e-Business in the Retail Sector
15
Glossary
Definitions by standardisation groups (ISO, ebXML)
The term 'business transaction' is a key concept underlying the development
of e-standards for B2B exchanges. Therefore, definitions have been
developed by standards communities to underpin their practical work.
Examples include:
Business: "a series of processes, each having a clearly understood
purpose, involving more than one party, realised through the exchange of
information and directed towards some mutually agreed upon goal,
extending over a period of time" [ISO/IEC 14662:2004]
Business transaction: "a predefined set of activities and/or processes of
parties which is initiated by a party to accomplish an explicitly shared
business goal and terminated upon recognition of one of the agreed
conclusions by all the involved parties even though some of the
recognition may be implicit" [ISO/IEC 14662:2004]
e-Business transaction: "a logical unit of business conducted by two or
more parties that generates a computable success or failure state"
[ebXML Glossary]
Exhibit 1.2-2: Process components of transactions
Pre-sale / pre-purchase
phase
Sale / purchase phase After sale /
after-purchase phase
Request for offer/proposal
Offer delivery
Information about offer
Negotiations
Placing an order
Invoicing
Payment
Delivery
Customer service
Guarantee management
Credit administration
Handling returns
Practically each step in a transaction can either be pursued electronically (online) or non-
electronically (offline), and all combinations of electronic and non-electronic
implementation are possible. It is therefore difficult to decide which components actually
have to be conducted online in order to call a transaction (as a whole) ‘electronic’.
In 2000, the OECD proposed broad and narrow definitions of electronic commerce, both
of which remain valid and useful today
8
. While the narrow definition focuses on 'internet
transactions' alone, the broad definition defines e-commerce as "the sale or purchase of
goods or services, whether between businesses, households, individuals, governments,
and other public or private organisations, conducted over computer-mediated
networks. The goods and services are ordered over those networks, but the payment
and the ultimate delivery of the goods or service may be conducted on- or offline" (OECD,
2001). The addendum regarding payment and delivery illustrates the difficulty mentioned
above to specify which of the processes along the transaction phases constitute e-
commerce (see Exhibit 1.2-2). The OECD definition excludes the pre-sale / pre- purchase
8
In 1999, the OECD Working Party on Indicators for the Information Society (WPIIS) established
an Expert Group on Defining and Measuring Electronic Commerce, in order to compile
definitions of electronic commerce which are policy-relevant and statistically feasible. By 2000,
work of the Group had resulted in definitions for electronic commerce transactions.
e-Business in the Retail Sector
16
phase and focuses instead on the ordering process. The SeBW follows the OECD
position on this issue,
9
while fully recognising the importance of the internet during the
pre-purchase phase for the initiation of business.
Glossary
Definition of key terms for this study
e-Transactions: commercial exchanges between a company and its
suppliers or customers which are conducted electronically. Participants
can be other companies ('B2B' – business-to-business), consumers
('B2C'), or governments ('B2G'). This includes processes during the pre-
sale or pre-purchase phase, the sale or purchase phase, and the after-
sale / purchase phase.
e-Commerce: the sale or purchase of goods or services, whether
between businesses, households, individuals, governments, and other
public or private organisations, conducted over computer-mediated
networks. (OECD)
e-Business: automated business processes (both intra- and inter-firm)
over computer mediated networks. (OECD)
e-Interactions: covers the full range of e-transactions as well as
collaborative business processes,. such as collaborative online design
processes which are not directly transaction focused.
Using the OECD definition, e-commerce is a key component of e-business but not the
only one. A wider focus oriented on business processes has been widely recognised.
This vision of e-commerce also covers the digitisation of internal business processes
(the internal processing of documents related to transactions) as well as cooperative or
collaborative processes between companies that are not necessarily transaction-
focused (for example industrial engineers collaborating on a design in an online
environment). The OECD WPIIS
10
proposes a definition of e-business as "automated
business processes (both intra-and inter-firm) over computer mediated networks" (OECD,
2004, p. 6). In addition, the OECD proposed that e-business processes should integrate
tasks and extend beyond a stand-alone or individual application. 'Automation' refers here
to the substitution of formerly manual processes. This can be achieved by replacing the
paper-based processing of documents by electronic exchanges (machine-to-machine)
but it requires the agreement between the participants on electronic standards and
processes for data exchange.
e-Business and a company's value chain
In some contexts, the term c-commerce (collaborative commerce) is used. Although this
concept was mostly abandoned when the 'new economy' bubble burst in 2001, it had the
merit of pointing towards the role of ICT in cooperations between enterprises and the
increasing digital integration of supply chains. These developments go beyond simple
point-to-point exchanges between two companies.
9
The respective survey questions ask companies whether they "place / accept online orders".
10
Working Party on Indicators for the Information Society.
e-Business in the Retail Sector
17
Despite dating back 20 years to the pre-e-business era, Michael Porter's framework of
the company value chain and value system between companies
11
remains useful to
understand the relevance of e-business in this context. A value chain logically presents
the main functional areas ('value activities') of a company and differentiates between
primary and support activities. However, these are "not a collection of independent
activities but a system of interdependent activities", which are "related by linkages within
the value chain".
12
These linkages can lead to competitive advantage through
optimisation and coordination. This is where ICT can have a major impact, in the key role
of optimising linkages and increasing the efficiency of processes.
The value system expands this concept by extending its scale beyond the single
company. The firm's value chain is linked to the value chains of (upstream) suppliers and
(downstream) buyers; the resulting larger set of processes is referred to as the value
system. All e-commerce and therefore electronic transactions occur within this value
system. Key dimensions of Porter’s framework (notably inbound and outbound logistics,
operations, and the value system) are reflected in the Supply Chain Management
(SCM) concept. Here, the focus is on optimising the procurement-production-delivery
processes, not only between a company and its direct suppliers and customers, but also
aiming at a full vertical integration of the entire supply chain (Tier 1, Tier 2, Tier n
suppliers). In this concept, each basic supply chain is a chain of sourcing, production, and
delivery processes with the respective process interfaces within and between
companies.
13
Analysing the digital integration of supply chains in various industries has
been an important theme in most sector studies by the SeBW.
Applying the concept to the retail industry
The conceptual framework outlined above is fully applicable to e-business in the retail
industry. In this sector, companies use ICT for a broad range of applications along the
value chain including procurement, warehouse management and logistics, and for
marketing, sales and customer services activities. The basic goals of e-business
identified are highly relevant in this sector: reducing costs by increasing the efficiency of
processes, optimally serving customer by innovative means of information provision and
communication, and enabling growth by increasing market reach. This study shows that
e-business developments in the retail industry have been dynamic over the last couple of
years in particular with regard to achieving process efficiency gains. However, the study
also points at some of the bottlenecks and challenges for an even wider and faster
adoption of e-business activity.
11
Porter, Michael E. (1985). Competitive Advantage. New York: Free Press. Page references in
quotations refer to the Free Press Export Edition 2004.
12
ibid., p. 48.
13
cf. SCOR Supply-Chain Council: Supply-Chain Operations Reference-model. SCOR Version
7.0. Available at www.supply-chain.org (accessed in March 2006).
e-Business in the Retail Sector
18
1.3 Study objectives and methodology
Research objectives
As competition in the retail industry is strong and barriers to entry are low, ICT and e-
business can take important roles in this industry. Another factor affecting ICT and e-
business uptake among retail firms in the EU is the heterogeneous structure (see chapter
2) of the industry: micro firms operating in regional markets have different ICT and e-
business requirements than globally-operating retail chains. Retail firms trade goods and
service and retail customers are end-consumers of the goods and services. Hence, while
the retail industry is not a goods-producing industry, opportunities for improving business
processes through ICT and e-business are numerous. Indeed, previous e-business
W@tch studies in 2003 and 2004 have shown that ICTs are a major enabler of process
efficiency in the industry. It is to be expected that ICT are (increasingly) being used in all
segments of the value chain, notably by the large players. It remains to be seen to what
extent this leads to changes in business models that go beyond process innovation in the
sense of improved existing processes.
Based on these general assumptions, and on findings of earlier studies conducted on the
retail industry, the study addresses the following overall research questions:
Dynamics of adoption: Has there been a dynamic adoption of ICT and e-
business in the period since 2003/04?
Drivers and barriers: What drives e-business adoption, what do companies
perceive as the main challenges and barriers?
Impact on firm and sector level: What are the main impacts of ICT adoption on
firm performance and on the industry as a whole (e.g. in terms of productivity
effects and skills requirements)?
Impact on international competition: Is there a link between e-business
developments and the scenario for international competition?
Policy implications: Do the findings on these research questions above have
implications for policy, for example in the fields of economic, competition or R&D
and innovation policy?
The methodological framework of the SeBW builds upon the methodology established for
the preceding "e-Business W@tch" program. It has been adapted to the new focus of
activity, enabling the progress from monitoring "e-readiness" and "e-activity" to the
evidence-based analysis of "e-impact".
Conceptual framework for the retail sector study
With the overall focus on supply chain management, the retail sector study is based upon
the following conceptual framework. The conceptual framework illustrates the elements
studied in the retail sector study: upstream supply chain management, supply chain
interfaces, downstream supply chain management, and the impact of firm size on e-
supply chain management. The upstream supply chain covers retailers’ activities with
suppliers, especially coordination and collaboration with these business partners. In-
house supply chain management looks at retailers’ internal systems especially for
operations such as logistics and distribution. The downstream supply chain covers
retailing firms’ activities related to selling goods to consumers. The impact of firm size on
e-Business in the Retail Sector
19
e-supply chain management considers the variety of firm sizes found in the retail industry.
These four foci will enable the identification of the various e-business experiences that
retailers come across when managing the different parts of their supply chains.
Exhibit 1.3-1: Conceptual framework for the retail sector study
Focal organisation Customer
Upstream Downstream
Supplier
Customer
Customer
Supplier
Tier 1
Supplier
Supplier
Supplier
Supplier
Tier 2
Supplier
Tier 3
Supplier
Supplier
Supply chain management
S
ize
In-house
Focal organisation Customer
Upstream Downstream
Supplier
Customer
Customer
Supplier
Tier 1
Supplier
Supplier
Supplier
Supplier
Tier 2
Supplier
Tier 3
Supplier
Supplier
Supply chain management
S
ize
In-house
Source: e-Business Watch 2007/2008
Furthermore, this framework enables drawing conclusions about entire supply chain
management issues in the retail sector.
The upstream supply chain: e-procurement. Retailers order a vast amount of
different goods from many different suppliers. These A diverse array of supply chain
solutions is available to organisations. Yet, it remains unclear how widespread the
adoption of such solutions is among European retailers and what benefits and risks
of such systems are for retailers. By enquiring about supply chain solutions (such
as e-procurement and e-storage applications) in use in the retail sector, the study
aims to identify the level of ICT penetration among suppliers to the retail industry.
This will enable the identification of diffusion patterns in retail supply networks. On a
qualitative level, the study aims to find out what benefits and risks retailers face as a
result of engaging in e-supply.
The in-house supply chain: internal ICT systems. One of the many opportunities
for retailers is to e-enable in-house processes and operations. One of the classic
challenges faced by organisations include data duplication through lack of system
integration and misalignment with business strategies. Systems such as Enterprise
Resource Planning (ERP), Radio Frequency Identification (RFID), Business
Process Management (BPM) and Customer Relationship Management (CRM) are
designed to reduce these challenges but these systems can be sources of new
problems. e-Business W@tch 2003/2004 found that, in comparison to other sectors,
retailers tend to rarely employ this type of systems. Benefits and drawbacks of such
systems are the focus in this report, as will be the amalgamation of different in-
house systems.
The downstream supply chain: e-retailing including e-marketing. While back
in 2003/2004 there was little penetration of e-commerce solutions among retailers,
one of the key trends in the industry is a growth in online sales: in 2007, e-
e-Business in the Retail Sector
20
commerce accounts for approximately 6% of total retail sales (Butler 2007) This
might indicate that retailers are increasingly being faced with electronically-enabled
downstream supply chains. Additionally, virtual enterprises present a threat for
existing retailers. This study investigates benefits and cost of e-sales solutions for
retailers; and it will provide indications about e-marketing activities in the retail
industry.
Firm size effects on e-business activities in retailing. Considering that the retail
industry is dominated by micro and large firms, the study assesses challenges
specific to micro retail firms and compares them to the situation in large retail
chains. The key question is how firm size influences e-supply chain management in
the retail industry.
Data collection
The study is based on a mix of data sources and methodologies, including primary data
collection, desk research and case studies. More specifically, information was collected
from the following sources:
SeBW Survey (2007): the retail industry is one of two services sectors covered by the
SeBW Survey besides the transport & logistics industry. In total, 1151 interviews in seven
EU countries and in the USA were conducted with decision-makers in retail companies.
The SeBW Survey is the main source of data used for analysing the state of play in ICT
adoption, business-to-business (B2B) process integration and automation. Detailed
information about this survey is available in Annex I.
Eurostat Community survey on ICT usage in enterprises (2006): results of the
Eurostat survey are being used as a complementary source for the analysis of ICT
adoption in companies from the retail sector.
Case studies: ten case studies illustrating ICT and e-business practices in European
retail firms were conducted. These cases were selected to demonstrate issues covered in
the topics in focus, with a view to achieve a balanced coverage of countries, business
activities (sub-sectors) and company size-bands.
Key informant interviews: in addition to interviews conducted with firm representatives
as part of the case study work, formal and informal interviews with retail industry experts
were conducted to foster understanding about the retail industry as a whole.
Sources of industry federations: annual reports and position papers of industry
federations were used, notably from the following European federations: EuroCommerce,
the European Distance Selling Trade Association (EMOTA), the Federation of European
Direct and Interactive Marketing (FEDMA). National industry federations sources used
include the German “Einzelhandelsverband”, the Austrian “Handelsverband” and the
“British Retail Consortium”.
EU-KLEMS: Data from the EU KLEMS Growth and Productivity Accounts are used as a
secondary data source especially for the economic analysis in chapter 4. The EU-KLEMS
Growth Accounts include measures of economic growth, productivity, employment
creation, capital formation and technological change at the industry level for 25 EU
Member States as well as for the United States
14
.
14
For more information about the database, see: EU-KLEMS Growth and Productivity Accounts,
Version 1.0, Part I Methodology. March 2007, prepared the Groningen Growth and
e-Business in the Retail Sector
21
Data analysis
Data is analysed using the following descriptive and analytical statistical methods:
Descriptive statistics: The discussion of the SeBW survey results in Chapter 3 is mostly
based on descriptive cross-tabular presentation of simple frequencies (typically
percentages of enterprises with a certain activity). This constitutes the first and most
basic step in data presentation. The requirement for this step is that micro-data have
been aggregated and that weighting has been applied. Weighting is considered an
important issue for data presentation. However, weighting is necessary, as due to
stratified sampling the sample size in each size-band is not proportional to the population
numbers. If proportional allocation had been used, the sample sizes in the 250+ size-
band would have been extremely small, not allowing any reasonable presentation of
results (see Annex I for details).
Analytical statistical methods: Descriptive presentation and discussion of survey
results, including the use of compound indicators derived from simple frequencies, is
useful as a first step; however, it is limited in its power to explain ICT impact. Therefore,
advanced statistical methods (such as growth accounting) were used to gain better
evidence on the economic impact of ICT. This economic analysis, which is mainly
presented in chapter 4, focuses on links between ICT adoption on the one hand and
productivity growth, innovation dynamics and market characteristics on the other. It
combines micro-data analysis (using data from the e-Business Survey 2007) and macro-
data analysis (using the EU-KLEMS Growth and Productivity Accounts). More information
about the econometric analysis methodology is provided in Annex II.
Validation of results – the Advisory Board
The study was conducted in close consultation with an Advisory Board consisting of the
following experts (in alphabetical order):
Paul Brackel, ECPNL, Netherlands
Enrico Colla, Negocia, France
Cécile Grégoire, EuroCommerce, Belgium
Kai Hudetz, ECC Handel, Germany
Three meetings with advisory board members were organised: the first meeting took
place on May 29
th
2007 in Brussels, during the inception phase. At this meeting, the study
exposé and research plan was discussed. The second meeting was held on January 14
th
,
2007 in Brussels. The objective for this meeting was to discuss and validate the findings
presented in the interim report. The third meeting was held at the e-Business Watch
Conference in Brussels on May 20
th
, 2008. The aim of this third meeting was to discuss
the final report and further activities to promote ICT and e-business use in the retail
industry.
Development Centre and the National Institute of Economic Research on behalf of the EU-
KLEMS consortium, available via www.euklems.net/.
e-Business in the Retail Sector
22
2 Context and background
Retail trade as defined by NACE 52 is the third largest EU-25 NACE division within the
non-financial services economy in terms of value added. Only wholesale trade (NACE 51)
and other business activities (NACE 74) are contributing more to the non-financial
services economy in terms of value added. In terms of employment, retail trade is the
second largest contributor to workforce employment in the EU-25 countries (European
Commission 2006). Due to its importance for the European economy, the retail industry
was studied in 2003 and 2004 by e-Business W@tch
15
; and in order to analyse recent
developments in this economically important industry, retail trade is included in the
2007/2008 SeBW.
2.1 Sector definition – scope of the study
Business activities covered
The European retail industry covers business activities specified in NACE Rev. 1.1
Division 52 which corresponds to NACE Rev. 2 Division 47: ‘retail trade, except of motor
vehicles and motorcycles’. The activities are classified into nine groups as shown in
Exhibit 2.1-1.
The first order structuring criterion in NACE Rev. 2 is whether or not retail sale is
organised in store or not-in-store. The second main criterion is whether the trade takes
place in specialised or in non-specialised stores. The not-in-store sales activities are
further broken down into trade via stalls and markets or other retail trade not in stores.
The third structuring criterion is the category of products sold.
In terms of NACE distribution, the retail industry in the European Union is dominated by
two groups: retailers that sell non-food items in store (NACE Rev. 1.1 Class 52.12 and
Groups 52.3 to 52.5) and retail sale of food items in store (NACE Rev. 1.1 Class 52.11
and Group 52.2). Retailers in the non-food items in store group accounted for
approximately 50% of turnover while the sale of food in store accounted for 44% of total
retail turnover in 2002. The remaining NACE groups are grouped under “other retail” in
this report: retail sales not in-store (NACE Group 52.6) and repair of personal and
household goods (NACE Group 52.7) which accounted for 5% and less than 1% of
turnover in 2002 respectively.
In order to cover the multi-faceted characteristics of the retail sector and obtain a best
possible supply chain management overview of the sector, all types of firms from all
NACE Rev.2 categories (which includes retail sale of automotive fuel, which is not
covered by NACE Rev. 1, group 52) are included in the study; no category was excluded.
15
The study report is available at www.ebusiness-watch.org (see "eBiz Studies")
e-Business in the Retail Sector
23
Exhibit 2.1-1: Business activities covered by the retail sector study
NACE
Rev. 2
NACE
Rev. 1.1
Business activities
47 52 Retail trade, except of motor vehicles and motorcycles
47.1 52.1 Retail sale in non-specialised stores
52.11: Retail sale in non-specialized stores with food, beverages or tobacco
predominating (47.11) e.g. grocery shops, hypermarkets
52.12: Other retail sale in non-specialized stores (47.19) e.g. co-operative stores
47.2 52.2 Retail sale of food, beverages and tobacco in specialised stores
52.21: Retail sale of fruit and vegetables (47.21)
52.22: Retail sale of meat and meat products (47.22)
52.23: Retail sale of fish, crustaceans and molluscs (47.23)
52.24: Retail sale of bread, cakes, flour confectionery and sugar confectionery (47.24)
52.25: Retail sale of alcoholic and other beverages (47.25)
52.26: Retail sale of tobacco products (47.26)
52:27: Other retail sale of food, beverages and tobacco in specialized stores (47.29)
47.3 50.5 Retail sale of automotive fuel in specialised stores
47.4 52.4x Retail sale of ICT equipment in specialised stores
47.41: Retail sale of computers, peripheral units and software in specialized stores (52.48)
47.42: Retail sale of telecommunications equipment in specialized stores (52.48)
47.43 Retail sale of audio and video equipment in specialized stores (52.45)
47.5 52.4x Retail sale of other household equipment in specialised stores
47.51: Retail sale of textiles in specialized stores (52.41)
47.52 Retail sale of hardware, paints and glass in specialized stores (52.46)
47.53: Retail sale of carpets, rugs, wall and floor coverings in specialized stores (52.44 &
52.48)
47.54: Retail sale of electrical household appliances in specialized stores (52.45)
47.59: Retail sale of furniture, lighting equipment and household articles n.e.c. in
specialized stores (52.44 & 52.45)
47.6 52.4x Retail sale of cultural and recreation goods in specialised stores
47.61: Retail sale of books in specialized stores (52.47)
47.62: Retail sale of newspapers and stationery in specialized stores (52.47)
47.63: Retail sale of music and video recordings in specialized stores (52.45)
47.64: Retail sale of sporting equipment in specialized stores (52.48)
47.65 Retail sale of games and toys in specialized stores (52.48)
47.7
52.3+4
x+5
Retail sale of other goods in specialised stores
47.71: Retail sale of clothing in specialised stores (52.42)
47.72: Retail sale of footwear and leather goods in specialised stores (52.43)
47.73: Dispensing chemist in specialised stores (52.31)
47.74: Retail sale of medical and orthopaedic goods in specialised stores (52.32)
47.75: Retail sale of cosmetic and toilet articles in specialised stores (52.33)
47.76: Retail sale of flowers, plants, seeds, fertilizers, pet animals and pet food in
specialised stores (52.48)
47.77: Retail sale of watches and jewellery in specialised stores (52.48)
47.78: Other retail sale of new goods in specialised stores (52.48)
47.79: Retail sale of second-hand goods in stores (52.50 & 52.63)
47.8 52.6x Retail sale via stalls and markets
47.81: Retail sale via stalls and markets of food, beverages and tobacco products (52.62)
47.82: Retail sale via stalls and markets of textiles, clothing and footwear (52.62)
47.89: Retail sale via stalls and markets of other goods (52.62)
47.9 52.6x Retail trade not in stores, stalls or markets
47.91: Retail sale via mail order houses or via Internet (52.61 & 52.63)
47.99: Other retail sale not in stores, stalls or markets (52.63)
e-Business in the Retail Sector
24
A brief definition of retailing
The retail sector study covers firms that resell new and used goods to the general public
for personal or household use and consumption. Retail firms do not further process
goods but companies that repair personal and household goods are included (NACE
Rev.1, Division 52). Retailers act as an interface between the manufacturers and
wholesalers on the one hand and consumers on the other. The retail firm is typically the
last point in a supply chain; the point from which a product reaches the end-consumer.
The main difference between retailers and wholesalers is that retailers direct their sales
efforts towards end-consumers while wholesalers primarily sell to retailers and other
businesses.
The typical retail firm provides an assortment of goods made by different manufacturers.
The type of assortments stocked and sold is one of the common determinants of the
NACE affiliation. The goods are sold to consumers via different distribution channels
including brick-and-mortar stores, market stalls, catalogues and the internet. Brick-and-
mortar stores are key retail outlets.
One common characteristic of the retail sector is that the vast majority of the sector’s
value added was generated by large enterprises employing more than 250 people and
micro enterprises employing fewer than 10 persons. German-based Metro and French
Carrefour, for example, are globally operating mega-retailers that fall within the category
as are internet retailers like Amazon.com and local grocery mom-and-pop shops (Mintel
2007). This wide variety of organisational forms and sizes is one of the characteristics of
the retail sector.
From a supply chain management perspective, retailing covers all processes of trade
between suppliers and retailers, in-house operations and trade between retailers and
customers.
2.2 Industry background
Number of enterprises
In 2004, some 3.73 million firms in the EU-27 fell into the retail sector category. Of these,
approximately 3.5 million were micro firms employing 1-9 people; some 138.000 were
small firms employing between 10 and 49 people; about 12.000 were medium-sized firms
employing between 50 and 249 people; and some 2900 were large firms with more than
250 employees (Eurostat 2006a). The vast majority of the sector’s value added was
generated by large enterprises (some 163871 billion Euros for the EU-25 in 2004) and
micro enterprises (126000 billion Euros for the EU-25 in 2004). Large enterprises are
particularly prevalent in the non-specialised stores group (NACE 52.1) and in the retail
sales not in stores (NACE 52.6) sub-groups (European Commission 2006).
Employment
The retail industry is one of the largest economic sectors in Europe providing employment
to more than 16.9 million people in the EU-27 countries in 2004. Retail firms are known to
employ a relatively high proportion of women, 61.3% in 2004in the EU-25; representing
the second highest proportion of female workforce among the relevant NACE sections C
to K (the highest is manufacture of clothing, NACE Division 18). Another employment
characteristic of the retail sector is the high proportion of part-time employment (29.3% of
e-Business in the Retail Sector
25
the workforce in 2004) which is in fact the highest among the respective business
economies. 18.3% of those employed in 2004 were aged between 15 and 24, which is
again relatively high.
Turnover and value added
The latest available data (European Commission 2006) for the retail sector show that the
EU-25 NACE Division 52 firms generated EUR 1.887 billion of turnover in 2002 with a
value added of EUR 351.6 billion. Retail trade of non-food items in-store (NACE 52.12
and Groups 52.3 to 52.5) accounted for approximately 50% of the turnover generated
within the sector. 44% of turnover was generated with sale of food items in-store (NACE
Class 52.11 and Group 52.2) while 5% came from retail sales not in-store (NACE Group
52.6) and less than 1% came from activities such as repair of personal and households
goods (NACE Group 52.7). In terms of country contributions to the overall value added in
the EU-25, the UK accounted for the largest share (22.3%) in 2002 followed by Germany
with 18.6 %, France (16.5 %, in 2001) and Italy (10.7%).
Breakdown by firm size
One of the defining characteristics of the retail sector is its pattern of organisational sizes:
large and micro firms dominate the market. Micro and small firms (between 1 and 49
employees) dominate in terms of number of enterprises and average number of
employees while large firms dominate in terms of value added and average number of
people employed. On average, 3.7 million micro/small retail firms employed 16.8 million
people adding value of 381 billion in 2004 (Exhibit 2.2-1).
Exhibit 2.2-1: Firm size breakdowns for number of enterprises, number of employees and
value added in €
Firm Size
Number of enterprises
(EU 27, 2004)
Number of employees
(EU 27, 2004)
Value added in €
(EU 25, 2004)
1 to 9 3,580,000 7,400,000 126,000,000
10 to 49 138,000 2,400,000 61,000,000
50 to 249 12,000 1,196,600 31,000,000
250+ 2,900 5,869,700 163,871,466
Total 3,732,900 16,866,300 381,871,466
Source: (Eurostat 2007)
Number of enterprises, employment, turnover and value added illustrate the significance
of the retail sector to the European economy. The breakdown by firm size however
indicates that generalisations about the sector as a whole are difficult to draw due to the
wide variety of firms (and products sold) covered by the sector.
2.3 Trends and challenges
There are signs that e-business is increasingly transforming elements of supply chain
management in the retail sector. Yet, while the diffusion of e-business is continuously
affecting retailers, understanding about supply chain management issues in retailers is
fragmented: certain ‘pockets of research interest’ result in a split picture about supply
chain management as a whole. There is, for example, a rapidly growing body of
knowledge about e-commerce in a business-to-consumer (B2C) context (such as To and
e-Business in the Retail Sector
26
Ngai 2006; Lee 2007) and e-supply in a business-to-business (B2B) context (such as
Talluri, Wenming et al. 2006) but only few exploit opportunities to study entire supply
chains (such as Rabinovich 2007). The SeBW study aims to address this issue by
combining three elements of the supply chain into one study about e-business in supply
chain management: e-supply, e-operations and e-sales.
Overview of trends and challenges
This section describes some of the main trends and challenges that retailers across
Europe currently face, going from general to specific issues. Issues directly related to
retailers’ use of ICT and e-business are not included and will be discussed in the
following chapters of this report. Firstly, recent macro-economic developments
determining retail turnover are pointed out. Second, a micro-economic view of
competition in the sector and consumers’ behaviour is presented. Thirdly, developments
at the business level are elaborated.
While these trends and challenges are evident as of 2008, some predict that ‘the growth
of international competition, the increasing concentration in the industry coupled with the
slowdown in domestic demand and the direct and indirect effects of the internet and
ecommerce will together substantially transform the sector over the next ten years’
(Reynolds, Howard et al. 2007, p.46). This report will shed some light on the effects the
internet and e-commerce are having on the retail industry (see particularly chapters 3 and
4).
2.3.1 Macro-economic developments slowing down retail sales
Continuing growth – but uncertainty about prospects
Retail industry performance is heavily dependent on macro-economic developments: the
industry’s turnover reflects consumer spending habits. Such spending is dependent on
numerous direct and indirect factors; first of all on the level of net income and on the
share of income consumers decide to save. Net income and savings, in turn, are
depending on factors such as macro-economic growth, unemployment, and taxation.
In late 2007, continuing into early 2008, the general economic environment for retail has
turned to become less favourable. In its Monthly Bulletin of March 2008, the European
Central Bank (ECB) states that real growth of General Domestic Product (GDP) in the
Euro area is continuing but moderating and that “uncertainty about the prospects for
economic growth remains unusually high.”
16
This is mainly due to a “high level of
uncertainty resulting from the turmoil in financial markets” that started in August 2007.
17
These uncertain trading conditions have continued to exist although as of June 2008
inflation is a major concern: in its June 2008 Bulletin, the ECB highlights that the ‘Annual
euro area HICP inflation has remained above 3% for the past seven months’ (p.55)
18
which is continuing to put pressure on the economy and the retail industry in particular
with its dependence on consumers.
16
ECB (2008), p. 5.
17
ECB (2008), p. 5.
18
Available at:http://www.ecb.de/home/html/index.en.html, last accessed June 24
th
, 2008.
e-Business in the Retail Sector
27
Private consumption weakening
Despite positive developments in real disposable income and favourable labour market
conditions, private consumption showed signs of weakness at the end of 2007.
19
Private
consumption growth declined from 0.5% in the third quarter of 2007 to -0.1% in the fourth
quarter. Retail sales in the euro area declined by 1.0% quarter-on-quarter in the fourth
quarter of 2007. This partly reflects developments in households’ decisions on saving and
spending in Germany, where private consumption declined substantially. However,
private consumption growth also decelerated in other countries including France and
Spain. The negative development in private consumption may be related to a strong rise
in food and energy prices but also to declining consumer confidence. The European
Commission’s retail trade confidence indicator, which signals the perceptions of retailers,
has declined in the course of 2007 and it has shown significant volatility in the recent
past.
20
On the other hand, this indicator remains at a historically high level and it
increased in February 2008. ECB predictions are not negative: “Conditions are favourable
in the labour market, implying that the outlook for private consumption in 2008 remains
broadly positive”.
21
2.3.2 Increasing concentration and strong competition
On a micro-economic level, i.e. on the level of companies and consumers, retailers
operate in an environment of generally strong competition and changing customer
preferences. As regards competition, concentration processes have been taking place
in many retail sub-sectors in the past decades, driving out smaller players and leaving a
smaller number of large chains to fight for profit margins. In the food sub-sector, for
example, there has been an increase in competition over the past 20 years (Clarke,
Jackson et al. 2006). This increase has partly been driven by a market consolidation
where the top five food retailers in the various EU countries continue to grab market
shares from competitors. This consolidation, driven by competition, is evident when
looking at the market shares of the top five European food retailers: the top five food
retailers in the different countries hold high proportions of each country’s markets. In
Germany and France, for example, more than two thirds of total food sales were made by
the top five retailers (Metro AG 2007), see also Exhibit 2.3-1.
At the same time, large enterprises from outside Europe such as US-based Wal-Mart and
Costco have sought and are still seeking to enter new markets in Europe which is further
increasing competition. Currently, seven of the ten largest retailers in the world are
European: Carrefour (France), Tesco (UK), Metro (Germany), Ahold (Netherlands), Rewe
(Germany), Schwarz Group (Germany), and Aldi (Germany) (EHI Retail Institute 2008).
22
The largest retailer in the world is Wal-Mart (US).
19
ECB (2008), p. 71.
20
Seehttp://ec.europa.eu/economy_finance/db_indicators/db_indicators8650_en.htm for the most
recent issue of business and consumer survey results.
21
ECB (2008), p. 72.
22
Data for 2006 according to EHI Retail Institute (2008), p. 30.
e-Business in the Retail Sector
28
Exhibit 2.3-1: Food sales market share of the top five food retailers in Europe
8 0
7 7
74
7 1
7 1
70
6 8
6 7
62
5 9
4 8
4 6
4 3
4 2
2 3
3 5
62
9 1
6 2
25
0 20 40 60 80 100
Finland
Sw eden
Luxembourg
Ireland
Belgium
Denmark
Austria
Germany
France
Slovakia
Portugal
Spain
Netherlands
United Kingdom
Hungary
Czech Republic
Greece
Italy
Romania
Poland
Source: Metro Retail Compendium (2007)
2.3.3 Changing consumer preferences
As regards customers, there are at least three broad trends that retailers face:
demographic changes towards a larger share of older people with particular consumption
habits, increasingly well-informed customers, and consumers demanding sustainable
products. As regards demographic change, older people require different marketing
strategies than younger ones, and retailers may need to consider appropriate strategic or
operative modifications. Related issues may concern legibility of price labels, reachability
of goods on shelves, possible differences between values of customers and shop
assistants, or particular perceptions of advertisements (Kaapke, Bald et al. 2005). In the
framework of the European Senior Economy Network (Sen@er), recommendations for
retailers and other companies how to best react to demographic changes are being
developed. Another demographic issue is the increasing attention of consumers towards
well-being. Growing concerns over obese people and overweight children in Western
countries are giving rise to a drive for healthy life styles and attitudes. This affects
retailers who have to pay better attention to the ingredients of the products they sell:
products high in, for example, salt and fat contribute to the rise in obesity among the
European population and consumers are increasingly asking for healthier products (and
services such as sports) as part of the well-being drive.
e-Business in the Retail Sector
29
Furthermore, many retailers are confronted with an increased level of product information
on the part of customers, i.e. more well-informed customers. This is largely a result of
the internet that offers consumers facilitated opportunities to search for information about
particular goods, compare goods, and to exchange information within user groups. In
particular, discussion forums about certain products may increase consumers’ sensibility
and influence sales – positively or negatively (Drösser 2008). This is partly giving rise to
multi-channel activities among European retail firms, where retailers aim to integrate the
various channels customers use to provide a consistent company sales channel profile
(which includes the internet).
Finally, consumers’ sensitivity about environmental issues is increasing, leading to an
increased demand for sustainability and sustainable products. Retailers need to find
strategies to respond to such changing attitudes and behaviour. An example is
“sustainable retailing”,
23
a UK retailers’ initiative related to sustainability. There are also
forums for ecologically correct consumptions such as www.utopia.de in Germany. This
trend incorporates the drive for so-called ‘Bio’ and ‘organic’ products and services.
These types of products and services are produced with the environment in mind. Unlike
conventionally produced goods and services, organic production and services aim to
reduce the effects on the environment by, for example, not using pesticides and selling
locally produced goods to avoid travel services. Consumer demand for these products
and services is increasing rapidly and the retail industry has started to respond to these
demands. With these types of products increasingly gaining market share across Europe
the need for approved and consumer-accepted ‘trustmarks’ is becoming ever important.
23
Seehttp://www.sustainable-retailing.co.uk/homepage.asp.
e-Business in the Retail Sector
30
3 Deployment of ICT and e-business applications
in the retail sector
As part of their efforts to cope with the challenging business environment described in the
previous section, retail companies need to take decisions regarding their ICT and e-
business strategies. This includes decisions about investments in ICT, organisational
changes and e-skills requirements among others. This chapter explores the current use
of ICT as well as e-business activities in the retail industry. It presents recent data on the
diffusion of ICT systems and standards for e-business in the retail sector, where
companies see the main drivers and barriers for e-business, and discusses issues such
as the demand for ICT skills and the outsourcing of services.
The main objective of this chapter is to provide a concise and up-to-date description of
the e-business state-of-play in the retail sector and to outline major developments in the
framework conditions for ICT usage, taking into account (to the extent possible) the
different requirements of small and large companies and of various value-systems within
the industry. This broad picture of sectoral e-business activities is the basis for the
analytical assessment on drivers and impacts of ICT adoption presented in Chapter 4.
The presentation of the empirical evidence has been structured into six main themes:
The situation in 2003/04. Section 3.1 briefly summarises the main findings of the
2003/2004 e-Business Watch study on the retail industry in light of the current
study. The results of the 2003/2004 study serve as a benchmark to assess the
dynamics of ICT and e-business developments between 2003/2004 and 2007.
Specific findings related to the various supply chain elements are presented in the
respective sections. Comparisons between e-procurement activities in 2003/2004
and 2007 are, for example, included in the procurement section 3.3.
e-Readiness: ICT infrastructure, networks, expenditure and skills. Section 3.2
looks at the existing ICT infrastructure of retail companies' including access to ICT
networks. Other general ICT and e-business issues covered in this section are ICT
expenditure and skills, especially e-skills. The objective of this section is to assess
the overall "e-readiness" of the retail sector. This is particularly important as e-
readiness is considered to form the basis for doing business electronically.
The upstream supply chain: e-procurement. Section 3.3 presents findings of the
Sectoral e-Business Watch survey related to the retail industry’s electronic
interactions with suppliers of goods and services. It covers issues such as
percentage of retail companies ordering online from suppliers and the percentage of
orders placed online in relation to total orders placed to suppliers.
The internal supply chain: in-house e-operations: Section 3.4 explores activities
related to operating a retail business and the effects of ICT and e-business thereon.
Examples include the use of Radio Frequency Identification (RFID), barcoding and
Customer Relationship Management (CRM) applications among retail firms.
The downstream supply chain – electronic marketing and sales. Section 3.5
covers the sale of retail products and services over the internet and other computer-
mediated networks to consumers. It includes information about the proportion of
retail firms selling over the internet and geographic origins of online customers. e-
Marketing, the second focus in this section, covers issues such as search engine
optimisation and online ads placed.
e-Business in the Retail Sector
31
Barriers to and drivers of e-business use. Section 3.6 assesses barriers to ICT
and e-business adoption and use reported by retail companies. Yet, this section
also looks at ‘the other side of the coin’ by providing information about the drivers
of ICT and e-business adoption and use among retail firms.
Concluding comments about the state of play of ICT and e-business in the retail industry
bring this chapter 3 to a close.
3.1 The state-of-play in 2003/ 04 – review of an earlier
retail sector study
This section briefly reviews the findings of the 2003/2004 e-Business Watch study
24
on
the retail industry in light of the 2007 SeBW study. The results of the 2003/2004 study
25
were collected by questioning retail firms in five European countries. These countries are
France, Germany, Italy, Spain and the UK. The 2007 survey was extended to include an
additional two countries: Poland and Sweden. This section discusses the general ICT/e-
business situation back in 2003/2004. In cases where specific variables of the 2003
survey can be compared directly with 2007 data, findings from 2003 regarding these
variables are presented in the respective sections 3.2 to 3.6. Overall, the results of the
2003/2004 study serve as a benchmark to assess the dynamics of ICT and e-business
developments between 2003/2004.
The general picture: the retail industry’s e-readiness in 2003/2004
The study of 2003/2004 concluded that ICTs are a "secondary consideration" for retail
companies. Yet, the study emphasised the dichotomy in this sector between micro and
small retailers on the one hand, and large retail chains on the other. Most of the large
retail chains, and perhaps some of the medium-sized firms, embodied a fairly
technological vision of innovation. The majority of the smaller firms, by contrast, seemed
to prioritise the use of efficient tools in the sense that profitability was a major
precondition for adopting ICT. By and large, however, ICT did not seem to be "profitable"
enough at that time (i.e. in 2003/04) for a majority of players.
Earlier study findings
e-Business in the retail sector: the digital divide
"The use of electronic business in the retail sector is far from being a
pervasive reality and is below the average adoption rates in other sectors.
One of the main reasons for this situation is that, in contrast with most
manufacturing sectors, micro enterprises and SMEs still play a dominant
role."
Source: e-Business W@tch sector study on the retail sector, August 2004, p. 15 (Introduction to
Chapter 2)
24
European Commission / e-Business W@tch (2004): Electronic Business in the Retail Sector.
The study findings are presented in two reports. Report I: The quantitative picture: diffusion of
ICT and e-business in 2003/04 (May 2004). Report II: Key issues, case studies, conclusions
(August 2004).
25
Data presented in the e-Business W@tch sector study on the retail sector of 2004 is based on a
survey conducted in 2003.
e-Business in the Retail Sector
32
Purchasing online was found to be the most widely adopted e-business activity.
Customer facing e-commerce strategies including e-sales activities were still very limited
in their deployment, although activities and strategies increased slightly with firm size.
The study argued that e-commerce advantages from a retailer's perspective tended to be
indirect and intangible: e-commerce would typically not help retailers to increase the
volume or value of their sales, but rather create marketing advantages (e.g. in terms of
customer loyalty due to improvements in service).
Both online purchasing and sales were mainly conducted on the website of the retailer or
supplier. Computer-mediated networks other than the internet were not widely used, with
the exception of EDI usage by large retail firms. For smaller retail companies, internet
marketplaces operated by third parties had some importance as an additional distribution
channel. e-Commerce was found to mainly involve the so-called "click & mortar" users,
i.e. traditional retailers which combine sales in stores with online sales. There were also
successful examples of "pure (online) players", which were typically highly focused and
specialised.
However, the study concluded that there was no single “best practice” model for the
multi-channel approach. Practitioners emphasised that this approach required innovation
in services, the introduction of new pricing models, a re-organisation of work processes
and the integration of existing with new ICT systems. The main challenge for retailers in
this process was often the organisational innovation part; many companies had neglected
this aspect because of the high costs involved.
Opportunities and risks, drivers and barriers
In 2003/2004, it was argued that the main opportunities stemming from e-business,
similarly as in other sectors, were efficiency and productivity gains and, thus, cost
savings. e-Business could help retailers to reduce costs related to commercial
transactions; e-procuring via marketplaces or buying groups would open up cost
advantages to small retailers. Moreover, the study concluded that e-business enabled
companies to reduce the quantity of goods to be stocked under the same sales
conditions, and to accelerate supply flows, leading to better customer service. The study
also pointed at "clear growth prospects for B2C e-commerce in retail", notwithstanding
that the percentage of companies that sold online was still limited, and also the average
share of sales made online (as percent of total sales). Exhibit 3.1-1 summarises
opportunities, challenges, drivers and barriers of e-Business identified in August 2004.
Exhibit 3.1-1: e-Business related opportunities and challenges for retail companies
e-Business related opportunities e-Business related challenges
• Cost savings
• Efficiency and productivity gains
• Increasing information about the market and
the customers (e-marketing)
• Online selling and multi-channel approach
• Lack of awareness
• Increasing market competition, where
retailers are highly concentrated
• Economic return of e-business
e-Business drivers e-Business barriers
• Trends in demography and lifestyle
• Improved systems for increasing the
efficiency of supply chain relationships
• New private labels
• Lack of interest in internet based
applications and sales systems among a
large number of retailers
• ICT skills gap
• Trust and security issues
Source: e-Business W@tch sector study on the retail sector (August 2004)
e-Business in the Retail Sector
33
A challenge was seen in the lack of awareness about ICT-related opportunities, notably
among the majority of small retailers. Furthermore, improved access to market
information for customers due to the internet was found to involve risks for retailers. This
unprecedented market transparency increased competition levels, even in markets where
concentration was already high, leading to eroding profit margins.
With regard to drivers and barriers, the study found that "current dynamics in
demography, changes in modern lifestyles, consumer choice, and improved legislation"
were major drivers for e-business adoption. Barriers included a lack of ICT skills and
"widespread concern among both consumers and retailers" with regard to security issues
in online retailing.
Policy implications: better information for SMEs & standardisation
The e-Business W@tch study of 2004 concluded that the key challenge for policy was
"… how to support the many micro and small enterprises from the sector in a competitive
environment that is increasingly becoming international and dominated by large players."
It was proposed that policy could consider two types of action in this context: first,
initiatives aimed at optimising hardware investments and infrastructures in general, for
example the promotion and coordination of technology buying groups, and consultancy
support dedicated to the implementation of e-business; second, initiatives to educate
small retailers about opportunities of using basic internet applications.
Besides specific support for SMEs, standardisation issues were considered as highly
relevant, in particular in the context of supply chain management. The study proposed
that standardisation of computer languages should be promoted.
3.2 ICT infrastructure, networks, expenditure and skills
This section looks at the ICT infrastructure of retail companies including access to ICT
networks. Other focal points in the section are ICT expenditure and skills. The objectives
are to assess:
the sector's overall "e-readiness", i.e. to what extent the basic ICT infrastructure for
doing business electronically is in place
the adoption dynamics since the last point of measurement in 2003
trends in ICT budgeting.
Internet access – the deployment of broadband
As in most industries, doing business in the retail sector without having internet access
is practically no longer possible. The only exception is small family-led shops, some of
whom are still operated without even using a computer.
26
Of those retail companies that
use computers, the vast majority (95%) is connected to the internet (see Exhibit 3.2-1),
even among the smallest of firms.
26
In the survey of 2003, only about 80% of micro retailers said they used computers, while 100%
of those retail companies with at least 10 employees used computers. The 20% without
computers are typically small family businesses ("mama-and-papa-shops") which operate in a
very traditional, "no-tech" environment. In the survey of 2007, these businesses were no longer
included; the population only covered retailers with computers.
e-Business in the Retail Sector
34
Exhibit 3.2-1: % of companies / employees with internet access (2007)
Companies with
internet access
Companies with
internet access
>2 Mbit/s
Average share of
employees with
internet access in
firms
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 97 95 44 32 48 68
Non-food stores 97 95 47 32 59 72
Food stores 96 91 36 31 27 52
Other retailing 100 99 42 29 43 62
Retail – USA 97 89 63 53 50 65
Retail – by size (EU-7)
Micro (1-9 empl.) 95 31 69
Small (10-49 empl.) 96 44 46
Medium (50-249 empl.) 99 45 32
Large (250+ empl.) 100 61 37
Other sectors (EU-7)
Transport & logistics 99 97 41 31 39 53
Retail – 2003 (EU-5) 89 79 29 16 n.a. n.a.
Micro (1-9 empl.) 78 16 n.a.
Small (10-49 empl.) 87 14 n.a.
Medium (50-249 empl.) 93 23 n.a.
Large (250+ empl.) 96 40 n.a.
Base (100%) all firms
firms with internet
access, excl. DK
all firms, excl. DK
N (Retail, 2007, EU-7+USA) 1151 839 1105
Questionnaire reference A1 A3c A2
The survey of 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Surveys 2003 / 2007 by the SeBW
Exhibit 3.2-2: % of companies having
internet access with >2 Mbit/s (2003 / 2007)
16 14
23
40
31
44
45
61
0
20
40
60
80
100
Micro (1-
9)
Small
(10-49)
Medium
(50-249)
Large
(250)
2003 2007
Base: companies with internet access,
excl. "don't know". N (2007, total) = 839.
In % of firms.
Source: e-Business Surveys 2003 / 2007
While internet access was already common
in 2003, the quality of companies' internet
access has significantly improved since,
notably among SMEs. The share of micro-
retailers (with 1-9 employees) that say they
are connected with broadband
27
has
doubled from about 15% to 30%; among
small and medium-sized retailers,
broadband diffusion has increased to about
45%. Broadband adoption among large
retailers has increased from 40% to 60%.
At the same time, the percentage of com-
panies which still access the internet with
low-bandwidth connections (of less than
144 kbit/s) has decreased to only about 5-
10%.
27
Broadband is defined in this study as internet connection with a bandwidth of at least 2 Mbit/s.
e-Business in the Retail Sector
35
Back in 2003, about 30% of micro-retailers companies still said that they used analogue
dial-up for connecting to the internet, typically at a rate of 56 kbit/s. However, there is still
scope for improvement. Broadband internet access should be considered as basic
infrastructure and become the norm for the majority of companies, at least for medium-
sized and large firms.
The maximum available bandwidth is an ICT infrastructure indicator, but this does not
provide information about the actual usage. Another indicator is how many employees
use the internet as part of their daily work. In retail companies, the average share of
employees with internet access at their workplace is close to 50% (see Exhibit 3.2-1).
This is more than in other sectors, for instance manufacturing sectors such as the steel
and furniture sectors (about 25-30%) and the chemical industries (45%). The percentage
is higher among smaller companies; this reflects that in the retail industry the internet is
mainly used for procurement and management tasks, but not by cashiers and normally
not by simple shop assistants
28
in their daily routines. As large retail stores have a higher
percentage of employees with such tasks, the total share of employees with internet
access is lower than in small shops where the manager and shop assistant is often the
same person.
Use of internal networks
Similarly to internet access, the use of ICT to connect computers internally to a company
network (Local Area Networks – LAN) has become a commonplace, at least for medium-
sized and large retailers. The adoption of LAN infrastructure has significantly increased
since 2003 (see Exhibit 3.2-3).
The diffusion of Wireless LAN (W-LAN) technology has surged in recent years. This
technology was not much used back in 2003; in the meantime, about 40% of employees
work in retail companies that operate a W-LAN. In large firms, the adoption rate has
reached close to 60%. These are similar adoption levels as in the transport and logistics
services sector, but lower than in most manufacturing industries, e.g. in the chemical
industry.
29
W-LAN is used to facilitate network access within a site or building: at certain
access points, distributed throughout various buildings and sites, W-LAN provides secure
Internet access to authorised users. In retail, it is often used in distribution warehouses,
but also in stores. These findings indicate that retailers are recognising the importance of
using W-LAN to further business process reengineering. Yet, they are lacking behind
other industries which might originate from the diversity and specific employment
structure within the industry: retail is labour intensive at the shop floor with a high
proportion of part-time employees and low skilled labour force.
28
In specialised non-food stores, however, internet access in the shop has become quite common
to support the work of shop assistants: they can quickly check information online (e.g. special
technical features of a product) and thus better respond to enquiries of customers.
29
In the chemical industry, close to 60% of employees work in companies with a W-LAN (see
Sectoral e-Business Watch study on the chemical, rubber and plastics industry, 2008).
e-Business in the Retail Sector
36
Exhibit 3.2-3: Internal networks used (2003 / 2007)
LAN W-LAN Intranet
Remote
access to
company
network
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
empl.
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail – 2007 total (EU-7) 66 49 40 25 50 28 45 22
Non-food stores 62 49 39 29 43 29 46 24
Food stores 69 50 36 17 63 25 39 17
Other retailing 78 49 56 16 55 33 53 25
Retail – USA 57 50 51 30 56 43 44 20
Retail – by size (EU-7)
Micro (1-9 empl.) 48 25 27 22
Small (10-49 empl.) 65 34 41 28
Medium (50-249 empl.) 80 44 56 45
Large (250+ empl.) 87 57 73 68
Other sectors (EU-7)
Transport & logistics 75 50 39 22 52 24 49 24
Retail – 2003 (EU-5) 56 32 n.a. 41 27 29 16
Micro (1-9 empl.) 31 n.a. 27 16
Small (10-49 empl.) 52 n.a. 26 24
Medium (50-249 empl.) 75 n.a. 56 36
Large (250+ empl.) 81 n.a. 60 38
Base (100%) all firms all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151 1151
Questionnaire reference A4a A4b A4d A5
The survey of 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Surveys 2003 / 2007 by the SeBW
Exhibit 3.2-4: % of companies enabling remote
access to their computer network (2003 / 2007)
16
24
36
38
22
28
45
68
0
20
40
60
80
100
Micro (1-
9)
Small
(10-49)
Medium
(50-249)
Large
(250)
2003 2007
Base: companies using computers,
N (2007, total) = 1151. In % of firms.
Source: e-Business Surveys 2003 / 2007
A useful indicator for "e-readiness" is
the share of companies that enable
remote access to their computer
network. This means that employees
can access data from a company's
network remotely, e.g. when working
from home or travelling. In the retail
sector, companies comprising 45% of
the sector's employment enable remote
access, up from about 30% in 2003
(see Exhibit 3.34). Diffusion of this
functionality increased in particular
among medium-sized and large
retailers, but only to a lesser extent
among small retailers. This is in
contrast to manufacturing sectors,
where the diffusion has increased
notably among SMEs in the same
period.
e-Business in the Retail Sector
37
An explanation is that working from home or entering the system from abroad is probably
less relevant for employees of smaller retail shops than in other sectors, for example for
salesmen of manufacturers.
No significant increase can be observed for the diffusion of intranet. In 2007, about 50%
of employees work in retail companies which operate an intranet, up from 40% in 2003.
This application, which is mainly used for internal knowledge sharing, seems to be near
to its saturation level. This may indicate that the significance of having an intranet is not
very high in the retail industry for those firms that have not adopted it.
For most of the ICT infrastructure indicators discussed in this section (internet access,
LAN, W-LAN, remote access), there are some differences between the sub-sectors (retail
in non-food stores, food stores and other retailing, see Section 2.1). Diffusion is typically
most advanced among other retailers although this group includes the pure online
retailers such as Amazon.com which is quite different from market stalls which are also
included in this group. Hence, on the aggregate level, these variations partly reflect
structural differences between the sub-sectors, including the numerical dominance of
SMEs and the importance of large multi-national retail corporations in terms of
employment and value added.
Use of open source technologies
Open source technologies are continuing to take away market share from more traditional
forms of pay-for technologies. The three specific open source technologies enquired
about in the Sectoral e-Business Watch survey were operating systems such as Linux,
databases such as MySQL and browsers such as Mozilla Firefox (Exhibit 3.2-5).
Exhibit 3.2-5: % of companies in EU-7 countries using open source technologies
22
17
27
33
9
17
21
40
12
22
20
24
33
7
20
27
40
14
31
38
13
35
24
22
33
42
27
0
5
10
15
20
25
30
35
40
45
Retail
(EU-7)
Non-f ood
stores
Food
stores
Other
retailing
1-9 10-49 50-249 250+ USA
Open Source operating system Open Source databases Open Source browsers
Base: companies using computers, N (2007, total) = 1151. In % of firms.
Source: e-Business Survey 2007
31% of retailers are using open source browsers while only 22% use open source
databases and 22% use open source operating systems. Across the three categories,
non-food, food and other retailing, non-food stores have the highest usage of browsers
with 38% closely followed by other retailing with 36% while food stores have the lowest
e-Business in the Retail Sector
38
share with 13% of open source browsers. A higher number of food stores in contrast use
open source operating systems and databases. By far the heaviest users of all three
open source technologies are sample firms in the other retailing group. Open source
technologies are more commonly used by retailers in Europe when compared to US
where 12% of operating systems, 14% of databases and 27% of retailers use open
source. While micro firms lag behind their larger counterparts with only 9% using open
source operating systems and 7% using open source databases, the levels of open
source browser usage are not lagging behind. Overall, large firms with more than 250
employees are the types of firms mostly employing open source technologies.
ICT skills requirements
Improving e-business skills, especially among SMEs, has been identified as a relevant
concern for policy in various studies by e-Business Watch and by the eBSN. A clear
distinction has to be made in this context between (larger) companies that can afford
employing ICT practitioners, i.e. staff with the specialised skills and tasks of planning,
implementing and maintaining ICT infrastructure,
30
and (typically smaller) retailers that do
not employ practitioners.
The critical divide here is between SMEs and the large retail chains. In total, only about
one in ten retail companies said that they employed ICT practitioners in 2007 (see Exhibit
3.2-6). However, this percentage is heavily determined by the vast number of micro-retail
companies with up to 9 employees, which obviously cannot employ and do not need a
specialist just to take care of their simple ICT infrastructure (which will typically consist of
a computer and an internet access, if at all). Among medium-sized firms, about a third of
all firms have specialists for ICT tasks. What comes as a surprise and raises questions is
that even among large retailers (with at least 250 employees) only about 50% employ ICT
practitioners. Retail companies not employing ICT staff seem to have completely
outsourced all ICT maintenance tasks to external service providers. On the other hand,
the term "ICT practitioner" in itself can be misleading in time-constrained telephone
interviews; some companies may not count their PC and network administrator(s) as ICT
practitioners, although they are mainly charged with ICT tasks.
But outsourcing is certainly a valid explanation for the low percentage of firms with ICT
practitioners. About 40% of the retailers interviewed in 2007 said that they had
outsourced ICT functions to external service providers which they had previously
conducted in-house in the past 12 months (prior to the interview). Outsourcing can mean
a wide array of practices in this context. It includes the "SaaS" ("Software as a Service")
distribution model, where companies pay a license to use a software online which is
hosted and operated by the service provider, rather than purchasing the software to be
installed within the company. It can also mean that whole business processes are
outsourced to specialised intermediaries. The importance of outsourcing in large firms is
demonstrated in the Casino Group and the Mercator case studies. In both firms, close co-
operation with external IT providers was crucial during the solution development phases.
The relationship went beyond the development phase with the IT vendors continuing to
run solutions for the case firms. In the Mercator case study, the firm providing the
30
The European eSkills Forum, established by the EC in March 2003, defined "ICT practitioner
skills" as the "capabilities required for researching, developing and designing, managing,
producing, consulting, marketing and selling, integrating, installing and administrating, maintain-
ing, supporting and service of ICT systems." Cf. eSkills For Europe: The Way Forward",
Synthesis Report by the eSkills Forum, September 2004.
e-Business in the Retail Sector
39
outsourced service even benefits from being able to sell the application developed with
the case firm to other retailers across Europe.
Exhibit 3.2-6: ICT skills requirements and outsourcing (2007)
Employ ICT
practitioners
Have outsourced
ICT services
previously
conducted in house
in past 12 months
Say that e-business
has a significant
impact on skills
requirements
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 23 11 56 46 49 41
Non-food stores 26 9 58 47 54 41
Food stores 16 13 53 51 40 35
Other retailing 20 18 49 28 41 54
Retail – USA 42 8 45 24 25 31
Retail – by size (EU-7)
Micro (1-9 empl.) 10 45 41
Small (10-49 empl.) 15 59 44
Medium (50-249 empl.) 32 63 50
Large (250+ empl.) 48 67 58
Other sectors (EU-7)
Transport & logistics 35 8 56 45 45 33
Base (100%) all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151
Questionnaire reference E1 E3 E5
The survey of 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Surveys 2003 / 2007 by the SeBW
ICT investment and budget trends
The general climate for ICT investments has significantly improved over the past few
years. This has a number of reasons: first, the positive economic framework conditions
since 2004 have made it easier for companies to make investments
31
; second, the wide-
spread distrust of ICT for some years after the crash of the "new economy" in 2001 has
mostly faded away; and third, ICT solutions have become more mature and better
adapted to the requirements of specific firms. It may also help that there are plenty of
business cases which demonstrate that well-planned investments in ICT can generate
return-on-investment even in the short term, often within less than two years.
32
The Sectoral e-Business Watch asked companies in 2007 whether they had made
investments in ICT during the past 12 months (prior to the interview), for example for new
hardware, software or networks. About 70% of small and medium-sized firms and more
than 90% of large firms said that they had done so (see Exhibit 3.2-7). Companies were
also asked whether, in the forthcoming financial year, they intend to increase, decrease
or roughly keep their ICT budget. The majority of companies, about 60%, expected to
maintain the ICT budget at about the same level. About 35% of companies said they
31
It remains to be seen whether the risk of an economic downturn / recession in the wake of the
financial market crisis of late 2007 will have a sizable impact on companies' ICT expenditure.
32
See, for example, business cases of ICT investments by SMEs documented by the German
"PROZEUS" initiative (www.prozeus.de).
e-Business in the Retail Sector
40
would increase their budget, and only a few companies (3%) said they planned to
decrease it (see Exhibit 3.3-7).
The finding that companies expect to either maintain or increase their budgets is con-
firmed by other market studies. Some of them are even more "bullish" in their forecasts:
IDC, an ICT market research company, estimates that German enterprises spent about
76 billion euros for ICT hardware, software and services in 2007, and forecasts that this
figure would increase by 7.5% in 2008.
33
However, the right ICT strategy it by no means a simple equation of "the more the better".
A survey by the consulting company Accenture among 700 companies world-wide found
that companies with a high turnover and profit spend on average 17% less for IT than
their competitors. Typically, these companies have specified clear priority areas for their
ICT investments and implemented sophisticated reporting systems to keep control of their
ICT budgets.
34
This holds true as a general recommendation, in particular for SMEs: they
should carefully think about ICT priorities, and then focus their resources on these areas.
Exhibit 3.2-7: % of companies that made
investments in ICT hardware or software in
2006/07
59
46
62
56
69
73
54
74
91
0 20 40 60 80 100
Retail (total, EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Retail (USA)
Exhibit 3.2-8: % of companies planning to
increase / maintain / decrease their ICT budget
in the forthcoming financial year
58%
3%
34%
increase
maintain
decrease
don't know
Reading example: "34% of all companies (by their
share of employment) said that they expected to
increase their ICT budget in the forthcoming
financial year."
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007 by the SeBW
33
quoted from: "Pflicht und Kür", in: WirtschaftsWoche, No. 10/2008, 3 March 2008, p. 98
34
ibid.
e-Business in the Retail Sector
41
3.3 The upstream supply chain: e-procurement
3.3.1 Introduction to upstream supply chain issues
Upstream SCM functions
The function of upstream supply chain management (SCM) is to design and manage the
processes, information and material flows between retailers and their suppliers. SCM is of
utmost importance to retailers. According to Accenture (2004), the supply chain can
represent 40% to 70% of a retailer's operating costs, and may comprise half of all the
company’s assets. Thus, it is one of the main cost drivers in this sector. Technology-
enabled improvements in SCM promise a high potential not only to cut costs, but also to
improve service levels for customers. Therefore, particularly for large retail chains, supply
chain management is a highly strategic issue and can be a critical factor for their
competitiveness.
In retail, suppliers can be grouped into three main categories:
the manufacturers of those goods which are sold by retail companies (whether in
stores, through mail order or e-commerce)
wholesalers, who resell new and used goods to retailers
and providers of goods or services which retailers need to run their business, such
as store equipment, office supplies and ICT hardware and services.
The particular role of ICT
ICTs are critical for efficient SCM, notably for larger retailers that have to manage
complex supply chains. The use of ICT-based systems for upstream supply chain
management enables retail firms to increase the transparency of processes and
information flows. This is key to optimising supply chain processes by, for example,
reducing the quantity of goods that need to be in stock under the same sales condition,
and thus to reduce costs and increase profitability. This section of the study explores to
what extent European retailers make use of ICT for managing their upstream supply
chain, and if the use of ICT in exchanges with suppliers has increased in the past 4-5
years. The section will then assess what kind of benefits retailers experience from SCM.
These benefits need to be weighed against risks associated with integrated supply
chains. To make SCM work, firms need to share at least some data with their supply
chain partners to various degrees. This data sharing bears risks for the partners involved.
Although the section looks at ICT usage in upstream supply chain management, it is
important to understand that this activity is closely linked with "downstream" activities in
marketing and sales (see Section 3.7). For example, analytical sales data collected at the
store level are an important input for planning the supply chain. Vice versa, an optimised
supply chain (e.g. with reduced out of stocks) enables a company to provide better
customer service.
e-Business in the Retail Sector
42
3.3.2 Findings about e-procurement
Preferred ways of data exchange with suppliers
As a starting point to assess how business data are typically exchanged between
retailers and their suppliers, a question that was newly introduced in the e-Business
Survey 2007 provides some insight: the SeBW asked retailers to assess which of the
following statements would best describe the way they exchanged data with their
business partners, offering four options: data are (a) mostly transmitted verbally, e.g. via
telephone; (b) mostly processed and exchanged in paper based format, that is by letter or
fax; (c) mostly electronically processed internally, but then exchanged in a paper-based
format; and (d) mostly processed and exchanged electronically.
Exhibit 3.3-1 shows that answers
are nearly equally spread across
the four options. As can be ex-
pected, the percentage of com-
panies that say they process and
exchange data mostly electron-
ically (or at least process them
electronically internally) increa-
ses by firm size. Among medium-
sized retailers, about 50% see
themselves in these more ad-
vanced e-business categories,
among large retailers, close to
60%. However, even among the
medium and large retailers, there
are still 15-20% that say that their
communication with business
partners is mostly "verbally".
There are two possible reasons
for not using ICT-based systems
in the first place: suppliers may
not yet be ready for exchanging
data electronically; or, in specific
markets, the type of goods and
products may not lend them-
selves for electronic ordering and
SCM.
Exhibit 3.3-1: Percentage of retail companies saying
that they exchange data with business partners …
22
19
28
23
14
20
24
29
14
22
21
21
30
16
20
25
29
43
30
34
31
11
33
35
30
26
25
26
26
20
36
36
25
20
15
18
0 20 40 60 80 100
Total retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
mostly electronically
electronical processing, paper-based exchange
mostly paper based
mostly verbally
Base (100%) = retailers using computers from 7 EU countries,
excluding "don't know" answers. N = 1125 (for total retail).
Figures for sector totals are weighted by employment ("firms
representing x% of employment in the sector / country"), figures
for size-bands in % of firms.
Source: e-Business Surveys 2003 / 2007 by the SeBW
e-Business in the Retail Sector
43
e-Procurement: ordering supplies online
As vital parts of the supply chain,
retailers have to organise for
ordering goods from suppliers,
receiving the goods and paying the
suppliers for the goods. These
processes are increasingly
organised and managed by e-
business. In 2007, retailers
accounting for 55% of employment
in the sector said that they ordered
at least some goods from suppliers
over the internet or through other
computer-mediated networks such
as EDI. Their share has increased
since 2003 (43%); however,
adoption has increased mainly
among SMEs, and to a lesser extent
among large retailers (see Exhibit
3.3-2).
Exhibit 3.3-2: Percentage of companies placing
orders for supplies online
(2003 / 2007)
43
28
39
43
53
55
52
63
67
58
0
20
40
60
80
100
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-
249)
Large
(250)
2003 2007
Base (100%) = retailers using computers from 7 EU countries
(2007) / 5 EU countries (2003). N (2007) = 1151. In % of firms.
Source: e-Business Surveys 2003 / 2007 by the SeBW
Eurostat has similar questions in its survey on ICT usage by enterprises, but divides the
question into two inquiring about placing orders on the internet and through other
networks. Overall, Eurostat found in its survey of 2006 that 36% of retail firms reported
placing orders on the internet, and 12% through other networks. Thus, the incidence of
ordering supplies online reported by Eurostat is slightly lower than in the survey of the
Sectoral e-Business Watch. In any case, the results of the Eurostat survey show that
networks for data exchange other than the internet play an important role for SCM in the
retail industry. Examples of such networks include electronic data interchange (EDI) and
extranets of suppliers where retailers can place their orders.
While the percentage of companies placing orders online is a measure for the overall "e-
readiness", it does not say a lot about the intensity of e-procurement activity. In fact, both
Eurostat and the SeBW find that most companies say they use supply-side e-business
only for a low percentage of their total orders. In the e-Business Watch surveys of 2003
and 2007, retail companies were asked to estimate how large a share of their total
purchases from suppliers (2003) / orders from suppliers (2007) was conducted online.
Results indicate a considerable increase in the intensity of e-procurement since 2003
35
.
The share of those firms for whom e-procurement was only a marginal activity has
decreased from about 60% in 2003 to 35% in 2007. At the same time, the share of
intensive users (procuring more than 25% of goods online) has increased from 17% in
2003 to 40% in 2007 (see Exhibit 3.3-3). A simple computation of answers to this survey
question, assuming that the average share will rather be towards the lower end in each of
the ranges offered as options for their answer,
36
suggests that the total share of orders
35
36
In both surveys, companies were given five options for their answer: "less than 5% of total
sales", "5-10%", "11-25%", "26-50%" and "more than 50% of total sales". To adjust for the larger
sales volumes of large companies, employment-weighted figures were used.
e-Business in the Retail Sector
44
placed by retailers online (by those companies that actually order online) has increased
from about 10-15% in 2003 to about 25-30% in 2007. Counting in all retail companies,
including those that do place any orders online, the total share of online orders has
probably increased from about 5% (2003) to about 15% (2007).
Exhibit 3.3-3: Percentage of retail firms
placing orders to suppliers online (2007)
60
53
51
52
63
67
58
67
66
48
47
81
48
70
55
55
0 20 40 60 80 100
Total retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sweden
UK
USA
Base (100%) = companies using computers.
N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and
countries are weighted by employment ("firms
representing x% of employment in the sector /
country"), figures for size-bands in % of firms.
Exhibit 3.3-4: Average percentage of orders
for supplies placed online (EU-7, 2003 / 2007)
2007
35%
18% 7%
14%
26%
50%
2003
60% 20%
3%
7%
10% 50%
Reading example:
"In 2007, retail companies representing 47% of
employment (among those that place orders for
supplies online) said that their online orders
accounted for up to 5% of their total orders from
suppliers."
Base (100%) = companies from 7 EU countries
(2007) / 5 EU countries (2003) accepting orders
online.
N (2007) = 699 / N (2003) = 152.
Weighting: Figures are weighted by
employment.
Source: e-Business Survey 2007 by the SeBW
Advanced forms of data exchange with suppliers
Software systems specifically developed for supply chain management support
companies, not only in the retail industry, to match supply and demand through integrated
and collaborative interaction tools. Such SCM systems provide an overview of the flows
of products/materials, information and finances. In the most advanced form, they cover
the whole process and value chain from suppliers/manufacturers to wholesalers, retailers
e-Business in the Retail Sector
45
and to consumer. SCM systems help to coordinate and integrate these flows both within
and among companies. One of the key objectives of any effective SCM system is to
reduce inventory (with the assumption that products are available when needed).
In the retail sector, enterprises representing close to 20% of employment say that they
have such an SCM system (see Exhibit 3.3-5). The use of SCM systems is clearly a
domain of the large retailers: while only about 10%-20% of small and medium-sized
retailers said they had adopted a SCM system, about 35% of large firms did so. The
potential of these advanced and quite costly systems is obviously much higher for large
retail companies and chains with their complex supply chains. In fact, a comparison with
results for the same question in 2003 shows that SCM systems have seen a dynamic
diffusion among large retailers (from 7% to 35%), but also among medium-sized ones
where adoption has doubled from 9% to 18%.
Exhibit 3.3-5: Percentage of companies using SCM software (2003 / 2007)
Adoption in 2007
(by segment and size-band)
20
17
16
5
9
18
35
19
35
0 10 20 30 40 50
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
Diffusion dynamics 2003 – 2007
6 6 5 9 7
19
5 9
18
35
0
10
20
30
40
50
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-
249)
Large
(250)
2003 2007
Base (100%) = retailers using computers from 7 EU countries (2007) / 5 EU countries (2003).
N (2007) = 1151, N (2003) = 504. In % of firms.
Source: e-Business Surveys 2003 / 2007 by the SeBW
The management of retail supply chains requires understanding and balancing of three
main dimensions: availability, inventory and cost (Accenture 2004). SCM can be regarded
as a tool to manage the trade-offs between these dimensions in the most efficient and
effective way. Any retail format can act as an example to illustrate this: ideally, all goods
should be available to customers at all times (no empty shelves) while at the same time
the volume of goods on stock should be as small as possible (to reduce warehouse
costs). However, the two goals need to be balanced: the smaller the inventory, the more
likely the occurrence of out-of-stock; similarly reduced costs versus forgone revenues and
dissatisfied customers need to be taken into consideration. SCM systems promise retail
companies to achieve the optimal balance. They typically have modules which support
functions including
37
:
Strategic network design (support for selecting locations for order and distribution
management)
37
See websites of providers of SCM solutions for retailers, for instance Infor SCM for Retail
(http://www.infor.de/loesungen/scm/branchen/retail/)
e-Business in the Retail Sector
46
Demand planning (analysis and forecast of future demand in cooperation with
business partners)
Network supply planning (planning distribution on the basis of results from demand
planning)
Warehouse management
Transport and logistics (decision on transportation means and routes)
Event management (automatic alerts in case of deviations or special situations to
enable a proactive dealing with the situation)
However, due to the heterogeneity of the retail sector, there is no single solution that fits
all purposes. Retail segments with short lifecycles, for example fashion, need to cope
with short lead-times and accelerating time-to-market, which in turn requires tight
integration with the supply base
38
. The supply chain strategy also depends on whether
retailers compete rather on price or on service levels. There is evidence that physical
efficiency is most important in cost-based competition, the ability to flexibly respond to
market requirements is critical in time-based competition (Gullberg and Lundvall 2004).
A more specific indicator for electronic data exchange between companies focuses on
the process of invoicing. It is widely recognised that electronic invoicing promises rather
easy-to-achieve cost savings for both parties involved (i.e. the invoicing entity and
receiving entity), because processing invoices in a standardised, electronic format can be
accomplished much faster compared to the often cumbersome handling of printed
invoices. The cost saving potential obviously depends on the number of invoices that
have to be processed; companies and sectors differ widely in this respect.
In the survey of 2007, retailers were asked whether they received e-invoices from
suppliers, for example in PDF format or through e-mail. In total, close to 50% of the
European retail companies interviewed said that they received at least some of the
invoices electronically. In the USA, even more than 60% said so (see Exhibit 3.3-6).
Except for micro-retailers with fewer than 10 employees, there is hardly a difference by
size in this regard. This confirms the dynamic adoption of e-invoicing in recent years. It
can be assumed that in a few years time, in B2B exchanges, most invoices will be
delivered electronically, notably among companies which do regular business with each
other.
The cost saving potential of e-invoicing critically depends on the technical way in which
invoices are generated, delivered and read. e-Invoicing in its most advanced form means
that an invoice is electronically generated and sent by the seller, and electronically
received, processed and archived by the paying retailer. In practice, e-invoicing typically
goes hand in hand with making payments electronically. However, the challenge is that
there are different technical options for delivering an invoice electronically, and different
views on which of these ways actually constitutes an "e-invoice". Notably, there is
disagreement whether an invoice sent as a PDF document (typically a scan from a
paper invoice) by e-mail is an e-invoice. The counterargument is that this document is not
machine-readable, thus data have to be keyed in manually by the receiver into his
system. It is only sent electronically, but not processed electronically; savings are
therefore significantly reduced. The survey in the retail sector covered the issue of e-
invoicing only peripherally and did not explore the adoption of different types of e-
invoicing.
38
See e-Business Watch sector study on the textile industry (2005), and accenture (2004)
e-Business in the Retail Sector
47
Exhibit 3.3-6: Percentage of retail companies
receiving invoices from suppliers
electronically (2007)
52
32
71
43
55
55
55
54
36
46
46
43
54
69
48
61
0 15 30 45 60 75
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sw eden
UK
USA
Exhibit 3.3-7: Percentage of retail companies
sharing information about inventory levels
with business partners online (2007)
14
17
17
9
16
22
23
16
18
16
12
22
15
32
15
14
0 10 20 30 40 50
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sw eden
UK
USA
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = all companies. N (Chemical, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007 by the SeBW
While the introduction of e-invoicing is normally not a big deal, it can be the first step
towards a more intensive ICT-enabled cooperation in the supply chain. A critical issue in
this context is the sharing of information. For optimal supply chain management, it is
indispensable that the buyer makes available information about inventory and pending
orders so that the supplier can deliver on time the right amount. This requires trust
between trading partners, since some of the data that need to be made available may be
confidential. The SeBW asked retail companies whether they share information about
inventory levels with business partners online. In total, retailers comprising about 15% of
employment said in 2007 that they did so. Among medium-sized and large retailers, the
incidence goes up to 20-25% (see Exhibit 3.43-7). In the USA, it appears that online
information sharing is more widely practiced; here, more than 30% of all retailers say they
share data about inventory levels with business partners.
Benefits and risks of SCM – case study evidence
The deployment of e-business as shown above drives the vertical integration of players
involved in the retail supply chain. e-Business has proven to be a useful tool both for
suppliers and retailers to reduce the quantity of goods to be stocked under the same
sales conditions, and to accelerate supply flows to offer better customer service. e-
e-Business in the Retail Sector
48
Business tools such as SCM systems permit information sharing, notably between
retailers, logistics providers and manufacturers of goods sold. This is frequently referred
to as the "e-extended supply chain", where, ideally, demand drives and automatically
determines supply flows. The application of this principle, however, can get close to a
contract situation between players. This can be an obstacle for an even more intensive
use of e-business, as the companies involved may not want to get too dependent on
each other. Still, the digital integration notably between retailers and manufacturers has
dynamically evolved in recent years.
Two of the case studies conducted for this report illustrate how small and medium-sized
firms approach upstream supply chain management. Cyprus-PC.com, a young laptop
retailer has managed to almost fully integrate its upstream supply chain with in-house
operations and downstream chain activities. The only manual link within the chain is the
order receipt management process. This link is manual because the current amount of
orders does not justify the cost for an electronic link. The upstream supply chain is
managed by one single system bought by the firm from DHL. Cyprus-PC.com benefits
from an owner (who also is manager of the firm) with a high ICT affinity and a strong
relationship with an ICT partner firm. Exhibit 3.2 illustrates the supply chain management
process at Cyprus-PC.com.
Exhibit 3.3-8: Supply chain management at Cyprus-PC.com
Cyprus-PC.com
Customer
Supplier
Customer
Customer
Supplier
Tier 1
Supplier
Partner-firm
Strong
relationship
DHL solution e-store
Physical stores
Telephone
Manual
Multiple channels
Delivery
Source: e-Business Watch 2007/2008
The supply chain management approach at Cyprus-PC.com shows that small firms can
achieve an almost full electronic integration of entire supply chains. Small firm
characteristics that alleviate or foster electronic integration include a lower degree of
complexity and a higher degree of flexibility in comparison to medium-sized and large
firms. Yet, financial constraints are an obstacle to electronic integration in small firms
which is less of a burden in medium-sized and large firms.
The Smart Supermarket case study provides an innovative approach to supply chain
management: the Maltese medium-sized, family run supermarket developed an e-
commerce solution from scratch involving its suppliers in the daily maintenance of the
solution. This creates a win-win situation where the firm is able to shift some of the
maintenance cost to its suppliers by collecting a fee per product placed online and the
e-Business in the Retail Sector
49
suppliers in turn get access to up-to-date market and sales information from the sales
data held on the system. Smart Supermarket even reports that the majority of
relationships with suppliers have improved significantly as a result of the introduction of e-
commerce.
Of the large case study firms included in the sample, Merctor, Globus, and Brooklands
have adopted e-procurement solutions. The Mercator, Slovenia case study illustrates the
importance of having a unified ERP system in a company, its dependant companies and
subsidiaries for an efficient implementation process. An information technology structure
consisting of various different ERP solutions can severely delay the implementation of e-
procurement in a large retail firm. The solution at DIY and hardware store specialist
Globus from Germany has been adopted to streamline business and order processes
related to indirect goods (goods in the third category, see section 3.3.1). The
implementation of the new e-procurement system has indeed provided the basis for a
complete re-organisation of processes related to the procurement of Maintenance Repair
and Operation (MRO) goods. At Brooklands, achieving better business process efficiency
was also a driver for adopting a new technology application infrastructure supporting its
purchasing logistics activities. Again, change management was an issue affecting the
success of the implementation.
3.4 The internal supply chain: in-house electronic
operations
3.4.1 Introduction to internal operations
Importance of internal e-business systems in retail
Internal supply chain management is the management of any aspect related to organising
for selling goods delivered by suppliers to consumers. As retailers do not transform
goods, operation is not concerned with organising a production process but with
arranging the in-house processes of receiving, distributing, and selling goods.
Computerised systems that mainly serve processes inside a company, i.e. that are not in
the first instance designed for communication with suppliers, customers or other business
partners, are considered here as “internal electronic operations”. A study of internal
operations in retail companies is of interest because, as in all industries, ICT and e-
business may be valuable for making internal business processes more effective. This
may be highly relevant particularly for the large retail firms with huge amounts of data to
be dealt with and complex processes. However, effective internal operations are also
crucial for SMEs. In particular, retail enterprises have to balance the cost effectiveness of
amounts of goods to be kept on store against relatively small customer purchases.
Business process efficiency, streamlining and related productivity increases are core
subjects whenever ICT and e-business use is analysed. They are also very often implicit
or explicit themes in e-Business Watch case studies. Even the very first e-Business
Watch report in May 2002 argued that the real revolution had occurred and was about to
take place in internal e-business processes – as well as in business-to-business e-
commerce. Since then, this assessment has been confirmed frequently. In most sectors
the major impact of e-business has been on reducing costs by making business
processes more efficient.
e-Business in the Retail Sector
50
Types of internal systems
There are numerous types of software applications that are relevant for internal electronic
operations:
Resource-oriented systems for enterprise resource planning (ERP) and supply
chain management (SCM). Knowledge management (KM) systems may also be
included in this category as they serve the management of human resources
Inventory-oriented systems for warehouse management and barcoding
Documentation-oriented systems for managing the placement and receipt of
orders, for document management (DM), and content management
Customer-oriented systems for customer relationship management (CRM)
Radio Frequency Identification (RFID) systems for tracking goods
All these systems can help to file, structure and process information in their field of
activity – information that may have huge scope particularly in large enterprises.
The SeBW Survey 2007 included systems for ERP and SCM, warehouse management
and barcoding, order placement, CRM and RFID. SCM systems have been discussed
above in section 3.2 because they are closely related to procurement issues
3.4.2 Findings about internal e-operations
General level of e-business processes
In the e-Business Survey 2007 the interviewees were asked what overall importance e-
business has for business processes in the company. They could state “most”, “a good
deal”, “some”, or “none”. A relative majority of companies representing 47% of the
industry’s employment said that they conduct some processes by e-business – see
Exhibit 3.5-1. 22% said “none”; a “good deal” was stated by 20%, and in 11% most
processes are conducted electronically.
As regards sub-sectors, the findings for non-food and food stores are very similar to the
overall results. In other retailing, the employment-weighted share of firms stating no e-
business at all was larger than in the other two sub-sectors, namely 35%, at the expense
of all other three categories.
The most considerable differences between size classes is in the share of firms stating
no e-business at all: It is largest in micro firms (35%) and declines with increasing size
class. 14% of the large firms said they conduct no e-business at all. On the other hand,
the share of firms stating that most of the processes are conducted by e-mail is also
largest in firms with more than 250 employees (15%), while it is similar in micro (7%),
small (9%) and medium-sized firms (9%).
US and EU-7 retailers are almost on the same level of overall e-business assessment.
The employment-weighted share of firms in which most or a good deal of processes is
done by e-business is almost the same: 31% in EU-7 firms and 29% in US retailers. The
level of firms reporting no e-business at all is higher in the US (27%) than in the EU-7
(22%).
e-Business in the Retail Sector
51
Exhibit 3.4-1: % of companies saying that ... of their business
processes are conducted as e-business (2007)
11
11
13
7
7
9
9
15
8
20
23
15
16
22
16
18
22
21
47
46
51
43
37
46
50
48
44
22
20
21
35
35
28
24
14
27
0 20 40 60 80 100
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
most a good deal some none
The survey in 2007 was
conducted in 7 EU
Member States (DE, FR,
IT, ES, PL, SE, UK) and in
the USA.
Base (100%) = companies
using computers; N
(Retail, EU-7 and USA) =
1151.
Weighting: Figures for
sector totals and countries
are weighted by
employment ("firms
representing x% of
employment in the sector /
country"), figures for size-
bands in % of firms.
Source:
e-Business Survey
2007
Specific software systems
Systems for enterprise resource planning (ERP) help to integrate and cover all major
business activities within a company, including product planning, parts purchasing,
inventory management, order tracking, human resources and finance. ERP systems are
an important "hub" for much of their e-business activities with other companies. B2B data
exchanges as well as planning and controlling processes are largely based on
functionalities provided by ERP systems. 11% of the EU-7 retailers, which is firms
representing 16% of the industry’s employment, reported to have an ERP system – see
Exhibit 3.5-2. The share of firms is much smaller than in manufacturing sectors such as
steel (33%), chemicals (38%) and furniture (21%) for which resources planning is more
important as they produce goods. As regards retail sub-sectors, ERP systems are not so
prevalent in other retailing, at least when considering the firm-weighted figure (3%). As
regards size classes, medium-sized firms (37%) reported an even higher level of ERP
use than large firms (33%).
In the US, ERP systems were reported to be used only by a tiny share of 2% of retailers.
This low level can partly be explained by the fact that US firms prefer to use SCM
systems instead of ERP: the level of SCM use in US firms (9% of firms, 35% of
employment) is larger than in the EU-7 (6% of firms, 19% of employment). When adding
up figures for both ERP and SCM, EU-7 and US retailers are on a similar level.
e-Business in the Retail Sector
52
Exhibit 3.4-2: % of companies using specific software systems to support operations (2007)
ERP system
Software
application to
manage the
placing or
receipt of
orders
Warehouse or
depot
management
system
Bar-coding
system
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail – 2007 total (EU-7) 16 11 60 48 51 42 59 36
Non-food stores 15 11 64 47 52 43 54 35
Food stores 17 13 55 52 47 39 71 45
Other retailing 23 3 51 43 60 41 58 22
Retail – USA 6 2 60 42 46 22 69 39
Retail – by size (EU-7)
Micro (1-9 empl.) 10 47 42 35
Small (10-49 empl.) 29 52 43 53
Medium (50-249 empl.) 37 59 52 66
Large (250+ empl.) 33 76 65 81
Other sectors (EU-7)
Transport & logistics 21 6 44 20 42 15 n.a. n.a.
Base (100%)
all firms all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151 1151
Questionnaire reference
A9a A9d A9e A9h
The survey (2007) was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Survey 2007
The Mercator case study is a business example providing several lessons regarding the
adoption of an ERP solution in a large European retailer. These lessons include that (a) a
unified ERP system is of utmost importance for enabling e-commerce activities and that
(b) ERP automation can reduce the amount of manual work in the procurement process
and thereby the number of human errors.
Warehouse or depot management systems are fairly widely used among EU-7
retailers. 42% of them, representing 51% of employment, stated to use such systems.
The share of firms using warehouse or depot management systems was found to be
almost the same in the three sub-sectors. Again the share of firms using such systems
was found to increase by size class, with micro firms on a level of 42% and large firms on
a level of 65%. In the US (15% of firms, 42% of employment), warehouse or depot
management systems are much less prevalent than in the EU-7.
Bar-coding systems were found to be used in 36% of the retail firms, which is firms
representing 59% of the industries employment. Food stores reported the largest share
(71% of employment), followed by other retailing (58% of employment) non-food stores
(54% of employment). This may confirm the perception from everyday shopping
experience that the majority of shops, particularly food shops, apply bar-coding systems.
Bar-coding systems were reported to be used much more often in large firms (81%), than
in medium-sized (66%), small (53%) and micro (35%) firms. For many micro firms, the
investments in bar-coding systems may appear to be too high. The share of firms using
bar-coding systems was found to be almost the same in the US (39%).
e-Business in the Retail Sector
53
Besides enquiring about these specific applications, retailers were asked whether they, in
general, use software applications to manager the placing or receipt of orders (Exhibit
3.4-3).
Exhibit 3.4-3: Companies using a software
application to manage the placing or receipt
of orders (in 2007)
64
55
51
47
52
59
76
54
70
61
52
46
64
65
60
60
0 20 40 60 80
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sw eden
UK
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N
(Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are
weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-
bands in % of firms.
Source: e-Business Survey 2007
Software applications to manage the
placing or receipt of orders carry out
parts of the functions a more complex ERP
system fulfils. EU-7 companies
representing 60% of retail employment
said they use such software (see Exhibit
3.5-3).
39
This may also include those firms
that actually have an ERP system. No
significant differences between sub-
sectors were identified.
According to Eurostat, the share of
retailers using IT systems to manage the
placement or receipt of orders has
increased by 10 percentage points from
41% in 2004 to 51% in 2006 (Eurostat
2006b).
However, there are differences between
size classes: The level of use of
applications for order management
increases by size class. 47% of the micro
retailers reported to have such a system
and 76% of large retailers.
The differences between countries are not
very large. The largest level of order
management software use was reported
by French retailers (70%) followed by
Spanish (65%) and UK retailers (64%); the
lowest level was reported by Swedish
retailers (46%).
The level of order management
applications use was found to be exactly
the same in EU-7 and US retailers.
Customer Relationship Management (CRM) systems
Customer relationship management (CRM) is a business concept seeking to maximise
competitiveness, revenues, and customer satisfaction (Bligh and Turk 2004)
40
.
Computerised systems that support this concept include the capture, storage and
39
The Eurostat retail survey in 2006 revealed a level of 51% of firms using such a system, so the
findings were very similar.
40
See Bligh/Turk (2004) for an elaborate concept of CRM
e-Business in the Retail Sector
54
analysis of information about customers, other vendors, business partners, and internal
processes. The analysed data can be used to optimise marketing efforts.
The e-Business Survey 2007 found that retailers representing 20% of the industry’s
employment use a CRM system (see Exhibit 3.4-4). Firms in the “other retailing” sub-
sector reported the highest share (29%), followed by food stores (24%) and non-food
stores (17%). There are considerable differences between size classes: While 38% of the
large retail firms stated to use a CRM system, the share is 23% in medium-sized firms
and only 13% in small firms and 9% in micro firms. CRM systems may offer the most
benefits to large companies with a large number of customers, while small and micro
firms may do without more simple software solutions to manage customers. In any case,
the use of CRM systems is more frequent in the US where firms representing 35% of the
retail industry’s employment said they use a CRM system.
Exhibit 3.4-4: % of retail companies having a CRM system in 2007
17
24
29
9
13
23
38
20
35
0 10 20 30 40 50
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
While the EU-7 retailers lag behind the US in CRM use, the share of retail firms that use
CRM systems increased sharply from 2003 to 2007. In 2003, firms representing only 8%
of the industry’s employment reported to have a CRM system. There was a reported
increase among firms from all size classes, and the steepest increase was stated by
large firms: from 9% in 2003 to 38% in 2007 (see Exhibit 3.4-5).
e-Business in the Retail Sector
55
Exhibit 3.4-5: % of retail companies having a CRM system in 2003 and 2007
8 3 12 15 9
20
9
13
23
38
0
10
20
30
40
50
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-249)
Large
(250)
2003 2007
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
The AMJG case study conducted for this report (see 5.4) focuses on the operations
domain: the firm has adopted a CRM solution to better organise data and information flow
among its retail outlets and headquarters. AMJG reports that both, efficiency and
effectiveness, have increased noticeably with the introduction of the new solution: delays
in product delivery for example were reduced by one quarter and the number of delayed
shippings was cut by approximately a quarter. Furthermore, efficiency and speed of client
management processes have increased. While IT systems provide opportunities for
increasing efficiency and effectiveness, AMJG managers point out that firms should plan
for in-house business process changes and human resource effects such as user
resistance as a result of introducing new in-house systems. The AMJG case study again
gives examples for these challenges: business processes were adjusted to cater for new
information available from the crossover and analysis feature of the new CRM solution.
Some employees initially had problems using the tool which led to changes to the
solution’s interface.
RFID use
Radio Frequency Identification (RFID) is a fairly new technology that allows tracking
goods and people through a wireless network. RFID technology helps to identify and
collect data attributes about a certain object or person, including localisation and
environmental measurements when integrated with sensor networks. RFID is assigned
high importance for the competitiveness of the European economy. In the retail industry,
RFID can for example be used for enhancing inventory management and speeding up
cash-desk check-out by attaching RFID tags to goods on sale.
e-Business in the Retail Sector
56
Exhibit 3.4-6: % of companies using RFID
(2007)
4
14
17
0
6
15
2
8
15
0 10 20 30 40 50
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N
(Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are
weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-
bands in % of firms.
Source: e-Business Survey 2007
RFID use is not yet very common in the
retail industry. Retail firms representing 8%
the industry’s employment reported to use
this technology. RFID use is much more
common in the “other retailing” sub-sector
(17%) and in food stores (14%) than in
non-food stores (4%) – see Exhibit 3.5-6.
RFID use is very rare in micro and small
retail firms. Only 0.1 % of the retailers in
the e-Business Survey 2007 said the use
RFID, and in small firms it was only 2%.
These low levels are due to high
investment costs for hardware, software,
personnel training and also re-organisation.
In medium-sized firms the reported share
of RFID users was 6%, while 15% of the
large firms said they use RFID.
Compared to the US, the EU is apparently
lagging behind in RFID use. US retailers
representing 15% of the industry’s
employment reported to use RFID, a level
almost twice as high as in the EU-7.
While only indicative due to the low numbers of respondents, the numbers can
nevertheless been used to indicate what firms use RFID for (Exhibit 3.4.-7). Almost all
(92%) of the 54 retail firms that use RFID (out of a total population of 1151 firms) say that
they use RFID to manage goods, products and service in-house. 64% of firms say that
they use RFID to support the ordering of goods, products and service and 62% say that
they use it to track and manage the whole organisational value chain. Approximately half
of the firms (49%) use RFID to support customer services. Hence, potentials for RFID are
particularly high for in-house operational purposes such as managing goods and
services.
e-Business in the Retail Sector
57
Exhibit 3.4-7: % of companies using RFID to… (2007)
62%
49%
92%
64%
support customer
services
manage goods,
products and
services in-
house
support ordering of
goods, products and
services
track and manage
the whole
organisational
value chain
100%
100%
100%
100%
Source: e-Business Watch 2007
While in summary, the EU-7 countries show lower levels of RFID usage than the US,
looking at individual countries reveals that RFID use in France is higher than in the US
while usage levels in the UK and Spain are along the same lines. Germany, Italy, Poland
and Sweden however lag far behind the US. Hence, the RFID results relating to EU-US
comparisons need to be interpreted with caution as wide gaps between the individual EU
countries exist (Exhibit 3.4-8).
Exhibit 3.4-8: % of EU-7 retail firms using
RFID: EU-7 vs. US
1
19
15
13
14
2 2 1
0
5
10
15
20
25
30
F
r
a
n
c
e
U
S
A
U
n
i
t
e
d
K
i
n
g
d
o
m
S
p
a
in
S
w
e
d
e
n
G
e
r
m
a
n
y
I
t
a
l
y
P
o
l
a
n
d
(N=1151, Data weighed by employment)
Exhibit 3.4-9: % of EU-7 transport & logistic
firms using RFID: EU-7 vs. US
14 14
9
7
0
20
21
25
0
5
10
15
20
25
30
S
p
a
in
I
t
a
l
y
U
S
A
U
n
i
t
e
d
K
i
n
g
d
o
m
G
e
r
m
a
n
y
F
r
a
n
c
e
S
w
e
d
e
n
P
o
l
a
n
d
(N=1097, Data weighed by employment)
Source: e-Business Watch 2007
Compared to the transport & logistics sector (Exhibit 3.4-9), which does not show the
specific country divergence, these findings might reflect the heterogeneous structure of
the retail sector in the EU on a country basis.
e-Business in the Retail Sector
58
3.5 The downstream supply chain: electronic marketing and
sales
3.5.1 Introduction to downstream supply chain issues
Overview of sales-side issues
The downstream supply chain covers activities and interactions of retail firms with
customers. In general, sales side business activities comprise of three aspects. The first
focus is on actual sales, i.e. transactions, and on related customer support activities, a
second one on marketing activities. Furthermore, logistics and distribution aspects related
to sales are important. All these activities may take place or may be supported by
computerised systems.
Customer characteristics
European retailers sell mainly to regional and national markets. 72% of the retailers,
which is 59% of the industry’s employment, sell mainly to regional markets, and 25% of
the retailers (36% of employment) sell mainly to national markets – see Exhibit 3.5-1.
Exhibit 3.5-1: Main locations of customers (2007)
Companies whose most significant market area is the…
regional market national market international market
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 59 72 36 25 4 3
NACE 52.12, 52.3-5 (non-
food)
56 70 39 26 6 3
NACE 52.11, 52.2 (food) 72 74 25 23 3 3
NACE 50.5, 52.6 (other) 46 80 52 17 2 3
Retail – by size (EU-7)
Micro (1-9 employees) 72
25
3
Small (10-49 employees) 71 22 7
Medium (50-249 empl.) 67 26 7
Large (250+ employees) 43 48 9
Retail – by country
Germany 57 69 33 27 9 4
Spain 56 82 28 15 16 3
France 81 88 18 10 1 2
Italy 77 83 20 14 4 3
Poland 58 60 36 36 5 4
Sweden 77 76 17 21 6 3
United Kingdom 37 66 63 34 1 1
USA 47 67 51 26 1 7
Other sectors (EU-7)
Transport and logistics 41 41 34 34 24 25
Base (100%) all firms all firms all firms
N (2007, EU-7+USA) 1139 1139 1139
Questionnaire reference G4a G4b G4c
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Source: e-Business Survey 2007
e-Business in the Retail Sector
59
The share of retailers that sell mainly to international markets is very small: 3% (4%
weighted by employment). As regards sub-sectors, the firm-weighted data are quite
similar to the overall figures, with other retailers (NACE Rev. 1.1 groups 50.5 and 52.6)
having an even stronger focus on regional markets. The figures for size-classes are
largely the same as for the overall retail sector, with small and medium-sized firms (both
7%) and large firms (9%) having a slightly higher share of firms selling to international
markets than micro firms (3%).
The figures for countries broadly reflect the overall figures. Notable deviations include a
stronger focus on regional markets in France (88% regional, 10% national) and a
stronger focus on national markets in Poland (60% regional, 36% national) and the UK
(66% regional, 34% national).
Exhibit 3.5-2: Stability of customer base of
EU-7 retail companies in 2007
11%
25%
64%
mainly regular customers
mainly changing customers
both regular and changing
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail,
EU-7 and USA) = 1151.
Weighting: Figures are weighted by employment
("firms representing x% of employment in the sector").
Source: e-Business Survey 2007
About half of the retail firms (53%), which is
firms representing 64% of the industry’s
employment, reported that they sell mainly
to a regular, i.e. non-changing customer
base see Exhibit 3.4-2. 26% (25%
weighted by employment) said that they
sell to a changing customer base and the
others (21% of firms, 11% weighted by
employment) spontaneously said that both
regular and changing customers are of the
same importance.
The share of companies reporting to have
a regular customer base is much smaller
than in manufacturing sectors. For
example, in the steel industry, 86% of the
firms interviewed in the e-Business Survey
2007 reported to sell to regular customers.
In the chemicals industry, the share of
regular customers is 80%, in the furniture
industry it is 66%. For retail firms it is thus
important to consider how to attract and
retain customers.
3.5.2 Findings about electronic sales
Electronic orders more prevalent than five years ago – large firms leading
The diffusion of internet technologies among consumers enables retailers to sell their
products via the internet to consumers. The share of EU inhabitants who used the
internet to purchase goods for private purposes has increased considerably in recent
years: In 2004, according to Eurostat, 22% of the EU-25 population had used the internet
e-Business in the Retail Sector
60
in the twelve months prior to the interview to order goods in the internet. By 2007, the
share had increased to 32%.
41
The basic precondition for online sales is a normally an own company website –
“normally” because an alternative is to sell through a portal hosted by a different
company. According to the e-Business Survey 2007, 48% of EU-7 retail companies,
representing 69% of the industry’s employment, have an own website. This is much less
than in the US where 65% of firms, which is 89% of employment, reported to have a
website. According to Eurostat, some 52% of European retailers have dedicated websites
on the internet (Eurostat 2006b), which equals the e-Business Watch findings. Of these,
38% of firms use it to market their own products, 24% use it to facilitate access to their
catalogues and price lists by customers and 17% provide after sales support through it.
Exhibit 3.5-3: % of retail companies
selling online in 2007
37
36
44
26
24
35
45
41
34
9
34
33
60
56
38
26
0 15 30 45 60 75
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sweden
UK
USA
The survey was conducted in 7
EU Member States (DE, FR, IT, ES, PL, SE, UK) and in
the USA.
Base (100%) = companies
using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector
totals and countries are weighted by employment
("firms representing x% of employment in the sector /
country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007 by the SeBW
26% of the EU-7 retailers, representing
38% of the industry’s employment, stated
that they sell goods “through the internet
or other computer-mediated networks” –
see Exhibit 3.4-3. This is similar to the
Eurostat findings for 2006 (23% of
companies). There are no considerable
differences between the sub-sectors, but
“other retailing” (44%) has a slightly higher
share than non-food stores (37%) and
food stores (36%). There is a clear
distinction between size classes: Almost
half of the large retail firms (45%) and
35% of the medium-sized ones sell online,
but only 24% of the small retailers and
26% of the micro retailers do so. However,
it is notable that micro firms are not
leaving far behind but that they are on the
same level as small firms.
Online sales were found to be most
frequent in the UK, where companies
representing 60% of the industry’s
employment sell online. This was by far
the highest percentage within the
countries included in the survey, followed
by Germany (41%) and four countries on
almost the same level: France and Poland
34%, Sweden 33% and Spain 26%. In
Italy, retailers representing only 9% of the
industry’s employment said they sell
online.
This finding is in line with Eurostat findings (Eurostat 2006b) that e-sales are particularly
rare in South European countries. On average, the EU-7 countries were found to be way
behind the USA where retailers representing 56% of employment stated to sell online.
41
Data retrieval from the Eurostat database athttp://epp.eurostat.ec.europa.eu in March 2008.
e-Business in the Retail Sector
61
Exhibit 3.5-4: % of retail companies
selling online in 2003 and 2007
19 9 22
25
27
38
26
24
35
45
0
20
40
60
80
100
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-
249)
Large
(250)
2003 2007
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail,
EU-7 and USA) = 1151.
Weighting: Figures for sector total are weighted by
employment ("firms representing x% of employment in
the sector"), figures for size-bands in % of firms.
Source: e-Business Surveys 2003 and 2007
The share of companies that sells online
doubled from 19% (employment-weighted)
in 2003 to 38% in 2007 – see Exhibit 3.6-4.
There was an apparent increase in all size
classes: Micro firms made a big jump from
9% of firms to 26%, small retail firms
increased their share of online sellers from
22% to 24% and medium-sized ones from
25% to 35%. The largest leap in terms of
percentage points was made by the large
firms, from 27% to 45%. This means that
while the share of online sellers among
large firms was found to be only slightly
higher than in SMEs in 2003, the
difference was found to be much larger in
2007.
Share of goods ordered online increased in the past five years
Those retailers that sell online were further asked about the share of goods sold online in
their total sales volume. Online sellers representing almost half (47%) of the industry’s
employment said that they sell less than 5% of their total sales volume online – see
Exhibit 3.5-5.
Exhibit 3.5-5: Share of goods sold online in
retail companies selling online in 2007
47%
19%
6%
12%
16% 50%
Exhibit 3.5-6: Share of goods sold online in
retail companies selling online in 2003
51%
34%
11%
2% 3%
50%
Reading example: "In 2007, 47% of all companies selling online (by their share of employment) said that the
share of goods they sold online was less than 5%."
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Surveys 2003 and 2007
e-Business in the Retail Sector
62
19% said they make between 5 and 10% of their sales online, and in 6% the reported
share was between 11 and 25%. More than a quarter (28%) of the online sellers reported
an online sales volume above 25% of their total sales: 12% said they sell between 26 and
50% online, and 16% of the online sellers stated to sell more than 50% online. Compared
to 2003, the share of firms in which online sales account for more than 25% of their sales
volume increased sharply, from 5% to 28% - see Exhibit 3.5-6. Thus, in the past five
years there has not only been an increase in the share of online sellers but also in the
amount of sales conducted through the internet or other computer networks. This finding
may confirm predictions that the industry will experience growth in online sales (Butler
2007).
Two of the case studies conducted for this report mention the share of online sales.
Neither Smart Supermarket (Section 5.8) nor Fleria Floral Creations (Section 5.7) are
selling a huge amount online: at Fleria Floral Creations, 0.24% of total annual sales are
made online and at Smart Supermarket only about 1% of total sales volume comes from
online shoppers. The regionally-based micro firm 4fitness in contrast sells more than 2/3
of its goods over the internet. Unlike Smart Supermarket and Fleria who are established
businesses that have been trading ‘offline’ for a number of years, 4fitness is a newly set
up firm (new in the sense that it has been trading for less than 4 years). The business
model of 4fitness has ever since the firm was set-up included the internet sales channel
whereas for Smart Supermarket and Fleria the internet sales channel is a new addition to
an existing, successful business model. Furthermore, the products sold by these three
firms differ regarding their suitability for internet sales: selling grocery and flowers
requires a different approach than selling fitness equipment and accessories over the
internet.
Geographic origin of online orders: SMEs extend their customer base
Retailers selling online were also asked about the geographic origin of their customers.
Retail firms representing approximately half of the industry’s employment (51%) said that
their online orders are mainly regional, and the share of mainly national orders (46%) was
almost equally large. In only 3% the orders are mainly international. Compared to the
figures about general sales (see Exhibit 3.5-1 and 3.5-7), it appears that online sales
helps to extend the geographic focus slightly from regional to national sales while the
international focus remains on the same low level. This was also found to be the case for
non-food stores and other retailing. However, food stores apparently use the internet to
further extend their regional sales focus: the employment-weighted share of firms selling
mainly to regional customers was found to be 72% and the share of mainly regional
online sales 79%.
Regarding size classes, it is striking that SMEs apparently use the internet to extend their
sales beyond the regional focus to national markets. The share of firms with a national
sales focus is much larger in online sales than in overall sales for micro firms (50%
national focus in online sales compared to 25% national focus in overall sales), small
firms (33% compared to 22%) and medium-sized firms (61% compared to 26%). On the
other hand, large firms apparently tend to use the internet to extend their regional
customer base. The share of large firms selling mainly to regional customers was found
to be 43% for overall sales and 50% for online sales. However, the figures for large firms
need to be interpreted with caution because the online sales data are based on a small
number of cases.
e-Business in the Retail Sector
63
The low level of electronic orders from abroad may be related to various difficulties, e.g.
language barriers, high costs of international advertising, lower trust of consumers in
foreign retailers, or high shipping costs. Legal issues may be another issue. Conflicting
legal rules between the Member States and matters of jurisdiction are obstacles to
increasing cross-border retail trade (see, for example, Schulte-Nölker 2007). The 4fitness
case study (Section 5.6) illustrates the difficulties of cross-border online trade.
Exhibit 3.5-7: Geographic origin of online orders in 2007
51
44
79
27
47
58
36
50
54
46
55
18
62
50
33
61
47
39
3
1
3
11
3
9
3
3
8
0 20 40 60 80 100
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing*
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)*
USA
regional national international
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
e-Business in the Retail Sector
64
Sending invoices electronically
Exhibit 3.5-8: Companies sending invoices
electronically in 2007
28
25
34
27
22
27
29
26
20
29
29
16
36
39
28
27
0 15 30 45 60 75
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sweden
UK
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the
USA.
Base (100%) = companies using computers; N
(Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries
are weighted by employment ("firms representing
x% of employment in the sector / country"), figures
for size-bands in % of firms.
Source: e-Business Survey 2007
A further issue of online transactions is the
sending of invoices. The e-Business
Survey 2007 found that retailers
representing 28% of the industry’s
employment send invoices electronically to
customers – see Exhibit 3.5-8. This means
that the share of companies sending e-
invoices is not even as high as the share
of companies selling online (38%,
employment-weighted). Apparently, even
those retailers that sell online prefer to
send invoices via conventional mail or fax,
possibly for legal reasons. One can
assume that retailers that sell online
include a paper invoice in the parcel of the
goods shipped.
The level of firms sending e-invoices is
fairly even across sub-sectors, size-
classes and countries. As regards
countries, the level of retailers sending e-
invoices is highest in the UK (36%) and
lowest in France (20%) and Sweden
(16%). Electronic invoices are much more
prevalent in the US: firms representing
39% of the industry’s employment send
invoices electronically.
Payment methods for online sales
Online orders need to be paid somehow, and the options offered for payment indicate
how easy (or difficult) it is for customers to buy over the internet. In the e-Business
Survey 2007, retailers that sell online were asked about seven possible ways for
customers to pay goods bought online. The option offered most frequently is credit cards,
offered by firms representing 63% of employment in the sector – see Exhibit 3.5-9. Debit
cards (55%) and cash on delivery (48%) are also quite common. Other options offered
include payments to the sellers’ accounts (40%), advance bank transfers (36%), cheques
(26%), and third-party payments (15%). It is striking that for all payment methods except
third-party payments, the levels of firms offering them are higher in the US than in the
EU-7. The differences are particularly large for credit cards (96% in the US versus 63% in
the EU-7) and debit cards (86% in the US versus 55% in the EU-7). This may reflect a
higher acceptance of credit and debit cards for paying any kind of purchases in the US,
but it also facilitates online payments.
e-Business in the Retail Sector
65
Exhibit 3.5-9: Accepted payment methods for online orders in 2007
55
48
40
36
26
15
96
86
62
65
40
37
15
63
0 20 40 60 80 100
credit cards
debit cards
cash on delivery
on account payments
advance bank
transfers
cheques
third-party payment
Retail (EU-7)
Retail (USA)
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = Companies whose customers can order goods or services on the internet or via other
computer-mediated networks; N (Retail, EU-7 and USA) = 339.
Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector /
country"). Questionnaire reference: B6
Source: e-Business Survey 2007
Case study findings about benefits and challenges of e-sales
Case studies conducted for this report indicate several benefits of e-sales:
Enhanced operations: Online sales may induce multi-channel retail synergies and
provide real-time market information. Retailers both large and small are realising
that benefits from online sales are minimal if the online sales activity is operated as
a stand-alone activity. Following little success with online sales, the case firms
EMPIK (Section 5.9) and Fleria Floral Creations (Section 5.7) for example have
come to realise the usefulness of integrating online sales with existing sales
channels and firm operations.
Enhanced customer relationships: Improved customer services and better
relationships with customers. The EMPIK case (Section 5.9) shows that customer
services can be improved dramatically through integrating online sales in a retail
business strategy. The Cyprus PC case on the other hand (Section 5.10) illustrates
the importance of an e-sales strategy that takes customer preferences into account,
which for the Cypriot case are the cultural aspects of speaking to people and the
desire to bargain.
Enhanced supplier relationships: Smart Supermarket (Section 5.8), for example,
offers suppliers the (paid) privilege to autonomously access and manage data held
within the Smart Supermarket e-sales solution.
Improved performance: Online sales may lead to efficiency and effectiveness
gains and increased competitive advantage. (See case study EMPiK section 5.9)
e-Business in the Retail Sector
66
However, the case studies also illustrate challenges retailers experience with e-sales.
The challenges can be subdivided into items related to customers on the one hand and
related to the company on the other. Customer-related challenges include the following:
Lack of market readiness: Customers may not be ready for online sales due to
reasons such as unwillingness to use computers and internet technology. Some
retailers try to overcome this issue through marketing activities. Smart Supermarket
(Section 5.8) and EMPiK (Section 5.9), for example, held specifically organised
marketing events to launch their e-sales activities.
Unfavourable customer attitudes: Customers may have attitudes that do not
favour online sales. Finding an appropriate fit between e-commerce practices and
buying habits of customers may be difficult. The companies may be ignorant on
how to overcome these barriers. Cypriot customers, for example, prefer to speak to
retailers to verify prices or bargain for extra discounts. Cyprus-PC.com (Section 5.3)
was able to grow significantly after the firm was set up by catering for a cultural
characteristic: it allowed online customers to bargain for discounts by integrating
online sales with telephone sales.
Customers lacking IT skills: Even if customers are generally willing to buy online,
they may be inexperienced with the technology and it may be difficult to find ways to
educate customers how to use e-sales applications. (see case study EMPiK,
section 5.9)
Challenges internal to the company include the following:
Strategic challenges: Finding the right e-commerce strategy and finding an
adequate fit for e-sales with the existing overall business strategy may be difficult
(see case study EMPiK, section 5.9).
Operative challenges: The companies may need to identify and address
limitations of selling online. Companies need to evaluate whether their products are
suitable for online sale and they may need to identify necessary changes to make
them suitable for selling online. Integrating e-sales practices with existing
operations and in-house departments may be difficult. They company may have to
arrange for and manage business process changes driven by e-commerce (see
case study Fleria Floral Creations, Section 5.7). They also need to organise for
logistic requirements necessary for e-commerce (see case study Smart
Supermarket, section 5.8). Another operative challenge is how to provide adequate
customer service which is important for sustainable online sales as demonstrated
by the 4fitness case study (Section 5.6).
Human resources challenges: Employees need to be trained on how to use e-
sales applications (see case studies EMPiK and Smart Supermarket, Section 5.9
and 5.7 respectively).
Technology development challenges: The companies may need to evaluate
whether the application chosen is the best possible match for the firm’s e-sales
needs. Security issues need to be met. There is a neccesity to explore the need for
integration of e-sales applications with existing in-house technology and conduct
integration whenever necessary. User-friendliness of the application needs to be
ensured. (See case study Fleria Floral Creations, section 5.7)
Cost challenges: While data about investment required for implementing e-sales
solutions is rare, the case studies show significant differences in the costs for e-
e-Business in the Retail Sector
67
sales: Smart Supermarket (see section 5.8) had to develop a solution from scratch
in close cooperation with an IT provider which was and continues to be cost
intensive. Fleria Floral Creations (see section 5.7) in contrast paid approximately
5000€ for the set-up and 1500€ annual maintenance charge. This figure is quite low
compared to Smart Supermarket’s cost.
The case studies suggest that, in order to reap the benefits and overcome the challenges
of adopting e-sales, retailers need to achieve a good fit between business strategy, e-
sales strategy, business operations, and customer attitudes.
3.5.3 Findings about electronic marketing
A sketch of marketing issues in retail
The term “marketing” describes the objective to direct all business decisions within a
company towards the necessities of the market, i.e. towards the needs of the customers.
This implies the use of particular means to influence the market and the customers’
preferences in order to enhance competitiveness. These means can be related to the
price of the product, product design, the geographical areas where the products are sold,
and ways to promote the products. These are the “four P” of marketing – price, product,
place and promotion (McCarthy 1960). Computerised systems can support marketing
efforts. Three items of particular importance were included in the e-Business Survey
2007: online placement of advertisements, engagement in optimising search engines,
and use of mobile services for marketing. Online placement of advertisements is included
in the following; the other two items will be included in the final report.
Search engine optimisation and online placement of advertisements
Placing online advertisements on websites that do not belong to the company itself is a
means of advertising introduced by internet business. It is very important for the business
concept of many online service providers. The case study of Cyprus-PC.com (Section
5.10) and 4fitness (Section 5.6) are examples of companies engaging in paid online
advertisements.
e-Business in the Retail Sector
68
Exhibit 3.5-10: % of companies placing
online ads on non-company websites (2007)
16
19
8
13
11
21
43
16
20
0 10 20 30 40 50
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing*
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)*
USA
Exhibit 3.5-11: % of companies engaging in
search engine optimisation (2007)
2007
46
52
42
40
45
41
46
47
53
0 10 20 30 40 50 60
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing*
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)*
USA
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = Question A5 = Yes, excl. Do not know; N (Retail, EU-7 and USA) = 768.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
Companies representing 16% of the retail industry’s employment in the EU-7 reported to
place online ads on other companies’ websites – see Exhibit 3.5-10. This promotion
method is more prevalent in food stores (19%) and non-food stores (16%) than in the
other retailing sub-sector (8%). Furthermore, online ads on other companies’ websites
are more frequently used by large (20%) and medium-sized firms (21%) than by small
(11%) and micro (18%) firms. The employment-weighted percentage is much higher in
the US (43%). This implies that the market for online advertisements appears to be
largely untapped in the EU. 47% of European retailers are however engaging in search
engine optimisation with the aim to increase visitors to their company’s website. Food
stores are slightly more active at search engine optimisation than non food stores and
other retailing companies: 52% of food stores are engaging in search engine optimisation
while 46% and 42% of non-food stores and other retailing respectively engage in it. There
are no significant differences between firm sizes with all sizes of firms being in the 40%
area. European retailers are also not far behind their EU counterparts with 53% of US
retailers engaging in search engine optimisation compared to the 47% in the EU.
e-Business in the Retail Sector
69
3.5.4 Electronic support of logistics and distribution
Introduction to logistics and distribution issues in retail
One could assume that downstream logistics and distribution are no core issues for the
retail sector because the vast majority of goods is bought on-site and the customers carry
them home themselves. In fact, downstream logistics may not be an issue for the majority
of retailers. However, logistics are a core issue for mail order retailers and for retailers
selling goods online that need to be shipped to customers. Such companies do not only
need to optimise transportation services but also warehousing and distribution centres.
Efficient customer-facing logistics are crucially important to keep down the costs of goods
sold in the internet and to satisfy customers who want to receive their orders swiftly,
safely and at low shipping costs. A particular challenge is to manage fluctuations in
demand which may be considerable, for example with regard to Christmas business.
Further challenges are reverse logistics, i.e. the return of goods from unsatisfied
customers, and trade across borders.
Current issues of logistics and distribution in online shopping
Computerised systems may support the logistics of goods sold online. Transport service
providers may, for example, give retailers the opportunity to check the current status of
shipping on the internet. Online shops themselves may offer their customers the
opportunity to check the delivery status online. An example for such an offer is Amazon,
the US-headquartered online shop: Amazon informs customers about the delivery status
by e-mail.
e-Commerce has brought several innovative forms of distribution into being. For example,
some logistics service providers such as DHL in Germany have started to implement
centralised delivery for goods ordered online where customers can fetch them in their
neighbourhood. Another trend is an increase in outsourcing of services to specialised
logistics providers to benefit from their specialised services. The increasing amount of
logistics services demanded by the industry in general is an indicator for the growing
importance of logistics for trade as an increasing number of goods have to be transported
and distributed. This includes transport across national boundaries,
3.6 Barriers and drivers of e-business use
Barriers for e-business adoption
The companies that stated that they conduct some or none of their business processes
as e-businesses (see section 3.4.2, “general level of e-business processes”) were further
asked why they do not use e-business more intensively. Seven possible reasons were
suggested and interviewees could answer “yes, important” or “no, not important”. The
results were the following (see also Exhibit 3.6-1 and 3.6-2):
The circumstance that “suppliers and customers are not prepared for e-
business” appears to be one of the most important reasons to not apply e-business
more intensively: across all sub-sectors and across all firms sizes more than half of
retail companies agreed to this statement. Overall, 64% of firms weighed by
employment (61% of firms weighed by number of firms) agreed. The overall share
in the US was significantly smaller (43%) indicating that the retail business
e-Business in the Retail Sector
70
ecosystem is more vibrant with regard to ICT use in the US
42
. Nevertheless, one
could also argue that many firms blame customers and suppliers for not using e-
business while their own efforts to introduce e-business are not considerable either.
Firm size matters: 64% of micro firms and 44% of small firms said that their
company is too small to benefit from e-business. 47% of micro firms also report
that for them ICT is too expensive (average for the retail sector: 36%). These
numbers decrease noticeably with firm size from 29% and 30% for small and
medium-sized firms respectively to only 20% for large firms with more than 250
employees. Micro and small firms also consider it to be more difficult to find reliable
IT providers than medium-sized and large firms. Security issues in contrast are
more relevant for large (40%) and small (39%) firms while only 28% of micro firms
and 23% of medium-sized firms report this issue to be a factor affecting the low
adoption of e-business. This finding however raises concerns about security
awareness among micro and medium-sized firms who might not be fully aware of
the exposure to and effects of e-business security issues for their respective
companies.
Regarding the three sub-categories, trade in food stores, trade in non-food stores
and other retailing, the other retailing group appears to be less affected by the
six categories of barriers questioned in the survey as fewer companies in this group
state that the barriers trouble them. No significant differences emerge between the
food-in-stores and non-food in stores groups although legal challenges with 30%
(28% in food stores), security concerns with 44% (16% in food stores) and
difficulties to find reliable IT providers with 28% (20% in food stores) are higher in
the non-food stores group.
Barriers perceived typical for EU retailers but not necessarily for US retailers.
Of the six categories of barriers questioned, the numbers for the US are always
lower than for the EU-7 except for ‘security issues’ where 46% of US retailers face
barriers compared to 36% of retailers in the EU-7. This indicates that overall, US
retailers seem to face other or even fewer barriers to e-business than EU -7
retailers.
Few differences are visible between barriers for the retail sector and the transport &
logistics sector. The overall numbers confirm that companies in both service
sectors tend to face similar barriers to e-business.
42
A business ecosystem is defined here as "the network of buyers, suppliers and makers of
related products or services” plus the socio-economic environment, including the institutional
and regulatory framework”. Seehttp://www.digital-ecosystems.org/.
e-Business in the Retail Sector
71
Exhibit 3.6-1: Barriers to e-business adoption as perceived by retail companies (2007)
Suppliers/Customers not
prepared
66
64
54
61
64
60
65
70
64
43
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Company too small
51
54
33
64
44
25
28
40
29
49
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
ICT too expensive
39
41
16
47
29
30
20
16
36
34
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Technology too complicated
21
18
9
28
27
15
4
27
19
10
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
e-Business in the Retail Sector
72
Exhibit 3.6-2: Barriers to e-business adoption as perceived by retail companies (2007) -
continued-
Security issues
44
28
18
28
39
23
40
31
36
46
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Legal challenges
30
16
17
29
28
24
18
24
25
14
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Difficult to find reliable
providers
28
20
17
26
25
16
17
6
24
23
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = Companies who stated that some or
none of their business processes are conducted as e-
-business; N (Retail, EU-7 and USA) = 858.
Weighting: Figures are weighted by employment
("firms representing x% of employment in the sector /
country"). Questionnaire reference: F2
T&L = Transport and Logistics industry (SL: Please
note in all relevant Exhibits.)
Source: e-Business Survey 2007
Drivers of e-business adoption: pressure from suppliers and customers
The e-Business Survey 2007 enquired whether retail companies experienced pressures
from customers and suppliers to adopt ICT solutions. These questions were posed as
those types of pressures can noteworthy stimulate the adoption of e-business and ICT.
Due to the nature of the retail industry, where the main customers are the end-consumers
of the goods sold, few pressures from these individual consumers are expected to occur.
e-Business in the Retail Sector
73
Hence, in order to explore the intangible role that these individual consumers can have as
a group, the question was reformulated to ask whether the companies have experienced
pressures from customers to adopt e-commerce. 9% of the retail firms in the sample,
which is firms representing 11% of the industry’s employment, reported to have
experienced pressure from customers to adopt e-commerce. This phenomenon is most
prevalent in the non-food group with 13% of firms reporting this issue, closely followed by
the other retailing group with 12%. The lowest number with 9% comes from the food
group which seems to be least affected by intangible end-consumer pressures to adopt e-
commerce. Hence, overall, consumers seem to be content with the existing sales
channels provided by retailers. The lack of pressure from consumers could also be
interpreted as a hint that e-commerce in the retail industry is not as important a sales
channel as often advocated. Firm size does not play and overarching role either with
numbers ranking from 8% for small firms to 15% for medium-sized firms – see Exhibit
3.6-3.
On the other end of the supply chain management scale is the pressure from suppliers.
10% of retail firms in the sample, which is firms representing 12% of the industry’s
employment, reported to have experienced pressure from suppliers to adapt their ICT.
These numbers are similar to the pressures for retailers to adopt e-commerce, indicating
that there is neither strong pressure on either sides of the supply chain, i.e. there is little
pressure on retailers from both, customers and suppliers, to adopt and adapt ICT and e.-
business technologies. There are no firm-size specific differences emerging with between
10% and 14% of firms reporting pressures from suppliers to adapt ICT (Exhibit 3.6-4).
Due to the buying power of especially large retail firms which have a sizeable slice of the
retail market, the question was raised whether EU-7 retailers demand the adoption of e-
business and ICT solutions from their suppliers. Indeed, 37% of large retail firms use their
buying power to demand from their suppliers new ICT or changes to the supplier existing
ICT structure. This power over suppliers decreases with firm size from 22% of medium-
sized firms to 15% of small firms and only 9% of micro firms putting pressures on
suppliers. The non-food group which for example includes the large hypermarkets is the
one where most firms (23%) put pressures on suppliers to adapt or implement new ICT.
The food and other retailing groups are almost equal with 15% and 14% of firms
respectively reporting that they put ICT pressure on suppliers.
e-Business in the Retail Sector
74
Exhibit 3.6-3: Customer and supplier e-business/ICT pressures (2007)
e-Business pressure
Customer
pressures to adopt
e-commerce
Supplier pressures
to adapt ICT
Put pressure on /
Demand from
suppliers to adapt /
implement new
ICT
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 11 9 12 10 20 10
NACE 52.12, 52.3-5 (non-food) 13 9 13 11 23 11
NACE 52.11, 52.2 (food) 9 7 10 5 15 5
NACE 50.5, 52.6 (other) 12 18 11 15 14 12
Retail – by size (EU-7)
Micro (1-9 employees) 9 10 9
Small (10-49 employees) 8 12 15
Medium (50-249 empl.) 15 14 22
Large (250+ employees) 13 13 37
Base (100%) All firms All firms All firms
N (2007, EU-7+USA) 1151 1151 1151
Questionnaire reference B11a B13 B15
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden, United
Kingdom) and in the USA.
Source: e-Business Survey 2007
3.7 Overall differences between size classes, countries, sub-
sectors and industries
“Lagmark” calculations
In the previous sections of Chapter 3, findings from the e-Business Survey 2007 for the
retail industry were presented by sub-sectors and size classes as well as EU in
comparison with the US. The figures indicated that in the EU-7, SME retail companies lag
behind large ones and that EU-7 retail firms tend to lag behind the US. There were no
obvious overall differences between sub-sectors. In the following, these differences will
be analysed with average values in order to provide a more concrete overview.
Average values for groups of indicators were calculated for four principal domains: ICT
infrastructure, e-procurement, internal systems, and e-sales. Taking the group of most
advanced firms as a benchmark, the results can be considered as “lagmarks”. For
example, the “lagmark” calculations for size classes indicate how much SMEs lag behind
large firms.
e-Business in the Retail Sector
75
SMEs lag behind large firms – most in internal operations and e-sales
Analysing differences between firms of different size classes, the average values show
the same ranking for all domains: micro retail firms lag behind small ones, small firms lag
behind medium-sized ones, and medium-sized ones in turn lag behind large firms – see
Exhibit 3.8-1. The differences between micro and large retail firms are most pronounced
for internal e-operations and e-sales, while the differences for e-procurement are small.
As regards ICT infrastructure, micro firms reach 41% of the possible maximum, large
firms 65%. For e-procurement, micro firms (34%) are close to small (38%), medium-
sized (39%) and large (42%) firms. For internal e-operations, micro firms reach 25%
which is only half of the value for large firms (49%). For e-sales there is a pronounced
difference between micro (20%) and small firms (22%) on the one hand as well as
medium-sized (31%) and large ones (38%) on the other.
Exhibit 3.7-1: “Lagmarks” for size class differences in ICT and e-business performance in
EU retail (2007)
ICT infrastructure
41
46
52
65
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
Firms with internet access, average share of
employees with internet access, broadband internet
access, LAN, WLAN, intranet, extranet, remote
access to company’s computer network.
e-Procurement
34
38
39
42
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
Firms procuring online, firms procuring more than
50% of purchases online, SCM, e-invoices from
customers.
Internal e-operations
25
30
38
49
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
ERP, CRM, software to manage placement or
receipt of orders, warehouse management systems,
bar-coding systems, RFID.
e-Sales
20
22
31
38
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
Own website, firms selling online, e-sellers selling
more than 50% of turnover online, credit cards for
online payment, sending e-invoices, placing online
ads on other companies’ websites, mobile
marketing.
Reading example: For the eight indicators of ICT infrastructure, micro retail firms (i.e. firms with 1-9
employees) reach on average 41% of the possible maximum (100%).
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Source: e-Business Survey 2007
e-Business in the Retail Sector
76
EU lags behind US – most in e-sales and e-procurement
The “lagmark” analysis revealed that EU retail firms lag behind US retailers in all four
domains. The US lead is strongest in e-sales, quite strong in e-procurement, and small in
ICT infrastructure and internal e-operations. As regards ICT infrastructure, EU retailers
reach 51% of the possible maximum value, US retailers 55%. In e-procurement, EU
retail companies (37%) are twelve percentage points behind the US (49%). In internal e-
operations, the lag of EU retail companies (36%) behind EU ones (39%) is small, only
three percentage points. However, US retailers are much more advanced in e-sales: they
reach 52% of the possible maximum, leaving EU retailers (34%) far behind.
Exhibit 3.7-2: “Lagmarks” for differences between EU and US retail companies in ICT and e-
business performance (2007)
ICT infrastructure
51
55
0 20 40 60 80 100
EU
US
Indicators:
Firms with internet access, average share of
employees with internet access, broadband internet
access, LAN, WLAN, intranet, extranet, remote
access to company’s computer network.
e-Procurement
37
49
0 20 40 60 80 100
EU
US
Indicators:
Firms procuring online, firms procuring more than
50% of purchases online, SCM, e-invoices from
customers.
Internal e-operations
36
39
0 20 40 60 80 100
EU
US
Indicators:
ERP, CRM, software to manage placement or
receipt of orders, warehouse management systems,
bar-coding systems, RFID.
e-Sales
34
52
0 20 40 60 80 100
EU
US
Indicators:
Own website, firms selling online, e-sellers selling
more than 50% of turnover online, credit cards for
online payment, sending e-invoices, placing online
ads on other companies’ websites, mobile
marketing.
Reading example: For the eight indicators of ICT infrastructure, EU retail companies reach on average 51%
of the possible maximum (100%), while US retail companies reach 55%.
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Source: e-Business Survey 2007
Overall, the e-commerce environment is less vibrant in the EU than in the US. The one
indicator used for highlighting barriers “suppliers and customers not prepared for e-
business” which is considerable higher in the EU than in the US, furthermore indicates
that the e-business ecosystem in the EU is different from the US ecosystem. European
retail firms seem to be less electronically bound, yet the question arises whether this is
necessarily a disadvantage for the EU economy. The economic analysis presented in
Chapter 4 indicates that productivity gains in the US retail sector, for example, are not
necessarily directly related to ICT.
e-Business in the Retail Sector
77
Sub-sectors: other retailing slightly more advanced than food and non-food
The “lagmark” analysis confirms that there are only minor differences between the three
retail sub-sectors in ICT and e-business performance. “Other retailing” appears to be
most advanced, having a slight lead over food and non-food in ICT infrastructure, internal
e-operations and e-sales. The food-sub-sector tends to perform the lowest values. As
regards ICT infrastructure, non-food (51%) and food (50%) are similar, while other
retailing leads with 57%. In e-procurement, non-food (39%) and other retailing (38%) are
close by, while food (31%) lags behind. The values for internal e-operations are quite
similar for non-food (34%), food (38%) and other retailing (40%). In e-sales, non-food
(33%) and food (34%) lag behind other retailing (41%).
Exhibit 3.7-3: “Lagmarks” for differences between EU retail sub-sectors in ICT and e-
business performance (2007)
ICT infrastructure
51
50
57
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
Firms with internet access, average share of
employees with internet access, broadband internet
access, LAN, WLAN, intranet, extranet, remote
access to company’s computer network.
e-Procurement
39
31
38
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
Firms procuring online, firms procuring more than
50% of purchases online, SCM, e-invoices from
customers.
Internal e-operations
34
38
40
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
ERP, CRM, software to manage placement or
receipt of orders, warehouse management systems,
bar-coding systems, RFID.
e-Sales
33
34
41
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
Own website, firms selling online, e-sellers selling
more than 50% of turnover online, credit cards for
online payment, sending e-invoices, placing online
ads on other companies’ websites, mobile
marketing.
Reading example: For the eight indicators of ICT infrastructure, retail companies from the non-food sub-
sector reach on average 51% of the possible maximum (100%).
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Source: e-Business Survey 2007
e-Business in the Retail Sector
78
3.8 Summary of the state of play of ICT and e-business in
retail
This chapter has shown that ICT and e-business can be beneficial for the whole supply
chain of the retail industry. It can support procurement, internal operations as well as
sales and distribution. However, there are challenges related to e-business use, for
example related to ICT use in SMEs and with regard to a generally higher level of ICT
and e-business in the US. Key findings of chapter 3 include the following:
Increase of ICT and e-business use since 2003: The results of the 2007 survey
can be compared with a similar survey conducted by e-Business Watch in 2003.
The 2003 study found that the use of e-business in the retail sector was far from
being a pervasive reality and below the average adoption rates in other sectors.
The 2007 survey found that ICT and e-business use have become more prevalent
in firms of all size classes. The 2003 study argued that the main opportunities
stemming from e-business, similarly as in other sectors, were efficiency and
productivity gains and, thus, cost savings. This was found to be still the same in
2007.
ICT infrastructure, skills and investments improved: The quality of SMEs'
internet access has significantly improved between 2003 and 2007. However, there
is scope for further improvement. Currently, retailers comprising about 45% of the
sector's employment are connected by broadband (>2 Mbit/s). Diffusion of internal
W-LANs has been fast. More than 50% of large retailers operate a W-LAN, and 35-
40% of small and medium retailers. As regards ICT skills, only about 10% of all
retail companies employ ICT specialists; even among large retailers, only about
50% do. Many companies completely outsource ICT services to external service
providers. The attitude towards ICT investments and budgets is more positive than
a couple of years ago. A third of the retailers plans to increase their ICT budgets,
only few expect budget cuts for the forthcoming financial period.
Electronic procurement: Online procurement practice can offer considerable cost
reduction benefits to the retail industry, mainly through process streamlining and
improved purchasing conditions. The level of retail firms ordering online increased
from firms representing 43% of the industry’s employment in 2003 to 55% in 2007,
and the share of e-procurers increased in all size classes. In those companies that
procure goods through the internet or computer-mediated networks, the share of
goods actually ordered online increased, too. The use of Supply Chain
Management (SCM) systems also increased considerably, from 6% in 2003 to 19%
in 2007 (weighted by employment), but this is exclusively due to a higher level of
SCM use in medium-sized and large firms.
Internal e-business systems: Internal e-business operations can significantly
enhance workflows and business processes and thus increase productivity.
However, companies representing almost half of the industry’s employment said
that they only conduct some processes by e-business. 22% even said “none”; a
“good deal” was stated by 20%, and in 11% most processes are conducted
electronically. As regards particular systems, firms representing 60% of the
industry’s employment reported to have a software application to manage the
placing or receipt of orders, 59% a bar-coding system, 51% a warehouse or depot
management system, and 16% an ERP system. RFID is not yet very common in
e-Business in the Retail Sector
79
the retail industry. Retail firms representing 8% of employment reported to use this
technology, and RFID use is very rare in micro and small retail firms.
Electronic sales and distribution: Retailers representing 38% of the industry’s
employment stated that they sell goods “through the internet or other computer-
mediated networks”. Almost half of the large retail firms (45%) and 35% of the
medium-sized ones sell online, but only 24% of the small retailers and 26% of the
micro retailers do so. The share of companies that sells online doubled from 19%
(employment-weighted) in 2003 to 38% in 2007. There was an apparent increase
in all size classes. There has also been an increase in the amount of sales
conducted online. Compared to the figures about general sales areas, it appears
that online sales helps to extend the geographic focus slightly from regional to
national sales while the international focus remains on the same low level. The e-
Business Survey 2007 also found that retailers representing 20% of the industry’s
employment use a CRM system, an increase from 8% in 2003.
Micro and small firms lag behind medium-sized and large ones: Micro and
small firms lag behind medium-sized and large firms in almost all indicators of ICT
and e-business use presented in this chapter. Exceptions include the level of
internet access which is close to 100%, the average share of employees with
internet access which is higher than in large firms, and the practice of sending
electronic invoices to customers which is on the same level in all size classes.
However, micro and small firms have been increasing their ICT adoption in recent
years.
EU retailers lag behind US: In most indicators discussed in this chapter, EU-7
retailers are lagging behind the US. In some cases the differences are large, for
example for placing online ads on other companies’ website (43% in the US versus
16% in the EU) and for options offered to pay online (higher percentages in the US
for all options). Exceptions include the share of firms with internet access, the
average share of employees with internet access, and the use of internal systems
for which the levels are similar or even higher in the EU. Surprisingly, the overall
importance of e-business stated by the firms is very similar between EU-7 and US
retailers. The reason may be that US retailers answered the question about e-
business importance with a higher reference level in mind.
e-Business in the Retail Sector
80
4 Drivers and impacts of ICT adoption
4.1 Conceptual framework: the structure – conduct –
performance paradigm
Adding an analytical perspective
Chapter 3 presented a descriptive assessment of the state-of-play of ICT and e-business
use in the retail industry. It focused on the diffusion of ICT-based applications and on how
they are used by companies, both for internal processes and for exchanges with other
organisations or consumers. This Chapter 4 adds a more analytical perspective on the
drivers and impact of ICT adoption in retail, based on an econometric analysis. The
section is organised as follows. First, it outlines a conceptual framework to assess the
economic drivers and impacts of the ICT adoption. Second, it includes four sections with
econometric analysis on of the relationship between ICT and five business dimensions,
i.e. productivity, employment, innovation dynamics, market structure and value chain. In
the analysis data from the e-Business Survey 2007 and EU KLEMS are used. The
chapter concludes with a summary of the main results.
The standard “structure – conduct – performance” paradigm
The conceptual framework of this sectional is a common analytical way for all sector
studies included in the Sectoral e-Business Watch project. Therefore references on the
specific sector outcomes like retailing are based on this joint concept to make it
comparable with other sector reports and to make them comparable in the cross-section
report as well.
Economic literature suggests that the ongoing diffusion of ICT and e-business
technologies and services among firms in the economy at large is a striking example of
the possible dynamics of technological change and economic development see, for
example (Bresnahan and Trajtenberg 1995; Helpman and Trajtenberg 1998; Helpman
and Trajtenberg 1998). The adoption and diffusion of new technologies can be spurred by
many different drivers and can have far-reaching consequences. Virtually all economic
spheres can be affected by technologically induced changes, including innovation
dynamics, productivity and growth, the development of market structures, firm
performance, and the composition of the demand for labour.
As a conceptual framework for the analysis of the interplay between these characteristics,
ICT diffusion and innovation, an extended Structure – Conduct – Performance (SCP)
paradigm is adopted
43
. Developed by Mason (1939) and Bain (1951), the paradigm states
that firm and industry performance is determined by the conduct of buyers and sellers,
which is a function of the market structure.
The term structure is used here meaning “industry structure” which includes but goes
beyond market structure characteristics of the original concept. The primary features of
an industry’s structure are related to market structure in the conventional sense: the
number and size of supplying firms as well as the number and preferences of customers
43
Following the discussion with Advisory Board members, the SCP paradigm was chosen over
other alternatives because it constitutes a comprehensive framework that allows capturing and
studying the interdependencies between sector characteristics and firms’ behaviour.
e-Business in the Retail Sector
81
and their size in case of businesses. An important aspect of market structure dynamics is
the level of ease of market entry. Further industry structure characteristics are related to
products, production and production factors: the degree of product differentiation, the
degree of vertical integration of production, i.e. value chain characteristic, the
technologies available to the firms, the firms’ cost structure (i.e. the relative importance of
costs for items such as production facilities, energy, personnel), and finally the workforce
composition and the demand for labour, most importantly with regard to knowledge and
skills. All these characteristics determine the level of competition in the industry.
These industry structure components influence a firm’s conduct. The conduct aspects
most important here are production strategies, particularly with regard to inter-firm
collaboration, as well as investments in ICT and in ICT-enabled innovation. Finally, a
firm’s performance is assumed to be the outcome of its conduct. Successful innovations
improve firm performance by, for example, reducing production cost, increasing
productivity, improving product quality or enabling it to enter new markets. This may
eventually lead to increased sales, turnover and market shares.
Extending the SCM paradigm: feedback effects
In contrast to the standard SCP paradigm, the flow of causality is in fact not one-
directional (Fauchart and Keilbach 2002). As an example of feedback between
performance and industry structure, successful and innovative companies are more likely
to grow and increase their market share at the expense of less progressive firms, which
transforms the market structure. There may also be feedbacks between conduct and
industry structure: For example, depending on the innovation type – i.e. product or
process innovation, ICT-enabled or not –, innovations influence the choice of products
manufactured and a firm’s cost structure. Innovations may also change the incentives to
perform activities in-house versus outsourcing them and, consequently, may influence the
demand for labour and its composition. It may also further shape the relationships with
suppliers and customers, for example with regard to collaboration intensity. Thus, in the
following discussion it is assumed that firm performance may have a feedback effect on
both firm conduct and industry structure, and conduct may have a feedback on structure.
This conceptualisation allows for an enhanced economic approach that studies the
drivers and impacts of ICT and ICT-enabled innovations at the firm and sector level.
Exhibit 4.1-1: Conceptual framework for the analysis of drivers and impact of ICT adoption
Structure
Structure
Conduct
Conduct
Performance
Performance
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
ICT
adoption
ICT
adoption
Performance:
- Productivity
- Turnover
- Market share
Performance:
- Productivity
- Turnover
- Market share
ICT enabled
innovation
ICT enabled
innovation
Feed-back loops
Structure
Structure
Conduct
Conduct
Performance
Performance
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
ICT
adoption
ICT
adoption
Performance:
- Productivity
- Turnover
- Market share
Performance:
- Productivity
- Turnover
- Market share
ICT enabled
innovation
ICT enabled
innovation
Feed-back loops
Source: e-Business Watch/DIW
Exhibit 4.4-1 illustrates the SCP paradigm together with the causality relationships of the
elements studied in this sector report. The extended SCP paradigm defines the two
e-Business in the Retail Sector
82
dimensions of the forthcoming analysis. First, the extended SCP paradigm identifies
market structure and firm characteristics that drive the diffusion of ICT and the process of
turning ICT use into marketable products and production processes, i.e. ICT-enabled
innovations. Second, the paradigm seeks to identify the feedback effects of firms’
innovative activity on these characteristics and firm performance.
Applying the SCM paradigm to an analysis of ICT drivers and impacts
The SCM paradigm allows one to identify firm and industry dimensions that can be
considered as relevant for the diffusion of ICT and its impact on these dimensions.
Consequently, the following elements of market and firm structure were identified as ICT
drivers: market rivalry, supplier-buyer relations and workforce composition. The impact of
ICT adoption and ICT enabled innovation is studied through productivity and employment
as proxies for firm performance. This construct enables the understanding of not only uni-
directional causal relationships but recognises the presence of firm performance
impacting upon the drivers of ICT adoption.
4.2 ICT and productivity
This section will specifically analyse to what extent ICT-capital investments have effects
on productivity growth (as compared to other factors) in the retail industry. With reference
to the Structure-Conduct-Performance framework (see introduction to this section), the
analysis in this section focuses on the links between conduct (ICT adoption and
innovation) and performance.
Exhibit 4.2-1: Scope of the analysis in Section 4.2
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(productivity)
ICT enabled
innovation
Section 4.2
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(productivity)
ICT enabled
innovation
Section 4.2
Source: e-Business Watch/DIW
4.2.1 Background and hypotheses
Empirical findings on ICT and productivity
In knowledge-driven and globalised market economies, increasing productivity is
considered as crucial for sustained competitiveness and growth. Studies on the impact of
ICT confirm productivity increasing effects in both the user sectors and in the ICT
producing sectors (Oliner and Sichel 2000). In particular, ICT was found to have positive
effects on labour productivity and total factor productivity (Pilat 2005). An important
finding is, however, that ICT-induced productivity effects vary significantly between
sectors and among countries (Nordhaus 2002). Recent research suggests that the
largest productivity growth effect occurs in the ICT-producing sectors themselves, and in
selected service industry sectors like banking, wholesale, retailing, and tele-
e-Business in the Retail Sector
83
communication (Inklaar, Timmer et al. 2007; Jorgenson, Ho et al. 2007; Jorgenson, Ho et
al. 2007)
Findings from case studies
Findings from case studies for this report indicate that retail enterprises use ICT and e-
business mainly to increase productivity and reduce costs, primarily process costs. Case
studies conducted for this report illustrate explicit productivity benefits from e-business:
The Casino case study (section 5.5) provides an example of how ICT can result in
increased labour productivity. Two areas of labour productivity increase were noted:
the first one was at the check-out tills in the hypermarkets where the IT solution
enabled employees to faster process customer check-outs. The second effect was
felt by the sales force which was able to increase productivity through better
information availability.
Productivity gains at Globus (section 5.3) were achieved through streamlined
procurement processes across the various in-store locations and across the whole
group of outlets.
Brooklands Plus Products/Dirk van den Broek (section 5.3) was also able to
increase productivity mainly through efficiency gains. Examples include enhanced
promotion management efficiencies, due to the attainment of full visibility into stock-
levels, purchasing, receiving and delivery processes from the adoption of the stock
management solution.
ICT-capital investment and total factor productivity growth
For the study of ICT impacts on firm-level productivity, two considerations are essential.
First, as depicted in the conceptual framework above, ICT investment does not lead to
productivity growth at firm-level by itself. It depends on how the technology is actually
used in business processes, i.e. on a company's ability to innovate its work processes
and business routines with support of ICT. Thus, only if ICT investment is combined with
complementary investment in working practices, human capital, and firm restructuring will
it have an impact on performance (Brynjolfsson and Hitt 2000). These complementary
investments and organisational changes are highly sector and firm-specific; therefore,
returns from ICT investments vary strongly across organisations (Pilat 2005). The need
for complementary investments in the retail is confirmed in by the case study firms:
especially the large retailers Mercator, Brooklands and Globus (sections 5.1-5.3) report
that the pure installation of a technical system bears little return on investment without
business process reorganisation and support from users and management. Second, it
has to be considered that outsourcing is an organisational innovation which can change
firm-level productivity (Erber and Sayed-Ahmed 2005).
Notwithstanding these considerations, the first step of the analysis is to assess the
contribution of ICT-capital investment to productivity growth (see Hypothesis P.1):
Hypothesis P.1: ICT-capital investment has become a main element in value added and
productivity growth in the retail industry, while other capital inputs summarised as non-
ICT-capital have diminished in their respective importance.
The second step is to consider the apparent need for companies to not only invest into
ICT but also into complementary items in order to increase productivity. A certain part of
such complementary investment is linked with total factor productivity (TFP). TFP
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84
represents output growth not caused by input growth. The attribute “total” refers to the
unknown complete set of influencing factors. TFP effects may be caused by numerous
factors, e.g. organisational changes in the company such as outsourcing that lead to
improved workflows and increased productivity.
44
Thus one can assume that ICT capital
investment has become a key driver of total factor productivity (TFP) growth. This will be
tested as a second hypothesis:
Hypothesis P.2: Total factor productivity growth in the retail industry has accelerated
together with increased investment in ICT-capital.
Another important factor that may influence the extent to which ICT enables productivity
growth is the complementarity between ICT capital and skills. A large body of literature
on skill-bias in technical change supports the finding that technical change is biased
towards skilled workers, reducing demand for unskilled labour and increasing wage
inequality and polarisation (Acemoglu 2002). The impact is clearly visible in today's
advanced economies; unskilled jobs have long been declining in absolute terms in
Europe and growing only slowly in the US, while skilled jobs for educated workers are
being created at a faster pace in most countries (Pianta 2004). ICT tends to be a skill-
biased technology and, thus, the application of ICT may increase the demand and wages
for skilled labour and decrease the same for unskilled labour. The analysis will therefore
focus on the interdependence of ICT investments with skills requirements in the retail
industry. This will help to understand the impact on employment dynamics in a more
nuanced way than just assessing the net impact on total sector employment. The
following hypothesis addresses this issue.
Hypothesis P.3: ICT and high- and medium-skilled labour have a positive impact on
labour productivity in the retail industry.
The analysis to confirm or reject these hypotheses has been conducted in two steps:
An analysis of the development of value added growth and the contribution of
different factors to it by means of growth accounting (section 4.2.2).
An analysis of the development of labour productivity growth and the contribution
of different factors to it by means of a stochastic possibility frontier (SPF)
(section 4.2.3).
On the basis of the results it will be discussed whether the hypotheses can be confirmed
or not (section 4.2.4).
Database: EU KLEMS
The empirical analyses are based on data from the EU KLEMS project. KLEMS stands
for “Capital, Labour, Energy, Material and Services”, indicating the domains for which the
project developed data from official statistical sources. The EU KLEMS database,
published by the Groningen Growth and Development Centre (GGDC) in March 2007,
reports specific data for the retail industry. Consistent EU KLEMS data are available by
country and only for a subset of the EU-27, typically EU-15 or less. EU KLEMS provides
44
In terms of calculation, TFP is a residual between growth of an output indicator, like gross value
added or gross production value, minus an aggregate index of factor inputs such as labour and
capital, weighted by their respective factor shares. TFP is also named ‘Solow residual’, because
Robert Solow (1957) was one of the first economists who pointed out the significance of
disembodied technical change for economic growth opposite to the classical view that in
particular capital accumulation, i.e. embodied technical change, is the key driver of growth.
e-Business in the Retail Sector
85
country data. Therefore, while the country level is not a primary item of analysis in the e-
Business Watch, the following sub-sections present country data. For the purpose of this
report, it is however not insightful to describe and interpret these country findings in
detail. Country differences may be due to numerous different characteristics of the
national retail industries, e.g. overall number of firms and employees, number of firms
and employees by size class, composition by sub-sectors, target markets, exceptional
national business cycles, trade union power, national industry policy, and large-scale
mergers in certain periods of time.
4.2.2 ICT impact on value added growth
Gross value added growth
Exhibit 4.2-2 shows the annual average growth rates of gross value added (GVA) in the
retail industry for three different time periods (1980-1995, 1995-2000, 2000-2005).
Growth rates were found to be predominantly positive. GVA varies greatly among
countries and there are few consistent trends. For example, Greece, Sweden and the UK
feature an increasing and positive trend, France a declining but positive one. An
accelerating retailing boom occurred in Ireland from 1995 onwards with 6% growth in the
period 1995-2000 and 8.7% in the period 2000-2004. Only four countries have
experienced negative values, all of them only in one of the three sub-periods and
predominantly in 2000-2004: Belgium -0.8% in 1980-1996, Germany -0.4 in 2000-2004,
Italy -1.8% in 2000-2004, and Netherlands -0.7% in 2000-2004.
Growth accounting of gross value added
Growth accounting is a familiar approach to study the contribution of different factor
inputs on overall output growth. Using standard techniques (Jorgenson, Gollop et al.
1987) the following decomposition of the real gross value added for eleven EU Member
States (see Exhibit 4.2-3 below, and Table A-1 in Annex 2) is obtainable. For the period
1995-2004, strongest overall growth in value added can be observed in Finland with
4.5%, followed by Sweden with 4.2%, the UK with 3.7% and Spain with 3.2%. Austria
with 2.5% and the Netherlands with 1.8% have experienced significantly lower growth. In
France and Denmark with 0.9%, followed by Germany with 0.7% and Belgium with 0.5%
retailing stayed nearly stagnant while Italy, with -0.5%, had to face a small decline.
e-Business in the Retail Sector
86
Exhibit 4.2-2: Growth of gross value added in retailing, 1980-2004
1.9
0.9
3.8
2.1
1.7
2.1
2.8
1.7
3.3
4.0
1.4
4.3
1.1
1.5
2.2
5.0
0.0
4.6
3.3
3.8
3.3
3.4
2.3
0.7
2.0
0.9
8.7
-1.3
2.1
-0.7
4.8
-0.8
2.5
1.5
0.0
2.2
0.9
0.4
-0.4
4.5
4.8
2.9
-2 0 2 4 6 8 10
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Exhibit 4.2-3: Retailing in selected EU Member States, growth accounts for gross value
added for 1995-2004 (contributions in percentage points)
0.3
1.4
0.3
0.4
0.7
0.4
0.5
0.4
0.4
0.4
0.6
0.9
0.6
0.8
1.3
-1.1
-1.4
-0.6
3.2
1.4
-1.4
1.0
3.0
0.5
-0.1
0.8
-0.6
-0.4
2.1
-0.1
-0.01
0.1
0.2
0.4
-0.3
0.5
0.2
0.4
0.1
0.2
0.3
1.0
1.4
0.6
0.9
0.2
0.03
0.3
0.1
0.4
0.1
-3 -2 -1 0 1 2 3 4 5 6
Austria
Belgium
Denmark
Spain
Finland
France
Germany
Italy
Netherlands
Sweden
United Kingdom
Total hours worked Labour composition ICT capital Non-ICT capital Total factor productivity
Source: EUKLEMS data base, GGDC; own calculation
The most dramatic sources for differences relate to the total factor productivity growth
differentials between the Member States. While Finland and Sweden experienced high
TFP-growth with 3.2% and 3% respectively over the nine years, Italy and Denmark faced
an average annual decline of 1.4%. For all EU-countries with the exception of Germany
with -0.3%, ICT-capital contributed positively to overall output growth, ranging from 0.9%
in Denmark to 0.2% for Spain and Italy. Non-ICT-capital sometimes contributed even
e-Business in the Retail Sector
88
more, for example in Luxembourg with 2% and the UK with 1.4%. Overall, non-ICT-
capital investments contributed positively on the growth performance in retailing. It would
be interesting to study these differences in greater detail, in particular the different
retailing sub-sectors, to understand how much the “in-the-box-effect” (discussed above)
and shifting expenditures to different consumer goods and service classes contributed to
these results and might explain the differences between the US and European ICT-
impacts. Furthermore, stricter regulations on the establishment of superstores and factory
outlet centres in many European countries might cause impediments towards a more
concentrated market structure in retailing when compared to the US. These results lend
little support to the hypothesis that ICT-capital investments contributed most to positive
output growth in all European countries.
Looking at the impacts of labour compositional change, one observes that the labour
quality change component from low-skilled towards medium- and high-skilled labour gave
positive growth impacts in all countries with the exception of the Netherlands. However,
there is a significant variety between countries like Spain with 0.53%, Italy with 0.41%,
the UK with 0.4%, Belgium with 0.39%, France with 0.36% and Sweden with 0.35% and
other countries like Denmark with 0.06%, Germany with 0.03% and Finland with 0.01%. A
potential cause could be the different stages the various countries are in when
transforming their retailing industry.
In contrast the change in total working hours gives a mixed picture for the different
countries: Italy with -0.61%, Germany with -0.35% and Sweden with -0.1% experienced a
moderate decline in overall working hours. Only Spain with 2.13% and Denmark with
1.37% experienced a significant increase in total working hours resulting in a significant
contribution to the growth of the retailing industry.
Conclusion: TFP key driver of retail industry growth – ICT less important
The results from this growth accounting exercise indicate that the key drivers to industry
growth come from total factor productivity growth. In some countries it comes from
increases in total working hours and labour quality changes. ICT-capital investments
are not key drivers in the growth of real value added in European retailing
industries. The same applies to non-ICT capital investments. The stronger total factor
productivity growth and changes in labour quality composition are, the better is the
countries’ performance in retailing. Extending working hours, most possibly associated
with longer opening times of shops, e.g. late hours during weekdays or longer opening
hours during the weekend, may have played a role in this development where
deregulation might have helped to increase overall growth of gross value added.
However, the EU KLEMS database does not offer sufficient data to analyse these
aspects in retailing on a solid empirical basis.
4.2.3 ICT impact on labour productivity growth
Labour productivity growth
According to literature, the resurgence of productivity growth in the US economy did not
last beyond the year 2000 or is not directly related to actual ICT investments (Gordon
2004; Jorgenson, Ho et al. 2007). Europe overall even did not show any acceleration in
productivity growth similar to that which happened in the US in the second half of the
1990s (Inklaar, Mahony et al. 2003). Retailing has been identified as a key driving sector
e-Business in the Retail Sector
89
where intensifying ICT-capital usage contributed significantly to aggregate labour
productivity growth acceleration in the US (van Ark, Inklaar et al. 2003). Therefore this
study analyses the particular developments and factors which led, in the 14 Member
States included, to fairly different overall outcomes than that expected when the Lisbon
Agenda was set up in 2000. At this time a similar resurgence of productivity growth due to
ICT investments as in the US was considered to take place in Europe as a catching-up
process to the US as leader in development from the year 2000 onwards.
Based on the EU-KLEMS-Database a decomposition of annual labour productivity growth
rates for 14 EU Member States for the periods of 1980-1995, 1995 -2000 and 2000-2004
shows two main characteristics: a significant heterogeneity of growth rates (see Exhibit
4.2-4. below, Table A-2 in Annex 2) and positive labour productivity growth in almost all
countries and in all periods. Very high average sustained annual labour productivity
growth is observed in very few countries like the UK and Sweden and less pronounced in
Portugal and Ireland, with average annual rates above 2.5% for the whole time period
1980-2004 and the respective sub-periods (see Figure 4-3, Table A-2 in the Annex 2).
The dynamics across countries show no common pattern as might be expected from the
literature which focused on the US experience. This gives some evidence that an
insufficient rapidly convergence in the retailing industries in the EU and Eurozone prevails
even after introducing the common currency.
Employment growth and average working hours per employee
Labour productivity growth based on working hours can be decomposed in the two
components of employment change and changes in average working hours per
employee. As the two following Exhibits 4.2-5 and 4.2-6 show, most countries
experienced positive employment growth over the whole period 1980 until 2004.
However, this was accompanied by significant decreases in average working hours in
most countries.
This development is attributable to an increasing tendency in retailing to substitute full-
time employment of employees by part-time employment. However, one would need
more detailed data for such an analysis than it is included in the EUKLEMS database.
As Exhibit 4.2-6 shows, working hours per employee increased in one of the periods in
only five countries: Denmark 1.1% in 1995-2000, Luxembourg 0.6% in 1995-2000, and,
almost negligible, 0.2% in Sweden in 1980-1995 as well as 0.1% in Belgium 1995-2000
and in Spain 2000-2004.
The low-skilled employees are most likely the ones who had to accept more and more
part-time jobs. By this, the relative skill-premium of medium- und high-skilled employees
in retailing increase is twofold. They have a greater chance to get a full-time job and due
to the associate higher wage and salary incomes from full-time opposite part-time jobs,
they obtain a more than proportional income advantage towards low-skilled workers. The
growing income gap between low- and medium to high-skilled workers consists therefore
of two components. A higher probability to obtain full-time employment and higher wages
and salaries because of the skill-advantage. The two trends observed in retailing are
therefore amplifying each other.
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Exhibit 4.2-4: Labour productivity growth in retail, 1980 – 2004 (annual average growth rates)
1.8
2.5
1.5
1.0
0.9
2.0
2.0
3.1
3.4
1.5
1.4
0.8
1.4
1.3
1.9
1.2
2.1
2.2
4.5
3.4
2.7
1.9
-0.7
-0.1
0.8
7.7
-1.3
0.1
-0.1
4.0
-0.1
2.1
-2.6
0.0
2.5
4.5
0.1
0.1
0.2
2.9
3.4
1.2
-4 -2 0 2 4 6 8
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Exhibit 4.2-5: Employment growth in retailing, 1980 – 2004 (annual average growth rates)
0.8
-0.5
1.0
1.5
4.1
0.0
1.1
1.2
1.9
-0.5
0.4
1.2
1.7
3.3
1.0
1.2
1.1
5.2
-0.9
1.9
2.6
1.3
0.3
1.0
1.0
2.5
1.9
-0.5
1.7
1.8
0.6
2.1
0.3
1.8
1.5
1.6
0.2
0.2
-0.1
0.2
0.1
-0.2
-1 0 1 2 3 4 5 6
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Exhibit 4.2-6: Average working hours per employee in retail, 1980 – 2004 (annual average
growth rates)
-0.7
-0.9
-0.3
-0.5
0.1
-0.3
-0.7
-1.1
-0.1
-2.1
-0.2
0.6
-1.5
-0.7
-0.3
-0.5
-0.1
-0.6
-0.4
0.1
-0.9
-0.7
-0.8
-0.6
-0.1
-0.9
-0.7
-0.6
-0.6
0.0
0.2
-0.9
-0.4
-1.1
0.2
-0.4
0.0
1.1
-0.1
-0.1
-0.1
-3 -2 -1 0 1 2
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Calculating the impact of ICT on labour productivity growth
To analyse the causes for labour productivity change in the retail industry, a stochastic
production possibility frontier (SPF) was estimated. As for the growth accounting, the
analysis is based on data from the EU KLEMS database, in particular on secondary
intermediate inputs as well as on the two primary input factors capital (broken down into
ICT and non-ICT capital stock) and labour (measured by working hours, separately
reported for high-, medium-, and low-skill categories). In this way the analysts were able
to estimate a stochastic production possibility frontier for the retail industry from 1995 until
2004 in 16 EU countries.
45
As a particular specification we used the error component model (Battese and Coelli,
1992), in which the parameters of a specified production function are estimated while
parts of the observed deviations are also explained by systematic differences in technical
efficiency across different countries (see appendix for details). To ensure constant returns
to scale of the production technology output and input variables were normalised by total
working hours (TWHs).
46
Thus, the estimated coefficients report the impact that different
factor intensities (e.g. intermediate inputs per TWH) have on labour productivity,
measured as gross output per TWH. To consider the potential impact of autonomous
technical change a time dummy was included as additional variable. The estimation
results based on a Cobb-Douglas production function are summarised in the following
Exhibit.
47
Exhibit 4.2-7: Parameter estimates of a Stochastic Production Possibility Frontier (Error
Component Models) for the retail industry, 1995 – 2004
Explanatory variables Parameters Standard error t-value
Intermediate Input per Total Working Hours 0.869 0.023 37.167
ICT-Capital Stock per Total Working Hours 0.041 0.014 2.996
Non-ICT-Capital Stock per Total Working Hours -0.034 0.021 -1.622
Medium-Skilled WH per Total Working Hours 0.043 0.015 2.914
Coefficients:
Constant 0.164 0.021 7.717
sigma squared 0.161 0.062 2.604
gamma 0.976 0.010 98.369
eta -0.020 0.006 -3.185
Log-Likelihood 180.4
No. of iterations 28
Endogenous variable: Gross Production Value per Total Working Hour (TWH), based on EU-16 Country Panel
including Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Luxembourg,
Netherlands, Poland, Slovenia, Spain, Sweden, United Kingdom.
Parameters estimate the impact of factor intensity (e.g. intermediate input per TWH) on output intensity (gross
production value per TWH) which can be interpreted as the impact on labour productivity.
Parameters for high-skilled and low-skilled labour insignificant and therefore not mentioned.
Source: EUKLEMS database of GGDC, DIW calculations
45
Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy,
Luxembourg, the Netherlands, Poland, Slovenia, Spain, Sweden and the UK.
46
This leads to an accordingly restricted stochastic production possibility frontier where the real
gross production value per working hour is explained by six factor intensities using total working
hours as the denominator.
47
See appendix for more details on technical specifications. For the econometric estimations we
used the Frontiers 4.1 software package (Coelli, 1996).
e-Business in the Retail Sector
94
The parameter estimates obtained are measures for the output elasticity of the respective
input factor, i.e. an increase of one unit of an input factor (e.g. ICT capital) increases the
output variable (production value) by a certain number of output units. Hence, a high
parameter value indicates a larger impact of the respective factor on labour productivity
changes. All parameters are statistically significantly different from zero at the 5%
significance level
48
, except non-ICT capital intensity.
49
The analysis led to the following
principal results:
The high output elasticity of 0.87 for intermediate input intensity is the dominant
feature of the analysis. This may be related to outsourcing of retailing activities
which implies a growing importance of intermediate input intensities.
50
For example,
retail supply-chains may be restructured by outsourcing activities upstream to
wholesale as well as transport and logistics service providers. A concrete example
may be a retail company that does no longer employ drivers and own lorries itself
but buys transport services on demand.
The ICT-capital intensity together with the medium-skilled labour intensity
contributes nearly at the same degree of 0.04, i.e. about 4% output elasticity. It
cannot be confirmed from our analysis if this co-movement is accidentally or
necessary. However, since high- and low-skilled labour intensities were found to
have no impact on labour productivity,
51
ICT-capital and medium-skilled-labour
inputs could even be necessary ingredients – in the sense of capital-skill
complementarily – to raise labour productivity growth.
For the individual values, the lowest output elasticity was calculated for non-ICT
capital stock intensity, however statistically insignificant. The parameter for non-ICT
capital was even negative, indicating that an increase of non-ICT capital may have
led to a decrease of productivity.
4.2.4 Conclusions: Minor ICT impact on growth of value added and
labour productivity
With regard to the three hypotheses concerning the role of ICT-capital that were
formulated in section 4.2.1, the analyses led to a twofold outcome. On the one hand the
growth accounting exercise confirms that ICT-capital played a positive role for value
added growth in all countries. On the other hand, the analysis based on a stochastic
possibility frontier revealed that probably the direct positive link between ICT-capital
investments and labour productivity growth is weak. Both exercises revealed that factors
other than pure ICT-capital growth appear to play a predominant role for labour
productivity growth in retailing: human capital inputs, organisational changes incorporated
in the total factor productivity growth, and outsourcing of non-core activities included in
the intermediate inputs. The key findings can be summarised as follows:
48
t-values above 2 assure by a rule of thumb this 5%-signficance threshold of the test.
49
Parameters for low- and high-skilled labour were also insignificant but left out because they
deteriorated the quality of the estimation.
50
See section 3.2, Exhibit 3.6-2 for findings about ICT outsourcing in retail firms.
51
Considering high- and low-skilled labour intensities did not simply yield insignificant parameter
estimates. In fact, the study team found that including them into the estimation even
deteriorated the overall fit or the estimations. Thus, they are not considered in the estimation
results as presented in Exhibit 4.2-7.
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Results for Hypotheses P.1-3:
ICT-capital investments were no key drivers for growth of real value added in
the European retail industry between 1980 and 2004. Growth accounting suggests
that the key drivers to value added growth in retailing came from total factor
productivity (TFP) growth, e.g. organisational changes.
The intensity of investments in intermediate inputs was found to be the main
component of labour productivity growth. Investments in ICT capital as well as
an increasing share of medium-skilled labour had a positive but small impact on
labour productivity growth.
Considering literature findings, this outcome is not surprising. There may be significant
delays between the introduction of new technologies and related organisational changes
on the one hand and impacts on productivity on the other. For example, an analysis for
the telecommunications industry (Erber 2005; Aral, Brynjolfsson et al. 2006) showed that
ICT-impacts on total factor productivity growth happen at a later stage than when the
initial investments take place. The hypothesis that there is an instantaneous impact of
ICT-capital investments on total factor productivity growth has to be refuted with regard to
the empirical analysis.
With respect to the hypotheses formulated in section 4.2.1, the following conclusions can
be drawn:
52
Exhibit 4.2-8: Results economic analysis ICT and value added growth
Hypotheses Result
P.1 ICT-capital investment has become a
main element in value added and
productivity growth in the retail industry,
while other capital inputs summarised as
non-ICT-capital have diminished in their
respective importance.
Not confirmed. Growth accounting
indicates that TFP changes played a
dominant role while ICT and non-ICT
capital inputs are less important
A production possibility frontier
analysis points at intermediate inputs
as key drivers of labour productivity
growth.
=> ICT is a small driver, not the key
driver of growth in this sector
(no)
P.2 TFP growth in the retail industry has
accelerated together with increased
investment in ICT-capital.
Not confirmed. There is no
instantaneous impact of ICT
investment on TFP growth.
no!
P.3 ICT and high- and medium-skilled labour
have a positive impact on labour
productivity growth.
Weakly confirmed. ICT capital and
medium-skilled labour have a positive
impact on labour productivity growth,
but the impact is small. The impact of
high-skilled labour was found to be
insignificant in statistical terms.
(yes)
52
For an overview of findings in other sectors see SeBW Report No. 10/2008 “an Economic
Assessment of ICT Adoption and its Impact on Innovation and Performance”, section 2.4,
Exhibit 2.4.1.
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4.3 ICT and innovation
This section analyses ICT-related innovation activity. It focuses on two questions. First,
what are the characteristics of firms that introduce ICT-enabled innovations? In terms of
the extended SCM paradigm, this question is related to the effects of industry structure
on firm conduct. Second, how do ICT-enabled innovations affect firm performance and
organisational change? This question is related to the effects of firm conduct on
performance and industry structure.
Exhibit 4.3-1: Scope of the analysis in Section 4.3
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
turnover)
ICT enabled
innovation
Section
4.3.2.
Section
4.3.3.
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
turnover)
ICT enabled
innovation
Section
4.3.2.
Section
4.3.3.
Source: DIW/empirica
Section 4.3.1 provides empirical evidence on innovation from the e-Business Survey
2007. The following sections offer further insights to what degree specific factors are
linked with ICT-enabled innovation in the retail industry (4.3.2), and whether companies
which conduct ICT-enabled innovation are likely to exhibit superior performance (4.3.3).
In the Structure-Conduct-Performance framework (see introduction to this section), this
analysis explores links between ICT adoption and ICT-enabled innovation, links between
innovation and performance.
4.3.1 Survey findings about ICT and innovation
Introduction to the importance of ICT for innovation
The growing diffusion of ICT in all areas of business is a major enabler of technological
change, innovation and ultimately economic development. ICT-driven innovation activity
is central to the subsequent effects of ICT economic impact. As a general purpose
technology, ICT can have effects on all innovation at all stages of the supply chain in the
retail industry. RFID, for example, is a technology innovation that is transforming
warehouse management in retail firms.
The links between the adoption of new e-business technologies and innovation are
broadly recognised. ICT investments in general and e-business applications in particular,
enable and drive both product and process innovation. They are drivers of process
innovation, because ICT implementation, to be successful, typically requires changes in
working routines. In micro-economic terms, a product innovation corresponds to the
generation of a new production function. A process innovation, on the other hand, can be
viewed as an outward shift of an existing supply function, which corresponds to lower
variable costs in the production of an existing product or service, and is therefore a
productivity increase. Thus, ICT-driven technological change moves firms towards new
technological trajectory.
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The capability for innovation is an important factor in the retail industry due to macro-
economic issues including the excessive dependence on consumers and micro economic
issues such as high competitive pressures. Considering these strong economically-driven
factors, retailers should have incentive to use e-business and ICT to compete and better
react to consumer desires. As the products sold are not transformed by the retailers, the
innovation potential within the industry is expected to originate mainly from process
innovations.
Data from the e-Business Survey 2007
In order to receive evidence about the role of ICT for innovation, the Sectoral e-Business
Watch asked companies from the sectors studied in 2007 whether they had "launched
any new or substantially improved products or services" during the past twelve months,
and if they had introduced "new or significantly improved internal processes" in the same
period of time. Those firms that had introduced innovations, the so-called ‘Innovators’
were then asked follow-up questions with the focus being on whether the innovation(s)
had been enabled by ICT.
21% of retail enterprises (representing 32% of sector employment) said that they had
launched new or improved products in 2006/07. Firms representing 70% of
employment, i.e. almost two thirds of those that reported product/service innovations,
said that their innovations had been directly related to or enabled by ICT (see Exhibit 4.3-
1). This high share indicates the important role ICT plays for innovative behaviour. With
60% and 67% respectively, micro and large firms are the types of firms benefiting most
from ICT enabling innovative behaviour (although the 67% for the large firms is indicative
due to a small number of respondents). Overall though, fewer SMEs than large firms
have launched new products and services in the 12 months preceding the interview: 44%
of large firms, 30% of medium-sized firms, 25% of small firms and 21% of micro firms.
Hence product/service innovations are firm-size dependent although there are more
opportunities for innovation in larger firms due to them being bigger than smaller ones.
It was a consistent finding in e-Business Watch sector studies that ICT play a crucial
role to support process innovation, in manufacturing as well as in services industries.
This can be confirmed for the retail industry. Firms representing 45% of the industry’s
employment said they introduced process innovation in the past twelve months. In firms
representing 32% of employment, 36% of the process innovations were ICT-related, and
in only 9% the process innovations were not ICT-related (see Exhibit 4.3-2). In micro
firms again the share of firms innovating with ICT was smaller than in small, medium-
sized and large firms. Hence, there appears to be evidence for a relatively higher
importance of ICT for business processes innovations in larger companies. Compared
the transport and logistics sector, the levels of overall process innovation and of ICT-
related process innovation in the retail industry were found to be along the same lines.
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Exhibit 4.3-2: % of companies having introduced product or process innovation (ICT enabled
versus non-ICT enabled, 2007)
Product/Service innovations
10
6
22
19
0 20 40 60 80 100
Retail (EU-7)
Transport
(EU-7)
non-ICT enabled product innovation
ICT-enabled product innovation
Process innovations
9
11
36
32
0 20 40 60 80 100
Retail (EU-7)
Transport
(EU-7)
non-ICT enabled process innovation
ICT-enabled process innovation
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%) = companies with at least 10 employees and using computers; N (Retail, EU-7) = 1151.
Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").
Questionnaire reference: D1-D4.
Source: e-Business Survey 2007 by the SeBW
In addition to the above discussed kinds of innovation, the e-Business Survey 2007
asked companies about four types of organisational innovation: changes in corporate
strategy, management techniques, organisational structure, and marketing concepts.
These types of innovation may need to accompany product or process innovation in order
to implement such innovations successfully, or they may be introduced self-sustained.
Between 24% and 36% of retail firms report that they have introduced organisational
innovations – see Exhibit 4.3-2. Of those innovations questioned, marketing and
structural innovations are most prevalent more than 1/3 of firms reporting changes in the
preceding twelve months. Due to its competitive nature and reliance on consumers,
marketing innovation seems to play more of role in the retail industry than in the transport
and logistics sector where only 18% of firms weighed by employment (compared to 30%
in the retail sector) report innovations of this kind. The numbers in the transport/logistics
sector are also lower than in the retail industry in the other three organisational innovation
categories (see Exhibit 4.3-2). The non-food group is introducing most of the innovations:
firms in this group are ahead of many others in the other two groups.
The survey also found that the levels of organisational innovation were similar in small
and medium-sized firms, while the levels for large firms were higher across all four
categories.
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Exhibit 4.3-3: ICT and organisational innovation (2007)
Companies having introduced major changes ...
in their
corporate
strategy in
the past 12
months
in their
management
techniques in
the past 12
months
in their
organisation
al structure
in the past 12
months
in their
marketing
concepts in
the past 12
months
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail – 2007 total (EU-7) 24 16 25 18 36 24 30 23
NACE 52.12, 52.3-5 (non-food) 26 13 28 16 38 23 38 23
NACE 52.11, 52.2 (food) 25 22 23 23 32 28 18 22
NACE 50.5, 52.6 (other) 17 25 15 28 35 26 12 19
Retail – by size (EU-7)
Micro (1-9 employees) 15 18 24 22
Small (10-49 employees) 20 23 30 29
Medium (50-249 empl.) 26 24 36 31
Large (250+ employees) 35 32 48 38
Other sectors
Transport & Logistics 21 17 19 14 37 23 18 13
Base (100%) all firms all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151 1151
Questionnaire reference D5a D5b D5c D5d
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Source: e-Business Survey 2007
In a cross-sector comparison, the share of ICT-enabled process innovation within all
process innovation is broadly in line (but at the lower end) with findings for other
manufacturing sectors. Exhibit 4.3-3 shows that results for various sectors studied by e-
Business Watch over the past three years are fairly consistent. The role of ICT for
process innovation was found to be most important in the publishing and automotive
industries. Differences are more pronounced for product innovation, obviously depending
on the nature of the goods and services produced. Notably in service industries such as
telecommunications and transport and logistics, ICT are essential for the development of
new products or services.
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Exhibit 4.3-4: Cross-sector comparison: percentage of product and process innovations that
are ICT-enabled
Sector Product innovation:
% ICT-linked
Process innovation:
% ICT-linked
Year of
survey*
Manufacturing
Chemical, rubber, plastics 36% ˜ ˜ 73% ˜ ˜ ˜ 2007
Food 15% ˜ 62% ˜ ˜ ˜ 2006
Pulp and paper 34% ˜ ˜ 59% ˜ ˜ ˜ 2006
ICT manufacturing 54% ˜ ˜ ˜ 70% ˜ ˜ ˜ 2006
Steel 48% ˜ ˜ 64% ˜ ˜ ˜ 2007
Furniture 44% ˜ ˜ 67% ˜ ˜ ˜ 2007
Automotive 21% ˜ 86% ˜ ˜ ˜ ˜ 2005
Pharmaceutical 18% ˜ 72% ˜ ˜ ˜ 2005
Machinery & equipment 25% ˜ 66% ˜ ˜ ˜ 2005
Publishing 65% ˜ ˜ ˜ 83% ˜ ˜ ˜ ˜ 2005
Retail and services
Retail 70% ˜ ˜ ˜ 81% ˜ ˜ ˜ ˜ 2007
Transport and logistics 76% ˜ ˜ ˜ ˜ 75% ˜ ˜ ˜ 2007
Telecommunications 86% ˜ ˜ ˜ ˜ 92% ˜ ˜ ˜ ˜ 2006
* Surveys of 2005 and 2006 as well as Retail & transport/logistics 2007 include micro-firms with up to 9
employees
Data weighted by employment. Reading example: "Out of those companies in the food industry which said they
had introduced new or significantly improved internal processes in the past 12 months, 62% said that at least
some of these process innovations were enabled by ICT."
Source: e-Business Surveys 2005, 2006 and 2007 by the SeBW
4.3.2 Links between skills, e-collaboration and ICT-enabled innovation
Internal capacity
Knowledge stock and skills found a firm’s absorptive capacity to adopt new technologies
(Cohen and Levinthal 1989). This, in turn, has a positive impact on a firm’s innovation
performance. Thus, in order to develop marketable products or feasible production
processes based on GPT, a firm needs to build up its knowledge stock and expertise, i.e.
complementary assets. The most obvious example of investments in complementary
assets include investments in software, training and organisational transformations that
accompany ICT investments. In other words, firms that combine high levels of ICT and
high levels of worker skills have better firm innovation performance. Thus, the following
hypothesis can be formulated:
Hypothesis I.1: Retail firms characterised by a higher share of employees with a
university degree are more likely to conduct ICT-enabled innovations, in comparison with
their peer-group in the same sector.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Question D2: "Have any of these product or service innovations been directly
related to or enabled by information or communication technology?" (asked to
companies having introduced new products / services)
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Question D4: "Have any of these process innovations been directly related to or
enabled by information or communication technology?" (asked to companies having
introduced new processes)
The main explanatory variable is the share of employees with a university degree. To
additionally account for the effect of internal capacity on innovation, a variable controlling
for the presence of ICT practitioners was added. This should control for the effect of ICT-
specific skills on a company’s innovative potential. The variables are based on the
following survey questions:
Question G11: "Please estimate the percentage share of employees with a college
or university degree in your company."
Question E1: "Does your company currently employ ICT practitioners?"
To analyse the relationship between ICT-enabled innovation and the share of employees
with a university degree, a probit regression was run.
53
Exhibit 4.5-3 reports the results.
54
Result for Hypothesis I.1:
Skills matter: Changes in share of employees with a higher university degree positively
affect the likelihood of conducting ICT-enabled innovations. Similarly, employing IT
practitioners significantly increases firm’s propensity to use ICT to develop new products
and services. This finding provides further evidence that the success of the ICT-driven
innovative process depends on the availability and quality of complementary assets.
Firm size is an advantage: Whereas firm age does not have any implications for
conducting ICT-enables innovations, being an SME negatively affects the likelihood of a
firm conducting such innovations. In other words, a large scale of operations might create
an advantage that allows a firm to overcome the cost barrier associated with innovative
activity.
Exhibit 4.3-5: Effect of employee skills on ICT-enabled innovation activity
Independent variable
a
Coefficient Standard Error
% of employees with higher university
degree (G11)
0.004** 0.002
IT practitioners (E1)
0.864*** 0.106
Less than 249 employees (Z2b) -0.343* 0.198
Firm founded before 1998 (G2) 0.060 0.092
Model diagnostics
N = 973
R-squared = 0.09
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: D2 and D4
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculations
53
Probit regressions are used to estimate the effect of a set of explanatory variables on a
dependent variable that only takes on values of 0 or 1 (binary indicator variable).
54
Coefficient estimates indicate how changes of dependent variables influence the dependent
variable. The estimation results do not allow for conclusions about the direction of causality,
mainly because the dependent and the independent variables are reported for the same time
period.
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Intra and inter-firm collaboration
There are indications that ICT has a direct impact on process innovation in companies by
facilitating links between different companies (Lee 2000). ICT-enabled inter-
organisational systems integration and collaboration may enhance the innovation
capabilities of companies by providing opportunities for shared learning, transfer of
technical knowledge and exchange of information.
The most obvious benefit of information exchange and integration with the help of ICT is
the optimisation of the value chain. Other, less obvious consequences for firms’
innovativeness can be found in tacit and knowledge-based processes. There ICT allows
creating communication infrastructures facilitating production networks of knowledge
workers or enables business partners to align the incentives of multiple players by
creating joint business units or facilitating the work of teams on the same tasks (McAfee
2006).
The use of electronic networks may lead to a higher probability of firms collaborating in
innovative activities and it may increase the amount of collaborative relations they have
(European Commission 2004). In other words, it can be said that the use of ICT
applications supporting information exchange and inter-firm collaboration constitutes
necessary input for ICT-enabled innovative output, i.e. re-engineered processes, new
products or distribution channels.
The e-Business Survey 2007 included a relevant question about inter-firm collaboration: it
regards information sharing about inventory levels with business partners. In 2007,
retailers comprising 15% of the sample population (employment weighed) said that they
share information online about inventory levels with business partners (see Exhibit 3.3-7).
Thus, the following hypothesis was formulated to test the assumed importance of
collaborative applications for innovative output:
Hypothesis I.2: Retail firms that use ICT applications to exchange information or
collaborate with business partners are more likely to introduce ICT enabled innovations,
compared with their peer-group in the same sector.
The hypothesis is tested on the basis of data from the e-Business Survey 2007. Again,
the analysis focuses only on ICT-enabled innovations (see questions D2 and D4 in
previous section). Independent variables control for the use of the following:
55
Question A7: "Does your company use a Supply Chain Management system?"
Question B9: "Does your company share information on inventory levels or
production plans electronically with business partners?"
Question B10: "Does your company use software applications other than e-mail to
collaborate with business partners in the design of new products or services?"
Exhibit 4.3-6 reports the results of the regression. An analysis of the results leads to the
following conclusions:
55
One could suspect that this hypothesis is tautological because the independent variables may
be included in the dependent ones. For example, if a company implemented an SCM system in
the past twelve months it would also state that it introduced new ICT-related processes in the
past twelve months. However, the share of such companies is unlikely to be large enough to
considerably influence significance level, direction and strength of the relationship.
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103
Results for Hypothesis I.2
e-Collaboration increases innovative output: The use of applications and practices
supporting the electronic exchange of information between companies positively affects
the likelihood of conducting ICT-enabled innovations.
Firm size is an advantage: Again, whereas firm age does not have any implications for
conducting ICT-enables innovations, small firm size negatively affects the likelihood of
conducting such innovations. The latter effect supports the finding of the previous e-
Business W@tch reports about the existence of the digital divide between large and small
firms. This result might indicate that the prevailing technology gap in terms of ICT usage
might negatively affect companies’ innovative capabilities.
Exhibit 4.3-6: Effect of electronic collaboration with business partners on ICT-enabled
innovation activity
Independent variable
a
Coefficient Standard Error
Use of SCM (A7) 0.410*** 0.112
Share information electronically (B9) 0.489*** 0.101
Less than 249 employees (Z2b) -0.453*** 0.160
Firm founded before 1998 (G2) 0.063 0.083
Model diagnostics
N = 1144
R-squared = 0.06
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: D2 and D4
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculation
4.3.3 ICT innovation, firm performance and organisational change
ICT-enabled innovation and firm performance
The effects of ICT on corporate performance are not clear because not all studies have
demonstrated clear payoffs from ICT investments (Chan 2000; Kohli and Devaraj 2003).
In addition, the results vary depending on how performance and ICT payoffs are
measured and analysed. For example, one empirical study finds positive impacts of ICT
investments on productivity, but not on profits (Brynjolfsson and Hitt 1996). Another study
did not find positive effects of ICT capital on productivity, while ICT labour positively
contributed to output and profitability (Prasad and Harker 1997).
These somewhat ambiguous results of the impact of ICT on corporate performance can
be explained if one drops the assumption that there is a direct link between ICT
investments and corporate performance. The key to understanding the impacts of ICT on
performance is to view ICT as an enabler of innovation (Koellinger 2006).
Indeed, Clayton and Waldron (2003), in a study on e-commerce adoption and business
impact, find that businesses maintaining higher levels of new and improved product sales
relative to turnover achieve above sector average rates of sales growth, i.e. they increase
e-Business in the Retail Sector
104
market share. The effect is present in both manufacturing and service sectors. Thus, the
following hypothesis can be formulated:
Hypothesis I.3: ICT-enabled innovations are correlated with retail firms’ turnover.
The hypothesis was tested on the basis of data from the e-Business Survey 2007.
Question G9 was: "Has the turnover of your company increased, decreased or stayed
roughly the same when comparing the last financial year with the year before?" For
questions D2 and D4 about innovation see the section related to Hypothesis I.1 above.
Exhibit 4.3-7 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis I.3
ICT-enabled output positively related with turnover increase: ICT-enabled innovative
activity positively affects the likelihood of a firm reporting a turnover increase. In other
words, firms that introduced ICT-enabled innovations were more likely to have
experienced a sales growth.
Firm size and age irrelevant for positive turnover development: Firm age and size do
not have any implications for positive turnover change. In light of the previous finding,
ICT-enables innovations have a stronger impact on positive turnover development than
the size and age of a firm.
Exhibit 4.3-7: Effect of ICT-enabled innovation activity on turnover increase
Independent variable
a
Coefficient Standard Error
ICT enabled innovation (D2, D4) 0.245*** 0.081
Less than 249 employees (Z2b) -0.149 0.156
Firm founded before 1998 (G2) -0.031 0.081
Model diagnostics
N = 1144
R-squared = 0.06
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: G9
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, DIW Berlin (2008)
ICT diffusion and organisational change
ICT diffusion may impact on a company’s organisation, i.e. the structure of and the
relationships between departments within an enterprise. Organisational changes may
relate to a rearrangement of functions, workflows and importance of departments and
employees working in them. Outsourcing also implies organisational changes; this
subject is however dealt with in the section about value chains below.
ICT transformed the process of replicating business innovations across
organisations(Brynjolfsson, McAfee et al. 2006).Traditionally, deploying business
innovation on a larger scale took time and required considerable involvement of
resources and employees. Today, ICT allows companies to embed business innovations
and then implement them across the organisation at a much lower cost than before
without compromising on quality. Every location or unit implements and follows all steps
of the new process in a way specified in the software design.
e-Business in the Retail Sector
105
The copy-exactly strategy is particularly beneficial if the initial understanding of the
process is low, the lifecycle is short and the process is difficult to improve(Terwiesch and
Wu 2004).This is true for manufacturing industries with rapidly changing production
technologies and intensive technological competition. In such industries the speed of
adoption of new production processes plays a decisive role for remaining at the cutting
edge. On the other hand, tools, such as email, knowledge management systems, wikis or
instant messaging, considerably improve the process of innovation in knowledge-
intensive and service-oriented sectors with informal, unstructured and spontaneous type
of work, such as banking (McAfee 2006). ICT facilitates firms’ innovativeness by
propagating innovations that are less structured than business processes. This leads to
the following hypothesis:
Hypothesis I.4: ICT use in retail firms is positively correlated with organisational
changes.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Questions D5a-d: "During the past 12 months, has your company introduced major
changes in its corporate strategy / management techniques / organisational
structure / marketing concepts?"
56
In order to account for various effects of different ICT components on organisations,
explanatory variables include:
Infrastructure endowment index that comprises of hardware components used by a
firm and includes the share of employees with an internet access at their workplace,
internet connection capacity and the use of LAN, Intranet and Extranet.
Software endowment index that comprises of software applications used by a firm.
The index includes the following applications: a software application to manage the
placing or receipt of orders, ERM, SCM, CRM and the use of the internet to buy and
sell goods.
ICT human capital variable that controls for the presence of ICT practitioners.
In addition, the regression includes dummy variables controlling for the percentage of
employees with a higher university degree, firm size, age and country of origin. To
analyse the relationship between ICT-enabled innovation and the use of electronic data
and information exchange between business partners, an ordered logit regression was
run.
57
Exhibit 4.3-8 reports the results of the regression. An analysis of the results leads to the
following conclusions:
56
For each positive answer a firm scores one point. Consequently, the dependent variable takes a
value between “0”, if a company did not carry out any of the listed changes, and “4” if it
undertook all of them.
57
Similar to probit/logit regressions, ordered logit model is used when the dependent variable is
ordinal. In contrast, however, to probit/logit an ordered logit model can be applied if the
dependent variable has more than two levels.
e-Business in the Retail Sector
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Results for Hypothesis I.4
ICT hardware of decreasing importance for organisational changes: Compared to
software, hardware endowment, measured in terms of network infrastructure usage and
internet access, does not have a large impact on the likelihood of introducing
organisational changes.
Software use and IT practitioners drive organisational changes: The intensity of ICT
applications use and in particular IT-skilled employees are the major drivers of
organisational changes. This together with the previous result indicates that ICT skills,
soft- and hardware have different implications for companies’ conduct and performance.
Whereas hardware is a necessary condition for an efficient ICT use, it is not a sufficient
condition for business transformation. These are rather human skills combined with
innovative software that enable firms to rearrange their operations, functions and
workflows, i.e. find innovative ways of doing business. Hardware infrastructure, in
contrast, is already a commodity that does not offer companies any potential to create a
competitive advantage.
Exhibit 4.3-8: ICT use and organizational change
Independent variable
a
Coefficient Standard Error
Infrastructure index (A2, A3, A4) 0.005** 0.002
Software index (A6, A7, B1, B3) 0.275*** 0.059
IT practitioners (E1) 0.843*** 0.177
% of employees with higher university
degree (G11)
0.002 0.003
Less than 249 employees (G2) 0.021 0.328
Firm founded before 1998 (Z2b) -0.212 0.156
Model diagnostics
N = 706
R-squared = 0.04
Note: Ordered logit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: D5
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculation
e-Business in the Retail Sector
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4.3.4 Overview of results on ICT and innovation
Summarising the results of the econometric testing of hypotheses on ICT and innovation,
all hypotheses were confirmed. The following table provides an overview of the results.
Exhibit 4.3-9: Results economic analysis ICT and innovation
Hypotheses Result
I.1 Retail firms characterised by a higher
share of employees with a university
degree are more likely to conduct ICT-
enabled innovations, in comparison with
their peer-group in the same sector.
Confirmed: Changes in share of
employees with a higher university
degree as well as employing IT
practitioners positively affect the
likelihood of conducting ICT-enabled
innovations.
Yes!
I.2 Retail firms that use ICT applications to
exchange information or collaborate with
business partners are more likely to
introduce ICT enabled innovations,
compared with their peer-group in the
same sector.
Confirmed: The use of applications and
practices supporting the electronic
exchange of information between
companies positively affects the
likelihood of conducting ICT-enabled
innovations.
Yes!
I.3 ICT-enabled innovations are correlated
with retail firms’ turnover.
Confirmed: ICT-enabled innovative
activity positively affects the likelihood
of a firm reporting a turnover increase.
Yes!
I.4 ICT use in retail firms is positively
correlated with organisational changes.
Partly confirmed: network infrastructure
usage and internet access does not
have a large impact on the likelihood of
introducing organisational changes,
but software has.
(yes)
4.4 ICT and market structure
This section analyses ICT diffusion with respect to market structure. It focuses on two
questions. First, does the structure of product markets and, in particular, the competition
affect the pace of ICT adoption, i.e. firm conduct? Second, how does firm conduct with
respect to the technology adoption affect corporate performance in terms of the firm’s
market position?
Exhibit 4.4-1: Scope of the analysis in Section 4.4
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(market share)
ICT enabled
innovation
Section
4.4.2
Section
4.4.3
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(market share)
ICT enabled
innovation
Section
4.4.2
Section
4.4.3
Source: Sectoral e-Business Watch /DIW
e-Business in the Retail Sector
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4.4.1 Survey findings on ICT and competition
Findings on the general competitive environment
The e-Business Survey 2007 included a set of questions about the companies’
perception of competition. 76% of the retail firms (representing 78% of employment) said
that rivalry in the market is increasing – see Exhibit 4.4-2. There were no considerable
differences between NACE groups and size classes in this assessment, and the values
for the chemicals and furniture industries are similar. However, the share of US steel
firms reporting increasing rivalry in the market was smaller, only 49%. The majority of EU-
7 steel firms (54%) also reported that market demand is not predictable. For the other
items asked, less than half of the steel firms agreed: “competitors’ actions are not
predictable” (41%), “production technologies change rapidly” (37%), “market position is
threatened by new entrants” (36%), “products and services become quickly obsolete in
the market” (17%).
Exhibit 4.4-2: Retail market characteristics (2007)
Companies which agree that their…
competitor
s’ actions
are not
predictable
market
position is
threatened
by new
entrants
products and
services
become
quickly
obsolete in
their market
market
demand is
not
predictable
rivalry in
the market
is
increasing
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail –total (EU-7) 41 47 45 49 30 36 52 60 78 76
Non-food stores 43 50 50 49 38 40 54 61 82 77
Food stores 42 35 36 45 16 24 48 55 75 75
Other retailing 31 55 37 60 23 27 48 67 63 78
Retail – USA 63 48 38 32 21 23 39 42 64 51
Retail – by size (EU-7)
Micro (1-9 empl.) 47 49 36 61 76
Small (10-49 empl.) 50 49 35 50 85
Medium (50-249 empl.) 45 38 36 46 80
Large (250+ empl.) 38 40 30 44 77
Other sectors (EU-7)
Transport & logistics 47 54 44 55 21 22 48 55 73 75
Base (100%) all firms all firms all firms all firms all firms
N (2007, EU-7+USA) 1151 1151 1151 1151 1151
Questionnaire reference G8a-a G8a-b G8a-c G8a-d G8a-e
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Source: e-Business Survey 2007
ICT impact on competition
Besides the questions about the general competitive nature of the retail sector, retail
firms were asked about the effects of ICT on competition. Almost half of retail firms (48%,
weighed by employment) questioned report that ICT affects competition in the sector.
Competitive pressures from ICT are notably more prevalent in the non-food sub-sector
e-Business in the Retail Sector
109
with 54% compared to 38% of the food stores and 37% of firms in the other retailing
group (see Exhibit 4.4-3). Retail firms of different sizes are affected on a similar level with
slightly fewer small firms reporting an impact. Compared to the USA, European retail
firms report higher levels of competition in the sector due to ICT: 48% in the EU versus
37% in the US.
Exhibit 4.4-3: Retail firms stating that ICT has an impact on competition in the sector
54
38
37
48
39
52
50
37
48
0 10 20 30 40 50 60
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151
Weighed by employment. Questionnaire reference: F4
Source: e-Business Survey 2007
Firms that stated that ICT affects competition in the sector were further asked about the
extents of this effect. 61% of retail firms said that competition has increased “somewhat”
due to ICT; 34% even said that competition had increased “significantly” due to ICT. The
picture is homogenous across all sub-sectors, firm sizes and in the US. The exceptions
are that only 17% of food stores report that competition has significantly increased due to
ICT and 78% of food stores think that competition has somewhat increased. More than
10% of firms in the other retailing group and 12% of firms in the US even think that
competition has decreased due to ICT (see Exhibit 4.4-4).
e-Business in the Retail Sector
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Exhibit 4.4-4: Reported influence of ICT on competition (2007)
34
38
17
39
31
34
28
40
37
61
58
78
51
65
65
67
53
51
5
4
4
10
5
1
12
7
5
0 20 40 60 80 100
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
competition has signif icantly increased due to ICT competition has somewhat increased due to ICT
competition has rather decreased due to ICT
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%): firms stating impact of ICT on competition (F4=yes); N (2007, EU-7+USA) = 457.
Weighed by employment. Questionnaire reference: F5a, F5b, F5c
Source: e-Business Survey 2007
4.4.2 Market structure and ICT diffusion
Increasing rivalry in the market might be another important factor that drives the adoption
of new technologies and innovation, as companies search for new opportunities to cut
costs by improving process efficiency or develop new products. Firms want to escape
competition by innovating. This can be done by securing a monopoly position, which
might stem from a successful innovation protected from imitating by means of a patent, a
trademark, or a copyright. Furthermore, just by being the first in the market, a firm may
secure an unchallenged position by building up the necessary capacity to enjoy
substantial economies of scale, or strategic know-how.
In order to investigate how strong the effect of market competition on the adoption of ICT
is, the following hypothesis was formulated:
Hypothesis M.1: Increasing rivalry in the retail market is a driver for the adoption of ICT.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Question G8a: "Please describe the type of competition in your main market. Do
you agree that rivalry in the market is increasing?" (Independent variable.)
e-Business in the Retail Sector
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Index on ICT endowment, based on several variables on ICT usage, including: the
use of LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the
internet to sell and buy goods and employing IT practitioners. (Dependent variable.)
Exhibit 4.4-5 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis M.1:
Increasing market rivalry drives ICT usage: The hypothesised relevance of increasing
market competition for the intensity of ICT adoption was confirmed. In other words, more
intense competition forces companies to use innovative technologies to cut costs and
look for more innovative ways of conducting business.
Firm size is an advantage: Again, firm size appears to have a considerably strong effect
on the adoption of ICT.
Exhibit 4.4-5: Market rivalry and the intensity of ICT use
Independent variable
a
Coefficient Standard Error
Increasing rivalry (G8a) 0.502* 0.260
Less than 249 employees (G2) -2.428*** 0.437
Firm founded before 1998 (Z2b) 0.290 0.224
Model diagnostics
N = 1144
R-squared = 0.08
Note: OLS regression. Table does not report country coefficients.
a
Questionnaire reference. Dependent variable: A2, A3, A4, A6, A7, B1 and B3
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, DIW own calculation
Due to intense competition in the retailing industry between smaller traditional shops and
large supermarkets and superstore chains a further concentration in retailing will most
likely continue. Since sophisticated ICT-applications favour large retail chains opposite
small ‘mom-and-pop’ shops, ICT in the retailing industry is changing the market structure
in favour of large corporations. Additionally, the global access via the internet offers large
e-commerce companies like Amazon, Ebay, Apple with iTunes the possibility to grab
increasingly significant market shares by fully integrated e-commerce supply chains from
traditional book or media shops. Additionally, one should keep in mind that the regulatory
environment for the retailing sector still differs in particular for the possibility to set up
larger superstore and shopping centres across Europe. Therefore, some of the observed
heterogeneity in retailing will be attributable to such regulatory impediments in some
countries to adjust to better and more efficient solutions elsewhere.
4.4.3 ICT impact on market structure
Historically, distance to market and transportation cost limited the number of customers a
firm could reach. At the beginning of the internet era, a common believe was that ICT and
e-commerce were to eliminate the limitations of location and enable firms to expand
regardless of geographical locations (Cairncross 1997).
One example of how ICT allows firms to expand their operations and change market
structure of existing markets, or create new ones, are entries of internet start-ups.
e-Business in the Retail Sector
112
Amazon or eBay are already icons of e-commerce that changed the landscape of the
retailing industry. Though of a smaller magnitude, these effects hold for traditional shops
as well.
ICT offers existing firms possibilities to expand their market reach, which consequently
leads to market structure changes as well. This can be illustrated by the way ICT enables
companies to cross boundaries of their markets and industries. An example for blurring
lines between sectors and a possible thread for retailing comes from manufacturing firms
like Dell. These firms use ICT to surpass the whole retailing sector and to sell their goods
directly to customers instead of depending on a network of retailers. This leads to the
following hypothesis:
Hypothesis M.2: ICT endowment is positively correlated with a change of market share.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Question G7: "Has the share of your company in this market increased, decreased,
or stayed roughly the same over the past 12 months?" (Dependent variable.)
The explanatory variable controlling for a firm’s ICT endowment level is an index
composed of answers to the questions regarding the internet connection type, the use of
LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the internet to sell
and buy goods and employing IT practitioners.
Exhibit 4.4-6 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis M.2
ICT enables firms to expand: The hypothesis that ICT enables firms to extend their
operations was confirmed. Companies that intensively use ICT applications are likely to
take advantage of their potential to increase their market reach and relative position to
the competitors.
Firm age relevant for the positive development of market share: Firm age negatively
affects a firm’s chances to increase its market share. This might indicate that younger
firms tend to grow at the expense of their older competitors.
Exhibit 4.4-6: The intensity of ICT use and change in the market share
Independent variable
a
Coefficient Standard Error
ICT endowment
(A2, A3, A4, A6, A7, B1, B3)
0.044*** 0.017
Firm founded before 1998 (Z2b) -0.371*** 0.131
Less than 249 employees (G2) 0.002 0.263
Model diagnostics
N = 1054
R-squared = 0.02
Note: Ordered logit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: G7
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculation
e-Business in the Retail Sector
113
4.4.4 Overview of results on ICT and market structure
Summarising the results of the econometric testing of hypotheses on ICT and market
structure, the two hypotheses were confirmed. The following table provides an overview
of the results.
Exhibit 4.4-7: Results economic analysis ICT and market structure
Hypotheses Result
M.1 Increasing rivalry in the retail market is a
driver for the adoption of ICT.
More intense competition forces
companies to use innovative
technologies to cut costs and look for
more innovative ways of conducting
business.
Yes!
M.2 ICT endowment is positively correlated
with a change of market share.
Companies that intensively use ICT
applications are likely to take
advantage of their potential to increase
their market reach and relative position
to the competitors.
Yes!
4.5 ICT and the retail sector’s value chain
This section analyses ICT diffusion with respect to the retail industry’s value chain. It
focuses on the question whether ICT use affects the firms’ decisions regarding ‘make or
buy’, i.e. outsourcing decisions. This question is related to the effects of firm conduct on
industry structure.
Exhibit 4.5-1: Scope of the analysis in Section 4.5
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
profits)
ICT enabled
innovation
Section
4.5
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
profits)
ICT enabled
innovation
Section
4.5
Source: Sectoral e-Business Watch /DIW
Theoretical background
In light of the transaction cost theory, decreasing costs of search, evaluation and
monitoring of suppliers should lead to a shift away from firms and toward markets as a
form of organizing economic activity (Coase 1937; Williamson 1985). Consequently, the
expectations regarding the potential of ICT as technologies introducing innovative ways
of doing business, re-shaping firm boundaries and changing the constellations of value
chains were enormous (Johnston and Lawrence 1988; Johnston and Vitale 1988;
Milgrom and Roberts 1990; Fulk and DeSanctis 1995). The availability of powerful and
cheap ICT was said to increase the attractiveness of markets (Malone, Joanne et al.
1987; Lucking-Reiley and Spulber 2001). The authors of the move to the market
paradigm argued that companies would reduce their dependency on hierarchy and
outsource business activities.
e-Business in the Retail Sector
114
Survey findings
Retail firms in the sample were asked about their ICT outsourcing activities (see Exhibit
4.5-2).
Exhibit 4.5-2: Outsourcing of ICT services (2007)
58
53
49
45
59
63
67
45
56
0 20 40 60 80
Retail (total, EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9 empl.)
Small (10-49 empl.)
Medium (50-249 empl.)
Large (250+ empl.)
Retail (USA)
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151
Weighted by employment. Questionnaire reference: E3
Source: e-Business Survey 2007
Outsourcing of ICT services increases with firm size: 49% of micro firms report that, in the
past 12 months, they have outsourced ICT services to external service providers which
were previously conducted in-house. This number increases to 59% for small firms, 63’%
for medium-sized firms and 67% for large firms. Compared to the US, European retailers
were relatively more active at outsourcing services in the past 12 months: 56% of
European retail firms have outsourced ICT services while 45% of US retailers have done
so in the same period of time. Outsourcing in the non-food store is highest with 58% of
firms doing it compared to 53% in the food store group and 49% in the other retailing
group.
Hypothesis testing
To test whether ICT leads to more market transactions in the analysed sector, the
following hypothesis was formulated:
Hypothesis V.1: ICT endowment in retail firms is positively correlated with outsourcing.
The hypothesis is tested on the basis of the following data from the e-Business Survey
2007:
Question G22: "Has your company outsourced any business activities in the past 12
months which were previously conducted in-house?" (Dependent variable)
e-Business in the Retail Sector
115
Index on ICT endowment, composed of answers to the questions regarding the
internet connection type, the use of LAN, WLAN, WWW, Intranet, Extranet, ERP,
SCM, CRM, the use of the internet to sell and buy goods and employing IT
practitioners.
Exhibit 4.5-3 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis V.1
ICT intensity increases the propensity to outsource business activities: The more
advanced a company is in terms of ICT use, the more likely it is to have outsourced some
business activities in the last twelve months. This provides support to the hypothesis that
ICT enables companies to redefine their make-or-buy decisions and to outsource
business activities that were previously done in-house.
Exhibit 4.5-3: The intensity of ICT use and outsourcing
Independent variable
a
Coefficient Standard Error
ICT endowment
(A2, A3, A4, A6, A7, B1, B3)
0.052*** 0.015
Less than 249 employees (G2) -0.332* 0.192
Firm founded before 1998 (Z2b) -0.239** 0.109
Model diagnostics
N = 1144
R-squared = 0.04
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: G22
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, DIW Berlin (2008)
In short, the econometric analysis related to ICT and value chains confirmed the
hypothesis on ICT and outsourcing, as shown in the following table.
Exhibit 4.5-4: Results economic analysis ICT and value chain
Hypotheses Result
V.1 ICT endowment in retail firms is
positively correlated with outsourcing.
ICT intensity increases the propensity
to outsource business activities:
Yes!
4.6 Summary of impact analysis
Findings of chapter 4 confirm that ICT and e-business have considerable impacts on the
retail industry. The analysis in this chapter was conducted along four types of impacts:
productivity, innovation, market structure, and value chains. The following conclusions
were drawn from an econometric analysis, the e-Business Survey 2007, case studies
conducted for this report and literature evaluation:
Productivity: Results from other studies indicate that ICT-induced productivity
effects are most pronounced in the ICT-producing industry as well as in selected
service industry sectors including retailing and wholesale. Evidence from the e-
Business Survey shows that particularly the larger companies in the retail industry
have dynamically adopted ICT (see chapter 3). Growth accounting analysis
conducted for this report (see section 4.2.2) suggests that ICT-capital investments
e-Business in the Retail Sector
116
are not key drivers in the growth of real value added in European retailing
industries. Total Factor Productivity, which includes for example organisational
changes, growth was found to account for much stronger contributions. However,
ICT can be embedded in other capital, so there may be a "hidden ICT-impact"
which cannot be measured by means of the data on ICT-investment available in the
database. As regards labour productivity, intermediate inputs intensity were found
to be the main components of labour productivity growth. This may predominantly
be due to outsourcing activity. ICT capital investments as well as the employment of
a large share of medium-skilled workers play a positive but minor role in labour
productivity growth (section 4.2.3). Overall, these findings indicate that ICT capital
investments alone are insufficient to significantly increase labour productivity. It may
be necessary to also invest into organisational changes and labour force training.
Innovation: In the retail industry, the e-Business Survey 2007 found the impact of
ICT to be mainly on process innovation but it also plays an important role in product
and service innovation. Many case studies conducted for this report confirm that
ICT can be considered as an enabler of innovation and positively impact on firm
performance, even if the impact cannot always be measured concretely. An
econometric analysis found, firstly, that employing people with a university degree
as well as employing IT practitioners significantly increases retail firms’ propensity
to use ICT to develop new products and services (section 4.3.2). Secondly, the use
of applications and practices that support the electronic exchange of information
between companies positively affects the likelihood of conducting ICT-enabled
innovations (section 4.3.2). As regards innovation and firm performance, the
analysis found that ICT-enabled innovation is positively related with turnover
increase irrespective of firm size and age (section 4.3.3). Secondly, ICT software is
an important driver of organisational changes, while hardware apparently is not
(section 4.3.3).
Market structure: As regards the relationship between market structure and ICT
adoption, the hypothesised relevance of increasing market competition for the
intensity of ICT adoption was confirmed. Findings also indicate that ICT and e-
business can be used to open up new markets, to cross boundaries of industries
and markets and to increase the number of customers. In other words, ICT appears
to have notable impact on the retail market’s structure (section 4.4).
Value chains: As regards outsourcing, the general expectations regarding the
potential of ICT to change value chains were enormous. The econometric analysis
found that ICT intensity indeed increased the propensity to outsource business
activities (section 4.5).
The following table (Exhibit 4.6-1) shows an overview of all hypotheses and results. Most
of the hypotheses were confirmed, but two hypotheses about ICT and productivity were
not:
e-Business in the Retail Sector
117
Exhibit 4.6-1: Results economic analysis ICT and market structure
Hypotheses Result
…related to ICT and productivity
P.1 ICT-capital investment has been a main element in value added and productivity
growth in the retail industry.
(no)
P.2 TFP growth in the retail industry has accelerated together with increased
investment in ICT-capital.
no!
P.3 ICT and high- and medium-skilled labour have a positive impact on labour
productivity growth.
(yes)
…related to ICT and innovation
I.1 Retail firms characterised by a higher share of employees with a university
degree are more likely to conduct ICT-enabled innovations.
Yes!
I.2 Retail firms that use ICT applications to exchange information or collaborate with
business partners are more likely to introduce ICT enabled innovations.
Yes!
I.3 ICT-enabled innovations are correlated with retail firms’ turnover. (yes)
I.4 ICT use in retail firms is positively correlated with organisational changes. Yes!
…related to ICT and market share
M.1 Increasing rivalry in the retail market is a driver for the adoption of ICT. Yes!
M.2 ICT endowment is positively correlated with a change of market share. Yes!
…related to ICT and value chains
V.1 ICT endowment in retail firms is positively correlated with outsourcing. Yes!
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5 Case studies
Introduction and overview
This report presents ten case studies of exemplary e-business practice in the retail
industry. The case studies illustrate and validate findings presented in chapters 3, 4 and
6. References to these case studies are provided in the appropriate sections of these
chapters. Exhibit 5.1-1 provides an overview of the case studies and the topics covered in
these cases (structuring criterions being the supply chain category and firm size).
Exhibit 4.6-1: Retail industry case studies included n this report
No Company Country NACE Firm Size Topic Element
1 Mercator Slovenia 52.1 Large
Competing through
upstream supply chain
management
e-supply
2 Globus Germany
52.12
(47.19)
Large
e-procurement
activities
e-supply
3
Brookland/ Dirk
van den Broek
Netherlands
52.1
(47.1)
Large
Supply chain
management software
e-supply/
e-
operations
4 AMJG Portugal
52.48
(47.42)
Small
Customer relationship
management to better
integrate in-house
operations
e-
operations
5 Casino Group France 52.2 Large
Using customer
relationship
management to
improve sales
e-
operations
6 4fitness Germany
52.48
(47.64)
Micro e-marketing/e-sales
e-
marketing/
e-sales
7
Fleria Floral
Creations
Greece
52.48
(47.76)
Small
Challenges when
adopting e-sales
e-sales
8
Smart
Supermarket
Malta
52.12
(47.11)
Medium
Experiences of
developing an e-sales
application from
scratch
e-sales
9 EMPiK Poland
52.45
(47.63) &
52.47
(47.61,
47.62)
Large Redeveloping e-sales e-sales
10 Cyprus-PC.com Cyprus
52.48
(47.41)
Small
Supply chain
management in a
small firm
e-
supply/e-
sales
Source: Sectoral e-Business Watch (2007)
Rationale for selecting cases to study
The main objective for choosing the cases to study was to be able to learn about the e-
business experiences of retailers in Europe and to examine the impact e-business is
having on these firms. The case studies were also specifically selected to illustrate and
e-Business in the Retail Sector
119
validate topics dealt with in chapters 3 and 4 of this report. In detail, the following
stratified selection criteria
58
were applied:
Firm sizes: all firm sizes should be included due to the firm size characteristics of
the retail industry: by number of enterprises, the majority of firms in the retail
industry are micro and small firms; large firms are important in terms of value added
to sector; medium-sized firms are less important. This objective was achieved by
including one micro (4fitness), three small (AMJG, Fleria Floral Creations and
Cyprus-PC.com), one medium-sized (Smart Supermarket) and five large firms
(Mercator, Gobus, Brookland/Dirk van den Broek, Casino Group, EMPiK). This is a
representative sample structure in terms of firm sizes.
NACE categories: the case studies should cover as many different NACE
categories as possible. Cases from the three main categories should be included:
non-food (NACE 52.12, 52.3, 52.4, 52.5 -- retailers that sell non-food items in
store), food (NACE 52.11, 52.2 -- retail sale of food items in store) and other trade
(NACE 50.5, 52.6 --retail sale of automotive fuel in specialised stores, retail sales
not in-store, stalls or markets). In terms of NACE categories, there is a slight bias
towards the non-food group in terms of number of enterprises with six firms
operating in this area: Cyprus-PC.com, Globus, AMJG, EMPiK, 4fitness and Fleria
Floral Creations. Two firms, Smart Supermarket and the Casino Group, are
specialised food retailers. The two large multinational retailers included in the study,
cover both, food and non-food retail formats hence the various format can be
included in the respective groups. In terms of value added, the split is more even
with the large firms making up for the low numbers in the food-group. No firm from
the other trade group was included, although boundaries with internet trade are
fluid: 4fitness, for example, has a very high percentage of internet sales and could
therefore also be included in the other trade group as an internet firm.
Experiences from different EU countries: a wide spectrum of EU countries should
be covered and especially countries not covered in the survey should be included.
This objective was achieved by including six case studies from countries not
covered by the survey: Cyprus, Greece, Malta, Netherlands, Portugal, and
Slovenia. The remaining case studies were done in countries covered by the
survey: France, Germany and Poland. A secondary country objective was to include
new Member States such as Slovenia and small EU Member States such as Malta
and Cyprus which was also accomplished.
Besides these stratified selection criteria, the case studies embrace the three supply
chain elements (e-supply, in-house e-operations and e-sales) identified in the
conceptual framework. Of the ten case studies conducted, three cover e-supply issues,
two look at in-house e-operations (plus one firm, Brooklands, that includes both, e-supply
and e-operations) four cases explore e-sales and one case, Cyprus-PC.com covers all
three elements. The key argument for conducting the case studies however remains that
the cases selected illustrate and validate topics dealt with in chapters 3 and 4. The
topics are in line with the overall objectives of the SeBW: to (1) study and assess the
58
Stratified sampling is a strategy whereby members of a sample are selected in such a way as to guarantee
appropriate numbers of subjects for subsequent subdivisions and groupings during the analysis of data
(available at:http://education.calumet.purdue.edu/vockell/research/chapter8.htm. (SL: Please format in common
way.)
e-Business in the Retail Sector
120
impact of ICT on individual enterprises, selected industries and the EU economy; to (2)
highlight barriers for ICT uptake; and to (3) identify and discuss public policy challenges.
ICT and e-business impact: the case studies are representative examples
illustrating the impact of ICT and e-business on enterprises. While the impact on the
retail industry is discussed in detail in Chapter 4, the case studies purposively
illustrate effects on individual enterprises. The cases for example show how the
adoption of ICT and e-business solutions can positively affect productivity by
increasing efficiency of employees (e.g. AMJG and Casino Group). The Globus
case study on the other hand illustrates that business process reengineering is
necessary to achieve a measurable return on investment from ICT uptake.
Brookland Plus Products in contrast decided to adapt the ERP solution adopted to
existing business processes rather than adopting business processes to the
solution adopted. The different enterprise-level effects are incorporated in greater
detail in chapter 4.
Barriers to e-business: the case studies illustrate numerous barriers to e-business
and ICT uptake among European retailers. Especially barriers to e-sales are
abundant: the case studies show that all types of firms from small to large (e.g.
Fleria Floral Creations and EMPiK), across different NACE categories (food and
non-food groups) and EU countries (e.g. Cyprus, Poland, and Malta) experience
significant problems with selling over the internet. With the exception of one firm,
4fitness, the proportion of online sales measured by the total sales volume remains
low (usually between 1 % and 10%) in European retail firms. Barriers to increasing
e-sales include cultural issues such as customers not being prepared to order over
the internet (Cyprus-PC.com and Smart Supermarket), problems with integrating
the e-sales channel into the overall business strategy (EMPiK and Fleria Floral
Creations), product suitability for e-sales (Fleria Floral Creations), and finding a
suitable online strategy (Smart Supermarket). The case studies also highlight other
issues that retailers come across when implementing e-business solutions. In large
firms, introducing a unified ERP system may for example speed up the roll-out of e-
commerce significantly as shown by the Mercator case. For in-house operations,
the AMJG case study shows that not having customised solutions could be a barrier
for application usage. Overall, the case studies illustrate barriers for all three
elements of the supply chain supporting the survey findings relating to e-business
barriers presented in Section 3.7.
Public policy challenges: the case studies provide policy makers with real-life
examples of ICT and e-business effects and barriers. Policy makers can use
insights gained from the case studies to, for example, show how policy
recommendations could support individual European enterprises in increasing
productivity which, in turn can positively affect retail industry productivity and the
European economy.
The following sub-sections 5.1 to 5.10 comprise the ten case studies conducted for the
SeBW retail industry sector study.
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5.1 Mercator, Slovenia
Abstract
With a share of 36% in the Slovenian fast moving consumer goods market, Mercator is
one of the largest commercial chains in South-Eastern Europe. In 1999, it launched a
project to introduce e-commerce into its upstream supply chain management. Software
and hardware solutions for the exchange of electronic business messages between
Mercator and its suppliers have been specifically developed for the company. The
electronic exchange of business messages has helped Mercator to improve work
organisation and the efficiency of its procurement process, cooperation with suppliers,
and control over its stocks. One of the solution providers also successfully sells the
solution on the market to other companies. This contributes to the expansion of e-
commerce across Slovenia and abroad. The case study provides an educative lesson
about the importance of having one unified ERP system in a company, its dependant
companies and subsidiaries for an efficient implementation of e-commerce.
Case study fact sheet
Full name of the company: Poslovni sistem Mercator, d.d., (Business
System Mercator Ltd.)
Location (headquarters / main branches): Slovenia
No. of employees: 12.957
Sector Retail trade
Main business activity: Retail sale of food, fast moving consumer goods,
technical equipment, furniture, construction
materials, textile goods, cosmetics and sports
equipment
Primary customers: Consumers, Petrol
59
, Istrabenz Turizem
60
,
Slovenian government
61
Year of foundation: 1949
Turnover in last financial year (€): 1.609.832.000
Most significant market area: Slovenia
Main e-business applications studied: * TIE EP, eb-MANAGER, e-SERVICE Client
5.1.1 Background and objectives
Poslovni sistem Mercator (refererred to as Mercator hereafter) is the controlling company
of the Mercator Group
62
which is one of the largest commercial chains in South-Eastern
Europe. It sells fast moving consumer goods, technical equipment, furniture, construction
materials, textile goods, cosmetics and sports equipment in Slovenia. Mercator has been
confronted by severe market conditions after Slovenia entered the EU in 2004. Foreign
59
Oil company; food products and other items are sold over Petrol filling stations.
60
Tourist company.
61
Mainly the Ministry of Defence and the Ministry of Education and Sport.
62
The Mercator group consists of 8 wholesale and retail trade companies in Slovenia, Croatia,
Serbia, Bosnia and Hercegovina, Montenegro and Macedonia; and 4 Slovene non-trading
companies concerned with the production of food and beverages, market research and market
intervention in the domestic and foreign markets, planning, engineering and technical
counselling on building shopping malls.
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competition has been on the increase since 1991 when Spar, a large Austrian
commercial chain, opened its first stores in Ljubljana, followed in 2000 by Leclerc, a
French commercial chain. Additionally, in 2005, a foreign discount chain Hofer entered
the Slovenian market, followed by the German retailer Lidl in 2007. In 2006, Mercator
held 37% of Slovenian market of fast moving consumer goods, while its main rival Spar
Slovenia held 15,1% of the market and Tuš, another Slovene commercial chain, 12,2%
(Planet Retail)
Against the background of internal restructuring and integration of the Slovenian fast
moving consumer goods and food industry at the end of the 90’s, Mercator started to
introduce e-commerce into its upstream supply chain management. In 1999 it launched a
project called “Introduction of Electronic Data Interchange into Procurement Processes”.
The main goal of the project was to introduce electronic exchange of business documents
between Mercator and (domestic and foreign) suppliers of fast moving consumer goods
and cosmetics. The solution had to be compatible with standards already in use by other
companies in European Union, since many of the company’s business partners are from
abroad. It should enable the exchange of the following six types of documents:
Orders: buyer-generated documents that authorise a purchase transaction; when
accepted by the seller, they become a binding contract between both parties
Inventory reports: lists of goods and materials stocked
Order confirmations: documents informing a purchaser that an order has been
received
Despatch advices: documents sent by a consignor or seller to the consignee or
buyer that the ordered goods are ready to be shipped, or have already been
shipped; also called dispatch notes
Receipt advices: documents sent by the receiver, i.e. buyer, to the seller to confirm
receipt of items and to report on shortages or damaged items and
Invoices: a commercial document issued by a seller to a buyer indicating that
payment is due from the buyer to the seller
According to the plan, business-to-business (B2B) e-commerce should first be
implemented between Mercator and its suppliers, and then between other companies in
the Mercator Group and their suppliers. The aim was to reduce the amount of manual
work needed for data processing; to bring down the number of mistakes made in the
ordering process; to reduce the required warehouse space; and to speed up the flow of
goods between the suppliers and its warehouses. This in turn would increase the
company’s competitiveness, through lower procurement and storage cost. Its
competitiveness would be especially boosted, if it was the first trading company with this
kind of solution on the Slovenian market, since it could make the biggest profit gains from
lower procurement and storage costs compared to its competitors. The company was
initially persuaded to introduce e-commerce by one of its suppliers, Procter & Gamble
Slovenia63. The latter wanted to simplify the exchange of documents with its customers
(including Mercator), because it would help its production planning. It even paid Mercator
a commission for electronic exchange of documents, since it calculated that the savings
63
Slovenian subsidiary of Procter & Gamble, a multinational manufacturer of product ranges
including personal care, household cleaning, laundry detergents, prescription drugs and
disposable nappies.
e-Business in the Retail Sector
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will outweigh the costs. This has later become a common arrangement in e-commerce
between Mercator and its suppliers of fast moving consumer goods and cosmetics.
At the moment only orders, order confirmations and inventory reports have been
introduced in B2B e-commerce between Mercator and its suppliers. They are also used in
e-commerce between Mercator and two non-trading members of Mercator Group - Eta
64
and Mercator Emba
65
, and between Mercator H (another member of Mercator Group) and
its suppliers. The despatch advice has only been used in wholesale business to customer
(B2C) e-commerce between Mercator and Petrol. The introduction of electronic exchange
of despatch advices, receipt advices and invoices in Mercator’s supply chain is still
pending.
5.1.2 e-Business activities
Timing of the activities
The implementation of e-commerce at Mercator was as follows:
1999: ATNET Advanced Technologies together with Mercator and Procter &
Gamble Slovenia start to develop and implement an e-business solution for
automating the procurement process. It enables the transfer of electronic
documents over a private network called ATbizNET/Panteon.net business network.
2000: Mercator launches a pilot, testing the exchange of orders and inventory
reports over ATbizNET/Panteon.net with Procter & Gamble. The test phase is
concluded after one month, after which the solution is put into practical use.
2001: Mercator extends the electronic exchange of orders and inventory reports
over ATbizNET/Panteon.net to 9 other suppliers of fast moving consumer goods
and cosmetics.
2002: Electronic order confirmation is introduced into e-commerce between
Mercator and 10 of its suppliers. At the end of 2002, Mercator conducts B2B e-
commerce with 25 suppliers. Also during this year, e-Service and WEB-EDI are
offered as alternative solutions to the suppliers. e-Service enables automatic
conversion of documents from in-house standards into GS1 EANCOM; and WEB-
EDI is a web portal located on a server connected over ATbizNET/Panteon.net with
information system of Mercator. Suppliers using this service are automatically
alerted via e-mail or SMS whenever Mercator’s ERP system produces an order for
the supplier. The supplier can then view the order over the portal and use the portal
to send order confirmations.
2003: Practice shows that new entry fields (for entering the buyer’s firm, function of
the contact person, name and surname of the contact person etc) are needed for
the electronic business documents. Therefore they are added to GS1 EANCOM
message definitions of electronic order and order confirmation. B2B e-commerce is
implemented between
three other members of Mercator Group (Mercator
Gorenjska, Mercator SVS, Mercator Dolenjska and Mercator Goriška) and their
suppliers. These companies are then annexed by Mercator in 2004 and 2005. At
the end of 2003 the company is involved in B2B e-commerce with 50 suppliers.
64
Food producer.
65
Food producer.
e-Business in the Retail Sector
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2004: Mercator expands electronic document exchange to 100 suppliers. Electronic
data exchange with the Statistical Office of the Republic of Slovenia is also
introduced in 2004. The company’s ERP system automatically compiles reports
about the company’s commerce with other companies within the EU from archived
electronic business documents. These reports are automatically sent over
ATbizNET/Panteon.net to the Statistical Office of the Republic of Slovenia.
2005: Mercator expands electronic document exchange to 125 suppliers.
2006: Despatch advice is introduced in B2C e-commerce between Mercator and
Petrol. Mercator expands electronic exchange of documents to 150 suppliers.
2007: Mercator expands electronic exchange of documents to more than 200
suppliers.
The solutions described have mainly been adopted by suppliers of fast moving consumer
goods and cosmetics. The number of suppliers involved in e-commerce is steadily rising
from year to year, as can be seen from the chronology. At first large suppliers joined e-
commerce with Mercator followed by smaller ones. Mercator has not put any deadlines or
demands to the suppliers that they have to use electronic commerce, if they want to stay
in business. However, it has started to charge suppliers that were invited to join, but still
do not conduct e-commerce, the cost for processing paper documents.
Technology used
This section briefly describes different technological solutions that have been developed
for e-commerce between Mercator and its suppliers. First the EANCOM standards used
for electronic business documents are presented, and then software and hardware
solutions (FULL_EDI, e-Service, WEB-EDI), including the network
(ATbizNET/Panteon.net) over which e-business documents are exchanged.
EANCOM Slovenia subset standard
Message definitions of order, order confirmation and inventory reports that are used in
Mercator’s e-commerce are based on GS1 EANCOM standards. The latter have been
chosen, because they are used by almost every large company in Europe. However, they
are very complicated, since they have been developed to cover the needs of every
branch in every detail. Therefore those EANCOM message definitions were simplified
according to Mercator’s needs. In 2003, GS1 Slovenia formally granted the simplified
version of GS1 EANCOM standards developed for Mercator’s e-commerce the status of
EANCOM Slovenian subset standard.
Full EDI solution
The FULL-EDI solution is based on two applications:
TIE EP, which translates e-business documents (orders and inventory reports) from
in-house standards used by Mercator’s ERP system into corresponding GS1
EANCOM standards and
eb-MANAGER, which performs different supplementary functions to the basic
functionalities of TIE EP such as providing overviews of messages received and
status overviews.
Every order and inventory report produced by Mercator’s ERP system is automatically
translated into the corresponding GS1 EANCOM standard by TIE EP. The document is
then archived in a database on Mercator’s server “Rip_novi” by eb-MANAGER. In
e-Business in the Retail Sector
125
addition it is also archived in another database on another Mercator’s server
“Rip_backup” as a backup copy. Later on, the document is sent over
ATbizNET/Panteon.net to the supplier's mailbox located on a server in
ATbizNET/Panteon.net (if the supplier too uses “FULL EDI” solution). The same is true
for any order confirmation sent by the supplier to Mercator in response to its order.
e-Service solution
This solution has been developed by Panteon Group on Mercator’s initiative for small
suppliers, which do not want (or cannot afford) to invest in expensive software for
conversions like TIE EP, but want to have a solution that is integrated with their ERP
system. The e-Service solution is not suited for suppliers without ERP system.
WEB-EDI solution
The WEB-EDI solution was developed on Mercator’s initiative for suppliers that do not
want or cannot afford to invest in any software or hardware required to conduct e-
commerce. WEB-EDI is also ideally suited for suppliers without ERP system.
Every document sent from Mercator to the supplier, that uses the WEB-EDI solution, is
sent to a web portal named “Enterprise portal” hosted on a server linked to
ATbizNET/Panteon.net. Whenever the portal receives a new document, it creates an e-
mail that is sent to the supplier’s contact person. Alternatively it can also create a text
message (SMS) that alerts the supplier over mobile phone. The supplier can log on to the
portal to view the document and can even send order confirmations to Mercator from the
portal.
ATbizNET/Panteon.net
ATbizNET/Panteon.net is a value-added network (VAN) provided by ATNET Advanced
Technologies and Panteon Group. It is a communications network physically separated
from the internet that provides communication channels and other services, such as
automatic error detection and correction, protocol conversions, and store-and-forward
message services. The network can be accessed over:
Modem access via dial-up line
Modem access via leased line
Modem access via ISDN line
Internet VPN (Extranet) access
Internet VPN Secure Client access
Cost for the system
Cost for building the e-commerce system at Mercator exceeded 35.000€
66
. Mercator also
has a services contract with ATNET Advanced Technologies: it pays a certain fee
67
to
ATNET Advanced Technologies for every document sent over ATbizNET/Panteon.net.
This is a special arrangement reserved for companies that exchange a lot of business
documents with their partners.
66
The total cost of developing the system has not been disclosed by the company. This is an
estimate of total cost that has been made at the beginning of the project however this figure has
been exceeded in the course of the project.
67
The fee has not been disclosed by Mercator.
e-Business in the Retail Sector
126
Important requirements and conditions
Mercator selected the GS1 EANCOM standard because it is compatible with solutions
used by other companies in Slovenia and in the European Union. For the success of the
project the question about the right type of network for the electronic exchange of
business messages was decisive. The internet proved to be too unreliable. When it was
tested for possible use in the early stages of the project, it was discovered, that it could
not handle bigger influxes of business documents. Even the number of 60 messages
proved to be too much to deal with, since it confused them with an attack on the system.
Newer tests have proven again that the contemporary internet is not suited for serious e-
commerce. For comparison, Mercator today exchanges around 7000 business messages
per month over the network. Also, since almost everybody can enter the internet, it is
highly exposed to cyber attacks to which a value-added network such as
ATbizNET/Panteon.net is much less exposed. That’s why it was decided to use
ATbizNET/Panteon.net instead, which is based on more reliable x.400 recommendations.
An important requirement was also the cooperation of suppliers in the development
process. The latter gave Mercator, ATNET Advanced Technologies and Panteon Group
valuable feedback on solutions proposed and developed. It was the feedback from small
suppliers, that the developed FULL-EDI solution is too expensive for them that persuaded
Mercator to initiate further development of e-commerce solutions in the directions of e-
Service and WEB-EDI. Those two solutions were developed by Panteon Group on its
own costs to satisfy market demands. By satisfying the needs of small suppliers, Panteon
Group has contributed significantly to the expansion of its e-commerce solutions in
Slovenia and abroad, making them the norm of the day. This of course is a positive
development for any company interested in e-commerce, since it can rely on one solution
for conducting e-commerce with all the other companies.
The situation today
The e-commerce solution enables the electronic exchange of orders, order confirmations
and inventory reports between Mercator’s warehouses and its suppliers. Dispatch
advices, receipt advices and invoices on the other hand must still be issued on paper.
Moreover, the solution does not enable the direct exchange of electronic business
documents between Mercator’s stores and the suppliers. Instead, the stores exchange
electronic business documents with warehouses using in-house standards. The next step
is to develop direct e-commerce links between the stores and the suppliers. Also, the
solutions for electronic exchange of dispatch advice
68
, receipt advice and invoice still
need to be implemented. Through numerous takeovers of other companies Mercator has
acquired a number of different ERP systems. To solve this problem the company has
decided to replace them with one new ERP system. Mercator is also looking at new
emerging standards for electronic business messages, such as GS1-XML (BMS). If the
usage of GS1-XML (BMS) spreads, the company will probably base its entire e-
commerce on this standard.
5.1.3 Impact
e-Commerce between Mercator and its suppliers not only changed the procurement
processes at the company, but also affect other trading companies in Slovenia that have
adopted the solutions developed (such as Spar Slovenia and Tuš). It also contributed to
68
For now Mercator only exchanges dispatch advices with Petrol.
e-Business in the Retail Sector
127
the overall expansion of e-commerce in Slovenia, since it was promoted by retail
companies among their business partners.
Within Mercator the introduction of e-commerce has had an impact on:
Work organisation: data from business documents used in the procurement
process is entered only once into the company’s ERP system. This automation has
reduced the amount of manual work in the procurement process and thereby the
number of human errors. e-Commerce also demanded classification of products
according to EAN article number, a bar-coding standard defined by the standards
organisation GS1 for marking retail goods. Before the introduction of EAN article
numbers, it was much more difficult to order the desired goods: for example if the
company wanted to order a certain type of cosmetic product, it had to send a
detailed description of the product to the supplier; as a result mistakes were made.
Now, those descriptions are replaced by a simple EAN article number. This has in
turn reduced the number of mistakes in the procurement process and simplified the
communication with suppliers. e-Commerce has not significantly changed the
company’s employment structure. Instead it resulted in redistribution of tasks in
sales department due to automation that not only enables faster issuing of orders
but also handling additional suppliers with the existing work force.
Role of sales representatives: supplier sales representatives no longer need to
control stock level at Mercator warehouses, which frees them to promoting new
products instead. Since the introduction of e-commerce, the employees of Mercator
can check stock levels at any time of the day. Therefore the negative influence of
sales representatives on issuing redundant orders has been diminished: before the
introduction of e-commerce they could easily persuade the company to make
additional purchases of goods that were not based on the low levels of stocks and
served only to increase the sales of the supplier.
Efficiency of inventory management and logistics: e-commerce has sped up the
flow of goods and reduced the required warehouse space. According to the
estimates of Mercator, e-commerce has reduced procurement costs by 10.8%. The
suppliers’ sales representatives do not have to check the level of stocks in
Mercator’s warehouses by hand anymore. Because of inventory reports that are sent
over ATbizNET/Panteon.net by Mercator to its suppliers, the latter can track the level
of the company’s stocks from the distance any time of the day. This in turn helps the
suppliers to plan their production more accurately. e-Commerce as it is now,
however, does not enable just in time inventory strategy, since the ordered goods
still need 24 to 48 hours to arrive in the company’s warehouses. Emergency orders
which have to be resolved in the matter of hours are therefore also resolved over the
telephone.
Business relationships between the company and its suppliers of fast moving
consumer goods and cosmetics: the suppliers can engage in closer cooperation
with Mercator in its clearance sales and discounts, since they can more accurately
track the company’s stocks and plan their production. Now the suppliers are
informed well in advance of incoming clearance sales and possible stock shortages
and can correspondingly adjust their production in time. Before the introduction of e-
commerce, they had to be constantly on guard in order not to be surprised by
unexpected orders.
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5.1.4 Lessons learned
Several lessons can be learned from the e-commerce adoption at Mercator:
The implementation of a unified ERP system in the company, and all of its subsidiaries
and dependent companies before the introduction of e-commerce is paramount to the
speed of the project. Mercator originally planned to end the project by the end of 2001,
however to this day, the project is still incomplete. Its decision to launch the project before
the introduction of a new ERP system, proved to be one of the main reasons for the delay
in the execution of the project.
After launching the project in 1999, Mercator took over many different companies, each
with their own ERP systems. Since every ERP system compiles business documents
according to internal standards, these have to be translated into GS1 EANCOM
standards for e-commerce. The company therefore had to decide between two
alternatives: the first one was to introduce a unified ERP system before implementing e-
commerce; and the second solution to adapt TIE EP application for conversions to each
of those ERP systems and worry about a unified ERP system at a later stage. The
implementation of the first solution would require more time at the beginning, but would
ultimately permanently solve the problem. The second solution on the other hand would
in essence only postpone the problem, but could save the company precious time at the
beginning. The company opted for the second solution. Unfortunately, this proved to be
more costly in the long term, since it took more time than originally anticipated and
caused delays. Consequently, the company was forced to slow down the development of
e-commerce in order to introduce a unified ERP system first. Meanwhile Mercator has
been overtaken in e-commerce by Spar Slovenia. The latter has first introduced a unified
ERP system and then proceeded with implementation of solutions developed by ATNET
advanced Technologies and Panteon Group for Mercator. Now, unlike Mercator, it is
already exchanging electronic despatch advices and receipt advices with its suppliers.
For Spar Slovenia the Panteon Group is also already developing a solution for electronic
exchange of invoices.
Leadership support is paramount to the success of such a large-scale project. According
to Mercator the support of the leadership was vital because it could provide additional
pressure on suppliers to accept the developed e-commerce solution. The introduction of
e-commerce also demanded extensive organisational changes that would normally
generate enormous resistance from the employees, if they were not backed by the
leadership. Such organisational change was a complete redesign of procurement
processes, which required Mercator together with its business partners to define the
quantities of goods that could be ordered through electronic procurement systems, the
terms and conditions under which orders should be fulfilled, and the responsibilities of
business partners in the process.
The simplified EANCOM message definitions should have been implemented all at once.
They have been developed all at the same time, but implemented one after another,
which has caused additional delay. The reasons for this were deficiencies discovered in
practical tests. As a consequence the message definitions had to be updated, which
could only be done in sequence: for example, a repair of deficiency discovered in an
order’s message definition also demanded adaptations in the message definition of order
confirmation, since the second document refers to data in the first one.
The suppliers (especially the smaller ones) should be motivated to take e-commerce
more seriously. In many cases the suppliers are not taking e-commerce seriously
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enough, because they are not checking their mailboxes regularly (i.e. they usually forget
to check them when they go on holidays). This has forced Mercator to employ an
additional employee, whose task (among others) is to remind the suppliers of their
obligation to regularly check for incoming orders. This could be prevented by introducing
penalties for suppliers that fail to meet their obligations. Additionally, this situation may
have been completely avoided if e-commerce solutions used by Mercator would already
support all business documents.
5.1.5 References
Research for this case study was conducted by Darko Štamfelj, University of Ljubljana,
Faculty of Social Sciences on behalf of the Sectoral e-Business Watch. Sources and
references used:
• Face-to-face interview with Martina Hozjan (contact person in Mercator),
3.12.2007 Ljubljana
• Telephone interviews with Martina Hozjan (contact person in Mercator), 10.-
12.12.2007 and 19.-26.1.2008
• Telephone Interviews with Marko Klasek (contact persons in Panteon Group),
10.-20.12.2007 and 19.-26.1.2008
• Ann Apps, Ross MacIntyre: XML - Using an Evolving Standard in Electronic
Publishing.http://citeseer.ist.psu.edu/419656.html
• Websites:
• BusinessDictionary.com,http://www.businessdictionary.com
• Mercator,http://www.mercator.si
• Wikipedia,http://www.wikipedia.org
• Delo,http://www.delo.si
• Panteon Group,http://www.panteongroup.com
• ATNET Advanced Technologies,http://www.atbiznet.net
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5.2 Globus, Germany
Abstract
Globus Holding GmbH & Co. KG is a family-owned retail company, based in Germany.
With a focus on the German market the company operates about 100 stores in this
country. In 2001, Globus implemented an e-procurement system, which has
streamlined the entire process of procuring indirect goods. Moreover, the system has
enabled the firm to procure strategically through pooling demands of single
departments within the various stores and setting up framework contracts with
preferred suppliers. The implementation of e-procurement at Globus illustrates the
need for a holistic approach to e-business adoption. The pure installation of a technical
system bears little return on investment without the re-organisation of business
processes and the full support of management and end-users.
Case study fact sheet
Full name of the company: Globus Holding GmbH & Co. KG
Location (headquarters / main branches): St. Wendel, Germany
No. of employees: 23 000
Sector Retail
Main business activity: Retail, home improvement, consumer electronics
Primary customers: Families
Year of foundation: 1828
Turnover in last financial year (€): 4.7 billion
Most significant market area: Germany with a focus on the South, Czech
Republic and Russia
Main e-business applications studied: * e-Procurement, e-Communication with suppliers
ICT and e-business impacts on work processes
ICT and e-business impacts on market structure
and competition
ICT and e-business impacts on innovation and
productivity
5.2.1 Background and objectives
Globus Holding GmbH & Co. KG is a family-owned retail business that was founded in
1828 in St. Wendel, Germany. It owns 38 self-service department stores, 51 home
improving stores, and 9 stores for electronic consumer goods in Germany. In addition,
Globus has 16 hypermarkets located in the Czech Republic (13) and Russia (3). The
company has a turnover of 4 to 5 billion Euros per year and employs 23,000 people.
Initial situation and objectives of the e-procurement project
In 2001, Globus started to restructure the procurement of indirect goods and introduced a
central electronic procurement system. This restructuring process was strongly driven by
competitive pressures as the retail business in Germany is characterised by fierce
competition coupled with tremendous cost pressure. Particularly hypermarkets, which are
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typically located in the periphery of bigger cities like Globus department stores
increasingly face competition from city stores due to rising prices for petrol.
In order to keep up with competition, searching for sources to cut costs is considered a
basic need within the company. While procurement of direct goods (i.e. goods traded by
Globus) offered little room for improvement as it was already streamlined and well
supported by IT, the procurement of so-called Maintenance Repair and Operation (MRO)
goods was not working at its full potential back in 2001. Purchasing volume of MRO
goods at Globus, which includes e.g. packaging material and cleaning products account
for about 6 to 8 million Euros per annum.
Prior to the introduction of e-procurement in 2001, a centralised system had not been
available and procurement activities had been completely in the responsibility of single
departments. ‘The cheese counter, the bakery or the butcher within each department
store always initialised a completely new and separated ordering procedure whenever
something was needed. Orders were placed via telephone, fax or field service and more
than 1000 employees were involved in these procedures’ (Mr Ortner, manager
responsible for e-procurement activities). In summary, every single department spent a
lot of time on procurement activities rather than concentrating on their core business.
Apart from being time and cost intensive, the processes were not transparent and prone
to errors. Due to the decentralized structure, some articles were ordered in parallel from
different vendors for different terms and conditions. Therefore, it was extremely difficult to
get information needed to analyze procurement activities and buying patterns.
Consequently, Globus could not realise larger order quantities leading to better
conditions.
Hence, the main objectives for the new e-procurement system at Globus was to
streamline and speed up the MRO procurement processes while giving shop floor
employees and managers the opportunity to better focus on their core activities.
Moreover, Globus wanted to increase procurement transparency and, in this way, carry
out the procurement of indirect goods in a more strategic way.
5.2.2 The e-procurement project at Globus
The implementation of the e-procurement system at Globus was accompanied by a
complete change to the existing MRO procurement processes: ‘70 to 80 percent of all
MRO goods buying processes is now executed via the system, even business cards are
ordered electronically’ (Mr. Ortner). Principally, the new system works as shown in Figure
1. Today, the system contains electronic catalogues displaying goods from 20 MRO
suppliers that have framework contracts with Globus.
In each store, between one and three contact persons are responsible for the
procurement of MRO goods and have access to the central e-procurement system.
These contact persons tend to work in the field of EDP (Electronic Data Processing) or
Human Resources.
Departments within the different stores report a need for an MRO good through
customised catalogues in form of excel-sheets. These catalogues are adapted to the
differing needs of each department. Selected members of staff within the departments
chose the MRO goods needed and record the quantities required in the sheets. These
excel sheets can easily be imported to the e-procurement system with a single mouse
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click. The various contact persons at the stores can pool the demand for certain MRO
goods and set up electronic orders.
As order information is recorded by the system, central procurement management at
Globus headquarters is able to monitor and analyse all processes taking place. For
example, various analysis and statistic tools facilitate internal backtracking of MRO
goods. In addition, information gathered provides the basis for strategic procurement
activities, such as negotiating framework contracts with suppliers.
Meanwhile, an invoice process is fully integrated into the system. Whenever MRO goods
are delivered to a store, the respective contact person adds a ‘goods received’ note to the
system. Hence, incoming invoices can be checked easily using the information stored in
the system.
Exhibit 5.2-1: The electronic procedure at Globus
Source: Globus/Sectoral e-Business Watch
The fully integrated electronic MRO procurement system connects the following
stakeholders and provides them with functions facilitating procurement activities: (SL:
Please use Bullet1 format for the following lists.)
MRO suppliers: Depending on their technical status, suppliers´ sales systems are
integrated with the e-procurement system of Globus in three different ways. About
half of all suppliers receive ordering information as pdf- or text-files, attached to e-
mails. Others receive ordering information via emails with attached XcbL69-files,
that can be directly processed into supplier’s sales systems. The e-mails are
generated automatically by the system. One of Globus´ largest suppliers is already
connected to the e-procurement system via EDI (Electronic Interchange), giving the
benefit of fully automated electronic processes.
Any changes in the catalogue data are transmitted electronically and can be
published to all involved parties at Globus without any additional effort. Suppliers
69
XcbL is a subtype of the standard language XML, which is commonly used for the description of
electronic business processes.
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just need to submit Excel sheets with new or changed product data. Then, the data
gets converted into the catalogues´ standard BMEcat and can thus be integrated
into the system.
Contact Persons in charge of the store’s procurement activities have access to a
multi-supplier catalogue that contains information on products and conditions
negotiated with Globus. They are endowed with functionalities to pool the demand
of single departments, to set up orders and to coordinate the ordering process.
Departments within the stores have access to Excel-based catalogues that are
adjusted to the individual needs of the departments and can be easily imported or
exported by the e-procurement system.
Central procurement management at the Globus Headquarter is able to monitor and
control the procurement process using information and statistics functions provided
by the system.
Support of related processes: Information gathered by the system is also used to
support invoice checks, the assignment of procurement costs, and the accounts of
single departments.
As a technical basis Globus uses the software system “Impact Ordering” from Healy
Hudson, a German software manufacturer specialised in e-procurement. The system
works completely web-based and runs on the servers of Healy Hudson. Users have
access to the system via internet. Suppliers receive orders via e-mail or EDI (as
described above). Healy Hudson manages the upload of new or changed product
information, i.e. the conversion of Excel-based data in BMEcat and the integration into
the system. Globus acquired a certain number of user licenses for Impact Ordering.
Costs like hosting, services and support are paid for annually.
Key challenges and success factors
The success of the e-procurement system at Globus depends on several important
factors. Based on the procurement manager’s experience the following challenges
emerge:
In depth-analyses and optimisation of processes is a precondition. The
implementation of an e-procurement system goes far beyond installing a technical
system. In fact, the technical system only supports procurement procedures as
defined by the company. ‘An e-procurement system is of little use, if the processes
behind are not organised in an efficient way’ (Mr Ortner). Thus e-procurement
managers at Globus put much effort into the analyses and optimisation of
procurement processes before implementing the technical solution.
Providers need to listen and meet company-specific requirements. When
choosing the technology, the Globus management did not just look for a standard
software but for a system that fulfils the company’s specific needs. As a retail
company, Globus demands extensive options for recording and analysing
information as well as for processing of complaints. All in all, choosing an e-
procurement system means to choose a technology partner with whom the
company cooperates for years in order to adjust and further develop the software.
‘Therefore it is of outstanding importance that the technology provider shows
industry expertise and – even more important - the willingness and ability to listen to
the customer’s needs’ (Mr. Ortner). Healy Hudson, the provider chosen by Globus
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met these criteria. Globus has now successfully been co-operating with this
technology partner for the last seven years.
Involving stakeholders and close co-operation with the technology provider
helps to ensure user acceptance. Managers at Globus are convinced that the e-
procurement-system only works, if it is fully accepted by the users and fulfils their
specific needs. Therefore, Globus organised several workshops, at which users of
the system and technology partners worked jointly on the specification of the
technical system.
E-procurement is a long-term project and always work in progress. Globus has
come to realise that an e-procurement system is never fully developed,
requirements change continuously and adjustments have to take place at all times.
Moreover, the firm is convinced that the acceptance of a new system increases, if
suggestions for improvements from users are taken into consideration. Therefore,
the procurement managers at Globus are continuously exchanging ideas about
further system development with both users and technology provider.
5.2.3 Impact
Since the implementation of the new electronic system, procurement processes have
changed completely. The new system provides a basis to procure indirect goods in a
much more organised way. Regarding procurement at Globus, Mr. Ortner refers to the
following key benefits:
Streamlined procurement processes. Compared to the former situation, the
procurement of MRO goods at Globus is much more streamlined. Departments just
have to indicate their needs on customised catalogues that can be imported to the
e-procurement system by a single mouse click. Contact persons at the stores can
pool demands and set up orders electronically without any additional paper work.
Suppliers receive orders immediately and can process them directly within their
sales systems. And finally, invoices can be checked automatically by comparing
data on the invoices with the data stored in the system. Thus, less people, less
time, and less manual work are needed to set up an order or to check an invoice.
Focus on core business activities. By means of the new e-procurement system,
single departments within the stores can focus on core business activities. ‘Today
the butcher is focused on running his butchery and the baker is focused on running
his bakery, rather than dealing with suppliers of MRO goods by fax or telephone’.
(Mr. Ortner)
Basis for strategic procurement activities and consolidation of buying power.
Since information about procurement activities is easily available, arising expenses
can be traced back and analysed by various statistic tools. In turn, the findings
provide a proper basis for consolidating the supplier base and negotiating
favourable framework contracts. Due to the pooling of MRO needs, larger order
quantities could be realised and prices were negotiated anew. ‘As a result of
strategic procurement activities, prices came down by about 20% on average’. (Mr.
Ortner)
Advantages for MRO suppliers. Suppliers that are connected to the e-
procurement system benefit as well: electronic orders are directly assigned to the
sales systems of the suppliers. As a consequence of this improved coordination of
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orderings at Globus, the suppliers´ sales and logistic processes are much more
streamlined. Suppliers connected to the system do not need additional sales
people, that visit departments at Globus and present their offers. In addition, all
indirect goods demanded by different departments within a store can be delivered in
one go.
It is difficult to quantify benefits and costs of the MRO e-procurement system due to the
rather unorganised way in which procurement of indirect goods was organised before the
system was installed (comprehensive information on procurement costs prior to 2001 is
not available). In addition, it would be extremely difficult to retrace all time and effort
associated with the introduction of the e-procurement system in detail.
Nevertheless, Globus management argues that the investment into MRO e-procurement
paid off quickly: procurement processes improved significantly, and cost reductions
through strategic buying activities are estimated to amount to a seven-digit number in
Euros. Globus also profits from the fact that running costs, especially for maintenance
and support, are financed by connected suppliers. Thereby expenses incurred are not
charged, but rather compensated through improved terms and conditions.
5.2.4 Lessons learned
This case study illustrates how e-business technologies can positively contribute to
process innovations and affect the way companies operate. At Globus Holding GmbH &
Co. KG, the implementation of the e-procurement system has been the basis for a
complete re-organisation of processes related to the procurement of MRO goods. The e-
procurement system helps to streamline and speed up the entire procurement process,
including procedures related to invoice checking and controlling.
Even more important, the system provides an appropriate basis for consolidating buying
power and setting up favourable framework contracts with suppliers. Of course, the
consolidation of purchasing power improves the position of Globus when negotiating with
the suppliers of MRO goods. MRO suppliers, however, may also benefit from e-
procurement systems as they can streamline sales and delivery processes. In this way,
the e-procurement system drives process innovations at both Globus and its suppliers.
The case study also illustrates some key challenges and success factors when
implementing an e-procurement system. The impact of e-business technologies strongly
depends on a number of environmental factors. For example, it turns out that e-
procurement projects go far beyond the pure installation of a technical system: the
system is only as convenient as the underlying organisational processes. Thus, much
time and effort is needed for the re-organisation of processes before the system is
installed. Another important point raised is the continuous need for adjustment and
improvements in order to ensure an efficient use and the acceptance of users. These
points should be taken into account when discussing the impact of e-business
technologies. They might explain, why similar technologies used in similar companies
may lead to very different outcomes.
5.2.5 References
Research for this case study was conducted by Dr. Andreas Stiehler and Timo Zumbro
(Berlecon Research) on behalf of the Sectoral e-Business Watch.
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Sources and references used:
• Interview with Mr. Ortner, procurement manager at Globus Holding GmbH & Co.
KG and in charge of the e-procurement project, 18
th
April 08
• Success story “Traditionshaus Globus setzt auf zentrale Bestellbündelung”,
www.healy-hudson.com, 2002.
• Websites:
• Globus,http://www.globus.net
• Healy Hudson,http://www.healy-hudson.com
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5.3 Brookland Plus Products/ Dirk van den Broek,
Netherlands
Abstract
This case study analyses Brookland Plus Products' implementation of a supply chain
management software - Aldata G.O.L.D. Stock - for managing supply chain and
logistics operations of its parent company, Dirk van den Broek. Dirk van den Broek is a
Dutch retailer with over 350 stores in the Netherlands. Brookland Plus Products is
responsible for logistics processes of Dirk van den Broek’s stores. Brookland has been
using supply chain management software since 1995 to support its warehouse and
distribution processes, and more recently decided to upgrade its implementation to
achieve business process consolidation and fulfil extended business requirements.
Case study fact sheet
Full name of the company: Dirk van den Broek / Brookland Plus Products
Location (headquarters / main branches): Netherlands
No. of employees: 13,500 / 1,000
Sector: Retail Chain / Logistics Subsidiary
Main business activity: Retail sale
Primary customers: Consumers / Dirk van de Broek's retail chains
Year of foundation: 1942
Turnover in last financial year (€): €1.8 billion
Most significant market area: The Netherlands
Main e-business applications studied: * Supply Chain Management (SCM)
5.3.1 Background and objectives
Dirk van den Broek is a Dutch supermarket chain operating multiple retail formats under
the Dirk, Bas and Digros brands - grocery stores and supermarkets - the drugstore and
personal care chain Dirx Drogist, wine retailer Dirck III, and travel agency D-reizen.
Dirk van den Broek focuses mainly on offering products at low prices through its
discounter chain. With over 13,500 employees and some 363 stores in the Netherlands,
Dirk van den Broek established four support organisations focusing on logistics,
purchasing, acquisition and project development, and professional services.
Logistics operations are managed by Brookland Plus Products (Brookland), a subsidiary
of Dirk van den Broek. Brookland operates several distribution centres in the Netherlands
to support the delivery of products to all of Dirk van den Broek's stores.
In 2001, Dirk van den Broek signed a joint-venture agreement with DekaMarkt, a Dutch
retailer that owns 85 supermarkets. Logistics integration of the DekaMarkt chain is
currently ongoing, after the establishment of shared-service centres for human resources,
IT, and Finance, centralised within the sister company Detailresult Services.
Supply chain management, which comprises supply chain planning and execution,
including logistics and distribution, is one of the most important business processes for
retailers. In fact, logistics efficiencies impact both top-line results, which in essence
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depend on merchandise shelf-availability and selling space, and profit margins, which
largely depend on supply chain efficiencies. Dirk van den Broek's business model,
focusing on convenience and local availability of products, is requiring solid merchandise
intelligence capabilities, robust supply chain execution efficiencies and the ability to
address a variety of logistics requests under a consolidated and centralised process.
With the objective of supporting its expanding retail formats, growth in stock-keeping-
units (SKUs) volumes managed by the Dirk van den Broek chain and integrating
DekaMarkt logistics into Brookland, the company required a major upgrade to its supply
chain management systems' functionalities and stronger integration with its central ERP
system.
5.3.2 e-Business activities
The Process
Brookland operates six warehouses (and another 4 for DekaMarkt) located throughout
the Netherlands in order to ensure fast replenishment efficiencies for all supported stores.
Transport of goods is performed by transport companies working nearly exclusively for
Brookland. Each store in the Dirk van den Broek chain places orders to Brookland using
a store ordering system, which captures actual sales data from the Point of Sale system.
A custom-built forecasting application providing basic analysis of historical demand
patterns contributes to the definition of the store replenishment plan. Brookland receives
and aggregates all orders coming from the stores, and then defines and execute the
delivery schedule in collaboration with value chain partners (Exhibit x.x-1).
Exhibit 5.3-1: Dirk van den Broek's Logistics Process
Source: Brookland/Sectoral e-Business Watch
Warehouse management includes reception of inbound deliveries, allocation to
warehouse racks, goods' pick-up, preparation and dispatch to fulfill delivery orders, and
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eventually goods forwarding when passing through multiple warehouses. Dirk van den
Broek's store selling space is limited to an average of 1,000 square meters, thus in order
to maximise selling space allocation, all stores keep their stock on the shelves. Brookland
manages approximately 12,000 individual articles, and suppliers can perform direct store
deliveries for perishable goods like meat, vegetables, bread, milk and magazines alike.
Brookland operates with high inventory turnover rates and frequent store replenishments,
e.g. between 2 to 4 times per day (from each warehouse, along with direct deliveries this
results in an average of 14 trucks per store per day). This represents a big challenge for
the company in finding the right balance between shelf-availability and replenishment
process efficiency, both at store and warehouse levels. An additional challenge for
Brookland is that replenishments tend to be very fragmented due to the diverse range of
orders received from the stores. Therefore, Brookland needs to run a coherent supply
chain process across different goods' categories in order to efficiently serve different retail
formats of the Dirk van den Broek chain.
Technology and Implementation Details
Since 1995, a legacy version of the Aldata supply chain management software
maintained by a third-party was in place. In 2001, Brookland needed to replace the
existing implementation with a packaged software solution, because support of its legacy
system was discontinued and the company required a new application to better match
their business process requirements. Dirk van den Broek's IT Director and Brookland's
Information Manager were the principal project influencers, but trust from the board
management was essential to fund the initiative. The contribution and support provided
by Line of Business Executives (LOB) was also important, although LOB were not the
main drivers for the implementation.
The selection process of the new system, performed with the support of IBM, was mainly
based on functionalities provided by the different applications under evaluation and
support level. Key users participating in the solution selection process included different
organisational layers, such as a warehouse manager responsible for operations in two
warehouses and order pickers. Brookland decided to deploy Aldata G.O.L.D. Stock 5.01
as this application provided the best fit to Brookland' process requirements, and Aldata
committed to further customise its application in order to fully match Brookland’s
requirements. As of June 2008, Brookland manages six warehouses with the software
solution and upgraded to Aldata G.O.L.D. Stock 5.03, which is a warehouse and logistics
execution management software that is part of a larger supply chain management suite.
In essence, the application provides the following functionalities:
Inbound and outbound management: functionalities include planning (for example
replenishment and routing), goods' reception, storage management, order
preparation, allocation, and dispatch.
Warehouse labor management
Traceability management, including control of information flows and goods
movements in the logistics network and event management (alert detection,
notification and response).
Following a workshop and a vendor evaluation process executed during 2004, Brookland
re-designed its master data management infrastructure based upon stronger ERP
integration and process consolidation in 2005 to optimise their supply chain performance
and accuracy of automated processes. With the objective of minimising supply chain
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errors and, as a result, maximise shelf availability while containing supply chain costs,
product and supplier data integrity is of paramount importance for retailers. Thus, Aldata
G.O.L.D. Central 5.04 was deployed as the central retail ERP platform to manage critical
operational aspects ranging from master data management and merchandising to
suppliers and invoice management. (not yet, all transactional data is not available since
these processes will be included starting 2009).
In 2007, Brookland's management also requested logistics and warehouse management
integration of the DekaMarkt chain, with the objective of achieving further reductions of
supply chain costs.
From a technological standpoint, Aldata G.O.L.D. Stock is a web-enabled application,
based on open standards such as Java and XML. The underlying database is Oracle
running. In the case of Brookland, it is an AIX (Advanced Interactive eXecutive) operating
system, IBM's proprietary version of UNIX.
Exhibit 5.3.2 illustrates the IT structure underlying the logistics process at Dirk cvan den
Broek’s logistics process (Exhibit 5.3.1).
Exhibit 5.3-2: Dirk van den Broek's IT structure underlying the logistics process
Source: Brookland/Sectoral e-Business Watch
Brookland also integrated the Aldata G.O.L.D. Vocal pick-by-voice system by equipping
100 warehouse operators with Vocollect Talkman devices. These are wearable
computers translating textual information into vocal instructions to warehouse workforce.
Pick-by-voice systems usually improve warehouse productivity, due to the fact that
warehouse pickers no longer have to read paper lists or handheld device displays for
instructions, but can use speech to perform their assignments. This capability reduces
orders' error rates and the time needed to prepare a delivery, while providing a safer
environment for warehouse workforce, thanks to hands-free and eyes-free operations. A
pilot project is currently ongoing to expand the pick-by-voice system with the use of
standard PDA (Personal Digital Assistant) handheld devices.
Costs
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Brookland is investing approximately €5 million between 2007 and 2010 for the
implementation of the Aldata G.O.L.D. modules, including licenses, application
development, functional design and system integration. The maintenance fee of the
system is approximately €200,000 per year.
Business process reengineering was not needed throughout the implementation due to
the fact that Brookland insisted on selecting a software application that was fully matching
its business processes. As a result, some adaptation and custom development activity
was required from the software vendor to solve all the identified functionality gaps, based
on a detailed blueprint of warehouse processes performed in a joint project by Brookland
and IBM Global Business Services.
5.3.3 Impact
Brookland did not go through a detailed Return On Investment (ROI) analysis to measure
the financial impact of the SCM implementation. However, a cost-benefit evaluation
project was conducted with the following metrics:
Intangible benefits: included in this category were benefits resulting from consolidation
of business processes and organisational changes. Due to their nature, intangible
benefits are difficult to quantify, but contributed to the attainment of productivity
enhancements. With the close integration of G.O.L.D. Central and G.O.L.D. Stock, for
example, it is now possible to exchange data such DESADV messages from suppliers to
speed up the reception process while also achieving improvements in quality. Another
example for intangible benefits originating from the standard G.O.L.D. Central solution is
that different variances of articles can be set which in turn enables Brookland to better
master articles and article variants.
Tangible benefits: Brookland expected measurable benefits to occur due to the adoption
of the SCM solution. Stock levels for example, were set to decrease as a result.
Furthermore, Brookland expected to better benefit from discounts that suppliers apply
regarding logistic conditions. Being able to operate as a true logistic service provider that
meets organisational demands without having to invest in costly modifications in the
current propriety systems was another tangible benefit expected..
While the aforementioned tangible and intangible benefits were identified in the cost-
benefit evaluation project, the key benefits obtained by Brookland and indirectly by Dirk
van den Broek from the SCM solution include the following:
Higher efficiencies of the replenishment process. Less human intervention is
required to fulfil the replenishment process due to the process automation and
consolidation enabled by the implemented software solution. As a result, accuracy
gains were achieved. The integration with the central back-end system and the
consolidation of the master data management infrastructure were two additional
enablers of optimised replenishments. For example, logistics delivery process
automation includes the use of EDI (Electronic Data Interchange) messages from
the ERP to the warehouse management system to notify delivery receipts. In
addition, Brookland also developed new capabilities that are enabling the company
to timely respond to fragmented store orders, for example the company is now able
to execute order picking at SKU-level in one warehouse.
Reduced out of stock as a result of optimised warehouse replenishment efficiencies
and automated management of the entire set of articles' attributes. Before the
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implementation of the SCM software, and due to the lack of master data
consolidation, it was necessary to create new articles to capture different product
attributes. This was a time consuming process that caused shortages on the store
shelves. The process was no longer necessary following the implementation of the
new SCM solution and the achievement of higher master data integrity thanks to
tight ERP integration.
Enhanced promotion management efficiencies, due to the attainment of full visibility
into stock-levels, purchasing, receiving and delivery processes. By combining these
four processes in a synergic and highly integrated manner, Brookland can ensure a
higher degree of reliability in store shelf availability for promotional campaigns.
Reduced supply chain management costs and logistics productivity enhancements -
Whilst Brookland did not reduce its workforce after the implementation of the SCM
software, the company shifted a significant portion of its warehouse workforce to
quality management and monitoring of SLA (Service Level Agreement) for goods
shipments (currently at 98%). In addition, the company achieved improved
management of suppliers' conditions and incentives due to the procurement
process consolidation, centralisation and integration with the replenishment
process.
Process scalability – Between 2000 and 2008 Brookland experienced a 100%
growth in the number of individual articles managed, e.g. from 6,000 to 12,000
articles. In consideration of the warehouse workforce re-organisation, this
essentially means that Brookland can now manage a larger volume of articles under
the same SLA without requiring additional workforce.
In conclusion, Brookland achieved the ability to execute just-in-time flows of outbound
logistics operations, optimisation of the replenishment process in response to variable
and fragmented demand patterns, improved visibility throughout the logistics network,
logistics costs reductions and more effective transportations to counteract high fuel costs,
and the ability to fulfil extended customer requirements.
Future Directions
In the future, Brookland is looking at the following opportunities that are expected to have
a big potential impact for Dirk van den Broek’s business performance:
Value chain ecosystem – the opportunity to enable stronger collaboration and
intimacy with value chain partners largely depends on trust and on company
cultures and ways of working. For example, Vendor Managed Inventory (VMI)
appears as a concrete opportunity to optimise supply chain performance, as
demonstrated by the likes of WalMart, Home Depot and Carrefour just to mention a
few examples of retailers that have successfully implemented VMI with key
suppliers. VMI is a supply chain business model in which suppliers are responsible
for maintaining the inventory levels required by retailers. Suppliers have access to
the retailer’s inventory data and are responsible for generating purchase orders.
Therefore, VMI requires a higher degree of partnership and sharing of mutual
interests and benefits that are specific to each party, and most importantly sharing
of risks, for example, in situations where the inventory does not sell. From a
technology perspective, it requires the use of EDI between suppliers and retailers,
and the availability of a web portal for suppliers.
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Brookland is also investigating into RFID (Radio Frequency Identification) for
warehouse and distribution operations. However, an initial pilot project was rejected
by the board management as the technology was considered to be too expensive
for item-level implementations. RFID has better potential, according to Brookland,
for pallet and container tracking, as well as for tracking crates that are used for the
delivery of perishable goods. Security and privacy are reported by Brookland as two
addiional concerns related to RFID.
By the end of 2008, Brookland will also implement Aldata G.O.L.D. Topase, a
forecasting and stock replenishment optimisation application that will replace the
custom-built forecasting software that is currently in use. With this new
implementation, Brookland expects to improve its forecasting and replenishment
efficiencies both at store and warehouse levels, because demand forecasts will be
based on an extended historical data range and suppliers' purchasing and logistics
conditions will be automatically taken into consideration during the forecasting
process. As a result, the company expects to further improve shelf-availability while
minimising supply chain costs.
5.3.4 Lessons learned
Among the key lessons learned by Brookland and Dirk van den Broek are:
The effort required on change management shall not be underestimated when
implementing a new SCM solution. In the case of Brookland, the effort required was
significant but highly beneficial for the success of the project.
Training is an important step for successful deployments of new SCM software.
Brookland provided training material for warehouse personnel and conducted
specific training sessions to warehouse supervisors, who in turn trained their team-
members. On the other hand, it was more difficult to perform training of assortment
managers and buyers due to their time constraints. As a result different training
methods are required to match different users' needs and get all users aligned to
the new practices, rules and systems characteristics.
Brookland recognised that the initial design and project scoping phase are
fundamental areas that need to be carefully assessed in order to ensure proper
project execution and alignment of IT with strategic business goals.
Brookland already established a positive working relation with the IT Vendor
selected for the new SCM software implementation. When Aldata consultants joined
the project, knowledge about the G.O.L.D. Suite was rapidly built; and alongside
IBM Global Business Services, Aldata’s partner in the G.O.L.D. implementation, a
strong team is assisting Brookland in the project.
Another important lesson learned at Brookland is that the replacement of any ERP
system does not come by itself: every adjacent system will be affected. A thorough
discussion on data migration is required as well as an impact analysis on the
application landscape.
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5.3.5 References
Research for this case study was conducted by Ivano Ortis, Global Retail Insights, an
IDC Company, on behalf of the Sectoral e-Business Watch. Sources and references
used:
Interview with Gerard Wensink, Information Manager, Brookland, April 24
th
, 2008
Websites:
• Dirk van de Broek,http://www.dirk.nl
• Aldata Solution,http://www.aldata-solution.com
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5.4 AMJ G Comunicações, Portugal
Abstract
The Portuguese telecommunications company AMJG specialises in selling mobile
phones and related services, including internet access. It developed a Customer
Relationship Management (CRM) system which allows it to manage client information
from several sources. The introduction of this system significantly improved the
effectiveness of relationships with company clients, as the storing and analysing of
information allowed AMJG to more easily identify their needs, and thus produce more
effective proposals.
Case study fact sheet
Full name of the company: AMJG Comunicações, S.A.
Location (HQ / main branches): Aveiro
Main business activity: Telecommunications equipment and services
Year of foundation: 1997
Number of employees: 35
Turnover in last financial year: 117,000 €
Primary customers: General public, and companies in all areas
Most significant geographic market: Portuguese regions of Aveiro, Espinho, São João
da Madeira, and Ovar
Main e-business applications studied: Customer Relationship Management
5.4.1 Background and objectives
AMJG Comunicações is an agent for the mobile phone company TMN (and its parent
company, PT Comunicações), promoting and selling the latter’s products. It has twelve
stores around the regions of Aveiro, Espinho, São João da Madeira, and Ovar, Portugal,
where it is one of the largest sellers in the telecommunications area. The twelve stores
are located around the specified regions, and each has an area of around 35 square
meters, with an average of two employees per store (the remaining employees work at
the company’s main office in Aveiro). Each store is connected to the internet (either by
ADSL or cable), a connection which they use primarily to access the e-business solution.
As an agent for a telecommunications company AMJG’s main business activity is in
selling the principal’s equipment and services, for which it receives a sales commission.
Those products consist primarily of mobile phones, access to TMN’s communications
network, internet access kits (which include modems, PDAs, or laptop PCs), as well as
installation and maintenance of related equipment and software. AMJG’s clients are the
general public and other companies. In the latter case, clients are individuals from the
companies, rather than the companies themselves, i.e. the deal is with the company but
the end clients are its employees.
Due to the fact that TMN does not give geographical exclusivity to any one of its agents,
the competition in the telecommunications area is fierce. AMJG’s business strategy rests
upon three principals: good store placement, high quality client service, and solutions
customised to the needs of its company clients.
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Due to the rapid pace of technological change in the telecommunications area, the use of
customer relationship management tools is highly important to keep a competitive edge,
as they allow identification of client needs and shopping trends in a faster way, to access
the latest product information instantly, and to crossover information more efficiently.
5.4.2 e-Business activity
The CRM solution developed for AMJG allows for just such advantages. It consists of a
Web-based (and thus accessible from anywhere where there is an internet connection)
application where the AMJG employees can instantly manage all types of information,
such as:
AMJG client list, with detailed information on each client, including individual
purchase histories;
All sold products, including their present status (delivered, ordered, pre-ordered);
Campaigns currently active or being prepared;
Products available for sale, with detailed information about each product, including
stock levels in the various stores;
Non-client companies that should be or already were the subject of a marketing
contact, plus its results;
Business rules that control the e-mail direct marketing feature;
Several analysis tools with crossover options to examine the information collected
and held by the CRM solution. These tools provide information including what types
of products are sold most (in absolute terms, per region, per campaign, etc.),
chronologically ordered ‘most sold’ product types over a period of time (to identify
trends), and impact of campaigns on types of products sold, etc.
The primary reason behind the decision to stop using a generic commercial application
and build a customised solution was the lack of support for several features specific to
the mobile phone industry (e.g. “purchase points”, where a client accumulates points in
each purchase which can later be used), as well as limitations in that software’s
crossover and analysis tools. Another important issue was the need for an interface with
TMN’s own internal e-business solution (all TMN agents must perform a certain number
of marketing campaigns, whose requirements they must download from that tool, and
later uploading the results).
The new tool is tailor-made to the specific needs of AMJG, with the information (and its
crossover analysis features) being oriented towards its business area, thus greatly
increasing the efficiency and speed of the client management process. It also
communicates directly with TMN’s e-business solution, allowing AMJG employees to
extract/update campaign information directly from the CRM tool.
The CRM project was implemented by the company IAITI, which was chosen based on
previous work it had done for AMJG on the latter’s Web site. The initial planning of the
tool took about two months and was a collaborative process between the two companies,
as IAITI had previous experience in the area and could advise AMJG on the best
approach to the CRM solution they wanted. The implementation of the CRM project took
about six months to achieve basic operational status. Since then the system has been
upgraded to include new features and better interoperability with other systems. The
CRM system consists of PHP pages linked to a MS Access database (upgrade to
Microsoft SQL Server is being considered). The pages are published by the IIS Web
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server, and the whole software is installed in the company’s intranet service, which runs
under the operating system Microsoft Windows Server 2003. The design of the project
was based on a number of requirements it had to fulfil. The most important were:
the system had to be able to gather information from different sources, some of
them external to the company (mainly TMN’s own e-business solution);
every client had to be identified univocally, a task that sometimes is not easy to
accomplish;
data had to be kept up-to-date, but also coherent among the several systems, so
the propagation of changes had to be carefully controlled;
some clients prefer to be anonymous, so there had to be a way to register them;
data had to be kept confidential, an important consideration both for client privacy,
and for competitive reasons.
To reduce cost the system was built over the company’s existing network, and as such no
new hardware was purchased. The CRM was implemented using Open Source
technology (PHP) and runs on top of software that the company already owned. The only
cost was the payment of the implementation service to IAITI, for a total of 7500 Euros.
The tool is used by all employees on different capacities, and for this reason it supports
four levels of access to users:
Store employees: can only access client and product information, but cannot make
changes; they can however insert new clients, register sales, and place orders on
products not currently available on the store;
Salesmen: can do all of the above plus access marketing campaign information (but
not create new campaigns); can also do some limited crossover of client
information;
Senior salesmen: can do all of the above plus create marketing campaigns, as well
as fully crossover and analyse data from clients; can also access campaigns in the
TMN e-business tool and register their results;
Administration: can fully access all features which, besides the above, include
assigning salesmen to specific clients/campaigns, and insert new product/service
information.
To date, the tool has been in use for about eight months. It is fully deployed and on
service in all stores and in AMJG’s headquarters, all of which are now integrated and
access the same database. All employees use it on a daily basis, with the TMN supplier
using it indirectly when it sends updates on its products or receives orders from the
stores.
Some minor new features (like support for importing/exporting Excel files, a format used
in some TMN documents) have been added to the system. Furthermore, it had several
small interface changes based on user feedback, and a few minor technical issues were
solved. It is currently considered reliable and user friendly by its users.
A new feature being already prepared for deployment is the ability to interface directly
with the TMN e-business tool in the few places it still uses Excel documents as a means
to exchange information. As TMN has announced it will change this soon, the CRM tool is
being prepared to access such data in the new format, resulting in a tighter integration
with the latter’s e-business tool. The implementation of this feature was so far simple as
the CRM already has the required database structure and information exchange
mechanism with TMN in place.
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5.4.3 Impact
The proper exploration of the CRM system’s capabilities led to a number of changes on
the working habits of the AMJG staff, such as the requirement to insert and classify all
data gathered about a client. Its introduction significantly improved the effectiveness of
relations with company clients by allowing an easier planning of visits to them, storing
and analysing information about their needs, and preparation of better oriented
proposals. This in turn led to changes in the company’s organisation, as the lesser need
to consult other sources of information led to quicker response time, as well as greater
mobility due to the Web nature of the system allowing it to be consulted from anywhere.
As the tool matured and its use spread to all AMJG employees the efficiency of the client
management process increased. Some of the areas directly affected were:
Company sales: sales for companies are up an estimated 6.4% since the tool
started working; while it is difficult to assert how much of this was a consequence of
using the tool, AMJG sales staff claimed it was the result of the better targeting of
potential clients brought about by the tool’s crossover and analysis features;
Work organisation: the greater efficiency of the new tool allowed to more quickly
process client information and prepare marketing campaigns, allowing salesmen to
spend less time on the office; this has led to a restructuring of job assignments
where salesmen now dedicate a larger share of their time to marketing in
companies;
Sales Staff: allows for a faster planning of visits and update on the status of client
companies, the quick spread of information on new products, and promotes
exchange of information among its members, by crossing over information from
several sources to identify potential new customers, making possible instant access
to updated product information, and set up of warning flags to other tool users to
take notice on specific subjects.
Business relationships with customers: individual clients now get better targeted
marketing campaigns as a result of the tool’s new analysis features; while it is
difficult to know how much is a consequence of adopting the tool, sales to individual
clients increased 12.8% since the tool was installed;
Inventory management and logistics: the tool allowed for increased speed in
placement of orders to TMN and between AMJG stores; delays in delivery of
products decreased by an estimated 1/4 to 1/5.
The CRM tool’s features make it useful not only to AMJG and its employees, it also is
beneficial for TMN and gives more options to AMJG clients. TMN now receives orders
from AMJG’s sales staff more quickly than with the previous methods (fax, or an upload
at the end of each day of an Excel file containing the list of product orders). TMN in turn
can send information on its products to AMJG faster (the previous method consisted of
an once-a-day file download). The CRM tool will also recognize certain information tags
when TMN sends its product information, which enables the latter to set warning flags on
specific items if it so wishes. Clients on the other hand, now have the option to
automatically receive e-mails with information on desired products. Furthermore, clients
can receive targeted e-mails with product offers based on their purchasing habits, the
mechanism of which is controlled by business rules set up by the sales staff.
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5.4.4 Lessons learned
The primary lesson learned at AMJG is about the power of custom-made solutions to
analyse and crossover information in a far more effective way. For example, the previous
generic tool lacked support for “purchase points”, a common feature in the Portuguese
cell-phone market (client receives virtual points every time he purchases a product or
service, and these can than be used as coupons to get a discount in new products). The
new CRM tool thus allowed targeted marketing of new cell phones to clients with a
certain minimum number of points, resulting in approximately a 50% increase in their use
by clients;
Another lesson was the importance of using tools that reduce planning and/or delivery
time. The increased efficiency brought about by the CRM tool decreased the time needed
to prepare marketing campaigns, as well as delivery of ordered products, and this
resulted in salesmen passing more time visiting companies, as well as greater client
satisfaction.
An unexpected issue was the initial difficulty some of the employees had in using some
parts of the tool, which required a few changes to the interface. A lesson drawn from this
is that, when developing a customised tool, the end users should be involved from the
start.
The tool’s information crossover features proved very popular with the sales staff, which
attributes greatly to the increase in sales to companies since the tool was introduced.
This has led to the discussion of the possibility to add even more specialized analysis
features to it, thus providing another lesson: when ordering a custom-made software tool,
always allow for the possibility of future unplanned improvements.
5.4.5 References
Research for this case study was conducted by Alfredo Silva, Inova+, on behalf of the
Sectoral e-Business Watch. Sources and references used:
Questionnaire and e-mail exchanges with José Gustavo, AMJG’s Managing
Director.
Interviews with João Correia, IAITI’s , 26-09-07, 11-10-07, IAITI offices
Company AMJG Web-site:http://www.amjg.pt/
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5.5 Casino Group, France
Abstract
The Casino Group is a leading food retailer in France. Founded in 1898, the firm sells
its products through various channels including different types of stores such as
hypermarkets and discount shops. In 2006, the Casino Group implemented a Customer
Relationship Management (CRM) system at its hypermarket branch. With this solution,
the firm aims to improve relationships with the ‘professional groups’ customers which
include public institutions, large enterprises and associations. Giving sales people
access to a centralised database significantly improved sales operations at the Casino
Group. The solution furthermore has a positive effect on marketing strategies and
activities. Overall, the solution has resulted in efficiency gains for the sales force and
the marketing department; productivity gains for the till employees; and improvement of
logistics, quality, hygiene, security and environment management within the Group.
Case study fact sheet
Full name of the company: Casino group
Location (headquarters / main branches): Sainte Etienne, France
No. of employees: 192 948
Sector: Retail
Main business activity: Food and non food retailer
Primary customers: Consumers
Year of foundation: 1898
Turnover in last financial year (€): €M 22,505
Most significant market area: France, North America, Asia, Indian Ocean
Main e-business applications studied: * Customer Relationship Management
5.5.1 Background and objectives
The Casino Group is strongly driven by its home market with 75% of its net sales
originating from sales in France in 2006. Before expanding into the international market,
the Group strongly consolidated its French home market position. These firm roots are
the source of the Casino Group’s ambitious and sustainable international expansion
which started in the late nineties. Internationally there are two priority markets: South
America and South East Asia. Across these markets, a diversified sales channel portfolio
including hypermarkets, supermarkets, convenience stores and discount stores ensures
that the Casino Group reaches a wide array of consumers.
Strategically, the Casino Group seeks to differentiate its offer from competitors with a
focus on the customer. To accentuate this differentiation in a competitive marketplace
assertive marketing initiatives have been designed to make every aspect of the business
customer-centric. Profoundly affected by this strategy is the hypermarket branch, which
includes 108 stores in France having a market share of 3.7% and representing 36% of
Casino Group’s revenues (€6,294 million in 2006). Marketing activities within this group
are based on the sustained development of the Casino brand, the introduction of new
food and non-food concepts and an ambitious customer loyalty program. An important
driver of both, revenue growth and margin improvement is this customer loyalty program:
purchases paid for with the Casino card continued to rise during 2006, reaching 60% of
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total revenue at year-end; number of active cardholders also increased by 10%. This has
a significant impact on revenue growth since the average value of a cardholder’s basket
is higher than that of customers not participating in the loyalty program. The CRM project,
called ‘E-DEAL’, is part of the differentiation and customer focus strategy.
The hypermarket branches serve the ‘professional groups’ segment which was created in
1998. This segment includes target customers like large companies, schools, and
restaurants. It represents approximately 2% of the income of each hypermarket. To
address this segment, one sales person is assigned to follow up and secure loyal
customers (in collaboration with the marketing department) in each hypermarket of the
Casino Group.
Prior to the implementation of the CRM tool, sales operations targeting the ‘professional
groups’ segment were not computerised and sales people mainly used fax and paper to
manage their customer appointments and to capture sales data. There was no
centralised information system to manage this data. In order to improve data
management and increase profitability of sales operations, the Marketing department of
the hypermarket branches decided to adopt a CRM solution that would:
automate and simplify operational sales processes
simplify in-store operational processes (mainly at the cash desks) and
enable the analysis of consumer habits with the aim to better address the
‘professionals group’ market segment.
5.5.2 e-Business activities
‘e-deal’ is the first CRM solution implemented at the Casino Group. The project was
launched at the end of 2005 and initiated and sponsored
70
by the marketing director of
the hypermarket branch. Following a detailed definition of project specifications, the
Casino Group launched a tender process to find and select a suitable solution provider.
The main requirements for the solution were to:
give marketing and sales personnel a centralised tool to follow up on activities
within the ‘professionals group’ segment
provide a unique customer database to sales personnel, enabling them to target,
follow up and secure loyal customers
comply with budget specifications (small budget)
provide an ergonomic, simple-to-use tool for users and
offer a web based tool which is easy to integrate into the existing information
systems infrastructure.
Following the selection of the solution providers (E-deal for the software and Unilog for
the integration of the solution) a development phase lasting approximately 7 months
allowed the hypermarket branches of Casino to adapt the software to its specific needs
and to engage in various test runs. Before the overall deployment of the solution, a two-
month pilot was done in three hypermarkets in France. These markets were selected due
to their diverse profiles which allowed for testing the solution in different environments.
70
The project sponsor denotes the person in a company committing political capital as well as
resources for a project.
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Following the pilot phase, the solution was deployed progressively: by the end of 2006 it
was installed at 20 stores with another 40 stores added in 2007. The target is to equip all
of the 108 stores by the end of 2008.
The project team consisted of two people from the Casino Computer Innovation
department, one Marketing project manager from the Casino hypermarket branches and
several consultants from the subcontractor company, working on the development and
integration of the solution. From the very beginning, end-users were involved in the
project: three sales representatives with different technical and professional backgrounds
participated in the development, testing and roll-out phases. Their views affected the
choice of tool, interfaces and functionalities; and they actively participated in training the
sales team in charge of the ‘professionals group’ segment. The initial training lasted one
day and is complemented by on-demand half-day refresh training sessions.
The solution deployed, developed with java language, is fully web-based, running on a
tom cat server. Each sales representative has a user login and password and can access
the tool via the Intranet.
Together with the CRM tool, the Casino hypermarket branch deployed a new customer
loyalty card for the ‘professionals group’ segment. The objective is to equip all customers
of the target segment with this card in order to being able to analyse their consumer
habits and perform targeted marketing activities. About 18.000 professional customers
are using the card today.
With the CRM solution, the sales process is as follows:
Sales representatives log into e-deal to see their calendars including customer
meetings scheduled by an external telemarketing company according to the
availability given beforehand.
The representatives access information(held on the database) about customers
with whom they have meetings scheduled in order to prepare these meetings.
All customer information and updates are stored in a central database, including
more than 200.000 contacts. This information can be accessed by the whole
‘professionals group’ segment sales force of all hypermarkets and by the marketing
department.
Before the solution was implemented, the telemarketing company sent customer meeting
proposals to the sales representatives who, as a first step, confirmed availability and
sent, as a second step, a final meeting acceptance or cancellation to the telemarketing
company. All information exchanges were done by fax. This process was significantly
simplified owing to the new CRM system.
The purchasing process of the ‘professionals group’ customer has been eased as well:
the loyalty card enables ‘professionals group’ customers to shop alongside other
consumers in stores while information about the card holders is being collected and
registered during check-out. Final year discounts are allocated to the respective cards
and managed automatically with data about all purchases being sent to the e-deal
system. Before the deployment of the solution, ‘professionals group’ customers had to
identify themselves at the reception of the store and get a specific paper that needed to
be shown at the cash desk. The cash desk employee then had to create a manual bill for
the customer which was a very time consuming activity.
With the purchasing process for the ‘professionals group’ customers now being
automated, accounting processes have also changed: prior to the introduction of the new
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system, the Marketing department received sales figures from individual sales
representatives on Excel sheets at the end of each month and data was manually keyed
into the central accounting system. There was no guarantee that figures were correct at
the time. With the e-deal solution, sales data is automatically transmitted from the tills to
the marketing department on a daily basis. The whole process is therefore now efficiently
organised and automated.
Future developments of the solution, such as the upgrade of the software version as well
as the synchronisation of the Outlook calendar with the e-deal calendar are planned for
2008. Thanks to the success of the project for the ‘professionals group’ segment, the
deployment of CRM tools across other Casino sales departments is envisaged.
5.5.3 Impact
The management of the hypermarket branch is very satisfied with the first results
achieved following implementation of the solution. Users have adopted the tool to suit
their sales process and feedback is very positive especially since the tool is simplifying
daily working processes.
The impacts of the solution can be summarised in efficiency gains for the sales force and
the marketing department, productivity gains for the till employees and in improvement of
logistics, quality, hygiene, security and environment management.
Hypermarket sales representatives in charge of the ‘professionals group’
segment
All customer information is consolidated in a centralised database that sales
representatives can access. 200.000 contacts have already been entered into the
database which is used by sales representatives to get to know customers and target
marketing actions to the specific profile of a customer.
The sales process is eased owing to a reduction of manual processes for scheduling
customer meetings. These meetings are organised to follow-up on existing customers
and to investigate new customers. The meetings are directly managed via an online
calendar shared between the telemarketing company taking the appointments and the
sales representatives.
Sales representatives are able to better match preferences and needs of the customers
thanks to detailed data available on their purchase habits. Representatives can now
negotiate prices, propose specific promotions to customers to reduce stocks or organise
specific events for targeted customers. This will probably have a positive impact on the
relationships with the customer.
Regarding the management of their own activities, sales representatives now have clear
visibility on their daily turnover and their position amongst the national sales force. This
allows them to better manage their sales activity and to exactly know if they are in line
with their sales objective.
Hypermarket branches marketing department
Activities of the entire ‘professionals group’ can now be controlled from an accountancy
and marketing point of view. Sales data of the income generated by the ‘professionals
group’ of each hypermarket is automatically gathered from the tills and represents reliable
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information for accountancy. Marketing personnel can now monitor activities on a daily
basis while they got the information only once a month before the new system was
implemented.
With this new information now available, the marketing department is able to launch
targeted direct marketing campaigns by segmenting the ‘professionals group’ market.
Detailed statistical sales analyses have made it possible to identify the top ten customers
or the top ten products sold. The tool enables marketing personnel to analyse customer
behaviour through detailed purchase data provided by the system. Marketing efforts can
be optimised by putting efforts on specific customers; examples include securing the
loyalty of regular customers or organising awareness and promotional campaigns for
customers that did not use their card for a certain amount of time with specific
promotional actions. Before the new system was deployed, marketing actions like specific
promotional offerings were sent to a very large amount of people and these actions
remained fruitless since they were not adapted to the target public.
Hypermarket logistics
Operations in the hypermarkets to manage the ‘professional groups’ segment have been
completely automated thanks to the introduction of the loyalty card and the CRM system.
This automation saves time for accountants and for customers and led to productivity
gains at the tills.
Another benefit results from the integration of e-deal with SAP allowing a better control of
the customer payments. Before the implementation of the solution there was no control
possible of non-paid bills of the customers who have certain payment facilities. Now a
detailed view of the status of customer payments is provided though the solution.
Hypermarket quality, hygienic, security and environment management
In case of product retirement (for example, removing contaminated products) the Casino
hypermarket branches now can exactly identify the customers who have bought the
product to be retired and be able to quickly inform the customer.
Due to the recent implementation of the system and the absence of any figures before
the CRM solution implementation the quantitative benefits are difficult to measure at this
stage. The Casino Group however now has a tool in place that gives a situational
overview allowing it to rapidly react to emerging quality, hygienic, security and
environmental challenges.
CRM tool usage
The Casino hypermarket branches today count about 200.000 contacts in their central
customer database and that 6.000 customer meetings could already been realised in 20
months allowing the representatives to attract more customers.
18.000 customer loyalty cards have been deployed until today which is considered to be
a great result. Customer satisfaction has also increased due to the simplified shopping
process for loyalty cards owners.
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5.5.4 Lessons learned
This case study illustrates the successful implementation of a CRM solution with a rapid
return on investment in terms of benefits achieved. It is important to highlight that such a
solution is not only suitable for large enterprise but also for small businesses due the
simplicity of the solution and the small budget required to put it in place: the solution is
not a complex system and can easily be adapted to the specific needs of a company.
The company then just needs to pay licence fees on a yearly basis and can outsource the
maintenance of the system to an external company. This makes such a solution
particularly suitable for small firms that do not have an internal IT department.
Several factors have contributed to the success of this project. First of all a company
should carefully analyse its functional needs and distinguish the different functionalities it
wants to deploy. ‘In order to facilitate the adoption, the deployment should be done
functionality by functionality starting with the most basic one’ recommends Stephane
Bayle, the CRM project director. The Casino Group started with the deployment of a
centralised customer database which was the most important functional requirement.
Another important point was the integration of a “representative” panel of users in the
project from its very beginning. Thanks to their active participation in choosing
functionalities and interfaces that meet user expectations the solution is widely used and
accepted by the end-users.
Even if the return of investment of this project cannot yet been calculated, Casino is
convinced that this project will bring great value to their customer-centric strategy in the
near future.
5.5.5 References
Research for this case study was conducted by Caren Hochheimer, Altran, on behalf of
the Sectoral e-Business Watch. Sources and references used:
Interview(s) with Stéphane Bayle, 4/01/08, Sainte Etienne France
Casino group Company annual report 2006
Websites:
•http://www.groupe-casino.fr
•http://www.e-deal.com/
• www.logicacmg.com
•http://www.geant-collectivites.fr/
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5.6 4fitness, Germany
Abstract
e-Marketing is an important, yet often undervalued factor for generating online sales.
4fitness, a small fitness equipment retailer based in Germany, uses e-marketing
activities successfully to generate more than two thirds of its sales from an internet
shop. This case study illustrates online sales and e-marketing activities at 4fitness. The
experiences of 4fitness produce several significant conclusions about e-marketing and
online sales for rurally-based micro firms. Among these are the effects of e-marketing
on the company, the impact of the internet shop on the company’s market reach, and
the role of business partnerships for bridging resource and skill gaps.
Case study fact sheet
Full name of the company: 4Fitness e.K.
Location (headquarters / main branches): Rohrdorf, Germany
No. of employees: Owner-managed firm, no other employees
Sector Retail sale of fitness equipment and accessories
Main business activity: Sales to consumers
Primary customers: Private consumers in Germany
Year of foundation: 2006
Turnover in last financial year (€): n.a.
Most significant market area: Germany
Main e-business applications studied: * e-Sales, e-Marketing
5.6.1 Background and objectives
4fitness (http://www.4fitness.biz/) is a specialist fitness equipment trading company based
in the rural town of Rohrdorf which is located some 70 km South-East of Munich in
Germany. A local entrepreneur founded the company in March 2005. This entrepreneur
decided to set-up his own company following several years of selling equipment as a
sales supervisor in a medium-sized sports shop in a neighbouring town. Trade
commenced in October 2005 when the first pieces of equipment were sold. Products on
sale include large fitness equipment such as exercise machines and treadmills; small
equipment such as heart rate monitors; and accessories such as free weights. The
company sources these products from ten key suppliers and sells them on to customers
all over Germany and German-speaking neighbouring countries including Austria and
South Tyrol in Northern Italy. As of 2008, the main customers of the company are
consumers from all over Germany. A minority of sales (less than 5%) is to hotels, so-
called rehabilitation centres and fitness studios. The majority of the equipment is sold
over the internet and in a brick-and-mortar shop in Rohrdorf. 4fitness is run by its owner;
the company does not have other full-time employees.
The fitness equipment and accessories retail trade is notoriously competitive. For a newly
established firm in a rural location, such as 4fitness, this competitive nature presents a
major problem: it is very difficult to reach customers through a bricks-and-mortar shop
alone – another sales channel reaching a wider audience is essential. During his previous
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work engagements, the owner recognised the growing importance of the internet. Sales
people in the fitness equipment business and manufacturers of fitness equipment also
suggested that the internet is of ever-increasing importance for generating sales. Hence,
the owner decided to sell his equipment and accessories over the internet.
5.6.2 Setting up and establishing the “e”-retail-business
The main initial technology task for the entrepreneur was to get the internet shop up and
running. This was crucial as the bricks-and-mortar shop is in a rural location and the
owner planned to use the internet to generate extra sales. The owner has used
computers in his previous job as a sales supervisor and he is used to using software
programs such as Microsoft Office applications and email programs. Yet, he does not
possess computer programming skills and he was not in a position to develop and launch
an internet shop from scratch without help. He therefore approached one of the directors
of a technology services provider, who lives locally. This technology services provider
agreed to support 4fitness in setting up and launching an internet shop. The online shop
development phase lasted six months in total. During this time, five briefing sessions took
place where the design of the shop and its main objectives were defined and refined.
Following a ‘teething phase’ of approximately six to eight weeks until everything was
running smoothly, it took another three weeks to add all the product information to the
online application. The owner added the product information to the shop while the
technology services provider carried out all the technical work.
e-marketing
Besides setting up the shop, the other major task for 4fitness was to establish the shop
and market it to potential customers. 4fitness engages in a number of e-marketing
activities to achieve this objective. The main activities are Google search engine
optimisation and placing Google online ads. ‘Google is the A&O of online advertising if
someone wants to sell something on the internet. Without it, there is no success!’ (Jakob
Steiner, 4fitness). The owner considers an application called AdWords (available at:https://adwords.google.com/select/Login?hl=en_GB) to be the key application for placing
online ads on Google. He uses this application -which is owend by Google and freely
available over the internet- to place the online ads. With AdWords, 4fitness can create
ads, choose keywords, make ads appear on Google, set budgets for ad campaigns, and
make payment to Google for their e-marketing services. Search engine optimisation
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in
contrast is considered less straight forward by the owner of 4fitness: he thinks the
process of aiming to place the products on offer in his online shop on early search pages
is a complicated procedure. The owner uses the Google Keyword tool to optimise the
search engine results for the products in his online shop.
71
According to Wikipedia (2008) ‘Search engine optimisation’ is the process of improving
the volume and quality of traffic to a web site from search engines via "natural" ("organic"
or "algorithmic") search results for targeted keywords. Usually, the earlier a site is
presented in the search results or the higher it "ranks", the more searchers will visit that
site.
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At the beginning, the owner concentrated his efforts on two search words: ‘Laufband’ and
‘Heimtrainer’ (treadmills and exercise machines respectively). Yet, he felt these efforts
were unsuccessful as, over a period of three months there was no significant move up
the search pages and sales did not increase either. Hence, he shifted his efforts away
from product groups towards advertising specific models of treadmills and exercise
machines such as “Crosstrainer CTR2”. This resulted in an increase of sales of the
specific models advertised as well as a move up the search pages. Overall, the owner
comments, that embarking on e-marketing is a ‘trial-and-error’ process. The technology
services provider was a valuable source of advice for 4fitness especially regarding the
use of AdWords and optimising search engine results. ‘Online advertising is difficult; the
tricky question is what to advertise where’ (Jakob Steiner, 4fitness).
Although Google is the main focus of e-marketing activities at 4fitness, the owner also
registered with price search machines such ashttp://www.guenstiger.de. 4fitness’ owner
decided not to engage in other price search engine activities apart from registering. For
the launch of the shop, online banners were placed over a period of five months on the
online sports pages of the main regional newspapers. These banners appeared on all the
sports-related sections and pages of the newspaper’s websites. This newspaper was
chosen for online advertising by the owner following a short analysis of media data: with
some 40.000 page views a day the owner was of the opinion that online ads on this
newspaper’s websites were suitable.
Technology used and cost for setting up and advertising the online shop
One desktop computer and a high speed internet connection are necessary for running
the online shop and engaging in e-marketing. The shop is hosted on the server of a large
German telecommunications provider and the owner accesses it via the internet
connection. From a software perspective, the desktop computer contains the common
Microsoft Office programs. When an internet order comes in via email, the owner prints
out the transport papers and the bill, attaches these documents to the equipment from the
warehouse and calls the transport firm to pick it up. The customer gets the equipment two
to three days after the order was placed. 4fitness has an ongoing service contract with a
third-party provider, which assembles the equipment bought by the online customers at
the customer’s premises. This equipment assembling activity is included in the online
price.
4fitness paid approximately 5000 Euros to the technology provider for developing and
setting up the online shop. This included all the technical and administrative work. The
partner firm is responsible for the technical maintenance of the online shop while the
owner looks after the content. One of the initial jobs for the owner was to add the different
products and product information (such as pictures and text describing the products on
sale) to the online shop. This activity lasted about three weeks. Initial costs for AdWords
amounted to about 1500 Euros. On top of that, some 2000 Euros were spent on further
optimising the shop and the online advertising. Ongoing costs include the hosting fee for
the server space which is about 160 Euros per annum and reoccurring cost for AdWords.
Cost for AdWords is fluctuating depending on, for example, the level of activities chosen
by the owner and the click rates (how often searchers click on the online ad placed)
achieved.
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5.6.3 Impact of e-marketing and selling online
The effects of e-marketing and selling online at 4fitness are organised into the following
four types: e-marketing, market reach, employment and the ability to concentrate on core
business activities.
e-marketing effects
4fitness generates between 75% and 80% of its sales from the internet shop; and, as far
as the company is concerned, e-marketing is a critical success factor for generating these
sales. Of the various e-marketing techniques employed, Google search engine
optimisation and placing online ads on Google are significant, as online sales are directly
affected by these e-marketing activities: an increase in sales of the specific products
marketed is measurable. Banner advertising in contrast shows no direct effects on online
sales although, according to 4fitness, intangible desired effects such as creating
awareness about the company and raising its image should be taken into consideration.
Besides marketing via Google and banner advertising, 4fitness uses registrations with
internet price search engines as an e-marketing technique. Again, this technique
produced no actual increase in online sales, but the owner reckons that it may have
brought potential customers to the company’s online shop that eventually might purchase
something.
Market reach
Retail trade over the internet, linked with a clear e-marketing strategy, is enabling 4fitness
to sell its products all over Germany and German-speaking neighbouring countries.
4fitness is therefore able to overcome national geographic boundaries; and to benefit
from reaching this national market. National and language borders however are difficult to
overcome as shown by the majority of internet sales originating from within Germany:
less than 1% of online sales at 4fitness come from outside Germany. It has, however to
be taken into consideration that the online shop is only available in the German language.
From a geographical perspective, no particular sales patterns emerge: customers from all
over Germany buy fitness equipment and accessories online at 4fitness. In terms of
products sold, all different types of products on offer sell via the internet shop.
Impact on employment
The online shop and the well-functioning relationships with the partner firms, especially
with the technology and the equipment services providers, enable the owner of 4fitness to
run his business without employees. Another factor besides online shop and partnerships
is that business processes at 4fitness are straightforward: the owner orders products from
suppliers and puts these into a warehouse until the actual sales comes through; or, if out-
of-stock, he asks suppliers to send products directly to customers with the service partner
ensuring that the equipment sold is in good order when it reaches the customer.
Compared to retail trade in a traditional shop, which constitute about 1/3 of sales at
4fitness, there is no need to physically showcase equipment in an online shop. This
saves 4fitness from having to employ sales staff manning the bricks-and-mortar shop in
Rohrdorf during regular opening hours. Hence, selling over the internet is one factor
(besides relationships with partner firms and business processes structure) that is
noticeably affecting employment at 4fitness.
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Ability to concentrate on core business activities
Selling equipment and accessories is the core business activities at 4fitness. This
includes e-marketing activities. The strong relationship with the technology provider
enables the owner of 4fitness to concentrate his efforts on the selling and marketing
activities as the partner firm provides adequate technology support for the online shop
and ample advice regarding e-marketing. The owner even goes as far as commenting
that he has no worries about technical issues because the partner firm is ‘always there’.
Furthermore, 4fitness uses a specialised logistics provider, a globally-operating German
logistics firm, to ship its products; and it uses a dedicated third-party service provider,
assembling equipment sold by 4fitness at customer premises. These partnerships give
the owner space and time to concentrate his efforts on core business activities.
5.6.4 Lessons learned from studying online sales and e-marketing
activities at 4fitness
The owner of 4fitness set-up and established a small retail business trading fitness
equipment and accessories in the rural town of Rohrdorf in Germany. The two main sales
channels for the firm are a bricks-and-mortar store and an internet shop. From the
experiences of 4fitness, the following lessons about e-marketing and selling online can be
learned:
e-Marketing is a complex issue, especially for micro firms
The experiences of 4fitness show that engaging in e-marketing is a complex issue: micro
firms need to make choices about the extent, type and scope of e-marketing. Without the
support from an experienced e-marketing partner firm (the technology provider), the
owner reckons, it would have been very difficult for him to make adequate choices and
grasp the potential of e-marketing. In terms of e-marketing processes, a trial-and-error
approach was, and continues to be, a suitable strategy for approaching e-marketing
activities at 4fitness. The owner however notes that these activities are bounded by
resource capacity such as financial resources available to carry out e-marketing
campaigns and time available for spending on activities.
The effects of e-marketing are difficult to measure
When the owner of 4fitness explored the impact that e-marketing was having on his firm,
he found that effects on actual sales made over the internet are measurable from placing
ads on Google and optimising Google search engine results. Banner advertising and
registering with internet price comparison sites did not produce measurable effects.
Indirectly though, these actions have intangible effects such as creating awareness about
the company. Apart from direct effects on the company’s online sales and indirect effects
on the company’s publicity, 4fitness reports that e-marketing influences the company’s
overall marketing budget and the owner’s schedule in terms of time spent engaging in e-
marketing activities. While a monetary value can be assigned to the marketing budget,
and time can be measured in minutes, these tend to be ad-hoc measures. The owner’s
time is particularly difficult to put into numbers. Hence, overall, it is difficult to measure the
effects of e-marketing.
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Involving Google in e-marketing activities is important for generating
online sales
While many different kinds of e-marketing techniques are generally available, the type
and extent of activity chosen determines the degree of the effect and, indirectly the
activity’s success. 4fitness observed that e-marketing activities involving Google had the
highest impact on actual internet sales of all the e-marketing activities the company
engaged in. These effects could not be observed for other search engines
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. Hence, the
owner of 4fitness intends to continue placing the emphasis of his firm’s e-marketing
activities on advertising via Google.
Relationships with business partners help micro firms to overcome lack of
technology skills and enable owners to focus on core business activities
4fitness is able to benefit from three strong partnerships with specialised services
providers
73
: a technology partner firm supports the owner in technical concerns; a
logistics provider ensures equipment delivery; and an equipment assembling services
provider sets up equipment sold at customer premises. These partnerships enable the
owner of 4fitness to overcome a lack of technology skills; a lack of logistics resources;
and geographical equipment set-up boundaries. Relationships between 4fitness and
these partner firms are established, working-well and sustainable. Preconditions for these
successful partnerships include that these business partners provide the exact skills
respectively resources needed by 4fitness at affordable prices and ensuring a high level
of service quality. Hence, the owner is able to concentrate his efforts on core business
activities.
Regionally-based micro firms can reach national markets through selling
over the internet
The online sales figures at 4fitness show that the company is selling to customers all over
Germany. The internet is therefore giving the company access to an entire national
market. Yet, while it dismantles boundaries within a country
74
, it seldom spreads across
national boundaries: the majority of sales at 4fitness come from within Germany. One
exception from this observation is countries where the same languages are spoken:
4fitness has been able to sell to German-speaking countries over the internet, crossing
national boundaries.
Customer service is an important component for sustainable online sales
The owner of 4fitness indicates that customers, and especially online customers, often
provide positive feedback about 4fitness’ service. Online customers tend to appreciate
that delivery charges and on-the-customer-premises equipment set-up are included in the
price; and that 4fitness is accessible, reacting quickly to customer queries. Specialising
on fitness equipment and accessories also gives 4fitness a competitive edge, as the
owner is able to provide expertise and an informed service to customers.
72
such as Yahoo, Ask Jeeves and Baidu
73
The business’ connection with an accountant is not included as it is considered an essential
partnership
74
Such a crossing regional and provincial boundaries
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Conclusion
The experiences of 4fitness illustrate that e-marketing is a critical success factor for
generating online sales: the type and extent of e-marketing actions chosen matter.
Entrepreneurs and micro firm owners should therefore choose their e-marketing activities
wisely. A potentially useful source for e-marketing support is partner firms. These
partners can provide entrepreneurs and micro firm owners with e-marketing expertise and
guidance, although it is not limited to these activities. Logistics and specialised service
providers, for example, can also be important sources for acquiring resources and skills.
Another important lesson from 4fitness’ experiences is that selling online enables rural
micro firms to reach national market, therefore widening market reach.
5.6.5 References
Research for this case study was conducted by Dr. Maria Woerndl, empirica GmbH on
behalf of the Sectoral e-Business Watch. Sources and references used:
Interview with Jakob Steiner, owner 4fitness, April 2008
Websites:
ohttp://www.4fitness.biz/
ohttp://www.techdivision.com/
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5.7 Fleria Floral Creations, Greece
Abstract
Fleria Floral Creations is among the leading companies in the flower industry in
Greece. The creation of an e-shop was Fleria’s attempt to increase the number of
orders placed through the internet, sell more ready-made floral creations and extend its
market share. This attempt did not reach its potential because of industry-specific and
cultural reasons as well as inadequate attention paid to the organisation of the e-shop.
The case study provides a record of the lessons that Fleria learned and also outlines its
current attempts to overcome the identified barriers to e-business.
Case study fact sheet
Full name of the company: Fleria Floral Creations
Location (HQ / main branches): Athens – Greece
Main business activity: Flower sales, Floral creations
Year of foundation: 1983
Number of employees: 50
Turnover in last financial year: 2.5 million euros
Primary customers: Private customers
Companies in various sectors (hotels, magazines,
newspapers etc.)
Most significant geographic market: Athens, Attica
Main e-business applications studied: Barriers of ICT and e-business, e-Sales
5.7.1 Background and objectives
Fleria Floral Creations was established in 1983 by Nina Ioannidou as a General
Partnership. In 1996 it was turned into an industrial and commercial S.A. because, in
addition to selling ready-made flowers, it became involved in the design and creation of
flower compilations and gifts. From 1996 until 2002 Fleria focussed on the establishment
of a network of shops in Athens and increased them from two to six. It is currently
entering the process of franchising. Fleria positions itself at the upper end of the market
selling high-quality flowers and flower compilations and providing customised service to
private customers and organisations. In 1996, Fleria’s sales were evenly distributed
between private customers and corporations. More recently, a larger proportion of its
sales were directed to private customers. Its clients require distinguished flowers or
flower compilations that are rather uncommon and cannot be easily found elsewhere in
the market. This is the reason that Fleria’s luxurious products are sold at a premium
price. Out of its 20,000 customers, more than 5,000 are estimated to belong to the top-
end of the upper class in terms of their wealth.
There are at least 14 organisations in the flower industry which have created e-shops.
Most of the flower organisations with successful e-shops compete in the mass market,
where cost is the most important criterion for achieving sales. As Fleria positions itself in
an elite niche market by targeting customers which require distinguished or customised
products, it primarily competes with only two other companies.
The principal reason that led Fleria to create an e-shop was to provide its customers with
the opportunity to have on-line access to all its products. The objective was to encourage
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some of them to shop through the internet but also to enable them to see the products
on-line and visit the shops, or place orders to the sales advisors by phone. Another
objective of the e-shop was to encourage clients to buy some ready-made products that
were already listed on-line, rather than order customised products. This would reduce
the extremely high cost of creating customised products for the majority of clients.
5.7.2 e-Business activity
Fleria assigned the creation of its e-shop to a third party in 2003. The e-shop has been
operational since then. The cost for the creation of the website and the set-up of a
central server was 5,000 Euros. The annual maintenance cost for the website and the
central server is 1,500 Euros. The central server operates at Fleria’s headquarters and
provides internet access to all six shops. This enables the sales advisors to know what
products customers refer to when they receive phone orders.
Following the creation of the e-shop, Fleria realised three important barriers that limited
the success of their ICT-based activities. First, only a small minority of Fleria’s customers
decided to place orders through the internet. A key reason behind this phenomenon is
that flowers are a luxurious and sentimental product. Most of the upper-class customers
who pay premium prices for the products do not want to order through the internet but
prefer to have direct contact with sales advisors. ”Our clients like to introduce themselves.
They expect a personalised service. ’You know who I am, I buy so many flowers every
year and I want to be treated in a different way’. They might not even discuss the price,
but they want the sales advisors to commit themselves” (Interview with Mr Tsilias).
Additionally, flowers usually involve a kind of sentimental need, encouraging clients to
contact sales advisors in order to fulfil this need. “When you buy a flower you fulfil a
sentimental need…Customers need to receive that from our sales advisors, and they do
not get that through the net. This is where all the difficulty lies. The sentimental part is
90% of the sale point of Fleria” (Interview with Mr Tsilias). Responding to these emotions
cannot be achieved when clients make a transaction through an electronic, automated,
impersonal system. According to the manager of Fleria, the same problem is faced by
their two key competitors, limiting the potential success of their e-shop. In conclusion, the
e-shop did not have a major impact upon the wealthy clients other than providing them
with some information which speeded up the sale process. These customers are key for
Fleria’s success. Therefore, the organisation does not want to risk taking away from
them the fulfilment of their sentimental needs and the feeling of satisfaction they receive
by speaking to sales advisors.
Second, while the Greek IT market and the broadband connections in particular appear to
be booming from 2004 onwards, consumers’ low trust in on-line transactions was another
reason that limited the success of Fleria’s e-shop. Credit card fraud is an important
reason that discourages Greek internet users from buying products and services on-line.
Fleria’s clients who visit their website prefer to see the products on-line, phone and place
their orders to their sales advisors rather than on-line. Additionally, despite the increasing
number of internet users in Greece, this is still at low levels compared to the European
Union’s average. This phenomenon is not unique to the flower industry, but seems to be
affecting e-shops of leading organisations in several other industries. Low trust in the
internet does not only affect on-line transactions but is also manifested in the trust placed
upon the quality of the products that are on-sale. “Many times the customers say: these
wonderful roses that I see on-line, are they going to be the same? They want to hear that
the flowers will be fresh, that the result will be amazing, that the delivery will be right on
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time, they want to hear that. Greeks do not trust the internet yet. You may see a Ferrari
being sold on E-bay, and an American might buy it quickly to take advantage of the price
bargain. But many Greeks are not like that. They would want to start up the engine,
listen to the car’s noise…This is the game, and it is not distrust to Fleria, it is a general
distrust to e-commerce” (Interview with Mr Tsilias).
Third, one cannot ignore the important limitations related to the set-up of this e-shop.
The website is not continuously upgraded as products created by Fleria are not always
listed on the website. In addition, Fleria did not invest in any e-marketing activities in
order to promote the e-shop. The website was only advertised to existing customers
through leaflets and brochures which listed their products. The lack of e-marketing
activities (advertising, search engine optimisation) limits the e-shop predominantly to its
existing client pool. Also, the payment system was described by Fleria’s manager as
cumbersome. A bank acts as an intermediary between the client and Fleria. The
procedure is as follows. Fleria staff access the ordering system, find the client’s order,
ensure that the order has been delivered and then act to collect the money from the bank.
This procedure is quite costly in terms of time and money, since some delays and
problems occur (e.g. need for frequent communication among sales advisors, drivers,
bank officers etc). Taken together, these facts suggest that Fleria did not place
substantial focus on planning and organising this side of its business.
Given the aforementioned barriers to the success of Fleria’s e-shop, several changes are
planned to take place from November 2007 until March 2008. A key objective underlining
the planned changes is the increase in the number of ready-made flower creations, since
preparing customised products for all customers is too costly. This objective will be
facilitated by continuously upgrading the e-shop with new products. Customers who tend
to phone the shops will be encouraged to view the products on-line and place orders
directly through the internet. This is expected to benefit customers since they will need
less time to place an order and will also view the products rather than listen to their
description. From an organisation’s point of view, Fleria expects to be able to sell more
ready-made floral creations and gifts which will reduce one of their most important costs,
as well as save time by occupying fewer agents on the phone.
Furthermore, the increase in the volume of phone calls (which is partially attributed to the
e-shop) led the company to decide to set-up a central call centre. Receiving all orders in
a central call centre is expected to improve the organisation of deliveries and is likely to
reduce related delays because fewer agents will be involved in receiving calls and
organising deliveries.
Finally, e-marketing activities such as advertising on popular portals is expected to take
place. Fleria will invest in advertising only after the organisation of its production side and
its logistics are improved, since the organisation is already facing a full load of daily
orders. Advertising is currently considered as a longer-term plan, since the company
might risk receiving more orders than those it can handle.
5.7.3 Impact
The creation of the e-shop can be described as a failure in terms of sales achieved,
though financially it had a neutral result. It can nonetheless be described as a success in
the sense that it served an informative role for the company’s clients, which contributed to
overall sales. Also, this ‘experimental’ phase provided important lessons to Fleria which
led the company to invest further in its e-commerce activities.
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The e-shop was not successful in terms of encouraging customers to place orders
and buy on-line. It is estimated that out of 100 visitors, only 5 place orders on-line.
The planned changes are expected to increase the number of sales achieved
through the internet.
The annual turnover of the e-shop is a mere 6,000 Euros per annum. This amounts
to 0.24% of the total annual sales of Fleria, and is equivalent to the daily turnover of
a single shop! From a financial perspective, the e-shop breaks even.
The e-shop was believed to be successful in terms of giving customers the
opportunity to be informed about products and see them. The website also helped
sales agents to serve customers because the latter could see the products
promoted by the former.
Following the above results, the company realised the potential of investing further
in its e-commerce activities, particularly regarding its corporate clients. This will
lead to the set-up of a central call centre, re-organisation of production and logistics
departments so as to cope with increased forecasted demand created through the
e-shop.
5.7.4 Lessons learned
A key learning point is that even an improved version of the e-shop will be faced with
considerable barriers because of the particular niche market that Fleria positions itself.
Buying flowers involves a sentimental process which is not easily experienced through
the internet. Selling floral creations on-line is also hampered by the fact that wealthy
customers prefer to introduce themselves to sales agents and expect personalised
service and customised products. It is hence not unsurprising that Fleria claims that
selling ready-made (rather than customised) floral creations might reduce the company’s
prestige. Nonetheless, they believe that a proportion of their clients, particularly
corporations, could use the internet and place orders on-line since these tend not always
to be emotional purchases.
Continuous investment of time and effort on the e-shop was another key lesson for
Fleria’s managers. Although the e-shop was supposed to be automated to a great degree
and one employee was assigned to check the orders with a certain frequency on a daily
basis, strategic planning regarding the e-shop proved to be inadequate. For instance,
although new products were continuously created at the shops, these were not listed on
the website. Fleria realised that some individuals or a third party need to be continuously
working on it in order to make further use of the available opportunities (e.g. keep clients’
records and use these for marketing activities).
Finally, low trust in products presented in the internet and reluctance to place orders on-
line appears to be linked to the fact that many Greek consumers do not yet trust the
internet. Clearly, this can be related to the fact that the use of the internet is still at its
infancy in this part of Europe. Greece ranks 24
th
out of the 27
th
EU Member States, with
23% of households having internet connections, compared to 49% EU average
(http://www.eett.gr/conference2007/pdf/Tsemperlidis.pdf), while the use of e-commerce in
Greece is 1.1% compared to 4% EU average (ibid.). In spite of the aforementioned
industry and country specific problems, Fleria decided to invest further in its e-shop. By
developing and investing in its e-shop alongside other departments, it foresees an
increase in its sales especially to corporate clients and a lesser extent to private
customers.
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5.7.5 References
Research for this case study was conducted by Dr Konstantinos Tasoulis on behalf of the
Sectoral e-Business Watch.
Interview with Mr Pavlos Tsilias, Director of Fleria, Head of E-shop, 19 September
2007, Athens
Company website,http://www.fleria.com (accessed September 2007)
http://www.go-online.gr/ebusiness/specials/article.html?article_id=549 (accessed
October 2007)
http://www.flowers.org.uk/index.htm (accessed 10 October 2007)
Consumers and broadband connections,http://www.eett.gr/conference2007/pdf/Tsemperlidis.pdf (accessed 18 October
2007)
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5.8 Smart Supermarket, Malta
Abstract
Smart Supermarket is a leading food and household retailer in Malta. In 2001, it
launched its online shopping services, making it the first supermarket in Malta to offer
this facility. The challenges faced were many, but Smart’s board of directors always
tried to find ways and means to address them. Although this solution still does not have
the critical mass of customers needed to attain profitability, Smart’s top management
intends to continue investing in it as they anticipate benefits, in terms of an increase in
online customers, in the longer term.
Case study fact sheet
Full name of the company: Smart Supermarket
Location (HQ / main branches): Balzan, Malta
Main business activity: Food and Household Retailer
Year of foundation: 1981
Number of employees: 120
Turnover in last financial year: n.a.
Primary customers: Food and Household Consumers
Most significant geographic market: Malta
Main e-business applications studied: e-Sales
5.8.1 Background and objectives
Smart Supermarket is a family-run business consisting of one large store situated in the
central part of the island. Its success story goes back to the early 1980s. At that time, the
company used to produce shirts. There was however a shift in the market with most
international manufacturers moving to other countries in search of cheap labour. The late
Carmelo Grech decided that it would make sense to move out of the textiles market
which was facing a slump. Thus, the idea of opening up a supermarket came about
following the slump faced by the textiles market in Malta. Smart supermarket was
eventually opened in Balzan (a central location in Malta) in 1981 in the rather limited
space of the shirt producing factory.
Then, few people believed that the idea would survive as it had to compete with the great
number of small grocers that controlled the market. Small grocers, apart from selling daily
necessities, were seen as social interaction points. On the other hand, it was perceived
that a supermarket would somewhat remove the social aspect from the daily shopping
experience.
However, the availability of a broad selection of goods under a single roof at relatively low
prices, made Smart supermarket increasingly popular with shoppers. The success of
Smart attracted competitors to enter the market. Yet, competition was never perceived as
a threat. On the contrary, it gave the owners of Smart the necessary drive to continue
expanding and improving the services offered to consumers. In 2000, a Lm1.5 million
(€3.5 million) project was inaugurated and this upgraded Smart to become one of the
most important players in the Maltese supermarket area: being situated in a highly-dense
residential area, having upgraded its parking facilities and having increased the floor
e-Business in the Retail Sector
169
space so that everything remains on one floor, made it an ever more convenient place to
buy daily and household necessities.
Following the successes of other foreign retailers engaging in e-commerce solutions to
expand their businesses, such as Tesco and Sainsbury’s in the UK, in 2001 Smart
supermarket extended its operations on to the web; making it the first supermarket in
Malta to offer this facility. Being an established supermarket with many new entrants in
the local market, Smart wanted to gain the coveted first mover advantage, as it had done
in the early years. The idea was that of retaining their original customers and the
possibility of tapping into a new market. Such strategy was seen as a way of giving
customers the flexibility of shopping at the store, as well as ordering via the internet and
pick up their order at the store or having it delivered.
5.8.2 e-Business activity
In order to put their idea into practice, the management and board of directors of Smart
supermarket were in search of a company willing to undertake the challenge. System
providers at the time were not only limited, but it was also very hard to find a company
willing to embark on the development of the proposed e-commerce solution. Finally,
AcrossLimits, a young dynamic Maltese company was approached and its developers
started working hand-in-hand with Smart’s top management to deliver the
aforementioned additional service to customers.
The challenges faced were many. Apart from having thousands of products to upload
online, there were neither photos nor a simple and consistent description of products in
the stock database. The enormous exercise of placing products online was done in
collaboration with suppliers. They have themselves decided how their products should
appear listed (if at all) and they have supplied the details accordingly. Primarily, yearly
charges for uploading products online, distinguished between having solely a description
(Lm0.45 i.e. €0.95) and having both a picture and a description (Lm0.90 i.e. €2.10).
Resistance from the suppliers’ side, however, eventually lead to a standard fee of Lm0.45
(€0.95) per product on a yearly basis, irrespective of how it is listed. This exercise,
besides involving time and money in taking photos and inputting information for each
product, involved a lot of chasing on the part of Smart’s personnel to obtain the
necessary information. It took approximately one year to get the system up and running.
Products of suppliers that were not interested in participating in this e-commerce solution,
where simply not added to the list of online products. However, most products found in
store are available online since big suppliers have thoroughly engaged in this e-
commerce solution.
An unfamiliar customer base with respect to online shopping also needed to be
addressed. Smart launched an event to illustrate how simple online shopping is. For this
purpose, in the first few months a call centre-like system, with 24-hour email support was
offered for customers who were getting lost online. However, the fear of online payments
was still an issue, and scary articles on Maltese newspapers made the matter even
worse. Thus, by general request, cash on delivery was also offered to online shoppers.
Since the site was built with all the necessary security precautions, by time, credit cards
became increasingly popular with online shoppers. In fact, Smart’s SSL (Secure Socket
Layer) server encrypts all the information entered in each order form prior to sending it
from a personal computer to Smart’s server; in this way there is no risk of having
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170
personal information leakages. Besides, orders reside in a secure area on the server and
only authorized personnel can access the data.
During the implementation phase, costs for such technical solution were exorbitantly high,
reaching circa Lm1,800 (€4,200) monthly for the first two years of operation. These costs,
amongst others, included further alterations to the system to cater for missing
functionality and additional features, and the constant updating of product details, prices
and photos. Instead of subcontracting the latter service, the board of directors eventually
decided to hire the person in charge of the above-mentioned exercise. Such decision
reduced both the time to send and receive information to and from the respective party
and the costs involved. As to training, employees were given a 6-month training period
until they familiarized themselves with the system. The solution did not involve the hiring
of new personnel; it rather shifted employees from one task to another. In this respect,
Smart employs two pickers to fill online orders by shopping the aisles of the store
alongside regular customers and another two drivers to deliver the orders at agreed times
according to Smart’s delivery schedule. In fact whereas before these personnel used to
stack the supermarket’s shelves or do other duties as required, following the introduction
of the e-commerce solution, their duties were redesigned to meet the needs of an online
shopping system.
With 625 categories of food and household goods for the large variety of products
available, Smart supermarket is proud to be the first local supermarket to launch a
complete online shopping experience to customers. This system makes the supermarket
accessible to anyone 24 hours a day, 7 days a week. Supermarkets in Malta open from
Mondays to Saturdays, and they barely stay open till 8 at night. Online shopping is
particularly appealing to persons with busy lifestyles. The fact that Smart is offering an e-
commerce solution that allows customers to shop late at night or on a Sunday can be
considered as a benefit, even though such orders will be then delivered the following day.
First-time users should make sure that they register in order to gain access to the online
shopping section with the password that will be automatically provided via email. Before
starting any order, a customer has to log in the system using his own email and
password. The next step is that of browsing through the virtual aisle adding products to
the shopping cart list and once ready, the customer must click on the Checkout button as
illustrated in Exhibit 1. This will check whether the Smart online shopping criteria are met;
where a customer’s online order meets the minimum amount threshold of Lm30 (€69.88).
If for some reason this criterion is not met, the system will notify the user. When the
needed criterion is met, the customer will then be transferred to a secure communication
link, whereby the credit card details, for those who opt for the online payment system, are
entered. On this last form, users must also confirm whether they would like product
replacements should something be out of stock. Once completed, the order will be sent to
Smart’s server where it will be processed for delivery or pickup service. A copy of the
order will be sent by email for the customer’s own records. Online shoppers can also
save the shopping cart for future use. Besides, all shopping at Smart, whether online or in
store contributes to the Smart Loyalty Card points; which can be exchanged to products
available through the scheme.
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Exhibit 5.8-1: Checkout procedure of the e-sales application
Source:e-business Watch 2007/2008
Online shoppers must always allow 24 hours for deliveries; which are available to all
areas in Malta, excluding Gozo and Comino. Delivery times are agreed telephonically
between the delivery people and the customer on a day to day basis based on Smart’s
delivery schedule, which can be accessed online. The delivery schedule has been based
according to which zone of the island a locality resides in order to ensure efficient and
economical deliveries. However, customers will be given the option to indicate a preferred
day and time on checkout. When orders are submitted online, through a personal user
name and password, authorized personnel responsible for online shopping service will
access the shopping lists sent by online customers. These personnel will then shop
alongside in-store customers to fulfil the online orders on the part of the customers and
once ready the order will be in for delivery.
A comprehensive online help section is also found in the website and this includes many
Frequently Asked Questions. Besides, registered users receive special offers via email,
as well as information of all that is currently happening at the supermarket. Online forms
are also available for those customers requiring further assistance.
Smart’s management and board of directors are planning to invest circa Lm10,000
(€23,294) on marketing activities in the next three years. They in fact intend to enhance
the use of the fields entered by online customers while registering in the e-commerce
solution, so as to use customer information for targeted marketing and personalized
promotions. Currently, only generalised marketing is being used and this mainly involves
special offers sent to registered customers via email and giving out small gifts (such as a
box of chocolates) with online orders during festive seasons; which is thought to be less
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172
effective than targeted advertising. By categorising customers into age groups, gender,
localities and other fields which might be of value, will not only help Smart to analyse
what the buying habits of different customer groups are, but will help them to be more
effective and specific in their marketing activities. Besides, they are also planning to
revamp the appearance of the website and are also working on improving the
classification of goods. Work on these changes is to be awarded to the system providers
with the most innovative and creative solution.
Smart’s management also intends to improve the logistics and target areas which are
further away from the store’s location. Although order deliveries for areas close to the
supermarket store are available every day from Monday to Saturday, customers residing
in these areas are probably more liable to shop at the store. Although in Malta distance is
not much of an issue, Balzan, the area where Smart supermarket is located, is quite busy
and traffic jams are a daily issue. Thus, online customers are more likely to be those who
reside further away from the store’s location and by improving the logistics to cater for
such areas, Smart is likely to attract more online customers. With this investment Smart’s
management forecasts a three- to six-times increase in online sales in the coming years.
5.8.3 Impact
Although home delivery of items purchased online is appealing for those for whom going
out to shop is difficult for various reasons, such as physical disability, the need to care for
small children, the lack of adequate or convenient transportation, and/ or a busy lifestyle,
not everyone has embraced online shopping as a replacement to regular trips at the
supermarket. In fact, even though online shopping for Smart’s products has been growing
since it has been launched, it still only accounts for a very small portion of total grocery
sales; in fact it only accounts for approximately 1% of the total sales volume. As a result,
currently, Smart’s online shopping solution is a loss-making business. In Malta, being a
very small island, this outcome is of no surprise. Apart from the fact that distance is not
an issue for making supermarket errands, shopping for daily food and household
necessities through the internet is a cultural shock for many. However, this has not
discouraged Smart’s visionary board of directors because by offering an additional
service to customers, they anticipate benefits in the longer term.
As to business relationships with customers, in terms of loyalty, one cannot derive any
conclusions at this stage. At present, there is no competition in the area and therefore
only if another local supermarket offers an e-commerce platform, would Smart’s
management be able to test the loyalty of their current online customers.
By involving suppliers in the process, business relationships have improved. During the
initial phase of this process, information to update product descriptions and pictures was
transmitted between Smart and suppliers either via telephone calls or emails. However,
as aforementioned, this created a large burden. By enabling suppliers to do this work
themselves, much of the hassle involved in this process has been lessened. In fact, each
supplier can now log into his personal account, with his own user name and password in
the website and view which of his products are available and how they appear online. As
to already-listed products, suppliers can upload product pictures and change and/or add
product descriptions. Suppliers also have the possibility to see how much of each
particular product has been sold online. Although big suppliers are making use of this
facility, smaller ones are not utilising it as yet. Currently, about 250 suppliers are using
this facility. This not only leads to cost reductions for Smart, but it gives much more
flexibility to suppliers.
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5.8.4 Lessons learned
Until recently, service charges (i.e. the charges for delivery and the service offered by
Smart’s personnel to shop on the part of online customers’ requests) were included in
online product prices. However, the management realised that this may be one of the
reasons hindering online sales. In fact, online product prices, with an exception for daily
necessities, were approximately two percent higher than those found in the store. For this
reason, the management have recently reassessed Smart’s online pricing scheme. A
fixed service charge of Lm2.50 (€5.82) has been introduced. This replaced the previous
mark-up in online prices that used to make up for the online service. Therefore, whereas
before the service charge was proportional to the amount of items bought (the more items
bought, the more a customer was charged), now this service charge is capped at Lm2.50
(€5.82), irrespective of the amount of items bought online. In this way all goods offered in
the store will be available on the website at the guaranteed same price. This will no
longer put a negative perception of products being sold at higher prices online. The
service charge will be conveyed much clearer to the online customer and there will be no
longer queries as to why products online are more expensive than those found in the
store. This has the potential to increase online orders. Since products online and in the
store bear the same price, customers will be more likely to buy products online. They
would now be in a better position to trade off between paying the fixed charge for the
services offered or go to the store to make their shopping themselves.
Besides, until recently, online orders had to contain a minimum of 10 different items and
meet the minimum amount threshold of Lm40 (€93.17). This could have been perceived
as a burden on the part of the customer, especially if they did not need the number of
items as had been specified in the online shopping criteria. For this reason, the new
minimum order value has been lowered from Lm40 (€93.17) to Lm30 (€69.88) and the 10
item minimum quantity has been removed.
The board of directors also realised that currently the delivery schedule can be improved
to the benefit of online shoppers. Most online shoppers hold full-time jobs and thus it is
more likely that they will be at home after office hours. At present, normal delivery times
do not cater much for these circumstances and the idea is that of shifting the delivery
schedule, which is currently from 9:00 till 19:00 (from Mondays to Fridays) and 9:00 till
15:00 (on Saturdays) to one which is more convenient to online shoppers. To better meet
customer needs, through their website, Smart is currently gathering delivery time
preferences in order to improve their delivery time bands. More than eighty percent of the
feedback received from online customers resulted in online customers preferring
deliveries between 16:00 and 20:00hours. It is envisaged that a change in delivery times
resulting from such feedback has the possibility to further increase online sales.
5.8.5 References
Research for this case study was conducted by Sara Buttigieg, Malta Federation of
Industry, on behalf of the Sectoral e-Business Watch. Sources and references used:
Interview with Mr. Joe Grech and Mr. Mark Elroy Ciantar on the 16 of August 2007
at Smart Supermarket offices.
Websites:
Smart Supermarket,http://www.smart.com.mt
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5.9 EMPiK, Poland
Abstract
This report analyses EMPiK’s entry process into the e-commerce market. EMPiK is the
biggest books retail company in Poland. The focus is on the creation and history of the
company’s e-seller Empik.com. The initial growth of e-business and internet use in
Poland is described in order to uncover how selling books brings a mutual learning
effect to the entire EMPiK chain of stores.
The launch of e-business activities at EMPiK has shown that e-commerce is more than
solely selling books: it allows getting strategic information of entire markets and, in
addition, bridges new channels of communication and provides product sale
opportunities to costumers. As a result, EMPiK has been able to evolve together with
the market, using e-business as a means for joining the new economy.
Case study fact sheet
Full name of the company: EMPiK sp. z o.o.
Location (HQ / main branches): Warsaw / 44 largest Polish cities
Main business activity: Retail (books, newspapers and magazines, music,
films, multimedia and stationery)
Year of foundation: 1948
Number of employees: 2000
Turnover in last financial year: 151.8 million euros
Primary customers: Polish consumers
Most significant geographic market: Poland
Main e-business applications studied: e-Sales, e-marketing
5.9.1 Background and objectives
EMPiK is the largest Polish retail network selling books, newspapers and magazines
(local and international titles), music, films, multimedia, stationery and photographic
products. Bookselling, however, remains the main activity of the company. There are
currently 98 EMPiK stores in 44 of the largest Polish cities, the majority of them in high
street locations or main shopping malls. EMPiK employs more than 2000 people and its
turnover in 2006 was around 591.9 million PLN
75
(151.8 million euros). At the moment,
EMPiK does not face tough competition, as it dominates the market of mega book stores
in Poland. However, its e-business attempt, Empik.com, could not achieve a similar
position: while it is the second largest online retailer in this segment, it is still behind the
market leader, Merlin.pl. EMPiK’s principal e-business effort objective is to strengthen its
importance in the virtual market for books and to consolidate its position in the knowledge
and internet era.
75
PLN, is the symbol of Polish zloty, the national currency in Poland.
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Exhibit 5.9-1: Location and number of EMPiK stores in Polish towns and cities
Source: EMPiK/Sectoral e-Business Watch
The origins of EMPiK can be traced back to a network established in 1948: Klub
Midzynarodowej Prasy i Ksi#%ki (Club of International Press and Book), which has been
the only place in post war Poland that provided access to international publications for the
wide public. At the beginning of the 1990s, 36 stores of the around 100 existing Klub
became EMPiK stores and the biggest ones located in the largest Polish cities were
transformed into EMPiK Megastores (with average area over 3500 m² each).
In 1994, EMPiK was sold by the Polish State Treasury to the capital group Eastbridge.
EMPiK and other companies of Eastbridge Group joined the National Investment Fund
Hetman in 2004 and then became NIF Empik Media & Fashion
76
(EM&F), one of
the largest Polish operators of non-food consumer brands with over 270 shops in Central
and Eastern Europe. The portfolio of NIF EM&F brands consists of:
leading Polish trade chains like: EMPiK, Smyk,
77;
the companies Ultimate Fashion and Optimum Distribution, which manages
branded fashion chains like: Zara, Esprit, River Island, Wallis, Evita Peroni, Mexx,
Aldo, Mango and Dior (and others) in Poland.
In 2006 EM&F Group bought the network of Ukrainian bookshops Bukva which were
changed into 23 EMPiK stores. Further plans of EM&F Group include the expansion in
countries as Russia, Kazakhstan, Romania and Germany.
76
National Investment Found has been one of the key-players in the Mass Privatisation Program
that started in Poland in 1997 aiming at privatizing over 400 medium and large size Polish state
owned enterprises.
77
Part of NIF EM&F was also the chain of shopping centres Galeria Centrum (GC) which were
sold in December 2006, the main reasons for selling GC was low profitability and lack of
synergy with other companies in the EM&F Group.
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176
5.9.2 e-Business activity
The history of Empik.com
The main e-business activity within EMPiK is Empik.com, established in 1999 to enable
virtual access to the products sold by EMPiK. Development of e-commerce is considered
as an important strategic goal within EMPiK and the EM&F Group. However, in 1999 the
internet as a channel of goods distribution was not sufficiently developed in Poland
78
,
thus e-commerce was not a very profitable activity. In 2001, Empik.com was sold to
Elektrim, a company that invested massively in internet activities. But a few months later
the domain Empik.com was closed due to financial difficulties, caused mainly by the
system of settlements between EMPiK and Empik.com. In fact, Empik.com as an external
company was purchasing the majority of goods from EMPiK and thus marked prices up,
making them higher than at EMPiK. As a result, many products in the virtual shop had
higher prices than in traditional EMPiK shops. An additional problem was an invalid
system of financial settlements with the Polish Post Office, which in principle would allow
customers to pay for products after the delivery to their houses. However, the whole
system was not effective and quite often money for delivered goods was lost, thus
influencing Empik.com’s profitability. Market conditions especially the “.com” crisis and
financial difficulties of Elektrim (new owner of Empik.com) led to the collapse of
Empik.com in 2001. All activities were suspended and Empik.com disappeared from the
Polish virtual book selling market. The 2001 agreement between EMPiK and Elektrim
guaranteed the right of using the Empik brand and run Empik.com until 2005 to Elektrim.
However, after initial difficulties in 2001, Elektrim was not able to fully recover and re-
open Empik.com. As a result, the shop and the website were closed between 2001 and
2005, until the agreement between EMPiK and Elektrim expired.
Following the closure of Empik.com, only the large competitor Merlin.pl and a few smaller
sellers survived in the Polish market of virtual book sales. This opportunity enabled
Merlin.pl to build a strong position and at present it is the largest e-bookseller in Poland
with 1.65 million clients monthly (December 2006). Moreover, in 2004 Merlin.pl was the
fastest developing company in the ICT sector in Central Europe.
After the agreement between EMPiK and Elektrim ran out, EMPiK recovered the rights
over the brand and a re-launch of Empik.com became possible in November 2005. The
comeback of Empik.com was accompanied by a substantial advertising campaign.
Nevertheless, it did not threaten the strong position acquired by Merlin, although
Empik.com’s product offer was larger and not limited to books (included recordings, films,
multimedia and stationery). In May 2006, a cooperation between EMPiK and the German
wholesaler Libri was launched to extend Empik.com’s offer from 200,000 to 2 million
overseas titles (books, music, films and multimedia). Empik.com managed to acquire
around 18% of the market within its first year of return to the market (2005-2006). Until
November 2006, the number of customers increased by 300%, reaching 476,000
registered users
79
. Though not the market leader, at the end of 2006 Empik.com won the
position of the most popular Polish e-seller, in the ranking of Money.pl and magazines
‘Wprost’ and Ceneo (Hipermarket 2006). Additionally, a study showed that bookselling
was the biggest e-commerce market in Poland: 64.3 % of respondents declared books to
78
In 2000 only less than 10 % of Polish household had Internet access.
79
Merlin.pl remains the market leader in e-bookselling, with profits of around 63 millions PLN in
2006, whereas Empik.com registered 17.9 millions PLN of revenue that year
.
e-Business in the Retail Sector
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be their main internet purchase. In 2007 Empik.com was also among the top five e-
commerce websites in Poland (megapanel/PBI.Gemius).
Empik.com solutions: focus on attractiveness and effectiveness of website
After four years of absence from the Polish e-commerce market, EMPiK wanted to attract
new clients by offering an accessible and easy to use selling tool within Empik.com, as
well as additional services besides book selling. The main focus of Empik.com was on
accessibility of goods; the intention was to allow easy access and shorten search time.
The online purchasing process was limited to three steps: delivery address, summary of
the transaction and payment. The purchased goods could be delivered to the client or
collected in any EMPiK store in Poland without delivery costs. The click-and-mortar
model benefits from the network of EMPiK shops to distribute products around the
country. This strategy has proven to be very popular, as half of the clients in 2006 chose
the click-and-mortar model to buy products. One advantage of this method, especially for
those clients that do not trust internet payments or deliveries, is that it enables clients to
order products online and proceed to full payment in store when picking up the product,
no earlier online payment is required.
At the end of 2006, when the number of Empik.com clients increased significantly (about
300%, see above), it became clear that the existing Empik.com selling platform (which
offered solely basic functions; e.g. choice of product, price calculation accepting choice)
would not be able to cope with the ever increasing number of customers and
transactions. Furthermore, the growing numbers of internet users in Poland alerted the
need for a new technological solution. The issue was addressed by EMPiK’s Board and a
new platform was prepared by a contractor, an American company called ATG
80
, within 9
months. However, its final shape was not clear from the early beginning and it has
changed several times before it was launched in its final form in September 2007. The
new technology is the ATG e-commerce solution, which allows not only online selling but
also enables to build continuous and personalised relationships with consumers by
developing various ways of interactions (via Web, e-mail, phone), and keeping
information of customers. The new platform required specialised implementation, which
was taken on by the Polish consulting company AMG.net SA
81
.
The newly developed Empik.com platform changed the navigation approach: the idea
was based on the concept of EMPiK as a combination of stores and providers of cultural
information to customers. The provision of cultural knowledge was a cornerstone for the
designing of the website. The new navigation solution is divided into three sections:
Shopping: information about products and e-selling tools.
Empikultura: news and information on cultural events connected to EMPiK or other
new or archived events in the whole of Poland.
Empiklopedia: a database of artists containing more than 20,000 records (at the
beginning of platform operation, this number will grow). The content of this section
is provided by Wikipedia and other mainly Polish providers of cultural information.
80
ATG is a leading US Company which designs, monitors and implements e-commerce software
solutions. ATG products were rated on first position in 2006 by two independent analysts (Forrester
Research, Inc. and Gartner, Inc.) in a B2C (business to consumer) segment.
81
Before working with Empik.com, AMG.net had clients among the largest Polish firms in sectors of
telecommunication (like TP SA, PTK Centertel) and finance (BRE Bank, Bank Millenium, mBank,
Multibank, Bank Pekao).
e-Business in the Retail Sector
178
After the implementation of the new platform, an alteration of the cooperation between
Empik.com and other departments of EMPiK was observed. Currently, there is
bidirectional cooperation principally with three departments: sales, logistics and
Marketing, in which Empik.com not only receives support but also offers information
gathered at Empik.com about clients, which are used to modify and verify activities at
these departments.
The service of payment transactions at Empik.com is currently provided by an external
company, PayBack (a limited liability company), which executes payment transactions for
e-commerce activities in Poland. This solution, apart from taking over payment
transactions between Empik.com and its customers, offers additional advantages: there
is no need for customers to engage in a registration procedure (what increases speed of
transaction); EMPiK.com has to take no responsibility for fraudulent intents and for the
system of daily reports of payment for accomplished transactions; the company can
easily monitor sales on a daily basis. Payment can also be done by bank transfer or
during the collection of purchased products in EMPiK stores (click-and-mortar model).
A software connection with warehouses checks the availability of the purchased good in
stock and time of sending, allowing Empik.com to provide additional applications for the
customers, like the estimation of the delivery date. Furthermore, cultural and
entertainment news from all over Poland and a service of used goods for sale (in e-bay
style) are available to Empik.com costumers. An innovation in the Polish bookselling
market is the offer of books taken off the shelves (so-called backorders). This allows
customer to access books that are not available anymore on the market and is also an
additional advantage for the company because it allows to clear old stock gathered in the
warehouses without additional costs.
The webpage is also a means of running various campaigns to attract customers.
A particular group of Empik.com clients are Poles living abroad (at the present moment it
is less than 10 % of all customers but this number is growing). Empik.com enables them
to buy Polish cultural products in other countries. In this sense, Empik.com also engages
in advertising abroad, for instance, last year a campaign in Polish pubs in London was
carried out.
Empik.com moreover indirectly supports traditional sales in EMPiK shops. Special ‘info-
points’ which are located in every store allow customers to buy products that are currently
unavailable in the particular store or its warehouse. Info-points permit customers to
purchase goods from Empik.com, however all transactions are still made by the store’s
staff, thus, the customer does not have to interact with the internet sale tools of
Empik.com, although benefiting from it. Collection of ordered goods is generally possible
after two or three working days at the store where the product was requested. According
to EMPiK management, this method of sale is useful as it expands the products on offer
in medium and small stores in peripheral locations, giving their customers access to the
full range of products available in EMPiK mega-stores without extra spending for storing
goods, though not all clients are happy to wait for ordered product two or three days. In
spite of that, the number of customers accessing goods this way is constant and reaches
approximately 10% of all Empik.com clients.
Since e-commerce requires additional description of the product, special requirements for
suppliers are made by Empik.com. All books on sale through the website need accurate
description provided by the supplier, which has to be much more detailed than for
traditional retail activities. For instance, the description of books has to contain not only
physical features of the product but also comprise information about the content in order
e-Business in the Retail Sector
179
to allow the costumer to see part of the book and make a better-informed purchase
decision. This description of the product is considered by Empik.com management as an
efficient way of allowing clients to get acquainted with the purchased good and it
furthermore encourages him/her to buy the products. For all those reasons, Empik.com is
cooperating with one of the EMPiK suppliers, a company called PolPerfect, which
provides the majority of goods sold via Empik.com’s website.
As of September 2007, the share of Empik.com in EMPiK’s turnover is slightly less than
10%, however, it is expected to grow as the number of monthly customers in low season
2007 (July/August) has reached the level of high season in 2006 (December-Christmas).
Empik.com’s revenue at the end of 2007 may exceed 30 million PLN (around 7.9m Euro),
an increase of about 68% in comparison to 2006 (when sale results amounted to 17.9m
PLN; 4.7m euros).
5.9.3 Impact
Empik.com has an important status within the EMPiK network. Thanks to new tools for
supporting sales, the management of EMPiK has a chance of looking at ‘traditional’ retail
from different perspectives and see both, drawbacks but also advantages. Solutions for
the former can be found in e-commerce (such as: allowing customer to access goods 24
hours a day; knowing better needs and requirements of the customers), although both
areas of retail complement each other mainly as Empik.com uses the EMPiK network of
shops in the click-and-mortar sales and EMPiK shops uses Empik.com tools to sell
through info-points. In this sense, it allows EMPiK to have wider access to customers
covering both, virtual and traditional markets.
The major impact of Empik.com on the management and organisation of EMPiK is to
bring it into the knowledge-based economy; and to support its modernisation and pave
the way to reach a larger number of customers, by activities including the following.
Empik.com provides the entire company with ‘real time’ information regarding
market needs, owing to an application that measures the activities of customers on
the website. Therefore, crucial information about e-customers is available to support
strategic decisions in the entire company, for instance: the number of clients, time
taken to choose products, products sold and those looked at but not sold as well as
popularity of products even before they are on the market (through “pre-order”). It
shapes not only Empik.com’s retail activities but also influences strategies
developed for traditional EMPiK stores.
A closer relation with costumers is achieved through Empik.com, which supplies
costumers with “real time” information about products available at EMPiK including
prices and other useful data on shops and the company.
EMPiK’s strategic aim of building shops connected with culture and entertainment is
facilitated by Empik.com, as it is a marketing channel to advertise and archive
cultural activities that take place in EMPiK.
Empik.com supports traditional retail in EMPiK shops. When a client cannot find a
product in a shop, it can be ordered at Empik.com via ‘info-points’ that exist in every
EMPiK store, and can be collected in stores after 2-3 days.
The success of Empik.com has a direct influence on EMPiK’s level of sales. The
observed growth of customers’ number spread and strengthens the brand, besides
supplying a tool that facilitates selling in shops.
e-Business in the Retail Sector
180
5.9.4 Lessons learned
One of the most important lessons learned from Empik.com’s experience is the mutual
learning that stands behind the cooperation between traditional retail and e-commerce
activities. Besides EMPiK using knowledge generated at Empik.com, the other way round
is also a reality, as said by the director of Empik.com, Tomasz Cisek: “Empik.com is a
younger brother of EMPiK, a brother who learns from the experience of the older one, but
uses different tools for its own activities”.
Another lesson is the importance of trust and patience when new solutions and tools
connected to e-commerce are introduced in a company. In EMPiK this was made through
empowering the manager of the new department (Empik.com), to become a member of
the EMPiK main board. This gave autonomy and status to e-commerce in the company
context, influencing the entire organisational culture of the corporation. This solution
changed the perspective of looking at internet not only as a technological innovation but
also as a tool for work, a tool that requires investment.
The company also learned to benefit from the complementarities of both ways of selling
books, as, firstly, EMPiK shops use facilities embedded in Empik.com (info-points) to
expand their offer of peripheral shops and save storage and transport costs (as
transported are only the purchased products) and to satisfy clients when they do not find
a particular product available at shop. Secondly, Empik.com can reach more costumers
by relying on the advantages of the large number of EMPiK shops to enhance sales using
the click-and-mortar system. This requires closely interaction with different departments
of EMPiK, especially logistics and marketing with Empik.com. Human-Resources was
also affected as employees had to be trained on how to deal with the “Info-points’ system.
Integration of internal activities of departments was necessary to provide the services.
Furthermore, Empik.com’s system used in info-points presents similarities with a
supportive corporate system, by which staff can order merchandise to satisfy store
demand required at a certain time.
The value of communication with costumers is also discovered. EMPiK is now able to
accomplish a two-way communication with its clients, which is in line with modern
techniques of marketing. The company manages to receive information on costumers,
through messages on the website, email or even phone calls and consolidated
information provided by the measures made by the application in the ICT system;
moreover, it can offer information about the company, its products and cultural events to
every client that accesses Empik.com.
5.9.5 References
Research for this case study was conducted by Dariusz wi#tek, on behalf of
the Sectoral e-Business Watch. Sources and references used:
Interview with Mr. Tomasz Cisek, director of Empik.com, member of the EMPiK
Main Board who is responsible for management, sale and marketing, 25 September
2007, EMPiK Headquarters, Warsaw ul. Krucza 50, Poland
EMPiK annual report 2006 - Grupa EM&F podsumowuje dzia&alno') za 4 kwarta&y
2006 roku (najwa+niejsze wydarzenia, wyniki finansowe, dalsze plany rozwoju),
Warszawa 15.02.2007 [Group EM&F reassuming activity for 4 quartiles of 2006 (the
most important events, financial results, plans of further development)]
Go&.biewski, 0., Rynek ksi#+ki w Polsce. Edycja 2006 – ksi.garstwo hurtowe,
Biblioteka Analiz, Warszawa 2006 [Books market in Poland. Edition 2006 –
wholesale book trade]
e-Business in the Retail Sector
181
Go&.biewski, 0., Rynek ksi#+ki w Polsce. Edycja 2006 – Dystrybucja, Biblioteka
Analiz, Warszawa 2006 [Books market in Poland. Edition 2006 – distribution]
Hipermarket w komputerze, Ranking sklepów internetowych, 2006, Wprost
41/2006, no 1243. (article in Polish weekly magazine Wprost)
Zwierzchowski Z., Merlin kontra Empik – gwiazdkowe starcie, Rzeczpospolita
24.11.2006, (article based on interview with Tomasz Cisek in Polish daily
Rzeczpospolita).
Websites:
Company EMPiK:http://www.empik.com
National Investment Fund EM&F:http://www.emf.pl
National Statistic Office:http://www.stat.gov.pl
Company ATG:http://www.atg.com
Company AMG.net:http://www.amg.net.pl
Megapanel / PBI.Gemius:http://panel.pbi.org.pl
e-Business in the Retail Sector
182
5.10 Cyprus-PC.com, Cyprus
Abstract
Cyprus-PC.com is one of the largest online stores in Cyprus, aiming to supply high
quality products and services to Cypriot residents. The company sells its goods online
over the internet, via telephone orders and through traditional sales channels (retail
shop). Those combined methods have been successful, resulting in a rapid increase of
total sales and turnover since the firm was founded. In particular the value of using
combined approaches is illustrated as the most efficient strategy for the case of Cyprus.
The present case provides evidence that supports the need to use those approaches in
relation to a sophisticated supply chain management.
Case study fact sheet
Full name of the company: Cyprus-PC.com
Location (HQ / main branches): Nicosia, Cyprus
Main business activity: Sale of laptops, PC peripherals and accessories
Year of foundation: 2003
Number of employees: 10
Turnover in last financial year: ~684.000 €
Primary customers: Cypriot consumers
Most significant geographic market: Cyprus
Main e-business applications studied: Supply chain management
Multi-channel sales approach
5.10.1 Background and objectives
Cyprus-PC.com was founded in 2003. It was the first Cyprus retailer for laptops. The firm
is now Cyprus’ leading laptop retailer with sales of over £400,000 (about 684,000 Euro)
per annum. Its sales are growing annually at a rate of approximately 10-20%. The firm is
a specialised e-store, selling a large number of laptops, PC peripherals and accessories.
The company’s philosophy is based on one simple idea: combine the comfort and
convenience of laptop selection via online catalogue with the personal contact and after
sale support of high street stores.
The idea of setting up such an e-store started as part of advertising the other company
the two owners have, which provides web development services
(http://www.hyperlife.com.cy). Another critical characteristic was the open mind
philosophy of the company’s managing director, who studied and worked abroad (USA)
for several years. The know-how of web development enabled the fast setup of the e-
store. The same company undertook the responsibility to do all the necessary
modifications that were required to respond to the challenges of the Cypriot market.
Hyperlife’s premises were also used for temporary storage of items ordered, traditional
sales and after sales support services. Hyperlife still maintains and manages the online
activities for Cyprus-PC.com.
For advertising, the company uses a mixture of different channels such as web search
engines (i.e. Google) paid online advertisements, radio, newspapers, magazines and
posters, depending on which is the most effective and efficient from time to time. This
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183
method of buying goods seems to be very appreciated by the Cypriot people. In fact the
majority of deals are done via telephone, after reviewing the products via the website.
Customers call the firm to verify the models they have already seen in the web site,
bargain for extra discount or ask for details of the expected delivery date. It is argued that
Cyprus is not a matured web-sales market and buyers like to talk to someone to verify the
prices, give further explanations even recommendations for models and get further
discount.
5.10.2 e-Business activity
Investing in ICT from the beginning
Since its beginnings in 2003, Cyprus-PC.com has been noticed for its innovative use of
technology. Computer systems along with user-friendly web design have always had a
huge impact on the way it functions as a retailer. Cyprus-PC.com has used ICT systems
to recognise market trends early, to monitor order levels, and to avoid any delays. The
firm senses the trend from the global market and consumers’ electronic questionnaires
and feedback. To accomplish those procedures a custom-made customer relationship
management (CRM) system has been developed, which provides accuracy in the
conduct of financial transactions and quick delivery of products all around Cyprus. The
latter is supported by a respectful courier company that ensures quick delivery.
Moreover, ICT has had a profound impact on the way the company communicates with
its customers. A very important element in this context is the different ways of
communication (online feedback, questionnaires and phone calls) the company offers to
its customers as well as immediate response in less than 24 hours. The systematic use of
e-mail is also characterised as an important communication tool that has increased the
volume of the two-way-communication.
Multi-channel approach
The business model of Cyprus-PC.com is a multi-channel approach: customers are
offered different possibilities for shopping. They can search for available products on the
internet and proceed on the online order. However, the Cypriot market is not yet
characterized as mature regarding e-commerce and online sales. Although the website is
widely used and appreciated, pure online sales presently account for a rather modest
share of 10-15% of total business sales. The rest of them are either confirmed through
phone calls (the majority of them) or customers prefer to visit the firm’s retail shop.
Cypriot customers prefer to talk to someone, find out who is at the other end of the line
and who to contact in case they have a question. Actually, the most common question is
related to after sales support. They want to guarantee that the company provides after
sales support (even friendly advice on how to install software programs). Verification of
prices is a Cypriot characteristic: it is either because companies that have websites do
not update their products and prices very often or because Cypriots like to bargain for
discounts. Lastly the company offers them the option to come and buy the same product
from its premises, but at a higher cost.
Combined approaches are also used for payments and delivery options. Customers can
pay via secure lines on the internet with the use of their credit cards. They can also pay
with cash or cheque on delivery, or they can visit the company’s premises to collect their
goods and pay by all the above mentioned ways.
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Fast technological developments and the spread of high-speed internet access – over the
past five years a vast increase of ADSL connections has been noticed, although Cyprus
is still placed at the last places in Europe 25 - enabled the company to make an early
start in online retailing. The website was one of the first online stores launched in Cyprus
and has been continuously developed since, with many features and services being
added such as online technical support, newsletters, and promotional offers for registered
users. The company is taking great care that the website is user friendly. It is company
philosophy that the services offered need to have real practical value for customers. For
example, the site shows the order status, sends updated e-mails on every change and
provides an identification number with which customers can be informed about the
delivery time of the ordered product.
Products can be delivered to any address in Cyprus with an extra delivery cost charged
at the end of the order. The delivery cost is related to the size and weight of shipment.
There is also an option available to send items abroad, after a call confirmation on behalf
of company. Cyprus-PC.com is concerned about online security: they only accept orders
that are placed using the Secure Socket Layer (SSL) standard to prevent customers from
inadvertently revealing personal information by using insecure connections. Payments
are credited, once the orders have been processed and are on way to be delivered. Due
to the fact of small distances, that means that quite often, customers first receive their
products and then are charged. Credit card details are stored only if customers approve
that option.
Online customers can register to receive an electronic newsletter that informs about
special offers and promotional deals. The company has also implemented a system of
regular customer feedback sessions in which online customers are invited to complete
small scale questionnaires, make suggestions of how services could be improved further
and are rewarded for their commitment to the company with special offers dedicated to
the company’s active users.
The customers can check stock availability and reserve goods by calling the company’s
call centre as well. It is company policy to process orders on the same day as long as the
order has been made before noon. Otherwise the delivery takes place next day.
Market competitiveness
One significant advantage for Cyprus-PC.com is its strong relationship with the web
development company: Hyperlife provides constant updates to the website and it offers
knowledge about internet trends. The continuous development of the user-friendly
website assists customers to easily find what they are looking for. At the same time, the
system collects aggregative details about the time spent and products reviewed. That
allows the company to change marketing policies and give emphasis to the customers’
preferences.
After sales support is considered an important tool for the company’s growth: options of
on-site support, online support and remote support with the customer’s authorization
ensure that the company enjoys a high level of trust among its customers. Furthermore,
customers can place questions online and receive replies, instantly send e-mail and
receive answer in less than 24 hours, or ask for remote technical support. A remote
support software program has been prior installed on their laptop and in case they face a
difficulty, a technician from the site can log it and investigate the faulty situation. However
this requires customers to have access to the internet.
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185
Aggressive marketing techniques are used as well. In particular, other similar online sites
are created giving emphasis only to expert users who do not wish to get any kind of
technical support apart from manufacturer’s guarantee. However, the majority of those
buyers are people who have extensive knowledge of IT systems or foreigners who will
stay in Cyprus for a short period of time. Those techniques are used to increase sales
and keep prices low, as other retail stores are using the firm’s site as a guidance to offer
lower prices.
Managing the supply chain
A major problem for the company to set up its supply chain was to efficiently manage the
flow of merchandising from an extensive number of suppliers and the quick delivery of
products throughout Cyprus. For this purpose, the company selected a solution from DHL
a courier company. This system helps Cyprus-PC.com to ensure merchandise is in the
right place at the right time.
Prior to the introduction of this system, the situation was very tricky and complex,
because every supplier has its own transportation system, its specific method of
documentation and specific standard industry lead times. The decision was therefore to
adopt a single system to assemble all the merchandise from suppliers and have them
presented as only one delivery. Cyprus-PC.com, depending on the kind of order (i.e.
laptops or peripherals), sends the consignment orders to the courier company. This
supply chain solution by DHL receives, validates and handles consignments from several
suppliers, on behalf of the company. It checks that the order is correct, consolidates it
with other orders and then delivers to company’s premises, or schedules the final
delivery. Meanwhile, it informs Cyprus-PC.com about the changed orders’ status and
sends identification numbers to enable tracking status either by Cyprus-PC.com or the
customer. Cyprus-PC.com updates the website and sends additional messages to the
customer including those tracking numbers. DHL also collects the payments in case the
customer decides to pay the amount on delivery and every afternoon aggregates the total
amounts and sends them to the company.
5.10.3 Impact
The CRM backed multi-channel approach combined with the DHL solution gives Cyprus-
PC.com a nearly fully integrated supply chain system. The only non-electronic link in the
chain is the transmission of orders from Cyprus-PC.com to the various hardware
suppliers. While the DHL solution has the capacity to provide this link, the firm is currently
not using it: the amount of daily orders is not high enough to justify this feature. As a
result, orders are transmitted to suppliers over the phone; the suppliers then prepare the
consignment orders. While the integration of the various systems enables Cyprus-
PC.com to operate efficiently and effectively, it also provide fast and efficient customer
services. Apart from that, the various technological elements of the supply chain system
have an impact on the firm, its suppliers and its customers.
The DHL system for example, offers strong financial and organisational advantages to
both Cyprus-PC.com and its suppliers:
It minimizes the necessary time of delivered from suppliers to company’s premises
It reduces the time needed for storage in the company’s premises
Customers can track the goods virtually live
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186
From a subjective point of view, the impact of having a modern control system in place on
firm’s operations is quite substantial. However, a further detailed analysis of the impact
the new system has had has not been performed.
On the customer side, the e-store is based on a custom made CRM system which
enables almost daily updates of thousands of prices with a few clicks. It combines
suppliers’ lists, stock average and customers’ preferences. As less paper-work and
manual processes are now required, orders can be tracked and fulfilled more effectively.
Information is more real-time, thus enabling Cyprus-PC.com to focus on more strategic
issues and new business opportunities, rather than spending time in manual processes
and manual order tracking.
While Cyprus-PC.com has a strong position in the Cypriot market, marketing initiatives,
including e-marketing, are seen as key strategic tools for driving company establishment
and growth. E-Marketing is going to help reach a wide range of targeted potential new
customers while maintaining and increasing the loyalty of existing customers.
The most important challenge for Cyprus-PC.com is to achieve critical mass. In order to
improve its profitability and to survive in the long run, Cyprus-PC.com needs to grow
significantly. In this context, a major challenge to overcome is the rather conservative
attitude of customers, used to passive purchasing, mainly through traditional sales
methods.
5.10.4 Lessons learned
Cyprus-PC.com is an online retail company at the forefront in its sector in using ICT
systems and e-business solutions. The company has reached a high level of system and
process integration both for its supply chain management and for its marketing and sales
operations. Competitive pressure along with increased quality of services drives the firm
to search for opportunities to reduce costs while delivering efficiency of business
processes. In order to succeed, the company has successfully integrated e-business
solutions with the local characteristics. The innovative business solution for the Cyprus
case was the custom-made CRM software that was designed to meet all their needs to
setup and maintain a user-friendly e-store. It also offers to its customers the possibility of
making purchases via a number of channels, including the web, telephone, and store
sales.
Although the director characterised the Cypriot market as developing in online sales, he
believes that e-sales are the future sales channels for laptops and PC peripherals. He
mentioned that although Cypriot customers have started to trust internet sales, there is
still an attitude to meet face-to-face or know who is at the other end of the telephone line.
That creates positive and negative experiences. A positive experience is that close and
constant relationships are built with many more customers that would enable the firm to
move away from competing only on price. At the same time, it causes negative feelings
as it does not reduce dependency on sales persons, space and working hours.
Finally, the system may help to promote knowledge and diffusion of ICT (already used by
Cyprus-PC.com) among independent retailers. This may have a sizeable impact on the
"e-readiness" of the sector in Cyprus in short and long term.
e-Business in the Retail Sector
187
5.10.5 References
Research for this case study was conducted by Despina Cochliou on behalf of the
Sectoral e-Business Watch. Sources and references used:
Interview with Christos Kartsioulis Managing Director, August 2007
Company website:http://www.cyprus-pc.com
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188
6 Conclusions: outlook and policy implications
6.1 Outlook on further developments expected
In the e-Business Survey 2007, the companies were asked about various expected
impacts of ICT and e-business on selected indicators: management and controlling,
administration and accounting, marketing and customer services, and logistics. The
highest expected impacts were found to be on administration and accounting. 43% of
the large retailers, 41% of the medium-sized ones and even 40% of the small ones
expect high impact of ICT in this regard. These expectations may reflect the high
opportunities of e-business for collecting, storing, retrieving and analysing large amounts
of data.
Exhibit 6.1-1: Expected impacts of ICT and e-business on selected indicators by size class
23
24
22
28
20
17
27
27
16
40
13
36
14
34
18
2 5
18
4 1
14
31
13
3 5
15
38
17
43
12
39
8
49
11
19
0 15 30 45 60 75
high impact on management and
controlling
no impact on management and
controlling
high impact on administration and
accounting
no impact on administration and
accounting
high impact on marketing and
customer services
no impact on marketing and
customer services
high impact on logistics
no impact on logistics
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures weighted by firms.
Source: e-Business Survey 2007
The expected impacts on logistics are also high, but there are large differences
between, firstly, large firms (49% “high impact”), secondly, medium-sized (35% “high
impact”) and small firms (34% “high impact”), and finally micro firms (17% “high impact”).
e-Business in the Retail Sector
189
The differences in the assessment of the expected impact of ICT on marketing and
customer services were not that large. 39% of the large firms expect high impacts in this
regard, 31% of the medium-sized firms, 36% of the small firms, and even 28% of the
micro firms. This is the largest value for micro firms for all four indicators. These figures
may reflect the widespread experience even of small retailers that internet use has
become important for many customers and that the internet is consequently a viable
means of communicating with customers.
As regards management and controlling, 38% of the large firms expect high impacts of
ICT. Almost the same percentage of medium-sized (25%) and small firms (27%) stated
high impacts in this regard, but only 19% of the micro firms.
For all indicators, the percentage of large firms stating a high expected impact of ICT was
the largest of all four size classes. This may indicate that large firms are going to keep on
investing considerably into ICT, possibly further widening the scissors of ICT use
between large firms and SMEs. The overall low figures for micro firms expecting high
impacts may reflect the generally limited perceived importance of ICT and e-business in
these firms, currently and also in the future.
6.2 Policy implications
6.2.1 Introduction to policy implications
Addressees and policy areas
Findings of research for this report lead to policy implications. The following implications
address in the first instance the European Commission. In second instance, national and
regional governments as well as European and national industry associations are also
addressed.
e-Business developments can have implications for several policy areas, including for
example overall industrial policy, education policy, research and technology transfer
policy. Relevant considerations made in this context can be grouped around two overall
objectives which may to some extent be antagonistic:
Promote ICT adoption: Policy may have an interest in accelerating the adoption
and competent use of ICT and e-business activity among companies, particularly
among SMEs. Such political activity is based on the assumption that ICT are a
driver of productivity and competitiveness, leading to increased economic growth,
wealth and employment.
Counteract ICT induced undesirable effects: At the same time, policy will have to
consider intervention if ICT use or e-business activity causes undesirable effects on
the aggregate level of the industry.
A basic assumption of this report is that it is generally the enterprises’ decision to use or
not use ICT and e-business and the extent to which they invest in it. Policy initiatives
should target areas in which market failures occur, which includes issues related to
research, development and technology transfer, knowledge and skills development,
standardisation, and environment protection.
e-Business in the Retail Sector
190
Principal European Commission policies relevant to the retail industry
The European Commission’s DG Enterprise and Industry does not have a dedicated unit
for the retail industry, but retail plays a role in many policy areas of the EC, including ICT
and e-business policy. Principal policy initiatives relevant for the retail industry include the
following.
SMEs are the main targets of the European Commission’s Competitiveness and
Innovation Framework Programme (CIP).
82
The information communication
technologies policy support program (ICT PSP), which is part of CIP, is particularly
relevant for the Sectoral e-Business Watch. One of the targets of ICT PSP is to
encourage innovation through the wider adoption of and investment in ICT. For example,
by adopting an e-supply application, retail SMEs could benefit from supply chain
processes innovations. Besides businesses, ICT PSP aims to promote the wider uptake
and best use of ICT by citizens which includes consumers. Consumers are the key
customers of retail firms and a wider uptake and use of ICT among consumers could
motivate or even force retailers to engage in more ICT activities.
i2010
83
is the EU policy framework for the information society and media for the years
2005-2010. The i2010 subtitle and objective is “a European Information Society for
growth and employment”. According to the framework’s website, “it promotes the positive
contribution that ICT can make to the economy, society and personal quality of life”. The
i2010 strategy has three aims: (1) to create a Single European Information Space, which
promotes an open and competitive internal market for information society and media
services, (2) to strengthen investment and innovation in ICT research, (3) to support
inclusion, better public services and quality of life through the use of ICT. i2010 is
relevant for the retail industry as the information society is bound to bring about changes
to society that affect consumers and retail firms alike. Consumers for example will
increasingly be exposed to ICT and get acquainted to using ICT in their daily lives
resulting in a change of behaviour and attitudes towards ICT. The retail industry is bound
to react to these changes in consumer behaviour.
The following policy suggestions may contribute to fulfilling the objectives of i2010 and
CIP.
6.2.2 Suggested political activities
Address retail value chains and the whole retail business ecosystem
Research findings for this report suggest that barriers for increased uptake of e-business
in the retail industry can be found along the complete value chain. Consequently, policy
makers may seek to promote ICT and e-business along the whole retail value chain. To
use an even more extensive notion, policy makers should consider the complete retail
business ecosystem, i.e. “the network of buyers, suppliers and makers of related
products or services plus the socio-economic environment, including the institutional and
regulatory framework”
84
. The following suggested political activities reflect this approach.
82
Seehttp://ec.europa.eu/cip/index_en.htm.
83
Seehttp://ec.europa.eu/information_society/eeurope/i2010/index_en.htm.
84
Seehttp://www.digital-ecosystems.org/.
e-Business in the Retail Sector
191
Promote electronic supply chain management among SMEs
ICT and e-business applications may considerably enhance value chains in the retail
industry. Enhancement opportunities apparently exist in all parts of the retail value chain:
e-procurement (section 3.3), in-house e-operations (section 3.4), and electronic
marketing and sales (section 3.5).
Electronic procurement of supply goods can enhance upstream supply chain
efficiency and reduce procurement costs significantly. The case studies of Smart
Supermarket (see section 5.2) and Cyprus-PC.com (see section 5.3) provide
related examples. While the share of retailers who procure electronically increased
from 43% in 2003 to 55% in 2007 (figures employment weighted), there still
appears to be scope for further improvement (see section 3.3). The retail industry
therefore could benefit from the increased adoption of e-supply applications and
access to e-supply networks.
The adoption of e-sales and related downstream supply chain management
practices often presents a challenge for retail firms of all sizes because it requires
particular strategies and operations. Section 3.6 provides a discussion of benefits
and challenges of adopting e-sales practices. The findings from the case studies
indicate that retailers should aim to find an appropriate fit for e-sales with business
strategy, in-house operations, and the cultural context the firm and its customers
are exposed to. The retail industry therefore could benefit from learning about
challenges experienced when adopting e-sales.
The adoption of in-house e-operations systems by SMEs may be of particular
importance. An overall view of the relative difference of ICT use between SMEs and
large firms shows that the gap is largest for in-house operations (see section 3.7).
Barriers to adopt e-business are apparently often related to hampered network effects: In
the e-Business Survey 2007, suppliers and customers not being ready for e-business
was mentioned as the most important reason to not apply e-business more intensely
(section 3.6). Therefore, policy makers may use their portfolio of industry support
activities to foster supply chain development in retail through ICT and e-business use. It
does not appear to be useful to focus initiatives on particular sub-sectors of the retail
industry because food, non-food and other retailing are fairly close together in their e-
business performance (see section 3.7).
While the European Commission should have a focus on cross-border activities, Member
States may naturally promote national or regional activities. In recent years, several EU
Member States have launched initiatives to facilitate e-business exchanges within
specific industry supply chains.
85
A sector focus does not guarantee success, but it
facilitates such policy initiatives as it drives the involvement of experts and associations
with sector background and reputation. A good practice may be to assess or measure the
return-on-investment in ICT and to document project results. This evidence can then be
used for show-casing success stories. In practice, related initiatives often take several
years, first in order to create a critical mass of participants and then to deal with the
complexity of many firms and stakeholders.
85
The information in this paragraph is based on a report of the project “benchmarking sectoral
policy initiatives in support of e-business for SMEs”, see European Commission (2007e).
e-Business in the Retail Sector
192
Promoting e-business on a regional level
Since retailers are generally rooted in the local and regional economy, support to e-
business should predominantly take place at the local and regional level. Retailing
associations or chambers of commerce could take a leading role in promoting the
adoption and extension of e-business practices in retail. Due to the constraints in public
spending, privately funded initiatives by business organisations could be an alternative.
Regional activities can be supplemented by national and EU initiatives, like the European
e-Business Support Network (eBSN,http://ec.europa.eu/enterprise/e-bsn/index_en.html),
the eSkills Forum (http://europa.eu.int/comm/enterprise/ict/policy/ict-skills.htm), the
European e-Business Legal Portal (www.ebusinesslex.net), and the European B2B
marketplaces portal (http://www.emarketservices.com).
Foster the dissemination of e-business knowledge in the retail industry
Many retail firms may consider ICT as a cost factor rather than an investment in benefits.
Improved awareness and knowledge about the effects and sustainability of e-business
technologies would be important to take informed decisions. For example, it may be
instructive for retailers to learn that e-sales practices apparently enable SMEs to extend
their – normally regional – sales focus to the national level. This is a finding from the e-
Business Survey 2007 (see section 3.4.1, geographic origin of online orders). It may also
be instructive to learn that solely adopting ICT capital without arranging for
complementary organisational changes and employee training apparently provides little
return on investment – a finding from the impact analysis for this report (see sections
4.2.4 and 4.3.2). Furthermore, case studies for this report show the benefits of firmly
rooting ICT and e-business in the company’s overall strategy.
European retailers could benefit from enhanced e-business knowledge transparency and
transfer at both European and national levels. Across the Union, dissemination activities
about e-business in the retail industry could be improved. Networks of excellence
involving public research institutions, retail associations and retail companies could be
established and promoted to facilitate a transfer of knowledge about ICT and e-business
practice.
Promote electronic ordering among European consumers
The low level of e-sales penetration in the EU may also be due to a relatively low affinity
towards ordering over the internet on the part of consumers. The circumstance that
“suppliers and customers are not prepared for e-business” appears to be one of the most
important reasons to not apply e-business more intensively: In the e-Business Survey,
across all sub-sectors and across all firms sizes more than half of retail companies
agreed to this statement (section 3.5). A separate assessment only for customers’
preparation is unfortunately not available from the survey. The case study of Cyprus-
PC.com (see section 5.3) shows difficulties related to customers affinity to ordering
electronically.
There are several reasons why consumers do not buy online even if they have a
computer with internet access:
First of all consumers may have security concerns with regard to personal data
and, in particular, payment data. Hence, retail firms selling online should seek to
adopt cachets proving that the e-sales solution is safe in order to overcome such
concerns. They can also offer a range of payment possibilities so that customers
e-Business in the Retail Sector
193
can select the one they prefer. The e-Business Survey 2007 found that EU-7 online
retailers lag behind the US in almost all online payment possibilities (see section
3.7).
Consumers may also find online shops too complicated to use, i.e. not user
friendly enough. Retailers should thus seek to implement solutions that are easy to
use.
Customers may also feel that they need personal contact and advice when they
go shopping. Retailers may need to implement interactive solutions or personalised
website features to overcome this barrier.
While it is solely up to the retailers to improve security and usability of their online shops,
policy makers can support the adoption of appropriate applications by promoting good
practice – see the section above about fostering e-business knowledge among retailers.
Policy makers can also promote examples of secure, simple and personal e-sales
practice among consumers so that reservations against online purchase may be
diminished.
e-Business in the Retail Sector
194
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Annex I: The e-Business Survey 2007 –
methodology report
Background and scope
The Sectoral e-Business Watch collects data relating to the use of ICT and e-business in
European enterprises by means of representative surveys. The e-Business Survey 2007,
the fifth in a series of surveys conducted in 2002, 2003, 2005 and 2006, was based on
5,325 telephone interviews with decision-makers from five industry sectors in nine EU
countries and the USA. Interviews were carried out from August to October 2007, using
computer-aided telephone interview (CATI) technology. The overall survey was divided
into four separate projects (each using a separate questionnaire) focussing on different
sectors and specific topics (see Exhibit A1-1). This document contains methodological
notes for Projects 1 and 2, which accounted for 4,369 of all interviews conducted.
Exhibit A1-1: Components ("projects") of the e-Business Survey 2007
Survey
project
Focus Sectors covered
No. of
interviews
1
e-Business in
manufacturing
• Chemical, rubber and plastics
• Steel
• Furniture
2121
2
e-Business in retail,
transport & logistics
• Retail
• Transport & logistics services
2248
3 RFID adoption
• Manufacturing sectors
• Retail
• Transport services
• Hospitals
434
4
Intellectual Property rights
in ICT SMEs
• ICT manufacturing
• ICT services
• Software publishing
683
Questionnaire
The questionnaires for Projects 1 and 2 contained about 70 questions which were
structured into the following modules:
A: ICT Infrastructure and e-Business software systems
B: Automated data exchange (Project 1) / e-Business with customers and suppliers
(Project 2)
C: e-Standards and interoperability issues (Project 1)
D: Innovation activity of the company
E: ICT Skills requirements and ICT costs
F: ICT Impacts, drivers and inhibitors
G: Background information about the company
Some of the questions were the same or similar to those used in previous surveys in
order to highlight trends in the answers (notably in previously surveyed sectors such as
the chemical and retail industries). Other questions were introduced or substantially
modified, in order to reflect recent developments and priorities. The survey placed
special focus on the degree of process automation in companies, i.e. to what extent
paper-based and manually processed exchanges with business partners had been
substituted by electronic data exchanges. Some questions were filtered, such as follow-
up questions dependent on previous answers, and no open questions were used.
e-Business in the Retail Sector
198
The questionnaires of all e-Business Watch surveys since 2002 can be downloaded from
the project website (www.ebusiness-watch.org/about/methodology.htm).
Population
As in 2005 and 2006, the survey considered only companies that used computers. For
the first time, a cut-off was introduced with regard to company size. When surveying the
manufacturing sector in Project 1, only companies with at least 10 employees were
interviewed. For the retail and transport sector in Project 2, the population also included
micro-companies with fewer than 10 employees, reflecting their important contribution
(see Exhibit A1.2). Sector totals are therefore not directly comparable between the two
projects.
The highest level of the population was the set of all computer-using enterprises (and, in
Project 1, with at least 10 employees) that were active within the national territory of one
of the eight countries covered, and whose primary business activity was covered by one
of the five sectors specified in the NACE Rev. 1.1.
86
Evidence from previous surveys
shows that computer use can be expected to reach 99% or more among medium-sized
and large firms across all sectors.
Exhibit A1-2: Population coverage of the e-Business Survey 2007
No. Sector name NACE Rev. 1.1
activities covered
Population
definition
No. of interviews
conducted
Project 1 – Manufacturing
1.1 Chemicals, rubber
& plastics
24, 25 911
1.2 Steel 27.1-3, 27.51-52 449
1.3 Furniture 36.12-14
Companies which
have at least 10
employees and use
computers
761
Project 2 – Retail and transport
2.1 Retail 52 1,151
2.2 Transport services
and logistics
60.10, 60.21+23+24
63.11+12+40
Companies that
use computers
1,097
Sampling frame and method
For each sector, the sample was drawn randomly from companies within the respective
sector population of each of the countries surveyed. The objective of this approach was
to fulfil minimum strata with respect to company size-bands per country-sector cell (see
Exhibit A1-3).
Exhibit A1-3: Strata by company-size
Target quota specified
Size-band
Project 1
Manufacturing
Project 2
Retail & transport
Micro enterprises (up to 9 employees) -- up to 30%
Small companies (10-49 employees) up to 40-50%* at least 30%
Medium-sized companies (50-250 employees) at least 40-45%* at least 25%
Large companies (250+ employees) at least 10-15%* at least 15%
* depending on sector
86
NACE Rev. 1.1 was replaced by the new version NACE Rev. 2 in January 2008. Nonetheless
when the survey was conducted, sectors still had to be defined on the basis of NACE Rev. 1.1
because business directories from which samples were drawn were based on the older version.
e-Business in the Retail Sector
199
Samples were drawn locally by fieldwork organisations based on official statistical
records and widely recognised business directories such as Dun & Bradstreet (used in
several countries) or Heins und Partner Business Pool.
The survey was carried out as an enterprise survey: data collection and reporting focus
on the enterprise, defined as a business organisation (legal unit) with one or more
establishments. Due to the small population of enterprises in some of the sector-country
cells, the target quota could not be achieved (particularly in the larger enterprise size-
bands) in each country. In these cases, interviews were shifted to the next largest size-
band (from large to medium-sized, from medium-sized to small), or to other sectors.
Fieldwork
Fieldwork was coordinated by the German branch of Ipsos GmbH (www.ipsos.de) and
conducted in cooperation with its local partner organisations (see Exhibit A1-4) on behalf
of the Sectoral e-Business Watch. Pilot interviews prior to the regular fieldwork were
conducted with about ten companies in each sector in Germany in August 2007, in order
to test the questionnaire (structure, comprehensibility of questions, average interview
length).
Exhibit A1-4: Institutes that conducted the fieldwork of the e-Business Survey 2007 and
number of interviews conducted per country (total for Projects 1 and 2)
Country Institute conducting the interviews
No. of interviews
conducted
France IPSOS Insight Marketing, 75628 Paris 551
Germany IPSOS GmbH, 23879 Mölln 555
Italy Demoskopea S.p.A., 20123 Milano 553
Poland IQS and Quant Group Sp.z.o.o, 00-610 Warszawa 546
Spain IPSOS Spain, 28036 Madrid 549
Sweden GfK Sverige AB, 22100 Lund 542
UK Continental Research, London EC1V 7DY 548
USA Market Probe International, Inc, New York, NY 10168 525
TOTAL 4,369
The two sector surveys had a total scope of 4,369 interviews, spread across eight
countries and five industries. In each of the eight countries, all five sectors were covered.
The target was to spread interviews as evenly as possible across sectors; however, due
to the comparatively small population of companies in the steel and (in some countries) in
the furniture industries, some interviews had to be moved either between countries
(within a sector) or between sectors (i.e. from steel or furniture to larger sectors, such as
the retail industry). Exhibit A1-5 shows the final distribution of interviews across sectors
and countries.
Exhibit A1-5: Interviews conducted per sector and country:
Sector Country DE ES FR IT PL SE UK USA Total
Project 1 – Total 305 290 235 303 254 170 264 300 2,121
1.1 Chemical 100 120 135 105 120 105 126 100 911
1.2 Steel 100 50 20 87 24 30 38 100 449
1.3 Furniture 105 120 80 111 110 35 100 100 761
Project 2 – Total 250 259 316 250 292 372 284 225 2,248
2.1 Retail 120 131 166 126 151 184 148 125 1,151
2.2 Transport 130 128 150 124 141 188 136 100 1,097
e-Business in the Retail Sector
200
Non response: In a voluntary telephone survey, in order to achieve the targeted
interview totals, it is always necessary to contact more companies than the number
targeted. In addition to refusals, or eligible respondents being unavailable, any sample
contains a proportion of "wrong" businesses (e.g., from another sector), and wrong and/or
unobtainable telephone numbers. Exhibit A1-6 shows the completion rate by country
(completed interviews as percentage of contacts made) and reasons for non-completion
of interviews. Higher refusal rates in some countries, sectors or size bands (especially
among large businesses) inevitably raise questions about a possible refusal bias: that is,
the possibility that respondents differ in their characteristics from those that refuse to
participate. However, this effect cannot be avoided in any voluntary survey (whether
telephone- or paper-based).
Exhibit A1-6: Interview contact protocol, completion rates and non-response reasons
DE ES FR IT PL SE UK US
1 Sample (gross) 6188 6435 6538 3071 10642 3016 8246 15862
1.1 Telephone number not valid 541 31 53 299 645 38 611 1811
1.2
Not a company (e.g. private
household)
82 209 6 36 327 2 57 431
1.3 Fax machine / modem 19 0 72 9 300 33 69 389
1.4
Quota completed à
address not used
973 2018 1531 101 2492 84 1087 193
1.5 No target person in company 992 267 264 129 975 101 662 821
1.6 Language problems 4 0 6 1 77 6 6 72
1.7 No answer on no. of employees 0 8 0 1 9 1 6 24
1.8
Company does not use
computers
35 75 32 76 35 5 110 398
1.9
Company
This study explores the effects of information and communication technology (ICT) and ebusiness on the retail industry. The objectives of the study are to illustrate how companies in this industry use ICT for conducting business; to assess the effects of this development for firms and for the industry as a whole and to supply implications for policy.
ICT and e-Business Impact in the
Retail Industry
Study report
No. 04/2008
This report was prepared by empirica on behalf of the European Commission,
Enterprise & Industry Directorate General, in the context of the "Sectoral e-Business
Watch" programme. The Sectoral e-Business Watch is implemented by empirica
GmbH in cooperation with Altran Group, Databank Consulting, DIW Berlin, IDC
EMEA, Ipsos, GOPA-Cartermill and Rambøll Management based on a service
contract with the European Commission.
European Commission, DG Enterprise & Industry
e-Mail: [email protected],
[email protected]
I I m mp pa ac ct t S St tu ud dy y N No o. . 0 04 4/ / 2 20 00 08 8
I I C CT T a an nd d e e- -B Bu us si in ne es ss s I I m mp pa ac ct t
i in n t th he e R Re et ta ai il l I I n nd du us st tr ry y
A Sectoral e-Business Watch study by
empirica GmbH
F Fi in na al l R Re ep po or rt t
Version 4.0
September 2008
e-Business in the Retail Sector
2
About the Sectoral e-Business Watch and this report
The European Commission, Enterprise & Industry Directorate General, launched the Sectoral e-
Business Watch (SeBW) to study and assess the impact of ICT on enterprises, industries and the
economy in general across different sectors of the economy in the enlarged European Union, EEA
and Accession countries. SeBW continues the successful work of the e-Business W@tch which,
since January 2002, has analysed e-business developments and impacts in manufacturing,
construction, financial and service sectors. All results are available on the internet and can be
accessed or ordered via the Europa server or directly at the SeBW website
(www.europa.eu.int/comm/enterprise/ict/policy/watch/index.htm, www.ebusiness-watch.org).
This document is a final report of a Sector Impact Study, focusing on electronic business in the
retail industry. The study describes how companies use ICT for conducting business, and, above
all, assesses implications thereof for firms and for the industry as a whole. The elaborations are
based on an international survey of enterprises on their ICT use, econometric analyses, expert
interviews and case studies.
Disclaimer
Neither the European Commission nor any person acting on behalf of the Commission is
responsible for the use which might be made of the following information. The views expressed in
this report are those of the authors and do not necessarily reflect those of the European
Commission. Nothing in this report implies or expresses a warranty of any kind. Results from this
report should only be used as guidelines as part of an overall strategy. For detailed advice on
corporate planning, business processes and management, technology integration and legal or tax
issues, the services of a professional should be obtained.
Acknowledgements
This report was prepared by empirica GmbH on behalf of the European Commission, Enterprise &
Industry Directorate General. The main author was Maria Woerndl. The study is a deliverable of the
Sectoral e-Business Watch, which is implemented by empirica GmbH in cooperation with Altran
Group, Databank Consulting, DIW Berlin, IDC EMEA, Ipsos, GOPA-Cartermill and Rambøll
Management, based on a service contract with the European Commission (principal contact and
coordination: Dr. Hasan Alkas).
The SeBW would like to thank Paul Brackel (Consultant), Enrico Colla (Negocia), Cécile Grégoire,
(EuroCommerce) and Kai Hudetz (ECC Handel) who were members of the Advisory Board in
2007/2008, for their valued feed-back, comments and contributions to this study.
Contact
For further information about this Sector Study or the Sectoral e-Business Watch, please contact:
empirica
Gesellschaft für
Kommunikations- und
Technologieforschung mbH
Oxfordstr. 2, 53111 Bonn,
Germany
[email protected]
Sectoral e-Business Watch
c/o empirica GmbH
Oxfordstr. 2, 53111 Bonn,
Germany
[email protected]
European Commission
Enterprise & Industry Directorate-
General
ICT for Competitiveness and
Innovation
[email protected]
Rights Restrictions
Material from this report can be freely used or reprinted but not commercially resold and, if quoted,
the exact source must be clearly acknowledged.
Bonn / Brussels, September 2008
e-Business in the Retail Sector
3
Table of Contents
Executive Summary ................................................................................................... 5
1 Introduction................................................................................................... 9
1.1 The Sectoral e-Business Watch......................................................................................... 10
1.2 ICT and e-Business – key terms and concepts .................................................................. 13
1.3 Study objectives and methodology..................................................................................... 18
2 Context and background............................................................................. 22
2.1 Sector definition – scope of the study................................................................................. 22
2.2 Industry background.......................................................................................................... 24
2.3 Trends and challenges ...................................................................................................... 25
2.3.1 Macro-economic developments slowing down retail sales ................................................................ 26
2.3.2 Increasing concentration and strong competition.............................................................................. 27
2.3.3 Changing consumer preferences..................................................................................................... 28
3 Deployment of ICT and e-business applications in the retail sector ......... 30
3.1 The state-of-play in 2003/04 – review of an earlier retail sector study................................. 31
3.2 ICT infrastructure, networks, expenditure and skills............................................................ 33
3.3 The upstream supply chain: e-procurement ....................................................................... 41
3.3.1 Introduction to upstream supply chain issues ................................................................................... 41
3.3.2 Findings about e-procurement ......................................................................................................... 42
3.4 The internal supply chain: in-house electronic operations................................................... 49
3.4.1 Introduction to internal operations.................................................................................................... 49
3.4.2 Findings about internal e-operations................................................................................................ 50
3.5 The downstream supply chain: electronic marketing and sales........................................... 58
3.5.1 Introduction to downstream supply chain issues............................................................................... 58
3.5.2 Findings about electronic sales........................................................................................................ 59
3.5.3 Findings about electronic marketing................................................................................................. 67
3.5.4 Electronic support of logistics and distribution .................................................................................. 69
3.6 Barriers and drivers of e-business use............................................................................... 69
3.7 Overall differences between size classes, countries, sub-sectors and industries ................ 74
3.8 Summary of the state of play of ICT and e-business in retail .............................................. 78
4 Drivers and impacts of ICT adoption........................................................... 80
4.1 Conceptual framework: the structure – conduct – performance paradigm........................... 80
4.2 ICT and productivity........................................................................................................... 82
4.2.1 Background and hypotheses ........................................................................................................... 82
4.2.2 ICT impact on value added growth .................................................................................................. 85
4.2.3 ICT impact on labour productivity growth ......................................................................................... 88
4.2.4 Conclusions: Minor ICT impact on growth of value added and labour productivity ............................. 94
e-Business in the Retail Sector
4
4.3 ICT and innovation ............................................................................................................ 96
4.3.1 Survey findings about ICT and innovation........................................................................................ 96
4.3.2 Links between skills, e-collaboration and ICT-enabled innovation ................................................... 100
4.3.3 ICT innovation, firm performance and organisational change.......................................................... 103
4.3.4 Overview of results on ICT and innovation..................................................................................... 107
4.4 ICT and market structure................................................................................................. 107
4.4.1 Survey findings on ICT and competition......................................................................................... 108
4.4.2 Market structure and ICT diffusion................................................................................................. 110
4.4.3 ICT impact on market structure...................................................................................................... 111
4.4.4 Overview of results on ICT and market structure............................................................................ 113
4.5 ICT and the retail sector’s value chain ............................................................................. 113
4.6 Summary of impact analysis............................................................................................ 115
5 Case studies.............................................................................................. 118
5.1 Mercator, Slovenia........................................................................................................... 121
5.2 Globus, Germany ............................................................................................................ 130
5.3 Brookland Plus Products/Dirk van den Broek, Netherlands .............................................. 137
5.4 AMJG Comunicações, Portugal ....................................................................................... 145
5.5 Casino Group, France ..................................................................................................... 150
5.6 4fitness, Germany ........................................................................................................... 156
5.7 Fleria Floral Creations, Greece........................................................................................ 163
5.8 Smart Supermarket, Malta............................................................................................... 168
5.9 EMPiK, Poland................................................................................................................ 174
5.10 Cyprus-PC.com, Cyprus.................................................................................................. 182
6 Conclusions: outlook and policy implications .......................................... 188
6.1 Outlook on further developments expected...................................................................... 188
6.2 Policy implications........................................................................................................... 189
6.2.1 Introduction to policy implications .................................................................................................. 189
6.2.2 Suggested political activities.......................................................................................................... 190
References ............................................................................................................. 194
Annex I: The e-Business Survey 2007 – methodology report ................................ 197
Annex II: Econometric analysis methodology ....................................................... 203
e-Business in the Retail Sector
5
Executive Summary
Key findings
Increase of e-business use 2003- 2007: as of
2007, firms representing more than half of the
industry’s employment procure electronically,
intense use of in-house e-business solutions is
rare, and more than one third sell
electronically. The share of firms with e-sales
activities doubled between 2003 and 2007.
Digital divide owing to firm size continues
to exist: retail SMEs lag behind large retailers
in ICT uptake – overall, e-business activities
tend to often increase with firm size.
e-Commerce environment less vibrant in
the EU than in the US: EU retailers tend to
use less e-business processes than US
retailers. There are also signs that the e-
business ecosystem differs notably between
the EU and the US (e.g. barriers to and drivers
for e-business differ).
Level of e-business use similar across
retail industry sub-sectors: the three retail
industry sub-sectors, non-food, food and other
retail, show no significant differences in ICT
uptake and e-business use.
ICT capital investments alone are
insufficient: without changes to the business
and especially business processes re-
engineering, there is little return from
investments in ICT.
ICT drive innovation: in the retail industry,
ICT mainly drive process innovation but the
use for product and service innovation is larger
than in other industries.
Objectives
This study explores the effects of information
and communication technology (ICT) and e-
business on the retail industry. The objectives
of the study are to illustrate how companies in
this industry use ICT for conducting business;
to assess the effects of this development for
firms and for the industry as a whole and to
supply implications for policy. The analysis is
based on an international survey covering
seven European Union (EU) Member States
and the USA. Additionally, ten case studies,
illustrating various issues, were conducted. An
econometric analysis of ICT impacts, an
evaluation of recent literature as well as
secondary data sources complete the report.
The retail industry covers business activities of
NACE Rev. 2 Division 47: ‘retail trade, except
of motor vehicles and motorcycles; repair of
personal and household goods’ (section 2.1).
The retail sector is studied through the lens of
supply chain management, divided into three
elements: the upstream supply chain (supplier
relationships), in-house supply chain (internal
e-operations) and downstream supply chain (e-
sales and marketing).
Retailing – a diversified industry
Retailing activities form one of the most
important industry sectors in the EU in terms of
numbers of enterprises and employment: in
2004, the industry comprised of approximately
17 million firms that employed 3.74 million
people in EU-27. Employment and turnover is
concentrated on large and small firms;
medium-sized firms are less important. The
retail industry covers a very wide array of
enterprises in terms of firm size, business
models and goods on sale. Two types of retail
trade activities are particularly important in the
EU: the sale of non-food items in store
accounting for 50% of turnover of the retail
sector and the sale of food items in store
accounting for 44%. The remaining categories,
retail sales not in-store and repair of personal
and household goods, accounted for together
6% of turnover. These patterns are usually
repeated across Member States (Section 2.2).
Trends and challenges: macro-
economic developments uncertain
Retail industry performance is heavily
dependent on macro-economic developments.
In late 2007, the economic environment for
e-Business in the Retail Sector
6
retail has turned to become less favourable:
there is uncertainty about the prospects for
economic growth, mainly due to the turmoil in
financial markets and rising cost for energy
and food. Private consumption continues to
show signs of weakness in early 2008.
Concentration processes have been taking
place in retail in the past decades, driving out
smaller players and leaving a smaller number
of large chains to fight for profit margins. Large
enterprises from outside Europe are seeking to
enter new markets in Europe which is further
increasing competition.
Regarding customers, there are at least three
trends: demographic changes towards a larger
share of older people with particular
consumption needs, customers who are
increasingly well-informed about products and
share such information with other customers,
and consumers demanding sustainable
products. Retailers need to adapt to these
trends with appropriate strategies and
operations (Section 2.3).
General increase of ICT and e-
business use since 2003
Compared to the 2003 e-Business Watch retail
industry findings, the 2007 results indicate that
ICT and e-business use have become more
prevalent in retail firms of all size classes.
Nevertheless, the use of e-business in the
retail sector was found to be still below the
average adoption rates in other sectors. The
2007 study also confirmed the 2003 conclusion
that the main e-business opportunities in the
retail industry, similarly as in other sectors, are
efficiency and productivity gains and, thus,
cost savings (Section 3.2).
The quality of SMEs' internet access has
significantly improved between 2003 and 2007.
However, there is scope for further
improvement as only about 45% of the sector's
firms weighted by employment are connected
via broadband (>2 Mbit/s). Diffusion of internal
W-LANs has been fast. More than 50% of
large retailers operate a W-LAN, and 35-40%
of small and medium-sized retailers. While only
about 10% of all retail companies employ ICT
specialists, even among large retailers only
about 50% do. Many companies completely
outsource ICT services to external service
providers. The attitude towards ICT
investments and budgets is more positive than
a couple of years ago. A third of retailers plan
to increase their ICT budgets, only few expect
budget cuts for the forthcoming financial
period.
Electronic procurement prevalent
The function of upstream supply chain
management (SCM) is to design and manage
the processes, information and material flows
between retailers and their suppliers. SCM is
of utmost importance to retailers, as it is both a
major cost driver and opportunity for
competitive advantage. Case studies
demonstrate that ICT have a high potential in
this context, not only to cut costs, but also to
improve service levels for customers.
However, companies have to balance
availability with inventory levels and associated
costs. Key findings about e-procurement and
SCM include:
e-Procurement: Retailers representing more
than 50% of the sector's employment order at
least some of their goods online. The Sectoral
e-Business Watch estimates the total share of
goods ordered online ( in those companies that
procure online) at about 25-30%the average
share of goods procured online has increased
by 10-15 percentage points compared to 2003.
SCM systems: Advanced software systems
specifically for SCM are still not widely diffused
(about 20% of retail companies); however,
adoption has seen a dynamic development
among large retail firms, where it has
increased from 7% to 35%.
Different levels of integration: The digital
integration between retailers and
manufacturers can evolve on a step-by-step
basis. Simple applications such as e-invoicing
are widely used already. Advanced forms such
as sharing information about inventory levels
online are only used by some companies.
Benefits also for small firms: Case studies
show that even small companies can gain
e-Business in the Retail Sector
7
significantly from ICT-enabled improvements in
their supply chain. However, the potential
benefits differ between segments and retail
business models.
Internal e-business systems:
intense e-business and RFID rare
Internal e-business operations can significantly
enhance workflows and business processes
and thus increase productivity. However,
companies representing almost half of the
industry’s employment said that they only
conduct some processes by e-business. 22%
even said “none”; a “good deal” was stated by
20%, and in 11% most processes are
conducted electronically. As regards particular
systems, firms representing 60% of
employment reported to have a software
application to manage the placing or receipt of
orders, 59% a bar-coding system, 51% a
warehouse or depot management system, and
16% an ERP system. RFID is not yet very
common in the retail industry. Retail firms
representing 8% of employment reported to
use this technology, and RFID use is very rare
in micro and small retail firms.
Electronic sales and distribution
doubled since 2003
Retailers representing 38% of the industry’s
employment stated that they sell goods
“through the internet or other computer-
mediated networks”. Almost half of the large
retail firms (45%) and 35% of the medium-
sized ones sell online, but only 24% of the
small retailers and 26% of the micro retailers
do so. The share of companies that sells
online doubled from 19% (employment-
weighted) in 2003 to 38% in 2007. There was
an apparent increase in all size classes. There
has also been an increase in the amount of
sales conducted online. Compared to the
figures about general sales areas, it appears
that online sales helps to extend the
geographic focus slightly from regional to
national sales while the international focus
remains on the same low level. The e-
Business Survey 2007 also found that retailers
representing 20% of the industry’s employment
use a CRM system, an increase from 8% in
2003.
Micro and small firms lag behind
medium-sized and large ones
Micro, small- and medium-sized firms lag
behind large firms in almost all indicators of
ICT and e-business use presented in this
report. Exceptions include the level of internet
access which is close to 100% in SMEs, the
average share of employees with internet
access which is higher in SMEs than in large
firms, and the practice of sending electronic
invoices to customers which is on the same
level in all size classes. Nevertheless it is
notable that micro and small firms have been
increasing their ICT adoption in recent years
(Chapter 3). The gap between SMEs and large
firms is most pronounced for internal e-
operations, followed by ICT infrastructure. As
regards e-sales, the usage gap is between
large and medium-sized firms on the one hand
as well as micro and small firms on the other.
In e-procurement, SMEs are almost on the
same level as large firms.
e-Commerce environment less
vibrant in the EU than in the US
Overall, the e-commerce environment is less
vibrant in the EU than in the US: across the
majority of variables, EU retail firms lag behind
US retailers. In some cases, the differences
are large, for example for placing online ads on
other companies’ websites (43% in the US
versus 16% in the EU) and for options offered
to pay online (higher percentages in the US for
all options). Exceptions include the share of
firms with internet access, the average share
of employees with internet access, and the use
of internal systems for which the levels are
similar or even higher in the EU. Surprisingly,
the overall importance of e-business stated by
the firms is very similar between EU-7 and US
retailers. The reason may be that US retailers
answered the question about e-business
importance with a higher reference level in
mind.
e-Business in the Retail Sector
8
Results of an econometric
analysis of ICT impacts
Productivity: ICT-capital investments have
not been key drivers in the growth of real value
added in European retailing. Total Factor
Productivity, which includes for example
organisational changes, was found to account
for much stronger contributions. As regards
labour productivity, intermediate inputs
intensity were found to be the main
components. This may predominantly be due
to outsourcing activity. ICT capital investments
as well as the employment of a large share of
medium-skilled workers play a positive but
minor role in labour productivity growth.
Overall, the findings indicate that ICT capital
investments alone are insufficient to increase
labour productivity significantly. It may be
necessary to also invest into organisational
changes and training (Section 4.2).
Innovation: In the retail industry, the e-
Business Survey 2007 found the impact of ICT
to be mainly on process innovation but it also
plays an important role in product and service
innovation. An econometric analysis found,
firstly, that employing people with a university
degree as well as employing IT practitioners
significantly increases retail firms’ propensity to
use ICT to develop new products and services.
Secondly, the use of applications and practices
that support the electronic exchange of
information between companies positively
affects the likelihood of conducting ICT-
enabled innovations. The analysis also found
that ICT-enabled innovation is positively
related with turnover increase irrespective of
firm size and age. Secondly, ICT software is an
important driver of organisational changes,
while hardware apparently is not (Section 4.3).
Market structure: The relevance of increasing
market competition for the intensity of ICT
adoption was confirmed. Findings also indicate
that ICT and e-business can be used to open
up new markets, to cross boundaries of
industries and markets and to increase the
number of customers (Section 4.4).
Value chains: The econometric analysis found
that ICT intensity indeed increased the
propensity to outsource business activities
(Section 4.5).
Policy implications
Barriers for increased uptake of e-business in
retail can be found along the complete value
chain. Consequently, policy makers should
seek to promote e-business along the whole
retail value chain and business ecosystem.
Promote SCM among SMEs: Policy makers
may support supply chain development in retail
through e-business use. While the European
Commission should have a focus on cross-
border activities, Member States may naturally
promote national or regional activities. A sector
focus facilitates such policy initiatives as it
drives the involvement of experts and
associations with sector background.
Promoting e-business on a regional level:
Since retailers are generally rooted in the local
and regional economy, support to e-business
should predominantly take place at the local
and regional level. Retailing associations or
chambers of commerce could take a leading
role in promoting the adoption and extension of
e-business practices in retail.
Foster dissemination of e-business
knowledge: Many retail firms consider ICT as
a cost factor rather than an investment in
benefits. Improved awareness and knowledge
about the effects of e-business would be
important. Key findings from this report which
are of interest for retailers include e.g. that ICT
investment should be complemented by
organisational changes, employee training and
rooting ICT in the company’s strategy.
Dissemination activities about e-business in
the retail industry could be improved.
Promote e-ordering by consumers: The low
level of e-sales penetration in the EU may also
be due to a relatively low affinity towards
ordering over the internet on the part of
consumers. They may have security concerns,
they may find online shops too complicated,
and they may require enhanced personal
communication. Policy makers can promote
examples of secure, simple and personal e-
sales practice among consumers and retailers.
e-Business in the Retail Sector
9
1 Introduction
This study focuses on the adoption and implications of e-business practice in the retail
industry. It describes how companies in this sector use information and communications
technology (ICT) for conducting business, assesses the impact of ICT for firm
performance in a context of global competition, and points at possible implications for
policy. The analysis is based on literature, interviews with industry representatives and
experts, company case studies and a telephone survey among decision-makers in
European enterprises from the retail industries. The study takes into account results of
earlier sector studies on the retail industry, published by e-Business W@tch in 2003 and
2004
1
.
Study structure
This report is structured into six main sections. Chapter 1 explains the background and
context why the study is being conducted: it introduces the Sectoral e-Business Watch
(SebW) program of the European Commission, a conceptual framework for the analysis
of e-business, and the specific methodology used for the study. Chapter 2 provides some
general information and key figures about the retail industry in Europe. Chapter 3
analyses the current state-of-play in e-business in this industry, focusing on specific ICT-
related issues that are considered to be particularly relevant to the sector. Chapter 4
assesses the impact of the developments described in chapter 3 on work processes and
employment, innovation and productivity, and – at sector level – on value chain
characteristics. Chapter 5 presents company case studies. These have been selected as
practical examples and evidence for the issues discussed in chapters 3 and 4. The final
chapter 6 summarises key findings and draws conclusions on policy implications that
could arise from the developments observed.
Combining descriptive and analytical approaches
The study approach is exploratory, descriptive and explanatory, applying a broad
methodological basis: a qualitative case study approach (Chapter 5) is combined with a
descriptive presentation of quantitative survey data (Chapter 3) and an economic
analysis of ICT adoption and its impacts (Chapter 4). This threefold approach is meant to
produce an in-depth understanding of current e-business practice in the industry, while
also assessing the economic effects of this practice, for instance on firm productivity and
innovation. While the results from these different approaches are presented like self-
sustained pieces of research in separate chapters, they are intertwined and cross-
referenced.
1
The previous study report on the retail industry is available at the Sectoral e-Business Watch
website athttp://www.ebusiness-watch.org/studies/on_sectors.htm.
e-Business in the Retail Sector
10
1.1 The Sectoral e-Business Watch
Mission and objectives
The "Sectoral e-Business Watch" (SeBW) studies the adoption, implications and impact
of electronic business practices in different sectors of the European economy. It
continues activities of the preceding "e-Business W@tch" which was launched by the
European Commission, Directorate-General (DG) Enterprise and Industry, in late 2001, to
support policy in the fields of ICT and e-business. The SeBW is based on a Framework
Contract and Specific Contract between DG Enterprise and Industry and empirica GmbH,
running until September 2008, with two extensions of up to 16 months possible.
In ICT-related fields, DG Enterprise and Industry has a twofold mission: "to enhance the
competitiveness of the ICT sector, and to facilitate the efficient uptake of ICT for
European enterprises in general." The services of the SeBW are expected to contribute to
these goals. This mission can be broken down into the following main objectives:
to assess the impact of ICT on enterprises, industries and the economy in
general, including the impacts on productivity and growth, and the role of ICT for
innovation and organisational changes;
to highlight barriers for ICT uptake, i.e. issues that are hindering a faster and/or
more effective use of ICT by enterprises in Europe;
to identify and discuss policy challenges stemming from the observed develop-
ments, notably at the European level;
to engage in dialogue with stakeholders from industry and policy institutions,
providing a forum for debating relevant issues.
By delivering evidence on ICT uptake and impact, the SeBW aims to support informed
policy decision-making in these fields in several policy domains including innovation,
competition and structural policy.
Policy context
The initial e-Business W@tch program was rooted in the eEurope Action Plans of 2002
and 2005. The aim of the eEurope 2005 Action Plan was "to promote take-up of e-
business with the aim of increasing the competitiveness of European enterprises and
raising productivity and growth through investment in information and communication
technologies, human resources (notably e-skills) and new business models".
2
The i2010 policy
3
, a follow-up to eEurope, also stresses the critical role of ICT for
productivity and innovation, stating that "… the adoption and skilful application of ICT is
one of the largest contributors to productivity and growth throughout the economy,
leading to business innovations in key sectors" (p. 6). The Communication anticipates "a
new era of e-business solutions", based on integrated ICT systems and tools, which will
lead to an increased business use of ICT. However, it also warns that businesses "still
face a lack of interoperability, reliability and security", which could hamper the realisation
of productivity gains (p. 7).
2
"eEurope 2005: An information society for all". Communication from the Commission,
COM(2002) 263 final, 28 May 2002, chapter 3.1.2.
3
"i2010 – A European Information Society for growth and employment." Communication from the
Commission, COM(2005) 229 final.
e-Business in the Retail Sector
11
In February 2005, the European Commission proposed a new start for the Lisbon
Strategy. While it recommended changes in the governance structures, i.e. the way
objectives are to be addressed, the overall focus on growth and jobs remained
unchanged. Some of the policy areas of the renewed Lisbon objectives address ICT-
related issues. Central Policy Area No. 6 deals with facilitating ICT uptake across the
European economy. Policy-makers in this area will require thorough analysis of ICT
uptake based on accurate and detailed information on the most recent developments.
Such evidence-based analysis is also needed when targeting individual sectors to fully
exploit the technological advantages, in alignment with Central Policy Area No. 7
“Contributing to a strong European industrial base”. Furthermore, Guideline No. 9,
addressed to Member States, encouraging the widespread use of ICT,
4
can be effectively
addressed only if actions are based on understanding of the potential for and probable
effectiveness of interventions.
"ICT are an important tool …"
"More efforts are needed to improve business processes in European
enterprises if the Lisbon targets of competitiveness are to be realised.
European companies, under the pressure of their main international
competitors, need to find new opportunities to reduce costs and improve
performance, internally and in relation to trading partners. ICT are an
important tool to increase companies’ competitiveness, but their adoption is
not enough; they have to be fully integrated into business processes."
Source: European Commission (2005): Information Society Benchmarking
Report
In 2005, taking globalisation and intense international competition into consideration, the
European Commission launched a new industrial policy
5
with the aim to create better
framework conditions for manufacturing industries in the coming years. Some of the
policy strands described have direct links to ICT usage, recognising the importance of
ICT for innovation, competitiveness and growth.
The SeBW is one of the policy instruments used by DG Enterprise and Industry to
support the implementation of the industrial policy and related programmes. Its activities
are complementary to other related policy programmes in the field of ICT, such as:
the e-Business Support Network (eBSN), a European network of e-business policy
makers and business support organisations,
the eSkills Forum, a task force established in 2003 to assess the demand and
supply of ICT and e-business skills and to develop policy recommendations,
the ICT Task Force, a group whose work is to draw together and integrate various
activities aiming to strengthen Europe's ICT sector, and
4
"Working Together for Growth and Jobs: a New Start for the Lisbon Strategy", Communication,
COM (2005) 24, Brussels, 02.02.2005. Available athttp://europa.eu.int/growthandjobs/pdf/COM2005_024_en.pdf.
5
"Implementing the Community Lisbon Programme: A Policy Framework to Strengthen EU
Manufacturing - towards a more integrated approach for Industrial Policy." Communication from
the Commission, COM(2005) 474 final, 5.10.2005
e-Business in the Retail Sector
12
activities in the areas of ICT standardisation, as part of the general
standardisation activities of the Commission.
6
In parallel to the work of the SeBW, the "Sectoral Innovation Watch" (see www.europe-
innova.org) analyses innovation performance and challenges across different EU sectors
from an economic perspective. Studies cover, inter alia, the following sectors: chemical,
automotive, aerospace, food, ICT, textiles, machinery and equipment.
Scope of the programme
Since 2001, the SeBW and its predecessor "e-Business W@tch" have published e-
business studies on about 25 sectors
7
of the European economy, annual comprehensive
synthesis reports about the state-of-play in e-business in the European Union, statistical
pocketbooks and studies on specific ICT issues. All publications can be downloaded from
the program's website at www.ebusiness-watch.org. In 2007/08, the main studies of the
SeBW focus on the following 10 sectors and specific topics:
Exhibit 1.1-1: Sectors and specific topics covered by the SeBW
No. Sector / topic in focus NACE Rev. 1.1 Reference to earlier
studies by SeBW
1 Chemical, rubber and plastics 24, 25 2004, 2003
2 Steel 27.1-3, 27.51+52 --
3 Furniture 36.12-14 --
4 Retail 52 2004, 2003
5 Transport and logistics services 60, 63 (parts thereof) --
6 Banking 65.1 2003
7 RFID adoption and implications (several sectors) --
8 Intellectual property rights for
ICT-producing SMEs
30.01+02, 32.1-3, 33.2+3;
64.2; 72 (parts thereof)
--
9 Impact of ICT and e-business on
energy use
--
10 Economic impact and drivers of
ICT adoption
--
Source: Sectoral e-Business Watch 2007/2008
The SeBW presents a 'wide-angle' perspective on the adoption and use of ICT in the
sectors studied. Studies assess how ICTs are having an influence on business
processes, notably by enabling electronic data exchanges between a company and its
customers, suppliers, service providers and business partners. (The underlying
conceptual framework is explained in more detail in the following section.) In addition, the
studies also provide some background information on the respective sectors, including
a briefing on current trends. Readers, however, should not mistakenly consider this part
as the main topic of the analysis. The introduction to the sector is neither intended, nor
could it be a substitute for more detailed industrial analysis.
6
The 2006 ICT Standardisation Work Programme complements the Commission's "Action Plan
for European Standardisation" of 2005 by dealing more in detail with ICT matters.
7
see overview at www.ebusiness-watch.org/studies/on_sectors.htm.
e-Business in the Retail Sector
13
1.2 ICT and e-Business – key terms and concepts
A definition of ICT
This study examines the use of information and communication technology (ICT) in
European businesses. ICT is an umbrella term that encompasses a wide array of
systems, devices and services used for data processing (the information side of ICT) as
well as telecommunications equipment and services for data transmission and
communication (the communication side). The European Information Technology
Observatory (2007) structures the ICT market into four segments with an estimated total
market value of about € 670 billion in 2007 (Exhibit 1.2-1).
Exhibit 1.2-1: The EU ICT market according to EITO (2007)
Market
segment
Products / services included (examples)
Market value for
EU (2007)
(EITO estimate)
ICT equipment Computer hardware, end-user communications
equipment (such as mobile phones), office equipment
(such as copiers) and data communications and network
equipment (such as switching and routing equipment,
cellular mobile infrastructure)
€159 billion
Software
products
System and application software €76 billion
IT services Consulting, implementation and operations management €140 billion
Carrier
services
Fixed voice telephone and data services, mobile
telephone services, cable TV
€293 billion
Source: EITO 2007
In its widest sense, 'e-business' refers to the application of these technologies in business
processes, including primary functions (such as production, inbound and outbound
logistics or sales), and support functions (such as administration, controlling, procurement
and human resources management). Companies in all sectors use ICT, but they do so in
different ways. This calls for a sectoral approach in studies of ICT usage and impact.
The following section introduces a wider framework for the discussion of e-business
developments that will be used in the following analysis of the retail industry.
Gaining momentum after a phase of disappointment
When the bust phase of the previous economic cycle – commonly referred to as the 'new
economy' – started in 2001, the former internet hype was suddenly replaced by a
widespread disappointment with e-business strategies. Companies adopted a more
reserved and sceptical attitude towards investing in ICT. Nevertheless, ICT has proved to
be the key technology of the past decade (OECD 2004, p. 8), and the evolutionary
development of e-business has certainly not come to an end. The maturity of ICT-based
data exchanges between businesses and their suppliers and customers, fostered by
progress in the definition and acceptance of standards, has substantially increased
across sectors and regions over the past five years. In parallel, recent trends such as
"Web 2.0" and social networking are widely discussed in terms of their business
implications and it is widely recognised that 'e'-elements have become an essential
component of modern business exchanges. In short, e-business has regained
momentum as a topic for enterprise strategy both for large multinationals and SMEs.
e-Business in the Retail Sector
14
"Measurement of e-business is of particular interest to policy makers
because of the potential productivity impacts of ICT use on business
functions. However, the ongoing challenges in this measurement field are
significant and include problems associated with measuring a subject which
is both complex and changing rapidly."
OECD (2005): ICT use by businesses. Revised OECD model survey, p. 17
Companies use ICT in their business processes mainly for three purposes: to reduce
costs, to better serve the customer, and to support growth (e.g. by increasing their market
reach). In essence, all e-business projects in companies explicitly or implicitly address
one or several of these objectives. In almost every case, introducing e-business can be
regarded as an ICT-enabled process innovation. Understanding one's business pro-
cesses and having a clear vision of how they could be improved (be it to save costs or to
improve service quality) are therefore critical requirements for firms to effectively use ICT.
The increasing competitive pressure on companies, many of which operate in a global
economy, has been a strong driver for ICT adoption. Firms are constantly searching for
opportunities to cut costs and ICT holds great promise in this respect as it increases the
efficiency of a firm’s business processes, both internally and between trading partners
in the value chain. While cutting costs continues to motivate e-business activity,
innovative firms have discovered and begun to exploit the potential of ICT for delivering
against key business objectives. They have integrated ICT into their production
processes and quality management and, most recently, in marketing and customer
services. These last sectors are widely considered key to improve competitiveness in the
current phase of development of European economies. Competing in mature markets
requires not only optimised cost structures, maximal efficiency, and products or services
of excellent quality but also the ability to communicate effectively and cooperate with
business partners and potential customers.
A definition of e-business
As part of this maturing process, electronic business has progressed from a specific to a
very broad topic. A central element is certainly the use of ICT to accomplish business
transactions, i.e. exchanges between a company and its suppliers or customers. These
can be other companies ('B2B' – business-to-business), consumers ('B2C' – business-to-
consumers), or governments ('B2G' – business-to-government). In the broad sense,
transactions include commercial as well as other exchanges such as sending tax return
forms to the tax authorities.
If transactions are conducted electronically ('e-transactions'), they constitute e-
commerce. Transactions can be broken down into different phases and related
business processes, each of which can be relevant for e-commerce (see Exhibit A.V-2).
The pre-sale (or pre-purchase) phase includes the presentation of (or request for)
information on the offer, and negotiations over the price. The sale / purchase phase
covers the ordering, invoicing, payment and delivery processes. Finally, the after sale /
purchase phase covers all processes after the product or service has been delivered to
the buyer, such as after sales customer services (e.g. repair, updates).
e-Business in the Retail Sector
15
Glossary
Definitions by standardisation groups (ISO, ebXML)
The term 'business transaction' is a key concept underlying the development
of e-standards for B2B exchanges. Therefore, definitions have been
developed by standards communities to underpin their practical work.
Examples include:
Business: "a series of processes, each having a clearly understood
purpose, involving more than one party, realised through the exchange of
information and directed towards some mutually agreed upon goal,
extending over a period of time" [ISO/IEC 14662:2004]
Business transaction: "a predefined set of activities and/or processes of
parties which is initiated by a party to accomplish an explicitly shared
business goal and terminated upon recognition of one of the agreed
conclusions by all the involved parties even though some of the
recognition may be implicit" [ISO/IEC 14662:2004]
e-Business transaction: "a logical unit of business conducted by two or
more parties that generates a computable success or failure state"
[ebXML Glossary]
Exhibit 1.2-2: Process components of transactions
Pre-sale / pre-purchase
phase
Sale / purchase phase After sale /
after-purchase phase
Request for offer/proposal
Offer delivery
Information about offer
Negotiations
Placing an order
Invoicing
Payment
Delivery
Customer service
Guarantee management
Credit administration
Handling returns
Practically each step in a transaction can either be pursued electronically (online) or non-
electronically (offline), and all combinations of electronic and non-electronic
implementation are possible. It is therefore difficult to decide which components actually
have to be conducted online in order to call a transaction (as a whole) ‘electronic’.
In 2000, the OECD proposed broad and narrow definitions of electronic commerce, both
of which remain valid and useful today
8
. While the narrow definition focuses on 'internet
transactions' alone, the broad definition defines e-commerce as "the sale or purchase of
goods or services, whether between businesses, households, individuals, governments,
and other public or private organisations, conducted over computer-mediated
networks. The goods and services are ordered over those networks, but the payment
and the ultimate delivery of the goods or service may be conducted on- or offline" (OECD,
2001). The addendum regarding payment and delivery illustrates the difficulty mentioned
above to specify which of the processes along the transaction phases constitute e-
commerce (see Exhibit 1.2-2). The OECD definition excludes the pre-sale / pre- purchase
8
In 1999, the OECD Working Party on Indicators for the Information Society (WPIIS) established
an Expert Group on Defining and Measuring Electronic Commerce, in order to compile
definitions of electronic commerce which are policy-relevant and statistically feasible. By 2000,
work of the Group had resulted in definitions for electronic commerce transactions.
e-Business in the Retail Sector
16
phase and focuses instead on the ordering process. The SeBW follows the OECD
position on this issue,
9
while fully recognising the importance of the internet during the
pre-purchase phase for the initiation of business.
Glossary
Definition of key terms for this study
e-Transactions: commercial exchanges between a company and its
suppliers or customers which are conducted electronically. Participants
can be other companies ('B2B' – business-to-business), consumers
('B2C'), or governments ('B2G'). This includes processes during the pre-
sale or pre-purchase phase, the sale or purchase phase, and the after-
sale / purchase phase.
e-Commerce: the sale or purchase of goods or services, whether
between businesses, households, individuals, governments, and other
public or private organisations, conducted over computer-mediated
networks. (OECD)
e-Business: automated business processes (both intra- and inter-firm)
over computer mediated networks. (OECD)
e-Interactions: covers the full range of e-transactions as well as
collaborative business processes,. such as collaborative online design
processes which are not directly transaction focused.
Using the OECD definition, e-commerce is a key component of e-business but not the
only one. A wider focus oriented on business processes has been widely recognised.
This vision of e-commerce also covers the digitisation of internal business processes
(the internal processing of documents related to transactions) as well as cooperative or
collaborative processes between companies that are not necessarily transaction-
focused (for example industrial engineers collaborating on a design in an online
environment). The OECD WPIIS
10
proposes a definition of e-business as "automated
business processes (both intra-and inter-firm) over computer mediated networks" (OECD,
2004, p. 6). In addition, the OECD proposed that e-business processes should integrate
tasks and extend beyond a stand-alone or individual application. 'Automation' refers here
to the substitution of formerly manual processes. This can be achieved by replacing the
paper-based processing of documents by electronic exchanges (machine-to-machine)
but it requires the agreement between the participants on electronic standards and
processes for data exchange.
e-Business and a company's value chain
In some contexts, the term c-commerce (collaborative commerce) is used. Although this
concept was mostly abandoned when the 'new economy' bubble burst in 2001, it had the
merit of pointing towards the role of ICT in cooperations between enterprises and the
increasing digital integration of supply chains. These developments go beyond simple
point-to-point exchanges between two companies.
9
The respective survey questions ask companies whether they "place / accept online orders".
10
Working Party on Indicators for the Information Society.
e-Business in the Retail Sector
17
Despite dating back 20 years to the pre-e-business era, Michael Porter's framework of
the company value chain and value system between companies
11
remains useful to
understand the relevance of e-business in this context. A value chain logically presents
the main functional areas ('value activities') of a company and differentiates between
primary and support activities. However, these are "not a collection of independent
activities but a system of interdependent activities", which are "related by linkages within
the value chain".
12
These linkages can lead to competitive advantage through
optimisation and coordination. This is where ICT can have a major impact, in the key role
of optimising linkages and increasing the efficiency of processes.
The value system expands this concept by extending its scale beyond the single
company. The firm's value chain is linked to the value chains of (upstream) suppliers and
(downstream) buyers; the resulting larger set of processes is referred to as the value
system. All e-commerce and therefore electronic transactions occur within this value
system. Key dimensions of Porter’s framework (notably inbound and outbound logistics,
operations, and the value system) are reflected in the Supply Chain Management
(SCM) concept. Here, the focus is on optimising the procurement-production-delivery
processes, not only between a company and its direct suppliers and customers, but also
aiming at a full vertical integration of the entire supply chain (Tier 1, Tier 2, Tier n
suppliers). In this concept, each basic supply chain is a chain of sourcing, production, and
delivery processes with the respective process interfaces within and between
companies.
13
Analysing the digital integration of supply chains in various industries has
been an important theme in most sector studies by the SeBW.
Applying the concept to the retail industry
The conceptual framework outlined above is fully applicable to e-business in the retail
industry. In this sector, companies use ICT for a broad range of applications along the
value chain including procurement, warehouse management and logistics, and for
marketing, sales and customer services activities. The basic goals of e-business
identified are highly relevant in this sector: reducing costs by increasing the efficiency of
processes, optimally serving customer by innovative means of information provision and
communication, and enabling growth by increasing market reach. This study shows that
e-business developments in the retail industry have been dynamic over the last couple of
years in particular with regard to achieving process efficiency gains. However, the study
also points at some of the bottlenecks and challenges for an even wider and faster
adoption of e-business activity.
11
Porter, Michael E. (1985). Competitive Advantage. New York: Free Press. Page references in
quotations refer to the Free Press Export Edition 2004.
12
ibid., p. 48.
13
cf. SCOR Supply-Chain Council: Supply-Chain Operations Reference-model. SCOR Version
7.0. Available at www.supply-chain.org (accessed in March 2006).
e-Business in the Retail Sector
18
1.3 Study objectives and methodology
Research objectives
As competition in the retail industry is strong and barriers to entry are low, ICT and e-
business can take important roles in this industry. Another factor affecting ICT and e-
business uptake among retail firms in the EU is the heterogeneous structure (see chapter
2) of the industry: micro firms operating in regional markets have different ICT and e-
business requirements than globally-operating retail chains. Retail firms trade goods and
service and retail customers are end-consumers of the goods and services. Hence, while
the retail industry is not a goods-producing industry, opportunities for improving business
processes through ICT and e-business are numerous. Indeed, previous e-business
W@tch studies in 2003 and 2004 have shown that ICTs are a major enabler of process
efficiency in the industry. It is to be expected that ICT are (increasingly) being used in all
segments of the value chain, notably by the large players. It remains to be seen to what
extent this leads to changes in business models that go beyond process innovation in the
sense of improved existing processes.
Based on these general assumptions, and on findings of earlier studies conducted on the
retail industry, the study addresses the following overall research questions:
Dynamics of adoption: Has there been a dynamic adoption of ICT and e-
business in the period since 2003/04?
Drivers and barriers: What drives e-business adoption, what do companies
perceive as the main challenges and barriers?
Impact on firm and sector level: What are the main impacts of ICT adoption on
firm performance and on the industry as a whole (e.g. in terms of productivity
effects and skills requirements)?
Impact on international competition: Is there a link between e-business
developments and the scenario for international competition?
Policy implications: Do the findings on these research questions above have
implications for policy, for example in the fields of economic, competition or R&D
and innovation policy?
The methodological framework of the SeBW builds upon the methodology established for
the preceding "e-Business W@tch" program. It has been adapted to the new focus of
activity, enabling the progress from monitoring "e-readiness" and "e-activity" to the
evidence-based analysis of "e-impact".
Conceptual framework for the retail sector study
With the overall focus on supply chain management, the retail sector study is based upon
the following conceptual framework. The conceptual framework illustrates the elements
studied in the retail sector study: upstream supply chain management, supply chain
interfaces, downstream supply chain management, and the impact of firm size on e-
supply chain management. The upstream supply chain covers retailers’ activities with
suppliers, especially coordination and collaboration with these business partners. In-
house supply chain management looks at retailers’ internal systems especially for
operations such as logistics and distribution. The downstream supply chain covers
retailing firms’ activities related to selling goods to consumers. The impact of firm size on
e-Business in the Retail Sector
19
e-supply chain management considers the variety of firm sizes found in the retail industry.
These four foci will enable the identification of the various e-business experiences that
retailers come across when managing the different parts of their supply chains.
Exhibit 1.3-1: Conceptual framework for the retail sector study
Focal organisation Customer
Upstream Downstream
Supplier
Customer
Customer
Supplier
Tier 1
Supplier
Supplier
Supplier
Supplier
Tier 2
Supplier
Tier 3
Supplier
Supplier
Supply chain management
S
ize
In-house
Focal organisation Customer
Upstream Downstream
Supplier
Customer
Customer
Supplier
Tier 1
Supplier
Supplier
Supplier
Supplier
Tier 2
Supplier
Tier 3
Supplier
Supplier
Supply chain management
S
ize
In-house
Source: e-Business Watch 2007/2008
Furthermore, this framework enables drawing conclusions about entire supply chain
management issues in the retail sector.
The upstream supply chain: e-procurement. Retailers order a vast amount of
different goods from many different suppliers. These A diverse array of supply chain
solutions is available to organisations. Yet, it remains unclear how widespread the
adoption of such solutions is among European retailers and what benefits and risks
of such systems are for retailers. By enquiring about supply chain solutions (such
as e-procurement and e-storage applications) in use in the retail sector, the study
aims to identify the level of ICT penetration among suppliers to the retail industry.
This will enable the identification of diffusion patterns in retail supply networks. On a
qualitative level, the study aims to find out what benefits and risks retailers face as a
result of engaging in e-supply.
The in-house supply chain: internal ICT systems. One of the many opportunities
for retailers is to e-enable in-house processes and operations. One of the classic
challenges faced by organisations include data duplication through lack of system
integration and misalignment with business strategies. Systems such as Enterprise
Resource Planning (ERP), Radio Frequency Identification (RFID), Business
Process Management (BPM) and Customer Relationship Management (CRM) are
designed to reduce these challenges but these systems can be sources of new
problems. e-Business W@tch 2003/2004 found that, in comparison to other sectors,
retailers tend to rarely employ this type of systems. Benefits and drawbacks of such
systems are the focus in this report, as will be the amalgamation of different in-
house systems.
The downstream supply chain: e-retailing including e-marketing. While back
in 2003/2004 there was little penetration of e-commerce solutions among retailers,
one of the key trends in the industry is a growth in online sales: in 2007, e-
e-Business in the Retail Sector
20
commerce accounts for approximately 6% of total retail sales (Butler 2007) This
might indicate that retailers are increasingly being faced with electronically-enabled
downstream supply chains. Additionally, virtual enterprises present a threat for
existing retailers. This study investigates benefits and cost of e-sales solutions for
retailers; and it will provide indications about e-marketing activities in the retail
industry.
Firm size effects on e-business activities in retailing. Considering that the retail
industry is dominated by micro and large firms, the study assesses challenges
specific to micro retail firms and compares them to the situation in large retail
chains. The key question is how firm size influences e-supply chain management in
the retail industry.
Data collection
The study is based on a mix of data sources and methodologies, including primary data
collection, desk research and case studies. More specifically, information was collected
from the following sources:
SeBW Survey (2007): the retail industry is one of two services sectors covered by the
SeBW Survey besides the transport & logistics industry. In total, 1151 interviews in seven
EU countries and in the USA were conducted with decision-makers in retail companies.
The SeBW Survey is the main source of data used for analysing the state of play in ICT
adoption, business-to-business (B2B) process integration and automation. Detailed
information about this survey is available in Annex I.
Eurostat Community survey on ICT usage in enterprises (2006): results of the
Eurostat survey are being used as a complementary source for the analysis of ICT
adoption in companies from the retail sector.
Case studies: ten case studies illustrating ICT and e-business practices in European
retail firms were conducted. These cases were selected to demonstrate issues covered in
the topics in focus, with a view to achieve a balanced coverage of countries, business
activities (sub-sectors) and company size-bands.
Key informant interviews: in addition to interviews conducted with firm representatives
as part of the case study work, formal and informal interviews with retail industry experts
were conducted to foster understanding about the retail industry as a whole.
Sources of industry federations: annual reports and position papers of industry
federations were used, notably from the following European federations: EuroCommerce,
the European Distance Selling Trade Association (EMOTA), the Federation of European
Direct and Interactive Marketing (FEDMA). National industry federations sources used
include the German “Einzelhandelsverband”, the Austrian “Handelsverband” and the
“British Retail Consortium”.
EU-KLEMS: Data from the EU KLEMS Growth and Productivity Accounts are used as a
secondary data source especially for the economic analysis in chapter 4. The EU-KLEMS
Growth Accounts include measures of economic growth, productivity, employment
creation, capital formation and technological change at the industry level for 25 EU
Member States as well as for the United States
14
.
14
For more information about the database, see: EU-KLEMS Growth and Productivity Accounts,
Version 1.0, Part I Methodology. March 2007, prepared the Groningen Growth and
e-Business in the Retail Sector
21
Data analysis
Data is analysed using the following descriptive and analytical statistical methods:
Descriptive statistics: The discussion of the SeBW survey results in Chapter 3 is mostly
based on descriptive cross-tabular presentation of simple frequencies (typically
percentages of enterprises with a certain activity). This constitutes the first and most
basic step in data presentation. The requirement for this step is that micro-data have
been aggregated and that weighting has been applied. Weighting is considered an
important issue for data presentation. However, weighting is necessary, as due to
stratified sampling the sample size in each size-band is not proportional to the population
numbers. If proportional allocation had been used, the sample sizes in the 250+ size-
band would have been extremely small, not allowing any reasonable presentation of
results (see Annex I for details).
Analytical statistical methods: Descriptive presentation and discussion of survey
results, including the use of compound indicators derived from simple frequencies, is
useful as a first step; however, it is limited in its power to explain ICT impact. Therefore,
advanced statistical methods (such as growth accounting) were used to gain better
evidence on the economic impact of ICT. This economic analysis, which is mainly
presented in chapter 4, focuses on links between ICT adoption on the one hand and
productivity growth, innovation dynamics and market characteristics on the other. It
combines micro-data analysis (using data from the e-Business Survey 2007) and macro-
data analysis (using the EU-KLEMS Growth and Productivity Accounts). More information
about the econometric analysis methodology is provided in Annex II.
Validation of results – the Advisory Board
The study was conducted in close consultation with an Advisory Board consisting of the
following experts (in alphabetical order):
Paul Brackel, ECPNL, Netherlands
Enrico Colla, Negocia, France
Cécile Grégoire, EuroCommerce, Belgium
Kai Hudetz, ECC Handel, Germany
Three meetings with advisory board members were organised: the first meeting took
place on May 29
th
2007 in Brussels, during the inception phase. At this meeting, the study
exposé and research plan was discussed. The second meeting was held on January 14
th
,
2007 in Brussels. The objective for this meeting was to discuss and validate the findings
presented in the interim report. The third meeting was held at the e-Business Watch
Conference in Brussels on May 20
th
, 2008. The aim of this third meeting was to discuss
the final report and further activities to promote ICT and e-business use in the retail
industry.
Development Centre and the National Institute of Economic Research on behalf of the EU-
KLEMS consortium, available via www.euklems.net/.
e-Business in the Retail Sector
22
2 Context and background
Retail trade as defined by NACE 52 is the third largest EU-25 NACE division within the
non-financial services economy in terms of value added. Only wholesale trade (NACE 51)
and other business activities (NACE 74) are contributing more to the non-financial
services economy in terms of value added. In terms of employment, retail trade is the
second largest contributor to workforce employment in the EU-25 countries (European
Commission 2006). Due to its importance for the European economy, the retail industry
was studied in 2003 and 2004 by e-Business W@tch
15
; and in order to analyse recent
developments in this economically important industry, retail trade is included in the
2007/2008 SeBW.
2.1 Sector definition – scope of the study
Business activities covered
The European retail industry covers business activities specified in NACE Rev. 1.1
Division 52 which corresponds to NACE Rev. 2 Division 47: ‘retail trade, except of motor
vehicles and motorcycles’. The activities are classified into nine groups as shown in
Exhibit 2.1-1.
The first order structuring criterion in NACE Rev. 2 is whether or not retail sale is
organised in store or not-in-store. The second main criterion is whether the trade takes
place in specialised or in non-specialised stores. The not-in-store sales activities are
further broken down into trade via stalls and markets or other retail trade not in stores.
The third structuring criterion is the category of products sold.
In terms of NACE distribution, the retail industry in the European Union is dominated by
two groups: retailers that sell non-food items in store (NACE Rev. 1.1 Class 52.12 and
Groups 52.3 to 52.5) and retail sale of food items in store (NACE Rev. 1.1 Class 52.11
and Group 52.2). Retailers in the non-food items in store group accounted for
approximately 50% of turnover while the sale of food in store accounted for 44% of total
retail turnover in 2002. The remaining NACE groups are grouped under “other retail” in
this report: retail sales not in-store (NACE Group 52.6) and repair of personal and
household goods (NACE Group 52.7) which accounted for 5% and less than 1% of
turnover in 2002 respectively.
In order to cover the multi-faceted characteristics of the retail sector and obtain a best
possible supply chain management overview of the sector, all types of firms from all
NACE Rev.2 categories (which includes retail sale of automotive fuel, which is not
covered by NACE Rev. 1, group 52) are included in the study; no category was excluded.
15
The study report is available at www.ebusiness-watch.org (see "eBiz Studies")
e-Business in the Retail Sector
23
Exhibit 2.1-1: Business activities covered by the retail sector study
NACE
Rev. 2
NACE
Rev. 1.1
Business activities
47 52 Retail trade, except of motor vehicles and motorcycles
47.1 52.1 Retail sale in non-specialised stores
52.11: Retail sale in non-specialized stores with food, beverages or tobacco
predominating (47.11) e.g. grocery shops, hypermarkets
52.12: Other retail sale in non-specialized stores (47.19) e.g. co-operative stores
47.2 52.2 Retail sale of food, beverages and tobacco in specialised stores
52.21: Retail sale of fruit and vegetables (47.21)
52.22: Retail sale of meat and meat products (47.22)
52.23: Retail sale of fish, crustaceans and molluscs (47.23)
52.24: Retail sale of bread, cakes, flour confectionery and sugar confectionery (47.24)
52.25: Retail sale of alcoholic and other beverages (47.25)
52.26: Retail sale of tobacco products (47.26)
52:27: Other retail sale of food, beverages and tobacco in specialized stores (47.29)
47.3 50.5 Retail sale of automotive fuel in specialised stores
47.4 52.4x Retail sale of ICT equipment in specialised stores
47.41: Retail sale of computers, peripheral units and software in specialized stores (52.48)
47.42: Retail sale of telecommunications equipment in specialized stores (52.48)
47.43 Retail sale of audio and video equipment in specialized stores (52.45)
47.5 52.4x Retail sale of other household equipment in specialised stores
47.51: Retail sale of textiles in specialized stores (52.41)
47.52 Retail sale of hardware, paints and glass in specialized stores (52.46)
47.53: Retail sale of carpets, rugs, wall and floor coverings in specialized stores (52.44 &
52.48)
47.54: Retail sale of electrical household appliances in specialized stores (52.45)
47.59: Retail sale of furniture, lighting equipment and household articles n.e.c. in
specialized stores (52.44 & 52.45)
47.6 52.4x Retail sale of cultural and recreation goods in specialised stores
47.61: Retail sale of books in specialized stores (52.47)
47.62: Retail sale of newspapers and stationery in specialized stores (52.47)
47.63: Retail sale of music and video recordings in specialized stores (52.45)
47.64: Retail sale of sporting equipment in specialized stores (52.48)
47.65 Retail sale of games and toys in specialized stores (52.48)
47.7
52.3+4
x+5
Retail sale of other goods in specialised stores
47.71: Retail sale of clothing in specialised stores (52.42)
47.72: Retail sale of footwear and leather goods in specialised stores (52.43)
47.73: Dispensing chemist in specialised stores (52.31)
47.74: Retail sale of medical and orthopaedic goods in specialised stores (52.32)
47.75: Retail sale of cosmetic and toilet articles in specialised stores (52.33)
47.76: Retail sale of flowers, plants, seeds, fertilizers, pet animals and pet food in
specialised stores (52.48)
47.77: Retail sale of watches and jewellery in specialised stores (52.48)
47.78: Other retail sale of new goods in specialised stores (52.48)
47.79: Retail sale of second-hand goods in stores (52.50 & 52.63)
47.8 52.6x Retail sale via stalls and markets
47.81: Retail sale via stalls and markets of food, beverages and tobacco products (52.62)
47.82: Retail sale via stalls and markets of textiles, clothing and footwear (52.62)
47.89: Retail sale via stalls and markets of other goods (52.62)
47.9 52.6x Retail trade not in stores, stalls or markets
47.91: Retail sale via mail order houses or via Internet (52.61 & 52.63)
47.99: Other retail sale not in stores, stalls or markets (52.63)
e-Business in the Retail Sector
24
A brief definition of retailing
The retail sector study covers firms that resell new and used goods to the general public
for personal or household use and consumption. Retail firms do not further process
goods but companies that repair personal and household goods are included (NACE
Rev.1, Division 52). Retailers act as an interface between the manufacturers and
wholesalers on the one hand and consumers on the other. The retail firm is typically the
last point in a supply chain; the point from which a product reaches the end-consumer.
The main difference between retailers and wholesalers is that retailers direct their sales
efforts towards end-consumers while wholesalers primarily sell to retailers and other
businesses.
The typical retail firm provides an assortment of goods made by different manufacturers.
The type of assortments stocked and sold is one of the common determinants of the
NACE affiliation. The goods are sold to consumers via different distribution channels
including brick-and-mortar stores, market stalls, catalogues and the internet. Brick-and-
mortar stores are key retail outlets.
One common characteristic of the retail sector is that the vast majority of the sector’s
value added was generated by large enterprises employing more than 250 people and
micro enterprises employing fewer than 10 persons. German-based Metro and French
Carrefour, for example, are globally operating mega-retailers that fall within the category
as are internet retailers like Amazon.com and local grocery mom-and-pop shops (Mintel
2007). This wide variety of organisational forms and sizes is one of the characteristics of
the retail sector.
From a supply chain management perspective, retailing covers all processes of trade
between suppliers and retailers, in-house operations and trade between retailers and
customers.
2.2 Industry background
Number of enterprises
In 2004, some 3.73 million firms in the EU-27 fell into the retail sector category. Of these,
approximately 3.5 million were micro firms employing 1-9 people; some 138.000 were
small firms employing between 10 and 49 people; about 12.000 were medium-sized firms
employing between 50 and 249 people; and some 2900 were large firms with more than
250 employees (Eurostat 2006a). The vast majority of the sector’s value added was
generated by large enterprises (some 163871 billion Euros for the EU-25 in 2004) and
micro enterprises (126000 billion Euros for the EU-25 in 2004). Large enterprises are
particularly prevalent in the non-specialised stores group (NACE 52.1) and in the retail
sales not in stores (NACE 52.6) sub-groups (European Commission 2006).
Employment
The retail industry is one of the largest economic sectors in Europe providing employment
to more than 16.9 million people in the EU-27 countries in 2004. Retail firms are known to
employ a relatively high proportion of women, 61.3% in 2004in the EU-25; representing
the second highest proportion of female workforce among the relevant NACE sections C
to K (the highest is manufacture of clothing, NACE Division 18). Another employment
characteristic of the retail sector is the high proportion of part-time employment (29.3% of
e-Business in the Retail Sector
25
the workforce in 2004) which is in fact the highest among the respective business
economies. 18.3% of those employed in 2004 were aged between 15 and 24, which is
again relatively high.
Turnover and value added
The latest available data (European Commission 2006) for the retail sector show that the
EU-25 NACE Division 52 firms generated EUR 1.887 billion of turnover in 2002 with a
value added of EUR 351.6 billion. Retail trade of non-food items in-store (NACE 52.12
and Groups 52.3 to 52.5) accounted for approximately 50% of the turnover generated
within the sector. 44% of turnover was generated with sale of food items in-store (NACE
Class 52.11 and Group 52.2) while 5% came from retail sales not in-store (NACE Group
52.6) and less than 1% came from activities such as repair of personal and households
goods (NACE Group 52.7). In terms of country contributions to the overall value added in
the EU-25, the UK accounted for the largest share (22.3%) in 2002 followed by Germany
with 18.6 %, France (16.5 %, in 2001) and Italy (10.7%).
Breakdown by firm size
One of the defining characteristics of the retail sector is its pattern of organisational sizes:
large and micro firms dominate the market. Micro and small firms (between 1 and 49
employees) dominate in terms of number of enterprises and average number of
employees while large firms dominate in terms of value added and average number of
people employed. On average, 3.7 million micro/small retail firms employed 16.8 million
people adding value of 381 billion in 2004 (Exhibit 2.2-1).
Exhibit 2.2-1: Firm size breakdowns for number of enterprises, number of employees and
value added in €
Firm Size
Number of enterprises
(EU 27, 2004)
Number of employees
(EU 27, 2004)
Value added in €
(EU 25, 2004)
1 to 9 3,580,000 7,400,000 126,000,000
10 to 49 138,000 2,400,000 61,000,000
50 to 249 12,000 1,196,600 31,000,000
250+ 2,900 5,869,700 163,871,466
Total 3,732,900 16,866,300 381,871,466
Source: (Eurostat 2007)
Number of enterprises, employment, turnover and value added illustrate the significance
of the retail sector to the European economy. The breakdown by firm size however
indicates that generalisations about the sector as a whole are difficult to draw due to the
wide variety of firms (and products sold) covered by the sector.
2.3 Trends and challenges
There are signs that e-business is increasingly transforming elements of supply chain
management in the retail sector. Yet, while the diffusion of e-business is continuously
affecting retailers, understanding about supply chain management issues in retailers is
fragmented: certain ‘pockets of research interest’ result in a split picture about supply
chain management as a whole. There is, for example, a rapidly growing body of
knowledge about e-commerce in a business-to-consumer (B2C) context (such as To and
e-Business in the Retail Sector
26
Ngai 2006; Lee 2007) and e-supply in a business-to-business (B2B) context (such as
Talluri, Wenming et al. 2006) but only few exploit opportunities to study entire supply
chains (such as Rabinovich 2007). The SeBW study aims to address this issue by
combining three elements of the supply chain into one study about e-business in supply
chain management: e-supply, e-operations and e-sales.
Overview of trends and challenges
This section describes some of the main trends and challenges that retailers across
Europe currently face, going from general to specific issues. Issues directly related to
retailers’ use of ICT and e-business are not included and will be discussed in the
following chapters of this report. Firstly, recent macro-economic developments
determining retail turnover are pointed out. Second, a micro-economic view of
competition in the sector and consumers’ behaviour is presented. Thirdly, developments
at the business level are elaborated.
While these trends and challenges are evident as of 2008, some predict that ‘the growth
of international competition, the increasing concentration in the industry coupled with the
slowdown in domestic demand and the direct and indirect effects of the internet and
ecommerce will together substantially transform the sector over the next ten years’
(Reynolds, Howard et al. 2007, p.46). This report will shed some light on the effects the
internet and e-commerce are having on the retail industry (see particularly chapters 3 and
4).
2.3.1 Macro-economic developments slowing down retail sales
Continuing growth – but uncertainty about prospects
Retail industry performance is heavily dependent on macro-economic developments: the
industry’s turnover reflects consumer spending habits. Such spending is dependent on
numerous direct and indirect factors; first of all on the level of net income and on the
share of income consumers decide to save. Net income and savings, in turn, are
depending on factors such as macro-economic growth, unemployment, and taxation.
In late 2007, continuing into early 2008, the general economic environment for retail has
turned to become less favourable. In its Monthly Bulletin of March 2008, the European
Central Bank (ECB) states that real growth of General Domestic Product (GDP) in the
Euro area is continuing but moderating and that “uncertainty about the prospects for
economic growth remains unusually high.”
16
This is mainly due to a “high level of
uncertainty resulting from the turmoil in financial markets” that started in August 2007.
17
These uncertain trading conditions have continued to exist although as of June 2008
inflation is a major concern: in its June 2008 Bulletin, the ECB highlights that the ‘Annual
euro area HICP inflation has remained above 3% for the past seven months’ (p.55)
18
which is continuing to put pressure on the economy and the retail industry in particular
with its dependence on consumers.
16
ECB (2008), p. 5.
17
ECB (2008), p. 5.
18
Available at:http://www.ecb.de/home/html/index.en.html, last accessed June 24
th
, 2008.
e-Business in the Retail Sector
27
Private consumption weakening
Despite positive developments in real disposable income and favourable labour market
conditions, private consumption showed signs of weakness at the end of 2007.
19
Private
consumption growth declined from 0.5% in the third quarter of 2007 to -0.1% in the fourth
quarter. Retail sales in the euro area declined by 1.0% quarter-on-quarter in the fourth
quarter of 2007. This partly reflects developments in households’ decisions on saving and
spending in Germany, where private consumption declined substantially. However,
private consumption growth also decelerated in other countries including France and
Spain. The negative development in private consumption may be related to a strong rise
in food and energy prices but also to declining consumer confidence. The European
Commission’s retail trade confidence indicator, which signals the perceptions of retailers,
has declined in the course of 2007 and it has shown significant volatility in the recent
past.
20
On the other hand, this indicator remains at a historically high level and it
increased in February 2008. ECB predictions are not negative: “Conditions are favourable
in the labour market, implying that the outlook for private consumption in 2008 remains
broadly positive”.
21
2.3.2 Increasing concentration and strong competition
On a micro-economic level, i.e. on the level of companies and consumers, retailers
operate in an environment of generally strong competition and changing customer
preferences. As regards competition, concentration processes have been taking place
in many retail sub-sectors in the past decades, driving out smaller players and leaving a
smaller number of large chains to fight for profit margins. In the food sub-sector, for
example, there has been an increase in competition over the past 20 years (Clarke,
Jackson et al. 2006). This increase has partly been driven by a market consolidation
where the top five food retailers in the various EU countries continue to grab market
shares from competitors. This consolidation, driven by competition, is evident when
looking at the market shares of the top five European food retailers: the top five food
retailers in the different countries hold high proportions of each country’s markets. In
Germany and France, for example, more than two thirds of total food sales were made by
the top five retailers (Metro AG 2007), see also Exhibit 2.3-1.
At the same time, large enterprises from outside Europe such as US-based Wal-Mart and
Costco have sought and are still seeking to enter new markets in Europe which is further
increasing competition. Currently, seven of the ten largest retailers in the world are
European: Carrefour (France), Tesco (UK), Metro (Germany), Ahold (Netherlands), Rewe
(Germany), Schwarz Group (Germany), and Aldi (Germany) (EHI Retail Institute 2008).
22
The largest retailer in the world is Wal-Mart (US).
19
ECB (2008), p. 71.
20
Seehttp://ec.europa.eu/economy_finance/db_indicators/db_indicators8650_en.htm for the most
recent issue of business and consumer survey results.
21
ECB (2008), p. 72.
22
Data for 2006 according to EHI Retail Institute (2008), p. 30.
e-Business in the Retail Sector
28
Exhibit 2.3-1: Food sales market share of the top five food retailers in Europe
8 0
7 7
74
7 1
7 1
70
6 8
6 7
62
5 9
4 8
4 6
4 3
4 2
2 3
3 5
62
9 1
6 2
25
0 20 40 60 80 100
Finland
Sw eden
Luxembourg
Ireland
Belgium
Denmark
Austria
Germany
France
Slovakia
Portugal
Spain
Netherlands
United Kingdom
Hungary
Czech Republic
Greece
Italy
Romania
Poland
Source: Metro Retail Compendium (2007)
2.3.3 Changing consumer preferences
As regards customers, there are at least three broad trends that retailers face:
demographic changes towards a larger share of older people with particular consumption
habits, increasingly well-informed customers, and consumers demanding sustainable
products. As regards demographic change, older people require different marketing
strategies than younger ones, and retailers may need to consider appropriate strategic or
operative modifications. Related issues may concern legibility of price labels, reachability
of goods on shelves, possible differences between values of customers and shop
assistants, or particular perceptions of advertisements (Kaapke, Bald et al. 2005). In the
framework of the European Senior Economy Network (Sen@er), recommendations for
retailers and other companies how to best react to demographic changes are being
developed. Another demographic issue is the increasing attention of consumers towards
well-being. Growing concerns over obese people and overweight children in Western
countries are giving rise to a drive for healthy life styles and attitudes. This affects
retailers who have to pay better attention to the ingredients of the products they sell:
products high in, for example, salt and fat contribute to the rise in obesity among the
European population and consumers are increasingly asking for healthier products (and
services such as sports) as part of the well-being drive.
e-Business in the Retail Sector
29
Furthermore, many retailers are confronted with an increased level of product information
on the part of customers, i.e. more well-informed customers. This is largely a result of
the internet that offers consumers facilitated opportunities to search for information about
particular goods, compare goods, and to exchange information within user groups. In
particular, discussion forums about certain products may increase consumers’ sensibility
and influence sales – positively or negatively (Drösser 2008). This is partly giving rise to
multi-channel activities among European retail firms, where retailers aim to integrate the
various channels customers use to provide a consistent company sales channel profile
(which includes the internet).
Finally, consumers’ sensitivity about environmental issues is increasing, leading to an
increased demand for sustainability and sustainable products. Retailers need to find
strategies to respond to such changing attitudes and behaviour. An example is
“sustainable retailing”,
23
a UK retailers’ initiative related to sustainability. There are also
forums for ecologically correct consumptions such as www.utopia.de in Germany. This
trend incorporates the drive for so-called ‘Bio’ and ‘organic’ products and services.
These types of products and services are produced with the environment in mind. Unlike
conventionally produced goods and services, organic production and services aim to
reduce the effects on the environment by, for example, not using pesticides and selling
locally produced goods to avoid travel services. Consumer demand for these products
and services is increasing rapidly and the retail industry has started to respond to these
demands. With these types of products increasingly gaining market share across Europe
the need for approved and consumer-accepted ‘trustmarks’ is becoming ever important.
23
Seehttp://www.sustainable-retailing.co.uk/homepage.asp.
e-Business in the Retail Sector
30
3 Deployment of ICT and e-business applications
in the retail sector
As part of their efforts to cope with the challenging business environment described in the
previous section, retail companies need to take decisions regarding their ICT and e-
business strategies. This includes decisions about investments in ICT, organisational
changes and e-skills requirements among others. This chapter explores the current use
of ICT as well as e-business activities in the retail industry. It presents recent data on the
diffusion of ICT systems and standards for e-business in the retail sector, where
companies see the main drivers and barriers for e-business, and discusses issues such
as the demand for ICT skills and the outsourcing of services.
The main objective of this chapter is to provide a concise and up-to-date description of
the e-business state-of-play in the retail sector and to outline major developments in the
framework conditions for ICT usage, taking into account (to the extent possible) the
different requirements of small and large companies and of various value-systems within
the industry. This broad picture of sectoral e-business activities is the basis for the
analytical assessment on drivers and impacts of ICT adoption presented in Chapter 4.
The presentation of the empirical evidence has been structured into six main themes:
The situation in 2003/04. Section 3.1 briefly summarises the main findings of the
2003/2004 e-Business Watch study on the retail industry in light of the current
study. The results of the 2003/2004 study serve as a benchmark to assess the
dynamics of ICT and e-business developments between 2003/2004 and 2007.
Specific findings related to the various supply chain elements are presented in the
respective sections. Comparisons between e-procurement activities in 2003/2004
and 2007 are, for example, included in the procurement section 3.3.
e-Readiness: ICT infrastructure, networks, expenditure and skills. Section 3.2
looks at the existing ICT infrastructure of retail companies' including access to ICT
networks. Other general ICT and e-business issues covered in this section are ICT
expenditure and skills, especially e-skills. The objective of this section is to assess
the overall "e-readiness" of the retail sector. This is particularly important as e-
readiness is considered to form the basis for doing business electronically.
The upstream supply chain: e-procurement. Section 3.3 presents findings of the
Sectoral e-Business Watch survey related to the retail industry’s electronic
interactions with suppliers of goods and services. It covers issues such as
percentage of retail companies ordering online from suppliers and the percentage of
orders placed online in relation to total orders placed to suppliers.
The internal supply chain: in-house e-operations: Section 3.4 explores activities
related to operating a retail business and the effects of ICT and e-business thereon.
Examples include the use of Radio Frequency Identification (RFID), barcoding and
Customer Relationship Management (CRM) applications among retail firms.
The downstream supply chain – electronic marketing and sales. Section 3.5
covers the sale of retail products and services over the internet and other computer-
mediated networks to consumers. It includes information about the proportion of
retail firms selling over the internet and geographic origins of online customers. e-
Marketing, the second focus in this section, covers issues such as search engine
optimisation and online ads placed.
e-Business in the Retail Sector
31
Barriers to and drivers of e-business use. Section 3.6 assesses barriers to ICT
and e-business adoption and use reported by retail companies. Yet, this section
also looks at ‘the other side of the coin’ by providing information about the drivers
of ICT and e-business adoption and use among retail firms.
Concluding comments about the state of play of ICT and e-business in the retail industry
bring this chapter 3 to a close.
3.1 The state-of-play in 2003/ 04 – review of an earlier
retail sector study
This section briefly reviews the findings of the 2003/2004 e-Business Watch study
24
on
the retail industry in light of the 2007 SeBW study. The results of the 2003/2004 study
25
were collected by questioning retail firms in five European countries. These countries are
France, Germany, Italy, Spain and the UK. The 2007 survey was extended to include an
additional two countries: Poland and Sweden. This section discusses the general ICT/e-
business situation back in 2003/2004. In cases where specific variables of the 2003
survey can be compared directly with 2007 data, findings from 2003 regarding these
variables are presented in the respective sections 3.2 to 3.6. Overall, the results of the
2003/2004 study serve as a benchmark to assess the dynamics of ICT and e-business
developments between 2003/2004.
The general picture: the retail industry’s e-readiness in 2003/2004
The study of 2003/2004 concluded that ICTs are a "secondary consideration" for retail
companies. Yet, the study emphasised the dichotomy in this sector between micro and
small retailers on the one hand, and large retail chains on the other. Most of the large
retail chains, and perhaps some of the medium-sized firms, embodied a fairly
technological vision of innovation. The majority of the smaller firms, by contrast, seemed
to prioritise the use of efficient tools in the sense that profitability was a major
precondition for adopting ICT. By and large, however, ICT did not seem to be "profitable"
enough at that time (i.e. in 2003/04) for a majority of players.
Earlier study findings
e-Business in the retail sector: the digital divide
"The use of electronic business in the retail sector is far from being a
pervasive reality and is below the average adoption rates in other sectors.
One of the main reasons for this situation is that, in contrast with most
manufacturing sectors, micro enterprises and SMEs still play a dominant
role."
Source: e-Business W@tch sector study on the retail sector, August 2004, p. 15 (Introduction to
Chapter 2)
24
European Commission / e-Business W@tch (2004): Electronic Business in the Retail Sector.
The study findings are presented in two reports. Report I: The quantitative picture: diffusion of
ICT and e-business in 2003/04 (May 2004). Report II: Key issues, case studies, conclusions
(August 2004).
25
Data presented in the e-Business W@tch sector study on the retail sector of 2004 is based on a
survey conducted in 2003.
e-Business in the Retail Sector
32
Purchasing online was found to be the most widely adopted e-business activity.
Customer facing e-commerce strategies including e-sales activities were still very limited
in their deployment, although activities and strategies increased slightly with firm size.
The study argued that e-commerce advantages from a retailer's perspective tended to be
indirect and intangible: e-commerce would typically not help retailers to increase the
volume or value of their sales, but rather create marketing advantages (e.g. in terms of
customer loyalty due to improvements in service).
Both online purchasing and sales were mainly conducted on the website of the retailer or
supplier. Computer-mediated networks other than the internet were not widely used, with
the exception of EDI usage by large retail firms. For smaller retail companies, internet
marketplaces operated by third parties had some importance as an additional distribution
channel. e-Commerce was found to mainly involve the so-called "click & mortar" users,
i.e. traditional retailers which combine sales in stores with online sales. There were also
successful examples of "pure (online) players", which were typically highly focused and
specialised.
However, the study concluded that there was no single “best practice” model for the
multi-channel approach. Practitioners emphasised that this approach required innovation
in services, the introduction of new pricing models, a re-organisation of work processes
and the integration of existing with new ICT systems. The main challenge for retailers in
this process was often the organisational innovation part; many companies had neglected
this aspect because of the high costs involved.
Opportunities and risks, drivers and barriers
In 2003/2004, it was argued that the main opportunities stemming from e-business,
similarly as in other sectors, were efficiency and productivity gains and, thus, cost
savings. e-Business could help retailers to reduce costs related to commercial
transactions; e-procuring via marketplaces or buying groups would open up cost
advantages to small retailers. Moreover, the study concluded that e-business enabled
companies to reduce the quantity of goods to be stocked under the same sales
conditions, and to accelerate supply flows, leading to better customer service. The study
also pointed at "clear growth prospects for B2C e-commerce in retail", notwithstanding
that the percentage of companies that sold online was still limited, and also the average
share of sales made online (as percent of total sales). Exhibit 3.1-1 summarises
opportunities, challenges, drivers and barriers of e-Business identified in August 2004.
Exhibit 3.1-1: e-Business related opportunities and challenges for retail companies
e-Business related opportunities e-Business related challenges
• Cost savings
• Efficiency and productivity gains
• Increasing information about the market and
the customers (e-marketing)
• Online selling and multi-channel approach
• Lack of awareness
• Increasing market competition, where
retailers are highly concentrated
• Economic return of e-business
e-Business drivers e-Business barriers
• Trends in demography and lifestyle
• Improved systems for increasing the
efficiency of supply chain relationships
• New private labels
• Lack of interest in internet based
applications and sales systems among a
large number of retailers
• ICT skills gap
• Trust and security issues
Source: e-Business W@tch sector study on the retail sector (August 2004)
e-Business in the Retail Sector
33
A challenge was seen in the lack of awareness about ICT-related opportunities, notably
among the majority of small retailers. Furthermore, improved access to market
information for customers due to the internet was found to involve risks for retailers. This
unprecedented market transparency increased competition levels, even in markets where
concentration was already high, leading to eroding profit margins.
With regard to drivers and barriers, the study found that "current dynamics in
demography, changes in modern lifestyles, consumer choice, and improved legislation"
were major drivers for e-business adoption. Barriers included a lack of ICT skills and
"widespread concern among both consumers and retailers" with regard to security issues
in online retailing.
Policy implications: better information for SMEs & standardisation
The e-Business W@tch study of 2004 concluded that the key challenge for policy was
"… how to support the many micro and small enterprises from the sector in a competitive
environment that is increasingly becoming international and dominated by large players."
It was proposed that policy could consider two types of action in this context: first,
initiatives aimed at optimising hardware investments and infrastructures in general, for
example the promotion and coordination of technology buying groups, and consultancy
support dedicated to the implementation of e-business; second, initiatives to educate
small retailers about opportunities of using basic internet applications.
Besides specific support for SMEs, standardisation issues were considered as highly
relevant, in particular in the context of supply chain management. The study proposed
that standardisation of computer languages should be promoted.
3.2 ICT infrastructure, networks, expenditure and skills
This section looks at the ICT infrastructure of retail companies including access to ICT
networks. Other focal points in the section are ICT expenditure and skills. The objectives
are to assess:
the sector's overall "e-readiness", i.e. to what extent the basic ICT infrastructure for
doing business electronically is in place
the adoption dynamics since the last point of measurement in 2003
trends in ICT budgeting.
Internet access – the deployment of broadband
As in most industries, doing business in the retail sector without having internet access
is practically no longer possible. The only exception is small family-led shops, some of
whom are still operated without even using a computer.
26
Of those retail companies that
use computers, the vast majority (95%) is connected to the internet (see Exhibit 3.2-1),
even among the smallest of firms.
26
In the survey of 2003, only about 80% of micro retailers said they used computers, while 100%
of those retail companies with at least 10 employees used computers. The 20% without
computers are typically small family businesses ("mama-and-papa-shops") which operate in a
very traditional, "no-tech" environment. In the survey of 2007, these businesses were no longer
included; the population only covered retailers with computers.
e-Business in the Retail Sector
34
Exhibit 3.2-1: % of companies / employees with internet access (2007)
Companies with
internet access
Companies with
internet access
>2 Mbit/s
Average share of
employees with
internet access in
firms
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 97 95 44 32 48 68
Non-food stores 97 95 47 32 59 72
Food stores 96 91 36 31 27 52
Other retailing 100 99 42 29 43 62
Retail – USA 97 89 63 53 50 65
Retail – by size (EU-7)
Micro (1-9 empl.) 95 31 69
Small (10-49 empl.) 96 44 46
Medium (50-249 empl.) 99 45 32
Large (250+ empl.) 100 61 37
Other sectors (EU-7)
Transport & logistics 99 97 41 31 39 53
Retail – 2003 (EU-5) 89 79 29 16 n.a. n.a.
Micro (1-9 empl.) 78 16 n.a.
Small (10-49 empl.) 87 14 n.a.
Medium (50-249 empl.) 93 23 n.a.
Large (250+ empl.) 96 40 n.a.
Base (100%) all firms
firms with internet
access, excl. DK
all firms, excl. DK
N (Retail, 2007, EU-7+USA) 1151 839 1105
Questionnaire reference A1 A3c A2
The survey of 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Surveys 2003 / 2007 by the SeBW
Exhibit 3.2-2: % of companies having
internet access with >2 Mbit/s (2003 / 2007)
16 14
23
40
31
44
45
61
0
20
40
60
80
100
Micro (1-
9)
Small
(10-49)
Medium
(50-249)
Large
(250)
2003 2007
Base: companies with internet access,
excl. "don't know". N (2007, total) = 839.
In % of firms.
Source: e-Business Surveys 2003 / 2007
While internet access was already common
in 2003, the quality of companies' internet
access has significantly improved since,
notably among SMEs. The share of micro-
retailers (with 1-9 employees) that say they
are connected with broadband
27
has
doubled from about 15% to 30%; among
small and medium-sized retailers,
broadband diffusion has increased to about
45%. Broadband adoption among large
retailers has increased from 40% to 60%.
At the same time, the percentage of com-
panies which still access the internet with
low-bandwidth connections (of less than
144 kbit/s) has decreased to only about 5-
10%.
27
Broadband is defined in this study as internet connection with a bandwidth of at least 2 Mbit/s.
e-Business in the Retail Sector
35
Back in 2003, about 30% of micro-retailers companies still said that they used analogue
dial-up for connecting to the internet, typically at a rate of 56 kbit/s. However, there is still
scope for improvement. Broadband internet access should be considered as basic
infrastructure and become the norm for the majority of companies, at least for medium-
sized and large firms.
The maximum available bandwidth is an ICT infrastructure indicator, but this does not
provide information about the actual usage. Another indicator is how many employees
use the internet as part of their daily work. In retail companies, the average share of
employees with internet access at their workplace is close to 50% (see Exhibit 3.2-1).
This is more than in other sectors, for instance manufacturing sectors such as the steel
and furniture sectors (about 25-30%) and the chemical industries (45%). The percentage
is higher among smaller companies; this reflects that in the retail industry the internet is
mainly used for procurement and management tasks, but not by cashiers and normally
not by simple shop assistants
28
in their daily routines. As large retail stores have a higher
percentage of employees with such tasks, the total share of employees with internet
access is lower than in small shops where the manager and shop assistant is often the
same person.
Use of internal networks
Similarly to internet access, the use of ICT to connect computers internally to a company
network (Local Area Networks – LAN) has become a commonplace, at least for medium-
sized and large retailers. The adoption of LAN infrastructure has significantly increased
since 2003 (see Exhibit 3.2-3).
The diffusion of Wireless LAN (W-LAN) technology has surged in recent years. This
technology was not much used back in 2003; in the meantime, about 40% of employees
work in retail companies that operate a W-LAN. In large firms, the adoption rate has
reached close to 60%. These are similar adoption levels as in the transport and logistics
services sector, but lower than in most manufacturing industries, e.g. in the chemical
industry.
29
W-LAN is used to facilitate network access within a site or building: at certain
access points, distributed throughout various buildings and sites, W-LAN provides secure
Internet access to authorised users. In retail, it is often used in distribution warehouses,
but also in stores. These findings indicate that retailers are recognising the importance of
using W-LAN to further business process reengineering. Yet, they are lacking behind
other industries which might originate from the diversity and specific employment
structure within the industry: retail is labour intensive at the shop floor with a high
proportion of part-time employees and low skilled labour force.
28
In specialised non-food stores, however, internet access in the shop has become quite common
to support the work of shop assistants: they can quickly check information online (e.g. special
technical features of a product) and thus better respond to enquiries of customers.
29
In the chemical industry, close to 60% of employees work in companies with a W-LAN (see
Sectoral e-Business Watch study on the chemical, rubber and plastics industry, 2008).
e-Business in the Retail Sector
36
Exhibit 3.2-3: Internal networks used (2003 / 2007)
LAN W-LAN Intranet
Remote
access to
company
network
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
empl.
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail – 2007 total (EU-7) 66 49 40 25 50 28 45 22
Non-food stores 62 49 39 29 43 29 46 24
Food stores 69 50 36 17 63 25 39 17
Other retailing 78 49 56 16 55 33 53 25
Retail – USA 57 50 51 30 56 43 44 20
Retail – by size (EU-7)
Micro (1-9 empl.) 48 25 27 22
Small (10-49 empl.) 65 34 41 28
Medium (50-249 empl.) 80 44 56 45
Large (250+ empl.) 87 57 73 68
Other sectors (EU-7)
Transport & logistics 75 50 39 22 52 24 49 24
Retail – 2003 (EU-5) 56 32 n.a. 41 27 29 16
Micro (1-9 empl.) 31 n.a. 27 16
Small (10-49 empl.) 52 n.a. 26 24
Medium (50-249 empl.) 75 n.a. 56 36
Large (250+ empl.) 81 n.a. 60 38
Base (100%) all firms all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151 1151
Questionnaire reference A4a A4b A4d A5
The survey of 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Surveys 2003 / 2007 by the SeBW
Exhibit 3.2-4: % of companies enabling remote
access to their computer network (2003 / 2007)
16
24
36
38
22
28
45
68
0
20
40
60
80
100
Micro (1-
9)
Small
(10-49)
Medium
(50-249)
Large
(250)
2003 2007
Base: companies using computers,
N (2007, total) = 1151. In % of firms.
Source: e-Business Surveys 2003 / 2007
A useful indicator for "e-readiness" is
the share of companies that enable
remote access to their computer
network. This means that employees
can access data from a company's
network remotely, e.g. when working
from home or travelling. In the retail
sector, companies comprising 45% of
the sector's employment enable remote
access, up from about 30% in 2003
(see Exhibit 3.34). Diffusion of this
functionality increased in particular
among medium-sized and large
retailers, but only to a lesser extent
among small retailers. This is in
contrast to manufacturing sectors,
where the diffusion has increased
notably among SMEs in the same
period.
e-Business in the Retail Sector
37
An explanation is that working from home or entering the system from abroad is probably
less relevant for employees of smaller retail shops than in other sectors, for example for
salesmen of manufacturers.
No significant increase can be observed for the diffusion of intranet. In 2007, about 50%
of employees work in retail companies which operate an intranet, up from 40% in 2003.
This application, which is mainly used for internal knowledge sharing, seems to be near
to its saturation level. This may indicate that the significance of having an intranet is not
very high in the retail industry for those firms that have not adopted it.
For most of the ICT infrastructure indicators discussed in this section (internet access,
LAN, W-LAN, remote access), there are some differences between the sub-sectors (retail
in non-food stores, food stores and other retailing, see Section 2.1). Diffusion is typically
most advanced among other retailers although this group includes the pure online
retailers such as Amazon.com which is quite different from market stalls which are also
included in this group. Hence, on the aggregate level, these variations partly reflect
structural differences between the sub-sectors, including the numerical dominance of
SMEs and the importance of large multi-national retail corporations in terms of
employment and value added.
Use of open source technologies
Open source technologies are continuing to take away market share from more traditional
forms of pay-for technologies. The three specific open source technologies enquired
about in the Sectoral e-Business Watch survey were operating systems such as Linux,
databases such as MySQL and browsers such as Mozilla Firefox (Exhibit 3.2-5).
Exhibit 3.2-5: % of companies in EU-7 countries using open source technologies
22
17
27
33
9
17
21
40
12
22
20
24
33
7
20
27
40
14
31
38
13
35
24
22
33
42
27
0
5
10
15
20
25
30
35
40
45
Retail
(EU-7)
Non-f ood
stores
Food
stores
Other
retailing
1-9 10-49 50-249 250+ USA
Open Source operating system Open Source databases Open Source browsers
Base: companies using computers, N (2007, total) = 1151. In % of firms.
Source: e-Business Survey 2007
31% of retailers are using open source browsers while only 22% use open source
databases and 22% use open source operating systems. Across the three categories,
non-food, food and other retailing, non-food stores have the highest usage of browsers
with 38% closely followed by other retailing with 36% while food stores have the lowest
e-Business in the Retail Sector
38
share with 13% of open source browsers. A higher number of food stores in contrast use
open source operating systems and databases. By far the heaviest users of all three
open source technologies are sample firms in the other retailing group. Open source
technologies are more commonly used by retailers in Europe when compared to US
where 12% of operating systems, 14% of databases and 27% of retailers use open
source. While micro firms lag behind their larger counterparts with only 9% using open
source operating systems and 7% using open source databases, the levels of open
source browser usage are not lagging behind. Overall, large firms with more than 250
employees are the types of firms mostly employing open source technologies.
ICT skills requirements
Improving e-business skills, especially among SMEs, has been identified as a relevant
concern for policy in various studies by e-Business Watch and by the eBSN. A clear
distinction has to be made in this context between (larger) companies that can afford
employing ICT practitioners, i.e. staff with the specialised skills and tasks of planning,
implementing and maintaining ICT infrastructure,
30
and (typically smaller) retailers that do
not employ practitioners.
The critical divide here is between SMEs and the large retail chains. In total, only about
one in ten retail companies said that they employed ICT practitioners in 2007 (see Exhibit
3.2-6). However, this percentage is heavily determined by the vast number of micro-retail
companies with up to 9 employees, which obviously cannot employ and do not need a
specialist just to take care of their simple ICT infrastructure (which will typically consist of
a computer and an internet access, if at all). Among medium-sized firms, about a third of
all firms have specialists for ICT tasks. What comes as a surprise and raises questions is
that even among large retailers (with at least 250 employees) only about 50% employ ICT
practitioners. Retail companies not employing ICT staff seem to have completely
outsourced all ICT maintenance tasks to external service providers. On the other hand,
the term "ICT practitioner" in itself can be misleading in time-constrained telephone
interviews; some companies may not count their PC and network administrator(s) as ICT
practitioners, although they are mainly charged with ICT tasks.
But outsourcing is certainly a valid explanation for the low percentage of firms with ICT
practitioners. About 40% of the retailers interviewed in 2007 said that they had
outsourced ICT functions to external service providers which they had previously
conducted in-house in the past 12 months (prior to the interview). Outsourcing can mean
a wide array of practices in this context. It includes the "SaaS" ("Software as a Service")
distribution model, where companies pay a license to use a software online which is
hosted and operated by the service provider, rather than purchasing the software to be
installed within the company. It can also mean that whole business processes are
outsourced to specialised intermediaries. The importance of outsourcing in large firms is
demonstrated in the Casino Group and the Mercator case studies. In both firms, close co-
operation with external IT providers was crucial during the solution development phases.
The relationship went beyond the development phase with the IT vendors continuing to
run solutions for the case firms. In the Mercator case study, the firm providing the
30
The European eSkills Forum, established by the EC in March 2003, defined "ICT practitioner
skills" as the "capabilities required for researching, developing and designing, managing,
producing, consulting, marketing and selling, integrating, installing and administrating, maintain-
ing, supporting and service of ICT systems." Cf. eSkills For Europe: The Way Forward",
Synthesis Report by the eSkills Forum, September 2004.
e-Business in the Retail Sector
39
outsourced service even benefits from being able to sell the application developed with
the case firm to other retailers across Europe.
Exhibit 3.2-6: ICT skills requirements and outsourcing (2007)
Employ ICT
practitioners
Have outsourced
ICT services
previously
conducted in house
in past 12 months
Say that e-business
has a significant
impact on skills
requirements
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 23 11 56 46 49 41
Non-food stores 26 9 58 47 54 41
Food stores 16 13 53 51 40 35
Other retailing 20 18 49 28 41 54
Retail – USA 42 8 45 24 25 31
Retail – by size (EU-7)
Micro (1-9 empl.) 10 45 41
Small (10-49 empl.) 15 59 44
Medium (50-249 empl.) 32 63 50
Large (250+ empl.) 48 67 58
Other sectors (EU-7)
Transport & logistics 35 8 56 45 45 33
Base (100%) all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151
Questionnaire reference E1 E3 E5
The survey of 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Surveys 2003 / 2007 by the SeBW
ICT investment and budget trends
The general climate for ICT investments has significantly improved over the past few
years. This has a number of reasons: first, the positive economic framework conditions
since 2004 have made it easier for companies to make investments
31
; second, the wide-
spread distrust of ICT for some years after the crash of the "new economy" in 2001 has
mostly faded away; and third, ICT solutions have become more mature and better
adapted to the requirements of specific firms. It may also help that there are plenty of
business cases which demonstrate that well-planned investments in ICT can generate
return-on-investment even in the short term, often within less than two years.
32
The Sectoral e-Business Watch asked companies in 2007 whether they had made
investments in ICT during the past 12 months (prior to the interview), for example for new
hardware, software or networks. About 70% of small and medium-sized firms and more
than 90% of large firms said that they had done so (see Exhibit 3.2-7). Companies were
also asked whether, in the forthcoming financial year, they intend to increase, decrease
or roughly keep their ICT budget. The majority of companies, about 60%, expected to
maintain the ICT budget at about the same level. About 35% of companies said they
31
It remains to be seen whether the risk of an economic downturn / recession in the wake of the
financial market crisis of late 2007 will have a sizable impact on companies' ICT expenditure.
32
See, for example, business cases of ICT investments by SMEs documented by the German
"PROZEUS" initiative (www.prozeus.de).
e-Business in the Retail Sector
40
would increase their budget, and only a few companies (3%) said they planned to
decrease it (see Exhibit 3.3-7).
The finding that companies expect to either maintain or increase their budgets is con-
firmed by other market studies. Some of them are even more "bullish" in their forecasts:
IDC, an ICT market research company, estimates that German enterprises spent about
76 billion euros for ICT hardware, software and services in 2007, and forecasts that this
figure would increase by 7.5% in 2008.
33
However, the right ICT strategy it by no means a simple equation of "the more the better".
A survey by the consulting company Accenture among 700 companies world-wide found
that companies with a high turnover and profit spend on average 17% less for IT than
their competitors. Typically, these companies have specified clear priority areas for their
ICT investments and implemented sophisticated reporting systems to keep control of their
ICT budgets.
34
This holds true as a general recommendation, in particular for SMEs: they
should carefully think about ICT priorities, and then focus their resources on these areas.
Exhibit 3.2-7: % of companies that made
investments in ICT hardware or software in
2006/07
59
46
62
56
69
73
54
74
91
0 20 40 60 80 100
Retail (total, EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Retail (USA)
Exhibit 3.2-8: % of companies planning to
increase / maintain / decrease their ICT budget
in the forthcoming financial year
58%
3%
34%
increase
maintain
decrease
don't know
Reading example: "34% of all companies (by their
share of employment) said that they expected to
increase their ICT budget in the forthcoming
financial year."
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007 by the SeBW
33
quoted from: "Pflicht und Kür", in: WirtschaftsWoche, No. 10/2008, 3 March 2008, p. 98
34
ibid.
e-Business in the Retail Sector
41
3.3 The upstream supply chain: e-procurement
3.3.1 Introduction to upstream supply chain issues
Upstream SCM functions
The function of upstream supply chain management (SCM) is to design and manage the
processes, information and material flows between retailers and their suppliers. SCM is of
utmost importance to retailers. According to Accenture (2004), the supply chain can
represent 40% to 70% of a retailer's operating costs, and may comprise half of all the
company’s assets. Thus, it is one of the main cost drivers in this sector. Technology-
enabled improvements in SCM promise a high potential not only to cut costs, but also to
improve service levels for customers. Therefore, particularly for large retail chains, supply
chain management is a highly strategic issue and can be a critical factor for their
competitiveness.
In retail, suppliers can be grouped into three main categories:
the manufacturers of those goods which are sold by retail companies (whether in
stores, through mail order or e-commerce)
wholesalers, who resell new and used goods to retailers
and providers of goods or services which retailers need to run their business, such
as store equipment, office supplies and ICT hardware and services.
The particular role of ICT
ICTs are critical for efficient SCM, notably for larger retailers that have to manage
complex supply chains. The use of ICT-based systems for upstream supply chain
management enables retail firms to increase the transparency of processes and
information flows. This is key to optimising supply chain processes by, for example,
reducing the quantity of goods that need to be in stock under the same sales condition,
and thus to reduce costs and increase profitability. This section of the study explores to
what extent European retailers make use of ICT for managing their upstream supply
chain, and if the use of ICT in exchanges with suppliers has increased in the past 4-5
years. The section will then assess what kind of benefits retailers experience from SCM.
These benefits need to be weighed against risks associated with integrated supply
chains. To make SCM work, firms need to share at least some data with their supply
chain partners to various degrees. This data sharing bears risks for the partners involved.
Although the section looks at ICT usage in upstream supply chain management, it is
important to understand that this activity is closely linked with "downstream" activities in
marketing and sales (see Section 3.7). For example, analytical sales data collected at the
store level are an important input for planning the supply chain. Vice versa, an optimised
supply chain (e.g. with reduced out of stocks) enables a company to provide better
customer service.
e-Business in the Retail Sector
42
3.3.2 Findings about e-procurement
Preferred ways of data exchange with suppliers
As a starting point to assess how business data are typically exchanged between
retailers and their suppliers, a question that was newly introduced in the e-Business
Survey 2007 provides some insight: the SeBW asked retailers to assess which of the
following statements would best describe the way they exchanged data with their
business partners, offering four options: data are (a) mostly transmitted verbally, e.g. via
telephone; (b) mostly processed and exchanged in paper based format, that is by letter or
fax; (c) mostly electronically processed internally, but then exchanged in a paper-based
format; and (d) mostly processed and exchanged electronically.
Exhibit 3.3-1 shows that answers
are nearly equally spread across
the four options. As can be ex-
pected, the percentage of com-
panies that say they process and
exchange data mostly electron-
ically (or at least process them
electronically internally) increa-
ses by firm size. Among medium-
sized retailers, about 50% see
themselves in these more ad-
vanced e-business categories,
among large retailers, close to
60%. However, even among the
medium and large retailers, there
are still 15-20% that say that their
communication with business
partners is mostly "verbally".
There are two possible reasons
for not using ICT-based systems
in the first place: suppliers may
not yet be ready for exchanging
data electronically; or, in specific
markets, the type of goods and
products may not lend them-
selves for electronic ordering and
SCM.
Exhibit 3.3-1: Percentage of retail companies saying
that they exchange data with business partners …
22
19
28
23
14
20
24
29
14
22
21
21
30
16
20
25
29
43
30
34
31
11
33
35
30
26
25
26
26
20
36
36
25
20
15
18
0 20 40 60 80 100
Total retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
mostly electronically
electronical processing, paper-based exchange
mostly paper based
mostly verbally
Base (100%) = retailers using computers from 7 EU countries,
excluding "don't know" answers. N = 1125 (for total retail).
Figures for sector totals are weighted by employment ("firms
representing x% of employment in the sector / country"), figures
for size-bands in % of firms.
Source: e-Business Surveys 2003 / 2007 by the SeBW
e-Business in the Retail Sector
43
e-Procurement: ordering supplies online
As vital parts of the supply chain,
retailers have to organise for
ordering goods from suppliers,
receiving the goods and paying the
suppliers for the goods. These
processes are increasingly
organised and managed by e-
business. In 2007, retailers
accounting for 55% of employment
in the sector said that they ordered
at least some goods from suppliers
over the internet or through other
computer-mediated networks such
as EDI. Their share has increased
since 2003 (43%); however,
adoption has increased mainly
among SMEs, and to a lesser extent
among large retailers (see Exhibit
3.3-2).
Exhibit 3.3-2: Percentage of companies placing
orders for supplies online
(2003 / 2007)
43
28
39
43
53
55
52
63
67
58
0
20
40
60
80
100
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-
249)
Large
(250)
2003 2007
Base (100%) = retailers using computers from 7 EU countries
(2007) / 5 EU countries (2003). N (2007) = 1151. In % of firms.
Source: e-Business Surveys 2003 / 2007 by the SeBW
Eurostat has similar questions in its survey on ICT usage by enterprises, but divides the
question into two inquiring about placing orders on the internet and through other
networks. Overall, Eurostat found in its survey of 2006 that 36% of retail firms reported
placing orders on the internet, and 12% through other networks. Thus, the incidence of
ordering supplies online reported by Eurostat is slightly lower than in the survey of the
Sectoral e-Business Watch. In any case, the results of the Eurostat survey show that
networks for data exchange other than the internet play an important role for SCM in the
retail industry. Examples of such networks include electronic data interchange (EDI) and
extranets of suppliers where retailers can place their orders.
While the percentage of companies placing orders online is a measure for the overall "e-
readiness", it does not say a lot about the intensity of e-procurement activity. In fact, both
Eurostat and the SeBW find that most companies say they use supply-side e-business
only for a low percentage of their total orders. In the e-Business Watch surveys of 2003
and 2007, retail companies were asked to estimate how large a share of their total
purchases from suppliers (2003) / orders from suppliers (2007) was conducted online.
Results indicate a considerable increase in the intensity of e-procurement since 2003
35
.
The share of those firms for whom e-procurement was only a marginal activity has
decreased from about 60% in 2003 to 35% in 2007. At the same time, the share of
intensive users (procuring more than 25% of goods online) has increased from 17% in
2003 to 40% in 2007 (see Exhibit 3.3-3). A simple computation of answers to this survey
question, assuming that the average share will rather be towards the lower end in each of
the ranges offered as options for their answer,
36
suggests that the total share of orders
35
36
In both surveys, companies were given five options for their answer: "less than 5% of total
sales", "5-10%", "11-25%", "26-50%" and "more than 50% of total sales". To adjust for the larger
sales volumes of large companies, employment-weighted figures were used.
e-Business in the Retail Sector
44
placed by retailers online (by those companies that actually order online) has increased
from about 10-15% in 2003 to about 25-30% in 2007. Counting in all retail companies,
including those that do place any orders online, the total share of online orders has
probably increased from about 5% (2003) to about 15% (2007).
Exhibit 3.3-3: Percentage of retail firms
placing orders to suppliers online (2007)
60
53
51
52
63
67
58
67
66
48
47
81
48
70
55
55
0 20 40 60 80 100
Total retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sweden
UK
USA
Base (100%) = companies using computers.
N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and
countries are weighted by employment ("firms
representing x% of employment in the sector /
country"), figures for size-bands in % of firms.
Exhibit 3.3-4: Average percentage of orders
for supplies placed online (EU-7, 2003 / 2007)
2007
35%
18% 7%
14%
26%
50%
2003
60% 20%
3%
7%
10% 50%
Reading example:
"In 2007, retail companies representing 47% of
employment (among those that place orders for
supplies online) said that their online orders
accounted for up to 5% of their total orders from
suppliers."
Base (100%) = companies from 7 EU countries
(2007) / 5 EU countries (2003) accepting orders
online.
N (2007) = 699 / N (2003) = 152.
Weighting: Figures are weighted by
employment.
Source: e-Business Survey 2007 by the SeBW
Advanced forms of data exchange with suppliers
Software systems specifically developed for supply chain management support
companies, not only in the retail industry, to match supply and demand through integrated
and collaborative interaction tools. Such SCM systems provide an overview of the flows
of products/materials, information and finances. In the most advanced form, they cover
the whole process and value chain from suppliers/manufacturers to wholesalers, retailers
e-Business in the Retail Sector
45
and to consumer. SCM systems help to coordinate and integrate these flows both within
and among companies. One of the key objectives of any effective SCM system is to
reduce inventory (with the assumption that products are available when needed).
In the retail sector, enterprises representing close to 20% of employment say that they
have such an SCM system (see Exhibit 3.3-5). The use of SCM systems is clearly a
domain of the large retailers: while only about 10%-20% of small and medium-sized
retailers said they had adopted a SCM system, about 35% of large firms did so. The
potential of these advanced and quite costly systems is obviously much higher for large
retail companies and chains with their complex supply chains. In fact, a comparison with
results for the same question in 2003 shows that SCM systems have seen a dynamic
diffusion among large retailers (from 7% to 35%), but also among medium-sized ones
where adoption has doubled from 9% to 18%.
Exhibit 3.3-5: Percentage of companies using SCM software (2003 / 2007)
Adoption in 2007
(by segment and size-band)
20
17
16
5
9
18
35
19
35
0 10 20 30 40 50
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
Diffusion dynamics 2003 – 2007
6 6 5 9 7
19
5 9
18
35
0
10
20
30
40
50
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-
249)
Large
(250)
2003 2007
Base (100%) = retailers using computers from 7 EU countries (2007) / 5 EU countries (2003).
N (2007) = 1151, N (2003) = 504. In % of firms.
Source: e-Business Surveys 2003 / 2007 by the SeBW
The management of retail supply chains requires understanding and balancing of three
main dimensions: availability, inventory and cost (Accenture 2004). SCM can be regarded
as a tool to manage the trade-offs between these dimensions in the most efficient and
effective way. Any retail format can act as an example to illustrate this: ideally, all goods
should be available to customers at all times (no empty shelves) while at the same time
the volume of goods on stock should be as small as possible (to reduce warehouse
costs). However, the two goals need to be balanced: the smaller the inventory, the more
likely the occurrence of out-of-stock; similarly reduced costs versus forgone revenues and
dissatisfied customers need to be taken into consideration. SCM systems promise retail
companies to achieve the optimal balance. They typically have modules which support
functions including
37
:
Strategic network design (support for selecting locations for order and distribution
management)
37
See websites of providers of SCM solutions for retailers, for instance Infor SCM for Retail
(http://www.infor.de/loesungen/scm/branchen/retail/)
e-Business in the Retail Sector
46
Demand planning (analysis and forecast of future demand in cooperation with
business partners)
Network supply planning (planning distribution on the basis of results from demand
planning)
Warehouse management
Transport and logistics (decision on transportation means and routes)
Event management (automatic alerts in case of deviations or special situations to
enable a proactive dealing with the situation)
However, due to the heterogeneity of the retail sector, there is no single solution that fits
all purposes. Retail segments with short lifecycles, for example fashion, need to cope
with short lead-times and accelerating time-to-market, which in turn requires tight
integration with the supply base
38
. The supply chain strategy also depends on whether
retailers compete rather on price or on service levels. There is evidence that physical
efficiency is most important in cost-based competition, the ability to flexibly respond to
market requirements is critical in time-based competition (Gullberg and Lundvall 2004).
A more specific indicator for electronic data exchange between companies focuses on
the process of invoicing. It is widely recognised that electronic invoicing promises rather
easy-to-achieve cost savings for both parties involved (i.e. the invoicing entity and
receiving entity), because processing invoices in a standardised, electronic format can be
accomplished much faster compared to the often cumbersome handling of printed
invoices. The cost saving potential obviously depends on the number of invoices that
have to be processed; companies and sectors differ widely in this respect.
In the survey of 2007, retailers were asked whether they received e-invoices from
suppliers, for example in PDF format or through e-mail. In total, close to 50% of the
European retail companies interviewed said that they received at least some of the
invoices electronically. In the USA, even more than 60% said so (see Exhibit 3.3-6).
Except for micro-retailers with fewer than 10 employees, there is hardly a difference by
size in this regard. This confirms the dynamic adoption of e-invoicing in recent years. It
can be assumed that in a few years time, in B2B exchanges, most invoices will be
delivered electronically, notably among companies which do regular business with each
other.
The cost saving potential of e-invoicing critically depends on the technical way in which
invoices are generated, delivered and read. e-Invoicing in its most advanced form means
that an invoice is electronically generated and sent by the seller, and electronically
received, processed and archived by the paying retailer. In practice, e-invoicing typically
goes hand in hand with making payments electronically. However, the challenge is that
there are different technical options for delivering an invoice electronically, and different
views on which of these ways actually constitutes an "e-invoice". Notably, there is
disagreement whether an invoice sent as a PDF document (typically a scan from a
paper invoice) by e-mail is an e-invoice. The counterargument is that this document is not
machine-readable, thus data have to be keyed in manually by the receiver into his
system. It is only sent electronically, but not processed electronically; savings are
therefore significantly reduced. The survey in the retail sector covered the issue of e-
invoicing only peripherally and did not explore the adoption of different types of e-
invoicing.
38
See e-Business Watch sector study on the textile industry (2005), and accenture (2004)
e-Business in the Retail Sector
47
Exhibit 3.3-6: Percentage of retail companies
receiving invoices from suppliers
electronically (2007)
52
32
71
43
55
55
55
54
36
46
46
43
54
69
48
61
0 15 30 45 60 75
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sw eden
UK
USA
Exhibit 3.3-7: Percentage of retail companies
sharing information about inventory levels
with business partners online (2007)
14
17
17
9
16
22
23
16
18
16
12
22
15
32
15
14
0 10 20 30 40 50
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sw eden
UK
USA
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = all companies. N (Chemical, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007 by the SeBW
While the introduction of e-invoicing is normally not a big deal, it can be the first step
towards a more intensive ICT-enabled cooperation in the supply chain. A critical issue in
this context is the sharing of information. For optimal supply chain management, it is
indispensable that the buyer makes available information about inventory and pending
orders so that the supplier can deliver on time the right amount. This requires trust
between trading partners, since some of the data that need to be made available may be
confidential. The SeBW asked retail companies whether they share information about
inventory levels with business partners online. In total, retailers comprising about 15% of
employment said in 2007 that they did so. Among medium-sized and large retailers, the
incidence goes up to 20-25% (see Exhibit 3.43-7). In the USA, it appears that online
information sharing is more widely practiced; here, more than 30% of all retailers say they
share data about inventory levels with business partners.
Benefits and risks of SCM – case study evidence
The deployment of e-business as shown above drives the vertical integration of players
involved in the retail supply chain. e-Business has proven to be a useful tool both for
suppliers and retailers to reduce the quantity of goods to be stocked under the same
sales conditions, and to accelerate supply flows to offer better customer service. e-
e-Business in the Retail Sector
48
Business tools such as SCM systems permit information sharing, notably between
retailers, logistics providers and manufacturers of goods sold. This is frequently referred
to as the "e-extended supply chain", where, ideally, demand drives and automatically
determines supply flows. The application of this principle, however, can get close to a
contract situation between players. This can be an obstacle for an even more intensive
use of e-business, as the companies involved may not want to get too dependent on
each other. Still, the digital integration notably between retailers and manufacturers has
dynamically evolved in recent years.
Two of the case studies conducted for this report illustrate how small and medium-sized
firms approach upstream supply chain management. Cyprus-PC.com, a young laptop
retailer has managed to almost fully integrate its upstream supply chain with in-house
operations and downstream chain activities. The only manual link within the chain is the
order receipt management process. This link is manual because the current amount of
orders does not justify the cost for an electronic link. The upstream supply chain is
managed by one single system bought by the firm from DHL. Cyprus-PC.com benefits
from an owner (who also is manager of the firm) with a high ICT affinity and a strong
relationship with an ICT partner firm. Exhibit 3.2 illustrates the supply chain management
process at Cyprus-PC.com.
Exhibit 3.3-8: Supply chain management at Cyprus-PC.com
Cyprus-PC.com
Customer
Supplier
Customer
Customer
Supplier
Tier 1
Supplier
Partner-firm
Strong
relationship
DHL solution e-store
Physical stores
Telephone
Manual
Multiple channels
Delivery
Source: e-Business Watch 2007/2008
The supply chain management approach at Cyprus-PC.com shows that small firms can
achieve an almost full electronic integration of entire supply chains. Small firm
characteristics that alleviate or foster electronic integration include a lower degree of
complexity and a higher degree of flexibility in comparison to medium-sized and large
firms. Yet, financial constraints are an obstacle to electronic integration in small firms
which is less of a burden in medium-sized and large firms.
The Smart Supermarket case study provides an innovative approach to supply chain
management: the Maltese medium-sized, family run supermarket developed an e-
commerce solution from scratch involving its suppliers in the daily maintenance of the
solution. This creates a win-win situation where the firm is able to shift some of the
maintenance cost to its suppliers by collecting a fee per product placed online and the
e-Business in the Retail Sector
49
suppliers in turn get access to up-to-date market and sales information from the sales
data held on the system. Smart Supermarket even reports that the majority of
relationships with suppliers have improved significantly as a result of the introduction of e-
commerce.
Of the large case study firms included in the sample, Merctor, Globus, and Brooklands
have adopted e-procurement solutions. The Mercator, Slovenia case study illustrates the
importance of having a unified ERP system in a company, its dependant companies and
subsidiaries for an efficient implementation process. An information technology structure
consisting of various different ERP solutions can severely delay the implementation of e-
procurement in a large retail firm. The solution at DIY and hardware store specialist
Globus from Germany has been adopted to streamline business and order processes
related to indirect goods (goods in the third category, see section 3.3.1). The
implementation of the new e-procurement system has indeed provided the basis for a
complete re-organisation of processes related to the procurement of Maintenance Repair
and Operation (MRO) goods. At Brooklands, achieving better business process efficiency
was also a driver for adopting a new technology application infrastructure supporting its
purchasing logistics activities. Again, change management was an issue affecting the
success of the implementation.
3.4 The internal supply chain: in-house electronic
operations
3.4.1 Introduction to internal operations
Importance of internal e-business systems in retail
Internal supply chain management is the management of any aspect related to organising
for selling goods delivered by suppliers to consumers. As retailers do not transform
goods, operation is not concerned with organising a production process but with
arranging the in-house processes of receiving, distributing, and selling goods.
Computerised systems that mainly serve processes inside a company, i.e. that are not in
the first instance designed for communication with suppliers, customers or other business
partners, are considered here as “internal electronic operations”. A study of internal
operations in retail companies is of interest because, as in all industries, ICT and e-
business may be valuable for making internal business processes more effective. This
may be highly relevant particularly for the large retail firms with huge amounts of data to
be dealt with and complex processes. However, effective internal operations are also
crucial for SMEs. In particular, retail enterprises have to balance the cost effectiveness of
amounts of goods to be kept on store against relatively small customer purchases.
Business process efficiency, streamlining and related productivity increases are core
subjects whenever ICT and e-business use is analysed. They are also very often implicit
or explicit themes in e-Business Watch case studies. Even the very first e-Business
Watch report in May 2002 argued that the real revolution had occurred and was about to
take place in internal e-business processes – as well as in business-to-business e-
commerce. Since then, this assessment has been confirmed frequently. In most sectors
the major impact of e-business has been on reducing costs by making business
processes more efficient.
e-Business in the Retail Sector
50
Types of internal systems
There are numerous types of software applications that are relevant for internal electronic
operations:
Resource-oriented systems for enterprise resource planning (ERP) and supply
chain management (SCM). Knowledge management (KM) systems may also be
included in this category as they serve the management of human resources
Inventory-oriented systems for warehouse management and barcoding
Documentation-oriented systems for managing the placement and receipt of
orders, for document management (DM), and content management
Customer-oriented systems for customer relationship management (CRM)
Radio Frequency Identification (RFID) systems for tracking goods
All these systems can help to file, structure and process information in their field of
activity – information that may have huge scope particularly in large enterprises.
The SeBW Survey 2007 included systems for ERP and SCM, warehouse management
and barcoding, order placement, CRM and RFID. SCM systems have been discussed
above in section 3.2 because they are closely related to procurement issues
3.4.2 Findings about internal e-operations
General level of e-business processes
In the e-Business Survey 2007 the interviewees were asked what overall importance e-
business has for business processes in the company. They could state “most”, “a good
deal”, “some”, or “none”. A relative majority of companies representing 47% of the
industry’s employment said that they conduct some processes by e-business – see
Exhibit 3.5-1. 22% said “none”; a “good deal” was stated by 20%, and in 11% most
processes are conducted electronically.
As regards sub-sectors, the findings for non-food and food stores are very similar to the
overall results. In other retailing, the employment-weighted share of firms stating no e-
business at all was larger than in the other two sub-sectors, namely 35%, at the expense
of all other three categories.
The most considerable differences between size classes is in the share of firms stating
no e-business at all: It is largest in micro firms (35%) and declines with increasing size
class. 14% of the large firms said they conduct no e-business at all. On the other hand,
the share of firms stating that most of the processes are conducted by e-mail is also
largest in firms with more than 250 employees (15%), while it is similar in micro (7%),
small (9%) and medium-sized firms (9%).
US and EU-7 retailers are almost on the same level of overall e-business assessment.
The employment-weighted share of firms in which most or a good deal of processes is
done by e-business is almost the same: 31% in EU-7 firms and 29% in US retailers. The
level of firms reporting no e-business at all is higher in the US (27%) than in the EU-7
(22%).
e-Business in the Retail Sector
51
Exhibit 3.4-1: % of companies saying that ... of their business
processes are conducted as e-business (2007)
11
11
13
7
7
9
9
15
8
20
23
15
16
22
16
18
22
21
47
46
51
43
37
46
50
48
44
22
20
21
35
35
28
24
14
27
0 20 40 60 80 100
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
most a good deal some none
The survey in 2007 was
conducted in 7 EU
Member States (DE, FR,
IT, ES, PL, SE, UK) and in
the USA.
Base (100%) = companies
using computers; N
(Retail, EU-7 and USA) =
1151.
Weighting: Figures for
sector totals and countries
are weighted by
employment ("firms
representing x% of
employment in the sector /
country"), figures for size-
bands in % of firms.
Source:
e-Business Survey
2007
Specific software systems
Systems for enterprise resource planning (ERP) help to integrate and cover all major
business activities within a company, including product planning, parts purchasing,
inventory management, order tracking, human resources and finance. ERP systems are
an important "hub" for much of their e-business activities with other companies. B2B data
exchanges as well as planning and controlling processes are largely based on
functionalities provided by ERP systems. 11% of the EU-7 retailers, which is firms
representing 16% of the industry’s employment, reported to have an ERP system – see
Exhibit 3.5-2. The share of firms is much smaller than in manufacturing sectors such as
steel (33%), chemicals (38%) and furniture (21%) for which resources planning is more
important as they produce goods. As regards retail sub-sectors, ERP systems are not so
prevalent in other retailing, at least when considering the firm-weighted figure (3%). As
regards size classes, medium-sized firms (37%) reported an even higher level of ERP
use than large firms (33%).
In the US, ERP systems were reported to be used only by a tiny share of 2% of retailers.
This low level can partly be explained by the fact that US firms prefer to use SCM
systems instead of ERP: the level of SCM use in US firms (9% of firms, 35% of
employment) is larger than in the EU-7 (6% of firms, 19% of employment). When adding
up figures for both ERP and SCM, EU-7 and US retailers are on a similar level.
e-Business in the Retail Sector
52
Exhibit 3.4-2: % of companies using specific software systems to support operations (2007)
ERP system
Software
application to
manage the
placing or
receipt of
orders
Warehouse or
depot
management
system
Bar-coding
system
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail – 2007 total (EU-7) 16 11 60 48 51 42 59 36
Non-food stores 15 11 64 47 52 43 54 35
Food stores 17 13 55 52 47 39 71 45
Other retailing 23 3 51 43 60 41 58 22
Retail – USA 6 2 60 42 46 22 69 39
Retail – by size (EU-7)
Micro (1-9 empl.) 10 47 42 35
Small (10-49 empl.) 29 52 43 53
Medium (50-249 empl.) 37 59 52 66
Large (250+ empl.) 33 76 65 81
Other sectors (EU-7)
Transport & logistics 21 6 44 20 42 15 n.a. n.a.
Base (100%)
all firms all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151 1151
Questionnaire reference
A9a A9d A9e A9h
The survey (2007) was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Source: e-Business Survey 2007
The Mercator case study is a business example providing several lessons regarding the
adoption of an ERP solution in a large European retailer. These lessons include that (a) a
unified ERP system is of utmost importance for enabling e-commerce activities and that
(b) ERP automation can reduce the amount of manual work in the procurement process
and thereby the number of human errors.
Warehouse or depot management systems are fairly widely used among EU-7
retailers. 42% of them, representing 51% of employment, stated to use such systems.
The share of firms using warehouse or depot management systems was found to be
almost the same in the three sub-sectors. Again the share of firms using such systems
was found to increase by size class, with micro firms on a level of 42% and large firms on
a level of 65%. In the US (15% of firms, 42% of employment), warehouse or depot
management systems are much less prevalent than in the EU-7.
Bar-coding systems were found to be used in 36% of the retail firms, which is firms
representing 59% of the industries employment. Food stores reported the largest share
(71% of employment), followed by other retailing (58% of employment) non-food stores
(54% of employment). This may confirm the perception from everyday shopping
experience that the majority of shops, particularly food shops, apply bar-coding systems.
Bar-coding systems were reported to be used much more often in large firms (81%), than
in medium-sized (66%), small (53%) and micro (35%) firms. For many micro firms, the
investments in bar-coding systems may appear to be too high. The share of firms using
bar-coding systems was found to be almost the same in the US (39%).
e-Business in the Retail Sector
53
Besides enquiring about these specific applications, retailers were asked whether they, in
general, use software applications to manager the placing or receipt of orders (Exhibit
3.4-3).
Exhibit 3.4-3: Companies using a software
application to manage the placing or receipt
of orders (in 2007)
64
55
51
47
52
59
76
54
70
61
52
46
64
65
60
60
0 20 40 60 80
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sw eden
UK
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N
(Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are
weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-
bands in % of firms.
Source: e-Business Survey 2007
Software applications to manage the
placing or receipt of orders carry out
parts of the functions a more complex ERP
system fulfils. EU-7 companies
representing 60% of retail employment
said they use such software (see Exhibit
3.5-3).
39
This may also include those firms
that actually have an ERP system. No
significant differences between sub-
sectors were identified.
According to Eurostat, the share of
retailers using IT systems to manage the
placement or receipt of orders has
increased by 10 percentage points from
41% in 2004 to 51% in 2006 (Eurostat
2006b).
However, there are differences between
size classes: The level of use of
applications for order management
increases by size class. 47% of the micro
retailers reported to have such a system
and 76% of large retailers.
The differences between countries are not
very large. The largest level of order
management software use was reported
by French retailers (70%) followed by
Spanish (65%) and UK retailers (64%); the
lowest level was reported by Swedish
retailers (46%).
The level of order management
applications use was found to be exactly
the same in EU-7 and US retailers.
Customer Relationship Management (CRM) systems
Customer relationship management (CRM) is a business concept seeking to maximise
competitiveness, revenues, and customer satisfaction (Bligh and Turk 2004)
40
.
Computerised systems that support this concept include the capture, storage and
39
The Eurostat retail survey in 2006 revealed a level of 51% of firms using such a system, so the
findings were very similar.
40
See Bligh/Turk (2004) for an elaborate concept of CRM
e-Business in the Retail Sector
54
analysis of information about customers, other vendors, business partners, and internal
processes. The analysed data can be used to optimise marketing efforts.
The e-Business Survey 2007 found that retailers representing 20% of the industry’s
employment use a CRM system (see Exhibit 3.4-4). Firms in the “other retailing” sub-
sector reported the highest share (29%), followed by food stores (24%) and non-food
stores (17%). There are considerable differences between size classes: While 38% of the
large retail firms stated to use a CRM system, the share is 23% in medium-sized firms
and only 13% in small firms and 9% in micro firms. CRM systems may offer the most
benefits to large companies with a large number of customers, while small and micro
firms may do without more simple software solutions to manage customers. In any case,
the use of CRM systems is more frequent in the US where firms representing 35% of the
retail industry’s employment said they use a CRM system.
Exhibit 3.4-4: % of retail companies having a CRM system in 2007
17
24
29
9
13
23
38
20
35
0 10 20 30 40 50
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
While the EU-7 retailers lag behind the US in CRM use, the share of retail firms that use
CRM systems increased sharply from 2003 to 2007. In 2003, firms representing only 8%
of the industry’s employment reported to have a CRM system. There was a reported
increase among firms from all size classes, and the steepest increase was stated by
large firms: from 9% in 2003 to 38% in 2007 (see Exhibit 3.4-5).
e-Business in the Retail Sector
55
Exhibit 3.4-5: % of retail companies having a CRM system in 2003 and 2007
8 3 12 15 9
20
9
13
23
38
0
10
20
30
40
50
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-249)
Large
(250)
2003 2007
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
The AMJG case study conducted for this report (see 5.4) focuses on the operations
domain: the firm has adopted a CRM solution to better organise data and information flow
among its retail outlets and headquarters. AMJG reports that both, efficiency and
effectiveness, have increased noticeably with the introduction of the new solution: delays
in product delivery for example were reduced by one quarter and the number of delayed
shippings was cut by approximately a quarter. Furthermore, efficiency and speed of client
management processes have increased. While IT systems provide opportunities for
increasing efficiency and effectiveness, AMJG managers point out that firms should plan
for in-house business process changes and human resource effects such as user
resistance as a result of introducing new in-house systems. The AMJG case study again
gives examples for these challenges: business processes were adjusted to cater for new
information available from the crossover and analysis feature of the new CRM solution.
Some employees initially had problems using the tool which led to changes to the
solution’s interface.
RFID use
Radio Frequency Identification (RFID) is a fairly new technology that allows tracking
goods and people through a wireless network. RFID technology helps to identify and
collect data attributes about a certain object or person, including localisation and
environmental measurements when integrated with sensor networks. RFID is assigned
high importance for the competitiveness of the European economy. In the retail industry,
RFID can for example be used for enhancing inventory management and speeding up
cash-desk check-out by attaching RFID tags to goods on sale.
e-Business in the Retail Sector
56
Exhibit 3.4-6: % of companies using RFID
(2007)
4
14
17
0
6
15
2
8
15
0 10 20 30 40 50
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N
(Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are
weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-
bands in % of firms.
Source: e-Business Survey 2007
RFID use is not yet very common in the
retail industry. Retail firms representing 8%
the industry’s employment reported to use
this technology. RFID use is much more
common in the “other retailing” sub-sector
(17%) and in food stores (14%) than in
non-food stores (4%) – see Exhibit 3.5-6.
RFID use is very rare in micro and small
retail firms. Only 0.1 % of the retailers in
the e-Business Survey 2007 said the use
RFID, and in small firms it was only 2%.
These low levels are due to high
investment costs for hardware, software,
personnel training and also re-organisation.
In medium-sized firms the reported share
of RFID users was 6%, while 15% of the
large firms said they use RFID.
Compared to the US, the EU is apparently
lagging behind in RFID use. US retailers
representing 15% of the industry’s
employment reported to use RFID, a level
almost twice as high as in the EU-7.
While only indicative due to the low numbers of respondents, the numbers can
nevertheless been used to indicate what firms use RFID for (Exhibit 3.4.-7). Almost all
(92%) of the 54 retail firms that use RFID (out of a total population of 1151 firms) say that
they use RFID to manage goods, products and service in-house. 64% of firms say that
they use RFID to support the ordering of goods, products and service and 62% say that
they use it to track and manage the whole organisational value chain. Approximately half
of the firms (49%) use RFID to support customer services. Hence, potentials for RFID are
particularly high for in-house operational purposes such as managing goods and
services.
e-Business in the Retail Sector
57
Exhibit 3.4-7: % of companies using RFID to… (2007)
62%
49%
92%
64%
support customer
services
manage goods,
products and
services in-
house
support ordering of
goods, products and
services
track and manage
the whole
organisational
value chain
100%
100%
100%
100%
Source: e-Business Watch 2007
While in summary, the EU-7 countries show lower levels of RFID usage than the US,
looking at individual countries reveals that RFID use in France is higher than in the US
while usage levels in the UK and Spain are along the same lines. Germany, Italy, Poland
and Sweden however lag far behind the US. Hence, the RFID results relating to EU-US
comparisons need to be interpreted with caution as wide gaps between the individual EU
countries exist (Exhibit 3.4-8).
Exhibit 3.4-8: % of EU-7 retail firms using
RFID: EU-7 vs. US
1
19
15
13
14
2 2 1
0
5
10
15
20
25
30
F
r
a
n
c
e
U
S
A
U
n
i
t
e
d
K
i
n
g
d
o
m
S
p
a
in
S
w
e
d
e
n
G
e
r
m
a
n
y
I
t
a
l
y
P
o
l
a
n
d
(N=1151, Data weighed by employment)
Exhibit 3.4-9: % of EU-7 transport & logistic
firms using RFID: EU-7 vs. US
14 14
9
7
0
20
21
25
0
5
10
15
20
25
30
S
p
a
in
I
t
a
l
y
U
S
A
U
n
i
t
e
d
K
i
n
g
d
o
m
G
e
r
m
a
n
y
F
r
a
n
c
e
S
w
e
d
e
n
P
o
l
a
n
d
(N=1097, Data weighed by employment)
Source: e-Business Watch 2007
Compared to the transport & logistics sector (Exhibit 3.4-9), which does not show the
specific country divergence, these findings might reflect the heterogeneous structure of
the retail sector in the EU on a country basis.
e-Business in the Retail Sector
58
3.5 The downstream supply chain: electronic marketing and
sales
3.5.1 Introduction to downstream supply chain issues
Overview of sales-side issues
The downstream supply chain covers activities and interactions of retail firms with
customers. In general, sales side business activities comprise of three aspects. The first
focus is on actual sales, i.e. transactions, and on related customer support activities, a
second one on marketing activities. Furthermore, logistics and distribution aspects related
to sales are important. All these activities may take place or may be supported by
computerised systems.
Customer characteristics
European retailers sell mainly to regional and national markets. 72% of the retailers,
which is 59% of the industry’s employment, sell mainly to regional markets, and 25% of
the retailers (36% of employment) sell mainly to national markets – see Exhibit 3.5-1.
Exhibit 3.5-1: Main locations of customers (2007)
Companies whose most significant market area is the…
regional market national market international market
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 59 72 36 25 4 3
NACE 52.12, 52.3-5 (non-
food)
56 70 39 26 6 3
NACE 52.11, 52.2 (food) 72 74 25 23 3 3
NACE 50.5, 52.6 (other) 46 80 52 17 2 3
Retail – by size (EU-7)
Micro (1-9 employees) 72
25
3
Small (10-49 employees) 71 22 7
Medium (50-249 empl.) 67 26 7
Large (250+ employees) 43 48 9
Retail – by country
Germany 57 69 33 27 9 4
Spain 56 82 28 15 16 3
France 81 88 18 10 1 2
Italy 77 83 20 14 4 3
Poland 58 60 36 36 5 4
Sweden 77 76 17 21 6 3
United Kingdom 37 66 63 34 1 1
USA 47 67 51 26 1 7
Other sectors (EU-7)
Transport and logistics 41 41 34 34 24 25
Base (100%) all firms all firms all firms
N (2007, EU-7+USA) 1139 1139 1139
Questionnaire reference G4a G4b G4c
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Source: e-Business Survey 2007
e-Business in the Retail Sector
59
The share of retailers that sell mainly to international markets is very small: 3% (4%
weighted by employment). As regards sub-sectors, the firm-weighted data are quite
similar to the overall figures, with other retailers (NACE Rev. 1.1 groups 50.5 and 52.6)
having an even stronger focus on regional markets. The figures for size-classes are
largely the same as for the overall retail sector, with small and medium-sized firms (both
7%) and large firms (9%) having a slightly higher share of firms selling to international
markets than micro firms (3%).
The figures for countries broadly reflect the overall figures. Notable deviations include a
stronger focus on regional markets in France (88% regional, 10% national) and a
stronger focus on national markets in Poland (60% regional, 36% national) and the UK
(66% regional, 34% national).
Exhibit 3.5-2: Stability of customer base of
EU-7 retail companies in 2007
11%
25%
64%
mainly regular customers
mainly changing customers
both regular and changing
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail,
EU-7 and USA) = 1151.
Weighting: Figures are weighted by employment
("firms representing x% of employment in the sector").
Source: e-Business Survey 2007
About half of the retail firms (53%), which is
firms representing 64% of the industry’s
employment, reported that they sell mainly
to a regular, i.e. non-changing customer
base see Exhibit 3.4-2. 26% (25%
weighted by employment) said that they
sell to a changing customer base and the
others (21% of firms, 11% weighted by
employment) spontaneously said that both
regular and changing customers are of the
same importance.
The share of companies reporting to have
a regular customer base is much smaller
than in manufacturing sectors. For
example, in the steel industry, 86% of the
firms interviewed in the e-Business Survey
2007 reported to sell to regular customers.
In the chemicals industry, the share of
regular customers is 80%, in the furniture
industry it is 66%. For retail firms it is thus
important to consider how to attract and
retain customers.
3.5.2 Findings about electronic sales
Electronic orders more prevalent than five years ago – large firms leading
The diffusion of internet technologies among consumers enables retailers to sell their
products via the internet to consumers. The share of EU inhabitants who used the
internet to purchase goods for private purposes has increased considerably in recent
years: In 2004, according to Eurostat, 22% of the EU-25 population had used the internet
e-Business in the Retail Sector
60
in the twelve months prior to the interview to order goods in the internet. By 2007, the
share had increased to 32%.
41
The basic precondition for online sales is a normally an own company website –
“normally” because an alternative is to sell through a portal hosted by a different
company. According to the e-Business Survey 2007, 48% of EU-7 retail companies,
representing 69% of the industry’s employment, have an own website. This is much less
than in the US where 65% of firms, which is 89% of employment, reported to have a
website. According to Eurostat, some 52% of European retailers have dedicated websites
on the internet (Eurostat 2006b), which equals the e-Business Watch findings. Of these,
38% of firms use it to market their own products, 24% use it to facilitate access to their
catalogues and price lists by customers and 17% provide after sales support through it.
Exhibit 3.5-3: % of retail companies
selling online in 2007
37
36
44
26
24
35
45
41
34
9
34
33
60
56
38
26
0 15 30 45 60 75
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sweden
UK
USA
The survey was conducted in 7
EU Member States (DE, FR, IT, ES, PL, SE, UK) and in
the USA.
Base (100%) = companies
using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector
totals and countries are weighted by employment
("firms representing x% of employment in the sector /
country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007 by the SeBW
26% of the EU-7 retailers, representing
38% of the industry’s employment, stated
that they sell goods “through the internet
or other computer-mediated networks” –
see Exhibit 3.4-3. This is similar to the
Eurostat findings for 2006 (23% of
companies). There are no considerable
differences between the sub-sectors, but
“other retailing” (44%) has a slightly higher
share than non-food stores (37%) and
food stores (36%). There is a clear
distinction between size classes: Almost
half of the large retail firms (45%) and
35% of the medium-sized ones sell online,
but only 24% of the small retailers and
26% of the micro retailers do so. However,
it is notable that micro firms are not
leaving far behind but that they are on the
same level as small firms.
Online sales were found to be most
frequent in the UK, where companies
representing 60% of the industry’s
employment sell online. This was by far
the highest percentage within the
countries included in the survey, followed
by Germany (41%) and four countries on
almost the same level: France and Poland
34%, Sweden 33% and Spain 26%. In
Italy, retailers representing only 9% of the
industry’s employment said they sell
online.
This finding is in line with Eurostat findings (Eurostat 2006b) that e-sales are particularly
rare in South European countries. On average, the EU-7 countries were found to be way
behind the USA where retailers representing 56% of employment stated to sell online.
41
Data retrieval from the Eurostat database athttp://epp.eurostat.ec.europa.eu in March 2008.
e-Business in the Retail Sector
61
Exhibit 3.5-4: % of retail companies
selling online in 2003 and 2007
19 9 22
25
27
38
26
24
35
45
0
20
40
60
80
100
Retail
(total)
Micro
(1-9)
Small
(10-49)
Medium
(50-
249)
Large
(250)
2003 2007
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail,
EU-7 and USA) = 1151.
Weighting: Figures for sector total are weighted by
employment ("firms representing x% of employment in
the sector"), figures for size-bands in % of firms.
Source: e-Business Surveys 2003 and 2007
The share of companies that sells online
doubled from 19% (employment-weighted)
in 2003 to 38% in 2007 – see Exhibit 3.6-4.
There was an apparent increase in all size
classes: Micro firms made a big jump from
9% of firms to 26%, small retail firms
increased their share of online sellers from
22% to 24% and medium-sized ones from
25% to 35%. The largest leap in terms of
percentage points was made by the large
firms, from 27% to 45%. This means that
while the share of online sellers among
large firms was found to be only slightly
higher than in SMEs in 2003, the
difference was found to be much larger in
2007.
Share of goods ordered online increased in the past five years
Those retailers that sell online were further asked about the share of goods sold online in
their total sales volume. Online sellers representing almost half (47%) of the industry’s
employment said that they sell less than 5% of their total sales volume online – see
Exhibit 3.5-5.
Exhibit 3.5-5: Share of goods sold online in
retail companies selling online in 2007
47%
19%
6%
12%
16% 50%
Exhibit 3.5-6: Share of goods sold online in
retail companies selling online in 2003
51%
34%
11%
2% 3%
50%
Reading example: "In 2007, 47% of all companies selling online (by their share of employment) said that the
share of goods they sold online was less than 5%."
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Surveys 2003 and 2007
e-Business in the Retail Sector
62
19% said they make between 5 and 10% of their sales online, and in 6% the reported
share was between 11 and 25%. More than a quarter (28%) of the online sellers reported
an online sales volume above 25% of their total sales: 12% said they sell between 26 and
50% online, and 16% of the online sellers stated to sell more than 50% online. Compared
to 2003, the share of firms in which online sales account for more than 25% of their sales
volume increased sharply, from 5% to 28% - see Exhibit 3.5-6. Thus, in the past five
years there has not only been an increase in the share of online sellers but also in the
amount of sales conducted through the internet or other computer networks. This finding
may confirm predictions that the industry will experience growth in online sales (Butler
2007).
Two of the case studies conducted for this report mention the share of online sales.
Neither Smart Supermarket (Section 5.8) nor Fleria Floral Creations (Section 5.7) are
selling a huge amount online: at Fleria Floral Creations, 0.24% of total annual sales are
made online and at Smart Supermarket only about 1% of total sales volume comes from
online shoppers. The regionally-based micro firm 4fitness in contrast sells more than 2/3
of its goods over the internet. Unlike Smart Supermarket and Fleria who are established
businesses that have been trading ‘offline’ for a number of years, 4fitness is a newly set
up firm (new in the sense that it has been trading for less than 4 years). The business
model of 4fitness has ever since the firm was set-up included the internet sales channel
whereas for Smart Supermarket and Fleria the internet sales channel is a new addition to
an existing, successful business model. Furthermore, the products sold by these three
firms differ regarding their suitability for internet sales: selling grocery and flowers
requires a different approach than selling fitness equipment and accessories over the
internet.
Geographic origin of online orders: SMEs extend their customer base
Retailers selling online were also asked about the geographic origin of their customers.
Retail firms representing approximately half of the industry’s employment (51%) said that
their online orders are mainly regional, and the share of mainly national orders (46%) was
almost equally large. In only 3% the orders are mainly international. Compared to the
figures about general sales (see Exhibit 3.5-1 and 3.5-7), it appears that online sales
helps to extend the geographic focus slightly from regional to national sales while the
international focus remains on the same low level. This was also found to be the case for
non-food stores and other retailing. However, food stores apparently use the internet to
further extend their regional sales focus: the employment-weighted share of firms selling
mainly to regional customers was found to be 72% and the share of mainly regional
online sales 79%.
Regarding size classes, it is striking that SMEs apparently use the internet to extend their
sales beyond the regional focus to national markets. The share of firms with a national
sales focus is much larger in online sales than in overall sales for micro firms (50%
national focus in online sales compared to 25% national focus in overall sales), small
firms (33% compared to 22%) and medium-sized firms (61% compared to 26%). On the
other hand, large firms apparently tend to use the internet to extend their regional
customer base. The share of large firms selling mainly to regional customers was found
to be 43% for overall sales and 50% for online sales. However, the figures for large firms
need to be interpreted with caution because the online sales data are based on a small
number of cases.
e-Business in the Retail Sector
63
The low level of electronic orders from abroad may be related to various difficulties, e.g.
language barriers, high costs of international advertising, lower trust of consumers in
foreign retailers, or high shipping costs. Legal issues may be another issue. Conflicting
legal rules between the Member States and matters of jurisdiction are obstacles to
increasing cross-border retail trade (see, for example, Schulte-Nölker 2007). The 4fitness
case study (Section 5.6) illustrates the difficulties of cross-border online trade.
Exhibit 3.5-7: Geographic origin of online orders in 2007
51
44
79
27
47
58
36
50
54
46
55
18
62
50
33
61
47
39
3
1
3
11
3
9
3
3
8
0 20 40 60 80 100
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing*
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)*
USA
regional national international
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
e-Business in the Retail Sector
64
Sending invoices electronically
Exhibit 3.5-8: Companies sending invoices
electronically in 2007
28
25
34
27
22
27
29
26
20
29
29
16
36
39
28
27
0 15 30 45 60 75
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
Germany
Spain
France
Italy
Poland
Sweden
UK
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the
USA.
Base (100%) = companies using computers; N
(Retail, EU-7 and USA) = 1151.
Weighting: Figures for sector totals and countries
are weighted by employment ("firms representing
x% of employment in the sector / country"), figures
for size-bands in % of firms.
Source: e-Business Survey 2007
A further issue of online transactions is the
sending of invoices. The e-Business
Survey 2007 found that retailers
representing 28% of the industry’s
employment send invoices electronically to
customers – see Exhibit 3.5-8. This means
that the share of companies sending e-
invoices is not even as high as the share
of companies selling online (38%,
employment-weighted). Apparently, even
those retailers that sell online prefer to
send invoices via conventional mail or fax,
possibly for legal reasons. One can
assume that retailers that sell online
include a paper invoice in the parcel of the
goods shipped.
The level of firms sending e-invoices is
fairly even across sub-sectors, size-
classes and countries. As regards
countries, the level of retailers sending e-
invoices is highest in the UK (36%) and
lowest in France (20%) and Sweden
(16%). Electronic invoices are much more
prevalent in the US: firms representing
39% of the industry’s employment send
invoices electronically.
Payment methods for online sales
Online orders need to be paid somehow, and the options offered for payment indicate
how easy (or difficult) it is for customers to buy over the internet. In the e-Business
Survey 2007, retailers that sell online were asked about seven possible ways for
customers to pay goods bought online. The option offered most frequently is credit cards,
offered by firms representing 63% of employment in the sector – see Exhibit 3.5-9. Debit
cards (55%) and cash on delivery (48%) are also quite common. Other options offered
include payments to the sellers’ accounts (40%), advance bank transfers (36%), cheques
(26%), and third-party payments (15%). It is striking that for all payment methods except
third-party payments, the levels of firms offering them are higher in the US than in the
EU-7. The differences are particularly large for credit cards (96% in the US versus 63% in
the EU-7) and debit cards (86% in the US versus 55% in the EU-7). This may reflect a
higher acceptance of credit and debit cards for paying any kind of purchases in the US,
but it also facilitates online payments.
e-Business in the Retail Sector
65
Exhibit 3.5-9: Accepted payment methods for online orders in 2007
55
48
40
36
26
15
96
86
62
65
40
37
15
63
0 20 40 60 80 100
credit cards
debit cards
cash on delivery
on account payments
advance bank
transfers
cheques
third-party payment
Retail (EU-7)
Retail (USA)
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = Companies whose customers can order goods or services on the internet or via other
computer-mediated networks; N (Retail, EU-7 and USA) = 339.
Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector /
country"). Questionnaire reference: B6
Source: e-Business Survey 2007
Case study findings about benefits and challenges of e-sales
Case studies conducted for this report indicate several benefits of e-sales:
Enhanced operations: Online sales may induce multi-channel retail synergies and
provide real-time market information. Retailers both large and small are realising
that benefits from online sales are minimal if the online sales activity is operated as
a stand-alone activity. Following little success with online sales, the case firms
EMPIK (Section 5.9) and Fleria Floral Creations (Section 5.7) for example have
come to realise the usefulness of integrating online sales with existing sales
channels and firm operations.
Enhanced customer relationships: Improved customer services and better
relationships with customers. The EMPIK case (Section 5.9) shows that customer
services can be improved dramatically through integrating online sales in a retail
business strategy. The Cyprus PC case on the other hand (Section 5.10) illustrates
the importance of an e-sales strategy that takes customer preferences into account,
which for the Cypriot case are the cultural aspects of speaking to people and the
desire to bargain.
Enhanced supplier relationships: Smart Supermarket (Section 5.8), for example,
offers suppliers the (paid) privilege to autonomously access and manage data held
within the Smart Supermarket e-sales solution.
Improved performance: Online sales may lead to efficiency and effectiveness
gains and increased competitive advantage. (See case study EMPiK section 5.9)
e-Business in the Retail Sector
66
However, the case studies also illustrate challenges retailers experience with e-sales.
The challenges can be subdivided into items related to customers on the one hand and
related to the company on the other. Customer-related challenges include the following:
Lack of market readiness: Customers may not be ready for online sales due to
reasons such as unwillingness to use computers and internet technology. Some
retailers try to overcome this issue through marketing activities. Smart Supermarket
(Section 5.8) and EMPiK (Section 5.9), for example, held specifically organised
marketing events to launch their e-sales activities.
Unfavourable customer attitudes: Customers may have attitudes that do not
favour online sales. Finding an appropriate fit between e-commerce practices and
buying habits of customers may be difficult. The companies may be ignorant on
how to overcome these barriers. Cypriot customers, for example, prefer to speak to
retailers to verify prices or bargain for extra discounts. Cyprus-PC.com (Section 5.3)
was able to grow significantly after the firm was set up by catering for a cultural
characteristic: it allowed online customers to bargain for discounts by integrating
online sales with telephone sales.
Customers lacking IT skills: Even if customers are generally willing to buy online,
they may be inexperienced with the technology and it may be difficult to find ways to
educate customers how to use e-sales applications. (see case study EMPiK,
section 5.9)
Challenges internal to the company include the following:
Strategic challenges: Finding the right e-commerce strategy and finding an
adequate fit for e-sales with the existing overall business strategy may be difficult
(see case study EMPiK, section 5.9).
Operative challenges: The companies may need to identify and address
limitations of selling online. Companies need to evaluate whether their products are
suitable for online sale and they may need to identify necessary changes to make
them suitable for selling online. Integrating e-sales practices with existing
operations and in-house departments may be difficult. They company may have to
arrange for and manage business process changes driven by e-commerce (see
case study Fleria Floral Creations, Section 5.7). They also need to organise for
logistic requirements necessary for e-commerce (see case study Smart
Supermarket, section 5.8). Another operative challenge is how to provide adequate
customer service which is important for sustainable online sales as demonstrated
by the 4fitness case study (Section 5.6).
Human resources challenges: Employees need to be trained on how to use e-
sales applications (see case studies EMPiK and Smart Supermarket, Section 5.9
and 5.7 respectively).
Technology development challenges: The companies may need to evaluate
whether the application chosen is the best possible match for the firm’s e-sales
needs. Security issues need to be met. There is a neccesity to explore the need for
integration of e-sales applications with existing in-house technology and conduct
integration whenever necessary. User-friendliness of the application needs to be
ensured. (See case study Fleria Floral Creations, section 5.7)
Cost challenges: While data about investment required for implementing e-sales
solutions is rare, the case studies show significant differences in the costs for e-
e-Business in the Retail Sector
67
sales: Smart Supermarket (see section 5.8) had to develop a solution from scratch
in close cooperation with an IT provider which was and continues to be cost
intensive. Fleria Floral Creations (see section 5.7) in contrast paid approximately
5000€ for the set-up and 1500€ annual maintenance charge. This figure is quite low
compared to Smart Supermarket’s cost.
The case studies suggest that, in order to reap the benefits and overcome the challenges
of adopting e-sales, retailers need to achieve a good fit between business strategy, e-
sales strategy, business operations, and customer attitudes.
3.5.3 Findings about electronic marketing
A sketch of marketing issues in retail
The term “marketing” describes the objective to direct all business decisions within a
company towards the necessities of the market, i.e. towards the needs of the customers.
This implies the use of particular means to influence the market and the customers’
preferences in order to enhance competitiveness. These means can be related to the
price of the product, product design, the geographical areas where the products are sold,
and ways to promote the products. These are the “four P” of marketing – price, product,
place and promotion (McCarthy 1960). Computerised systems can support marketing
efforts. Three items of particular importance were included in the e-Business Survey
2007: online placement of advertisements, engagement in optimising search engines,
and use of mobile services for marketing. Online placement of advertisements is included
in the following; the other two items will be included in the final report.
Search engine optimisation and online placement of advertisements
Placing online advertisements on websites that do not belong to the company itself is a
means of advertising introduced by internet business. It is very important for the business
concept of many online service providers. The case study of Cyprus-PC.com (Section
5.10) and 4fitness (Section 5.6) are examples of companies engaging in paid online
advertisements.
e-Business in the Retail Sector
68
Exhibit 3.5-10: % of companies placing
online ads on non-company websites (2007)
16
19
8
13
11
21
43
16
20
0 10 20 30 40 50
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing*
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)*
USA
Exhibit 3.5-11: % of companies engaging in
search engine optimisation (2007)
2007
46
52
42
40
45
41
46
47
53
0 10 20 30 40 50 60
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing*
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)*
USA
The survey in 2007 was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = Question A5 = Yes, excl. Do not know; N (Retail, EU-7 and USA) = 768.
Weighting: Figures for sector totals and countries are weighted by employment ("firms representing x% of
employment in the sector / country"), figures for size-bands in % of firms.
Source: e-Business Survey 2007
Companies representing 16% of the retail industry’s employment in the EU-7 reported to
place online ads on other companies’ websites – see Exhibit 3.5-10. This promotion
method is more prevalent in food stores (19%) and non-food stores (16%) than in the
other retailing sub-sector (8%). Furthermore, online ads on other companies’ websites
are more frequently used by large (20%) and medium-sized firms (21%) than by small
(11%) and micro (18%) firms. The employment-weighted percentage is much higher in
the US (43%). This implies that the market for online advertisements appears to be
largely untapped in the EU. 47% of European retailers are however engaging in search
engine optimisation with the aim to increase visitors to their company’s website. Food
stores are slightly more active at search engine optimisation than non food stores and
other retailing companies: 52% of food stores are engaging in search engine optimisation
while 46% and 42% of non-food stores and other retailing respectively engage in it. There
are no significant differences between firm sizes with all sizes of firms being in the 40%
area. European retailers are also not far behind their EU counterparts with 53% of US
retailers engaging in search engine optimisation compared to the 47% in the EU.
e-Business in the Retail Sector
69
3.5.4 Electronic support of logistics and distribution
Introduction to logistics and distribution issues in retail
One could assume that downstream logistics and distribution are no core issues for the
retail sector because the vast majority of goods is bought on-site and the customers carry
them home themselves. In fact, downstream logistics may not be an issue for the majority
of retailers. However, logistics are a core issue for mail order retailers and for retailers
selling goods online that need to be shipped to customers. Such companies do not only
need to optimise transportation services but also warehousing and distribution centres.
Efficient customer-facing logistics are crucially important to keep down the costs of goods
sold in the internet and to satisfy customers who want to receive their orders swiftly,
safely and at low shipping costs. A particular challenge is to manage fluctuations in
demand which may be considerable, for example with regard to Christmas business.
Further challenges are reverse logistics, i.e. the return of goods from unsatisfied
customers, and trade across borders.
Current issues of logistics and distribution in online shopping
Computerised systems may support the logistics of goods sold online. Transport service
providers may, for example, give retailers the opportunity to check the current status of
shipping on the internet. Online shops themselves may offer their customers the
opportunity to check the delivery status online. An example for such an offer is Amazon,
the US-headquartered online shop: Amazon informs customers about the delivery status
by e-mail.
e-Commerce has brought several innovative forms of distribution into being. For example,
some logistics service providers such as DHL in Germany have started to implement
centralised delivery for goods ordered online where customers can fetch them in their
neighbourhood. Another trend is an increase in outsourcing of services to specialised
logistics providers to benefit from their specialised services. The increasing amount of
logistics services demanded by the industry in general is an indicator for the growing
importance of logistics for trade as an increasing number of goods have to be transported
and distributed. This includes transport across national boundaries,
3.6 Barriers and drivers of e-business use
Barriers for e-business adoption
The companies that stated that they conduct some or none of their business processes
as e-businesses (see section 3.4.2, “general level of e-business processes”) were further
asked why they do not use e-business more intensively. Seven possible reasons were
suggested and interviewees could answer “yes, important” or “no, not important”. The
results were the following (see also Exhibit 3.6-1 and 3.6-2):
The circumstance that “suppliers and customers are not prepared for e-
business” appears to be one of the most important reasons to not apply e-business
more intensively: across all sub-sectors and across all firms sizes more than half of
retail companies agreed to this statement. Overall, 64% of firms weighed by
employment (61% of firms weighed by number of firms) agreed. The overall share
in the US was significantly smaller (43%) indicating that the retail business
e-Business in the Retail Sector
70
ecosystem is more vibrant with regard to ICT use in the US
42
. Nevertheless, one
could also argue that many firms blame customers and suppliers for not using e-
business while their own efforts to introduce e-business are not considerable either.
Firm size matters: 64% of micro firms and 44% of small firms said that their
company is too small to benefit from e-business. 47% of micro firms also report
that for them ICT is too expensive (average for the retail sector: 36%). These
numbers decrease noticeably with firm size from 29% and 30% for small and
medium-sized firms respectively to only 20% for large firms with more than 250
employees. Micro and small firms also consider it to be more difficult to find reliable
IT providers than medium-sized and large firms. Security issues in contrast are
more relevant for large (40%) and small (39%) firms while only 28% of micro firms
and 23% of medium-sized firms report this issue to be a factor affecting the low
adoption of e-business. This finding however raises concerns about security
awareness among micro and medium-sized firms who might not be fully aware of
the exposure to and effects of e-business security issues for their respective
companies.
Regarding the three sub-categories, trade in food stores, trade in non-food stores
and other retailing, the other retailing group appears to be less affected by the
six categories of barriers questioned in the survey as fewer companies in this group
state that the barriers trouble them. No significant differences emerge between the
food-in-stores and non-food in stores groups although legal challenges with 30%
(28% in food stores), security concerns with 44% (16% in food stores) and
difficulties to find reliable IT providers with 28% (20% in food stores) are higher in
the non-food stores group.
Barriers perceived typical for EU retailers but not necessarily for US retailers.
Of the six categories of barriers questioned, the numbers for the US are always
lower than for the EU-7 except for ‘security issues’ where 46% of US retailers face
barriers compared to 36% of retailers in the EU-7. This indicates that overall, US
retailers seem to face other or even fewer barriers to e-business than EU -7
retailers.
Few differences are visible between barriers for the retail sector and the transport &
logistics sector. The overall numbers confirm that companies in both service
sectors tend to face similar barriers to e-business.
42
A business ecosystem is defined here as "the network of buyers, suppliers and makers of
related products or services” plus the socio-economic environment, including the institutional
and regulatory framework”. Seehttp://www.digital-ecosystems.org/.
e-Business in the Retail Sector
71
Exhibit 3.6-1: Barriers to e-business adoption as perceived by retail companies (2007)
Suppliers/Customers not
prepared
66
64
54
61
64
60
65
70
64
43
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Company too small
51
54
33
64
44
25
28
40
29
49
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
ICT too expensive
39
41
16
47
29
30
20
16
36
34
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Technology too complicated
21
18
9
28
27
15
4
27
19
10
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
e-Business in the Retail Sector
72
Exhibit 3.6-2: Barriers to e-business adoption as perceived by retail companies (2007) -
continued-
Security issues
44
28
18
28
39
23
40
31
36
46
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Legal challenges
30
16
17
29
28
24
18
24
25
14
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
Difficult to find reliable
providers
28
20
17
26
25
16
17
6
24
23
0 20 40 60 80
Total retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
T&L
USA
The survey in 2007 was conducted in 7 EU Member
States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = Companies who stated that some or
none of their business processes are conducted as e-
-business; N (Retail, EU-7 and USA) = 858.
Weighting: Figures are weighted by employment
("firms representing x% of employment in the sector /
country"). Questionnaire reference: F2
T&L = Transport and Logistics industry (SL: Please
note in all relevant Exhibits.)
Source: e-Business Survey 2007
Drivers of e-business adoption: pressure from suppliers and customers
The e-Business Survey 2007 enquired whether retail companies experienced pressures
from customers and suppliers to adopt ICT solutions. These questions were posed as
those types of pressures can noteworthy stimulate the adoption of e-business and ICT.
Due to the nature of the retail industry, where the main customers are the end-consumers
of the goods sold, few pressures from these individual consumers are expected to occur.
e-Business in the Retail Sector
73
Hence, in order to explore the intangible role that these individual consumers can have as
a group, the question was reformulated to ask whether the companies have experienced
pressures from customers to adopt e-commerce. 9% of the retail firms in the sample,
which is firms representing 11% of the industry’s employment, reported to have
experienced pressure from customers to adopt e-commerce. This phenomenon is most
prevalent in the non-food group with 13% of firms reporting this issue, closely followed by
the other retailing group with 12%. The lowest number with 9% comes from the food
group which seems to be least affected by intangible end-consumer pressures to adopt e-
commerce. Hence, overall, consumers seem to be content with the existing sales
channels provided by retailers. The lack of pressure from consumers could also be
interpreted as a hint that e-commerce in the retail industry is not as important a sales
channel as often advocated. Firm size does not play and overarching role either with
numbers ranking from 8% for small firms to 15% for medium-sized firms – see Exhibit
3.6-3.
On the other end of the supply chain management scale is the pressure from suppliers.
10% of retail firms in the sample, which is firms representing 12% of the industry’s
employment, reported to have experienced pressure from suppliers to adapt their ICT.
These numbers are similar to the pressures for retailers to adopt e-commerce, indicating
that there is neither strong pressure on either sides of the supply chain, i.e. there is little
pressure on retailers from both, customers and suppliers, to adopt and adapt ICT and e.-
business technologies. There are no firm-size specific differences emerging with between
10% and 14% of firms reporting pressures from suppliers to adapt ICT (Exhibit 3.6-4).
Due to the buying power of especially large retail firms which have a sizeable slice of the
retail market, the question was raised whether EU-7 retailers demand the adoption of e-
business and ICT solutions from their suppliers. Indeed, 37% of large retail firms use their
buying power to demand from their suppliers new ICT or changes to the supplier existing
ICT structure. This power over suppliers decreases with firm size from 22% of medium-
sized firms to 15% of small firms and only 9% of micro firms putting pressures on
suppliers. The non-food group which for example includes the large hypermarkets is the
one where most firms (23%) put pressures on suppliers to adapt or implement new ICT.
The food and other retailing groups are almost equal with 15% and 14% of firms
respectively reporting that they put ICT pressure on suppliers.
e-Business in the Retail Sector
74
Exhibit 3.6-3: Customer and supplier e-business/ICT pressures (2007)
e-Business pressure
Customer
pressures to adopt
e-commerce
Supplier pressures
to adapt ICT
Put pressure on /
Demand from
suppliers to adapt /
implement new
ICT
Weighting scheme:
% of empl. % of firms % of empl. % of firms % of empl. % of firms
Retail – 2007 total (EU-7) 11 9 12 10 20 10
NACE 52.12, 52.3-5 (non-food) 13 9 13 11 23 11
NACE 52.11, 52.2 (food) 9 7 10 5 15 5
NACE 50.5, 52.6 (other) 12 18 11 15 14 12
Retail – by size (EU-7)
Micro (1-9 employees) 9 10 9
Small (10-49 employees) 8 12 15
Medium (50-249 empl.) 15 14 22
Large (250+ employees) 13 13 37
Base (100%) All firms All firms All firms
N (2007, EU-7+USA) 1151 1151 1151
Questionnaire reference B11a B13 B15
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden, United
Kingdom) and in the USA.
Source: e-Business Survey 2007
3.7 Overall differences between size classes, countries, sub-
sectors and industries
“Lagmark” calculations
In the previous sections of Chapter 3, findings from the e-Business Survey 2007 for the
retail industry were presented by sub-sectors and size classes as well as EU in
comparison with the US. The figures indicated that in the EU-7, SME retail companies lag
behind large ones and that EU-7 retail firms tend to lag behind the US. There were no
obvious overall differences between sub-sectors. In the following, these differences will
be analysed with average values in order to provide a more concrete overview.
Average values for groups of indicators were calculated for four principal domains: ICT
infrastructure, e-procurement, internal systems, and e-sales. Taking the group of most
advanced firms as a benchmark, the results can be considered as “lagmarks”. For
example, the “lagmark” calculations for size classes indicate how much SMEs lag behind
large firms.
e-Business in the Retail Sector
75
SMEs lag behind large firms – most in internal operations and e-sales
Analysing differences between firms of different size classes, the average values show
the same ranking for all domains: micro retail firms lag behind small ones, small firms lag
behind medium-sized ones, and medium-sized ones in turn lag behind large firms – see
Exhibit 3.8-1. The differences between micro and large retail firms are most pronounced
for internal e-operations and e-sales, while the differences for e-procurement are small.
As regards ICT infrastructure, micro firms reach 41% of the possible maximum, large
firms 65%. For e-procurement, micro firms (34%) are close to small (38%), medium-
sized (39%) and large (42%) firms. For internal e-operations, micro firms reach 25%
which is only half of the value for large firms (49%). For e-sales there is a pronounced
difference between micro (20%) and small firms (22%) on the one hand as well as
medium-sized (31%) and large ones (38%) on the other.
Exhibit 3.7-1: “Lagmarks” for size class differences in ICT and e-business performance in
EU retail (2007)
ICT infrastructure
41
46
52
65
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
Firms with internet access, average share of
employees with internet access, broadband internet
access, LAN, WLAN, intranet, extranet, remote
access to company’s computer network.
e-Procurement
34
38
39
42
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
Firms procuring online, firms procuring more than
50% of purchases online, SCM, e-invoices from
customers.
Internal e-operations
25
30
38
49
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
ERP, CRM, software to manage placement or
receipt of orders, warehouse management systems,
bar-coding systems, RFID.
e-Sales
20
22
31
38
0 20 40 60 80 100
Micro (1-9
empl.)
Small (10-49
empl.)
Medium (50-
249 empl.)
Large (250+
empl.)
Indicators:
Own website, firms selling online, e-sellers selling
more than 50% of turnover online, credit cards for
online payment, sending e-invoices, placing online
ads on other companies’ websites, mobile
marketing.
Reading example: For the eight indicators of ICT infrastructure, micro retail firms (i.e. firms with 1-9
employees) reach on average 41% of the possible maximum (100%).
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Source: e-Business Survey 2007
e-Business in the Retail Sector
76
EU lags behind US – most in e-sales and e-procurement
The “lagmark” analysis revealed that EU retail firms lag behind US retailers in all four
domains. The US lead is strongest in e-sales, quite strong in e-procurement, and small in
ICT infrastructure and internal e-operations. As regards ICT infrastructure, EU retailers
reach 51% of the possible maximum value, US retailers 55%. In e-procurement, EU
retail companies (37%) are twelve percentage points behind the US (49%). In internal e-
operations, the lag of EU retail companies (36%) behind EU ones (39%) is small, only
three percentage points. However, US retailers are much more advanced in e-sales: they
reach 52% of the possible maximum, leaving EU retailers (34%) far behind.
Exhibit 3.7-2: “Lagmarks” for differences between EU and US retail companies in ICT and e-
business performance (2007)
ICT infrastructure
51
55
0 20 40 60 80 100
EU
US
Indicators:
Firms with internet access, average share of
employees with internet access, broadband internet
access, LAN, WLAN, intranet, extranet, remote
access to company’s computer network.
e-Procurement
37
49
0 20 40 60 80 100
EU
US
Indicators:
Firms procuring online, firms procuring more than
50% of purchases online, SCM, e-invoices from
customers.
Internal e-operations
36
39
0 20 40 60 80 100
EU
US
Indicators:
ERP, CRM, software to manage placement or
receipt of orders, warehouse management systems,
bar-coding systems, RFID.
e-Sales
34
52
0 20 40 60 80 100
EU
US
Indicators:
Own website, firms selling online, e-sellers selling
more than 50% of turnover online, credit cards for
online payment, sending e-invoices, placing online
ads on other companies’ websites, mobile
marketing.
Reading example: For the eight indicators of ICT infrastructure, EU retail companies reach on average 51%
of the possible maximum (100%), while US retail companies reach 55%.
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Source: e-Business Survey 2007
Overall, the e-commerce environment is less vibrant in the EU than in the US. The one
indicator used for highlighting barriers “suppliers and customers not prepared for e-
business” which is considerable higher in the EU than in the US, furthermore indicates
that the e-business ecosystem in the EU is different from the US ecosystem. European
retail firms seem to be less electronically bound, yet the question arises whether this is
necessarily a disadvantage for the EU economy. The economic analysis presented in
Chapter 4 indicates that productivity gains in the US retail sector, for example, are not
necessarily directly related to ICT.
e-Business in the Retail Sector
77
Sub-sectors: other retailing slightly more advanced than food and non-food
The “lagmark” analysis confirms that there are only minor differences between the three
retail sub-sectors in ICT and e-business performance. “Other retailing” appears to be
most advanced, having a slight lead over food and non-food in ICT infrastructure, internal
e-operations and e-sales. The food-sub-sector tends to perform the lowest values. As
regards ICT infrastructure, non-food (51%) and food (50%) are similar, while other
retailing leads with 57%. In e-procurement, non-food (39%) and other retailing (38%) are
close by, while food (31%) lags behind. The values for internal e-operations are quite
similar for non-food (34%), food (38%) and other retailing (40%). In e-sales, non-food
(33%) and food (34%) lag behind other retailing (41%).
Exhibit 3.7-3: “Lagmarks” for differences between EU retail sub-sectors in ICT and e-
business performance (2007)
ICT infrastructure
51
50
57
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
Firms with internet access, average share of
employees with internet access, broadband internet
access, LAN, WLAN, intranet, extranet, remote
access to company’s computer network.
e-Procurement
39
31
38
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
Firms procuring online, firms procuring more than
50% of purchases online, SCM, e-invoices from
customers.
Internal e-operations
34
38
40
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
ERP, CRM, software to manage placement or
receipt of orders, warehouse management systems,
bar-coding systems, RFID.
e-Sales
33
34
41
0 20 40 60 80 100
Non-food
Food
Other
Indicators:
Own website, firms selling online, e-sellers selling
more than 50% of turnover online, credit cards for
online payment, sending e-invoices, placing online
ads on other companies’ websites, mobile
marketing.
Reading example: For the eight indicators of ICT infrastructure, retail companies from the non-food sub-
sector reach on average 51% of the possible maximum (100%).
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Source: e-Business Survey 2007
e-Business in the Retail Sector
78
3.8 Summary of the state of play of ICT and e-business in
retail
This chapter has shown that ICT and e-business can be beneficial for the whole supply
chain of the retail industry. It can support procurement, internal operations as well as
sales and distribution. However, there are challenges related to e-business use, for
example related to ICT use in SMEs and with regard to a generally higher level of ICT
and e-business in the US. Key findings of chapter 3 include the following:
Increase of ICT and e-business use since 2003: The results of the 2007 survey
can be compared with a similar survey conducted by e-Business Watch in 2003.
The 2003 study found that the use of e-business in the retail sector was far from
being a pervasive reality and below the average adoption rates in other sectors.
The 2007 survey found that ICT and e-business use have become more prevalent
in firms of all size classes. The 2003 study argued that the main opportunities
stemming from e-business, similarly as in other sectors, were efficiency and
productivity gains and, thus, cost savings. This was found to be still the same in
2007.
ICT infrastructure, skills and investments improved: The quality of SMEs'
internet access has significantly improved between 2003 and 2007. However, there
is scope for further improvement. Currently, retailers comprising about 45% of the
sector's employment are connected by broadband (>2 Mbit/s). Diffusion of internal
W-LANs has been fast. More than 50% of large retailers operate a W-LAN, and 35-
40% of small and medium retailers. As regards ICT skills, only about 10% of all
retail companies employ ICT specialists; even among large retailers, only about
50% do. Many companies completely outsource ICT services to external service
providers. The attitude towards ICT investments and budgets is more positive than
a couple of years ago. A third of the retailers plans to increase their ICT budgets,
only few expect budget cuts for the forthcoming financial period.
Electronic procurement: Online procurement practice can offer considerable cost
reduction benefits to the retail industry, mainly through process streamlining and
improved purchasing conditions. The level of retail firms ordering online increased
from firms representing 43% of the industry’s employment in 2003 to 55% in 2007,
and the share of e-procurers increased in all size classes. In those companies that
procure goods through the internet or computer-mediated networks, the share of
goods actually ordered online increased, too. The use of Supply Chain
Management (SCM) systems also increased considerably, from 6% in 2003 to 19%
in 2007 (weighted by employment), but this is exclusively due to a higher level of
SCM use in medium-sized and large firms.
Internal e-business systems: Internal e-business operations can significantly
enhance workflows and business processes and thus increase productivity.
However, companies representing almost half of the industry’s employment said
that they only conduct some processes by e-business. 22% even said “none”; a
“good deal” was stated by 20%, and in 11% most processes are conducted
electronically. As regards particular systems, firms representing 60% of the
industry’s employment reported to have a software application to manage the
placing or receipt of orders, 59% a bar-coding system, 51% a warehouse or depot
management system, and 16% an ERP system. RFID is not yet very common in
e-Business in the Retail Sector
79
the retail industry. Retail firms representing 8% of employment reported to use this
technology, and RFID use is very rare in micro and small retail firms.
Electronic sales and distribution: Retailers representing 38% of the industry’s
employment stated that they sell goods “through the internet or other computer-
mediated networks”. Almost half of the large retail firms (45%) and 35% of the
medium-sized ones sell online, but only 24% of the small retailers and 26% of the
micro retailers do so. The share of companies that sells online doubled from 19%
(employment-weighted) in 2003 to 38% in 2007. There was an apparent increase
in all size classes. There has also been an increase in the amount of sales
conducted online. Compared to the figures about general sales areas, it appears
that online sales helps to extend the geographic focus slightly from regional to
national sales while the international focus remains on the same low level. The e-
Business Survey 2007 also found that retailers representing 20% of the industry’s
employment use a CRM system, an increase from 8% in 2003.
Micro and small firms lag behind medium-sized and large ones: Micro and
small firms lag behind medium-sized and large firms in almost all indicators of ICT
and e-business use presented in this chapter. Exceptions include the level of
internet access which is close to 100%, the average share of employees with
internet access which is higher than in large firms, and the practice of sending
electronic invoices to customers which is on the same level in all size classes.
However, micro and small firms have been increasing their ICT adoption in recent
years.
EU retailers lag behind US: In most indicators discussed in this chapter, EU-7
retailers are lagging behind the US. In some cases the differences are large, for
example for placing online ads on other companies’ website (43% in the US versus
16% in the EU) and for options offered to pay online (higher percentages in the US
for all options). Exceptions include the share of firms with internet access, the
average share of employees with internet access, and the use of internal systems
for which the levels are similar or even higher in the EU. Surprisingly, the overall
importance of e-business stated by the firms is very similar between EU-7 and US
retailers. The reason may be that US retailers answered the question about e-
business importance with a higher reference level in mind.
e-Business in the Retail Sector
80
4 Drivers and impacts of ICT adoption
4.1 Conceptual framework: the structure – conduct –
performance paradigm
Adding an analytical perspective
Chapter 3 presented a descriptive assessment of the state-of-play of ICT and e-business
use in the retail industry. It focused on the diffusion of ICT-based applications and on how
they are used by companies, both for internal processes and for exchanges with other
organisations or consumers. This Chapter 4 adds a more analytical perspective on the
drivers and impact of ICT adoption in retail, based on an econometric analysis. The
section is organised as follows. First, it outlines a conceptual framework to assess the
economic drivers and impacts of the ICT adoption. Second, it includes four sections with
econometric analysis on of the relationship between ICT and five business dimensions,
i.e. productivity, employment, innovation dynamics, market structure and value chain. In
the analysis data from the e-Business Survey 2007 and EU KLEMS are used. The
chapter concludes with a summary of the main results.
The standard “structure – conduct – performance” paradigm
The conceptual framework of this sectional is a common analytical way for all sector
studies included in the Sectoral e-Business Watch project. Therefore references on the
specific sector outcomes like retailing are based on this joint concept to make it
comparable with other sector reports and to make them comparable in the cross-section
report as well.
Economic literature suggests that the ongoing diffusion of ICT and e-business
technologies and services among firms in the economy at large is a striking example of
the possible dynamics of technological change and economic development see, for
example (Bresnahan and Trajtenberg 1995; Helpman and Trajtenberg 1998; Helpman
and Trajtenberg 1998). The adoption and diffusion of new technologies can be spurred by
many different drivers and can have far-reaching consequences. Virtually all economic
spheres can be affected by technologically induced changes, including innovation
dynamics, productivity and growth, the development of market structures, firm
performance, and the composition of the demand for labour.
As a conceptual framework for the analysis of the interplay between these characteristics,
ICT diffusion and innovation, an extended Structure – Conduct – Performance (SCP)
paradigm is adopted
43
. Developed by Mason (1939) and Bain (1951), the paradigm states
that firm and industry performance is determined by the conduct of buyers and sellers,
which is a function of the market structure.
The term structure is used here meaning “industry structure” which includes but goes
beyond market structure characteristics of the original concept. The primary features of
an industry’s structure are related to market structure in the conventional sense: the
number and size of supplying firms as well as the number and preferences of customers
43
Following the discussion with Advisory Board members, the SCP paradigm was chosen over
other alternatives because it constitutes a comprehensive framework that allows capturing and
studying the interdependencies between sector characteristics and firms’ behaviour.
e-Business in the Retail Sector
81
and their size in case of businesses. An important aspect of market structure dynamics is
the level of ease of market entry. Further industry structure characteristics are related to
products, production and production factors: the degree of product differentiation, the
degree of vertical integration of production, i.e. value chain characteristic, the
technologies available to the firms, the firms’ cost structure (i.e. the relative importance of
costs for items such as production facilities, energy, personnel), and finally the workforce
composition and the demand for labour, most importantly with regard to knowledge and
skills. All these characteristics determine the level of competition in the industry.
These industry structure components influence a firm’s conduct. The conduct aspects
most important here are production strategies, particularly with regard to inter-firm
collaboration, as well as investments in ICT and in ICT-enabled innovation. Finally, a
firm’s performance is assumed to be the outcome of its conduct. Successful innovations
improve firm performance by, for example, reducing production cost, increasing
productivity, improving product quality or enabling it to enter new markets. This may
eventually lead to increased sales, turnover and market shares.
Extending the SCM paradigm: feedback effects
In contrast to the standard SCP paradigm, the flow of causality is in fact not one-
directional (Fauchart and Keilbach 2002). As an example of feedback between
performance and industry structure, successful and innovative companies are more likely
to grow and increase their market share at the expense of less progressive firms, which
transforms the market structure. There may also be feedbacks between conduct and
industry structure: For example, depending on the innovation type – i.e. product or
process innovation, ICT-enabled or not –, innovations influence the choice of products
manufactured and a firm’s cost structure. Innovations may also change the incentives to
perform activities in-house versus outsourcing them and, consequently, may influence the
demand for labour and its composition. It may also further shape the relationships with
suppliers and customers, for example with regard to collaboration intensity. Thus, in the
following discussion it is assumed that firm performance may have a feedback effect on
both firm conduct and industry structure, and conduct may have a feedback on structure.
This conceptualisation allows for an enhanced economic approach that studies the
drivers and impacts of ICT and ICT-enabled innovations at the firm and sector level.
Exhibit 4.1-1: Conceptual framework for the analysis of drivers and impact of ICT adoption
Structure
Structure
Conduct
Conduct
Performance
Performance
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
ICT
adoption
ICT
adoption
Performance:
- Productivity
- Turnover
- Market share
Performance:
- Productivity
- Turnover
- Market share
ICT enabled
innovation
ICT enabled
innovation
Feed-back loops
Structure
Structure
Conduct
Conduct
Performance
Performance
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
Market / firm
characteristics:
- Market
structure
- Technology
- Value chain
ICT
adoption
ICT
adoption
Performance:
- Productivity
- Turnover
- Market share
Performance:
- Productivity
- Turnover
- Market share
ICT enabled
innovation
ICT enabled
innovation
Feed-back loops
Source: e-Business Watch/DIW
Exhibit 4.4-1 illustrates the SCP paradigm together with the causality relationships of the
elements studied in this sector report. The extended SCP paradigm defines the two
e-Business in the Retail Sector
82
dimensions of the forthcoming analysis. First, the extended SCP paradigm identifies
market structure and firm characteristics that drive the diffusion of ICT and the process of
turning ICT use into marketable products and production processes, i.e. ICT-enabled
innovations. Second, the paradigm seeks to identify the feedback effects of firms’
innovative activity on these characteristics and firm performance.
Applying the SCM paradigm to an analysis of ICT drivers and impacts
The SCM paradigm allows one to identify firm and industry dimensions that can be
considered as relevant for the diffusion of ICT and its impact on these dimensions.
Consequently, the following elements of market and firm structure were identified as ICT
drivers: market rivalry, supplier-buyer relations and workforce composition. The impact of
ICT adoption and ICT enabled innovation is studied through productivity and employment
as proxies for firm performance. This construct enables the understanding of not only uni-
directional causal relationships but recognises the presence of firm performance
impacting upon the drivers of ICT adoption.
4.2 ICT and productivity
This section will specifically analyse to what extent ICT-capital investments have effects
on productivity growth (as compared to other factors) in the retail industry. With reference
to the Structure-Conduct-Performance framework (see introduction to this section), the
analysis in this section focuses on the links between conduct (ICT adoption and
innovation) and performance.
Exhibit 4.2-1: Scope of the analysis in Section 4.2
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(productivity)
ICT enabled
innovation
Section 4.2
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(productivity)
ICT enabled
innovation
Section 4.2
Source: e-Business Watch/DIW
4.2.1 Background and hypotheses
Empirical findings on ICT and productivity
In knowledge-driven and globalised market economies, increasing productivity is
considered as crucial for sustained competitiveness and growth. Studies on the impact of
ICT confirm productivity increasing effects in both the user sectors and in the ICT
producing sectors (Oliner and Sichel 2000). In particular, ICT was found to have positive
effects on labour productivity and total factor productivity (Pilat 2005). An important
finding is, however, that ICT-induced productivity effects vary significantly between
sectors and among countries (Nordhaus 2002). Recent research suggests that the
largest productivity growth effect occurs in the ICT-producing sectors themselves, and in
selected service industry sectors like banking, wholesale, retailing, and tele-
e-Business in the Retail Sector
83
communication (Inklaar, Timmer et al. 2007; Jorgenson, Ho et al. 2007; Jorgenson, Ho et
al. 2007)
Findings from case studies
Findings from case studies for this report indicate that retail enterprises use ICT and e-
business mainly to increase productivity and reduce costs, primarily process costs. Case
studies conducted for this report illustrate explicit productivity benefits from e-business:
The Casino case study (section 5.5) provides an example of how ICT can result in
increased labour productivity. Two areas of labour productivity increase were noted:
the first one was at the check-out tills in the hypermarkets where the IT solution
enabled employees to faster process customer check-outs. The second effect was
felt by the sales force which was able to increase productivity through better
information availability.
Productivity gains at Globus (section 5.3) were achieved through streamlined
procurement processes across the various in-store locations and across the whole
group of outlets.
Brooklands Plus Products/Dirk van den Broek (section 5.3) was also able to
increase productivity mainly through efficiency gains. Examples include enhanced
promotion management efficiencies, due to the attainment of full visibility into stock-
levels, purchasing, receiving and delivery processes from the adoption of the stock
management solution.
ICT-capital investment and total factor productivity growth
For the study of ICT impacts on firm-level productivity, two considerations are essential.
First, as depicted in the conceptual framework above, ICT investment does not lead to
productivity growth at firm-level by itself. It depends on how the technology is actually
used in business processes, i.e. on a company's ability to innovate its work processes
and business routines with support of ICT. Thus, only if ICT investment is combined with
complementary investment in working practices, human capital, and firm restructuring will
it have an impact on performance (Brynjolfsson and Hitt 2000). These complementary
investments and organisational changes are highly sector and firm-specific; therefore,
returns from ICT investments vary strongly across organisations (Pilat 2005). The need
for complementary investments in the retail is confirmed in by the case study firms:
especially the large retailers Mercator, Brooklands and Globus (sections 5.1-5.3) report
that the pure installation of a technical system bears little return on investment without
business process reorganisation and support from users and management. Second, it
has to be considered that outsourcing is an organisational innovation which can change
firm-level productivity (Erber and Sayed-Ahmed 2005).
Notwithstanding these considerations, the first step of the analysis is to assess the
contribution of ICT-capital investment to productivity growth (see Hypothesis P.1):
Hypothesis P.1: ICT-capital investment has become a main element in value added and
productivity growth in the retail industry, while other capital inputs summarised as non-
ICT-capital have diminished in their respective importance.
The second step is to consider the apparent need for companies to not only invest into
ICT but also into complementary items in order to increase productivity. A certain part of
such complementary investment is linked with total factor productivity (TFP). TFP
e-Business in the Retail Sector
84
represents output growth not caused by input growth. The attribute “total” refers to the
unknown complete set of influencing factors. TFP effects may be caused by numerous
factors, e.g. organisational changes in the company such as outsourcing that lead to
improved workflows and increased productivity.
44
Thus one can assume that ICT capital
investment has become a key driver of total factor productivity (TFP) growth. This will be
tested as a second hypothesis:
Hypothesis P.2: Total factor productivity growth in the retail industry has accelerated
together with increased investment in ICT-capital.
Another important factor that may influence the extent to which ICT enables productivity
growth is the complementarity between ICT capital and skills. A large body of literature
on skill-bias in technical change supports the finding that technical change is biased
towards skilled workers, reducing demand for unskilled labour and increasing wage
inequality and polarisation (Acemoglu 2002). The impact is clearly visible in today's
advanced economies; unskilled jobs have long been declining in absolute terms in
Europe and growing only slowly in the US, while skilled jobs for educated workers are
being created at a faster pace in most countries (Pianta 2004). ICT tends to be a skill-
biased technology and, thus, the application of ICT may increase the demand and wages
for skilled labour and decrease the same for unskilled labour. The analysis will therefore
focus on the interdependence of ICT investments with skills requirements in the retail
industry. This will help to understand the impact on employment dynamics in a more
nuanced way than just assessing the net impact on total sector employment. The
following hypothesis addresses this issue.
Hypothesis P.3: ICT and high- and medium-skilled labour have a positive impact on
labour productivity in the retail industry.
The analysis to confirm or reject these hypotheses has been conducted in two steps:
An analysis of the development of value added growth and the contribution of
different factors to it by means of growth accounting (section 4.2.2).
An analysis of the development of labour productivity growth and the contribution
of different factors to it by means of a stochastic possibility frontier (SPF)
(section 4.2.3).
On the basis of the results it will be discussed whether the hypotheses can be confirmed
or not (section 4.2.4).
Database: EU KLEMS
The empirical analyses are based on data from the EU KLEMS project. KLEMS stands
for “Capital, Labour, Energy, Material and Services”, indicating the domains for which the
project developed data from official statistical sources. The EU KLEMS database,
published by the Groningen Growth and Development Centre (GGDC) in March 2007,
reports specific data for the retail industry. Consistent EU KLEMS data are available by
country and only for a subset of the EU-27, typically EU-15 or less. EU KLEMS provides
44
In terms of calculation, TFP is a residual between growth of an output indicator, like gross value
added or gross production value, minus an aggregate index of factor inputs such as labour and
capital, weighted by their respective factor shares. TFP is also named ‘Solow residual’, because
Robert Solow (1957) was one of the first economists who pointed out the significance of
disembodied technical change for economic growth opposite to the classical view that in
particular capital accumulation, i.e. embodied technical change, is the key driver of growth.
e-Business in the Retail Sector
85
country data. Therefore, while the country level is not a primary item of analysis in the e-
Business Watch, the following sub-sections present country data. For the purpose of this
report, it is however not insightful to describe and interpret these country findings in
detail. Country differences may be due to numerous different characteristics of the
national retail industries, e.g. overall number of firms and employees, number of firms
and employees by size class, composition by sub-sectors, target markets, exceptional
national business cycles, trade union power, national industry policy, and large-scale
mergers in certain periods of time.
4.2.2 ICT impact on value added growth
Gross value added growth
Exhibit 4.2-2 shows the annual average growth rates of gross value added (GVA) in the
retail industry for three different time periods (1980-1995, 1995-2000, 2000-2005).
Growth rates were found to be predominantly positive. GVA varies greatly among
countries and there are few consistent trends. For example, Greece, Sweden and the UK
feature an increasing and positive trend, France a declining but positive one. An
accelerating retailing boom occurred in Ireland from 1995 onwards with 6% growth in the
period 1995-2000 and 8.7% in the period 2000-2004. Only four countries have
experienced negative values, all of them only in one of the three sub-periods and
predominantly in 2000-2004: Belgium -0.8% in 1980-1996, Germany -0.4 in 2000-2004,
Italy -1.8% in 2000-2004, and Netherlands -0.7% in 2000-2004.
Growth accounting of gross value added
Growth accounting is a familiar approach to study the contribution of different factor
inputs on overall output growth. Using standard techniques (Jorgenson, Gollop et al.
1987) the following decomposition of the real gross value added for eleven EU Member
States (see Exhibit 4.2-3 below, and Table A-1 in Annex 2) is obtainable. For the period
1995-2004, strongest overall growth in value added can be observed in Finland with
4.5%, followed by Sweden with 4.2%, the UK with 3.7% and Spain with 3.2%. Austria
with 2.5% and the Netherlands with 1.8% have experienced significantly lower growth. In
France and Denmark with 0.9%, followed by Germany with 0.7% and Belgium with 0.5%
retailing stayed nearly stagnant while Italy, with -0.5%, had to face a small decline.
e-Business in the Retail Sector
86
Exhibit 4.2-2: Growth of gross value added in retailing, 1980-2004
1.9
0.9
3.8
2.1
1.7
2.1
2.8
1.7
3.3
4.0
1.4
4.3
1.1
1.5
2.2
5.0
0.0
4.6
3.3
3.8
3.3
3.4
2.3
0.7
2.0
0.9
8.7
-1.3
2.1
-0.7
4.8
-0.8
2.5
1.5
0.0
2.2
0.9
0.4
-0.4
4.5
4.8
2.9
-2 0 2 4 6 8 10
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Exhibit 4.2-3: Retailing in selected EU Member States, growth accounts for gross value
added for 1995-2004 (contributions in percentage points)
0.3
1.4
0.3
0.4
0.7
0.4
0.5
0.4
0.4
0.4
0.6
0.9
0.6
0.8
1.3
-1.1
-1.4
-0.6
3.2
1.4
-1.4
1.0
3.0
0.5
-0.1
0.8
-0.6
-0.4
2.1
-0.1
-0.01
0.1
0.2
0.4
-0.3
0.5
0.2
0.4
0.1
0.2
0.3
1.0
1.4
0.6
0.9
0.2
0.03
0.3
0.1
0.4
0.1
-3 -2 -1 0 1 2 3 4 5 6
Austria
Belgium
Denmark
Spain
Finland
France
Germany
Italy
Netherlands
Sweden
United Kingdom
Total hours worked Labour composition ICT capital Non-ICT capital Total factor productivity
Source: EUKLEMS data base, GGDC; own calculation
The most dramatic sources for differences relate to the total factor productivity growth
differentials between the Member States. While Finland and Sweden experienced high
TFP-growth with 3.2% and 3% respectively over the nine years, Italy and Denmark faced
an average annual decline of 1.4%. For all EU-countries with the exception of Germany
with -0.3%, ICT-capital contributed positively to overall output growth, ranging from 0.9%
in Denmark to 0.2% for Spain and Italy. Non-ICT-capital sometimes contributed even
e-Business in the Retail Sector
88
more, for example in Luxembourg with 2% and the UK with 1.4%. Overall, non-ICT-
capital investments contributed positively on the growth performance in retailing. It would
be interesting to study these differences in greater detail, in particular the different
retailing sub-sectors, to understand how much the “in-the-box-effect” (discussed above)
and shifting expenditures to different consumer goods and service classes contributed to
these results and might explain the differences between the US and European ICT-
impacts. Furthermore, stricter regulations on the establishment of superstores and factory
outlet centres in many European countries might cause impediments towards a more
concentrated market structure in retailing when compared to the US. These results lend
little support to the hypothesis that ICT-capital investments contributed most to positive
output growth in all European countries.
Looking at the impacts of labour compositional change, one observes that the labour
quality change component from low-skilled towards medium- and high-skilled labour gave
positive growth impacts in all countries with the exception of the Netherlands. However,
there is a significant variety between countries like Spain with 0.53%, Italy with 0.41%,
the UK with 0.4%, Belgium with 0.39%, France with 0.36% and Sweden with 0.35% and
other countries like Denmark with 0.06%, Germany with 0.03% and Finland with 0.01%. A
potential cause could be the different stages the various countries are in when
transforming their retailing industry.
In contrast the change in total working hours gives a mixed picture for the different
countries: Italy with -0.61%, Germany with -0.35% and Sweden with -0.1% experienced a
moderate decline in overall working hours. Only Spain with 2.13% and Denmark with
1.37% experienced a significant increase in total working hours resulting in a significant
contribution to the growth of the retailing industry.
Conclusion: TFP key driver of retail industry growth – ICT less important
The results from this growth accounting exercise indicate that the key drivers to industry
growth come from total factor productivity growth. In some countries it comes from
increases in total working hours and labour quality changes. ICT-capital investments
are not key drivers in the growth of real value added in European retailing
industries. The same applies to non-ICT capital investments. The stronger total factor
productivity growth and changes in labour quality composition are, the better is the
countries’ performance in retailing. Extending working hours, most possibly associated
with longer opening times of shops, e.g. late hours during weekdays or longer opening
hours during the weekend, may have played a role in this development where
deregulation might have helped to increase overall growth of gross value added.
However, the EU KLEMS database does not offer sufficient data to analyse these
aspects in retailing on a solid empirical basis.
4.2.3 ICT impact on labour productivity growth
Labour productivity growth
According to literature, the resurgence of productivity growth in the US economy did not
last beyond the year 2000 or is not directly related to actual ICT investments (Gordon
2004; Jorgenson, Ho et al. 2007). Europe overall even did not show any acceleration in
productivity growth similar to that which happened in the US in the second half of the
1990s (Inklaar, Mahony et al. 2003). Retailing has been identified as a key driving sector
e-Business in the Retail Sector
89
where intensifying ICT-capital usage contributed significantly to aggregate labour
productivity growth acceleration in the US (van Ark, Inklaar et al. 2003). Therefore this
study analyses the particular developments and factors which led, in the 14 Member
States included, to fairly different overall outcomes than that expected when the Lisbon
Agenda was set up in 2000. At this time a similar resurgence of productivity growth due to
ICT investments as in the US was considered to take place in Europe as a catching-up
process to the US as leader in development from the year 2000 onwards.
Based on the EU-KLEMS-Database a decomposition of annual labour productivity growth
rates for 14 EU Member States for the periods of 1980-1995, 1995 -2000 and 2000-2004
shows two main characteristics: a significant heterogeneity of growth rates (see Exhibit
4.2-4. below, Table A-2 in Annex 2) and positive labour productivity growth in almost all
countries and in all periods. Very high average sustained annual labour productivity
growth is observed in very few countries like the UK and Sweden and less pronounced in
Portugal and Ireland, with average annual rates above 2.5% for the whole time period
1980-2004 and the respective sub-periods (see Figure 4-3, Table A-2 in the Annex 2).
The dynamics across countries show no common pattern as might be expected from the
literature which focused on the US experience. This gives some evidence that an
insufficient rapidly convergence in the retailing industries in the EU and Eurozone prevails
even after introducing the common currency.
Employment growth and average working hours per employee
Labour productivity growth based on working hours can be decomposed in the two
components of employment change and changes in average working hours per
employee. As the two following Exhibits 4.2-5 and 4.2-6 show, most countries
experienced positive employment growth over the whole period 1980 until 2004.
However, this was accompanied by significant decreases in average working hours in
most countries.
This development is attributable to an increasing tendency in retailing to substitute full-
time employment of employees by part-time employment. However, one would need
more detailed data for such an analysis than it is included in the EUKLEMS database.
As Exhibit 4.2-6 shows, working hours per employee increased in one of the periods in
only five countries: Denmark 1.1% in 1995-2000, Luxembourg 0.6% in 1995-2000, and,
almost negligible, 0.2% in Sweden in 1980-1995 as well as 0.1% in Belgium 1995-2000
and in Spain 2000-2004.
The low-skilled employees are most likely the ones who had to accept more and more
part-time jobs. By this, the relative skill-premium of medium- und high-skilled employees
in retailing increase is twofold. They have a greater chance to get a full-time job and due
to the associate higher wage and salary incomes from full-time opposite part-time jobs,
they obtain a more than proportional income advantage towards low-skilled workers. The
growing income gap between low- and medium to high-skilled workers consists therefore
of two components. A higher probability to obtain full-time employment and higher wages
and salaries because of the skill-advantage. The two trends observed in retailing are
therefore amplifying each other.
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Exhibit 4.2-4: Labour productivity growth in retail, 1980 – 2004 (annual average growth rates)
1.8
2.5
1.5
1.0
0.9
2.0
2.0
3.1
3.4
1.5
1.4
0.8
1.4
1.3
1.9
1.2
2.1
2.2
4.5
3.4
2.7
1.9
-0.7
-0.1
0.8
7.7
-1.3
0.1
-0.1
4.0
-0.1
2.1
-2.6
0.0
2.5
4.5
0.1
0.1
0.2
2.9
3.4
1.2
-4 -2 0 2 4 6 8
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Exhibit 4.2-5: Employment growth in retailing, 1980 – 2004 (annual average growth rates)
0.8
-0.5
1.0
1.5
4.1
0.0
1.1
1.2
1.9
-0.5
0.4
1.2
1.7
3.3
1.0
1.2
1.1
5.2
-0.9
1.9
2.6
1.3
0.3
1.0
1.0
2.5
1.9
-0.5
1.7
1.8
0.6
2.1
0.3
1.8
1.5
1.6
0.2
0.2
-0.1
0.2
0.1
-0.2
-1 0 1 2 3 4 5 6
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Exhibit 4.2-6: Average working hours per employee in retail, 1980 – 2004 (annual average
growth rates)
-0.7
-0.9
-0.3
-0.5
0.1
-0.3
-0.7
-1.1
-0.1
-2.1
-0.2
0.6
-1.5
-0.7
-0.3
-0.5
-0.1
-0.6
-0.4
0.1
-0.9
-0.7
-0.8
-0.6
-0.1
-0.9
-0.7
-0.6
-0.6
0.0
0.2
-0.9
-0.4
-1.1
0.2
-0.4
0.0
1.1
-0.1
-0.1
-0.1
-3 -2 -1 0 1 2
Austria
Belgium
Denmark
Spain
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Sweden
United Kingdom
1980-1995
1995-2000
2000-2004
Source: EUKLEMS data base, GGDC; own calculation
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Calculating the impact of ICT on labour productivity growth
To analyse the causes for labour productivity change in the retail industry, a stochastic
production possibility frontier (SPF) was estimated. As for the growth accounting, the
analysis is based on data from the EU KLEMS database, in particular on secondary
intermediate inputs as well as on the two primary input factors capital (broken down into
ICT and non-ICT capital stock) and labour (measured by working hours, separately
reported for high-, medium-, and low-skill categories). In this way the analysts were able
to estimate a stochastic production possibility frontier for the retail industry from 1995 until
2004 in 16 EU countries.
45
As a particular specification we used the error component model (Battese and Coelli,
1992), in which the parameters of a specified production function are estimated while
parts of the observed deviations are also explained by systematic differences in technical
efficiency across different countries (see appendix for details). To ensure constant returns
to scale of the production technology output and input variables were normalised by total
working hours (TWHs).
46
Thus, the estimated coefficients report the impact that different
factor intensities (e.g. intermediate inputs per TWH) have on labour productivity,
measured as gross output per TWH. To consider the potential impact of autonomous
technical change a time dummy was included as additional variable. The estimation
results based on a Cobb-Douglas production function are summarised in the following
Exhibit.
47
Exhibit 4.2-7: Parameter estimates of a Stochastic Production Possibility Frontier (Error
Component Models) for the retail industry, 1995 – 2004
Explanatory variables Parameters Standard error t-value
Intermediate Input per Total Working Hours 0.869 0.023 37.167
ICT-Capital Stock per Total Working Hours 0.041 0.014 2.996
Non-ICT-Capital Stock per Total Working Hours -0.034 0.021 -1.622
Medium-Skilled WH per Total Working Hours 0.043 0.015 2.914
Coefficients:
Constant 0.164 0.021 7.717
sigma squared 0.161 0.062 2.604
gamma 0.976 0.010 98.369
eta -0.020 0.006 -3.185
Log-Likelihood 180.4
No. of iterations 28
Endogenous variable: Gross Production Value per Total Working Hour (TWH), based on EU-16 Country Panel
including Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy, Luxembourg,
Netherlands, Poland, Slovenia, Spain, Sweden, United Kingdom.
Parameters estimate the impact of factor intensity (e.g. intermediate input per TWH) on output intensity (gross
production value per TWH) which can be interpreted as the impact on labour productivity.
Parameters for high-skilled and low-skilled labour insignificant and therefore not mentioned.
Source: EUKLEMS database of GGDC, DIW calculations
45
Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy,
Luxembourg, the Netherlands, Poland, Slovenia, Spain, Sweden and the UK.
46
This leads to an accordingly restricted stochastic production possibility frontier where the real
gross production value per working hour is explained by six factor intensities using total working
hours as the denominator.
47
See appendix for more details on technical specifications. For the econometric estimations we
used the Frontiers 4.1 software package (Coelli, 1996).
e-Business in the Retail Sector
94
The parameter estimates obtained are measures for the output elasticity of the respective
input factor, i.e. an increase of one unit of an input factor (e.g. ICT capital) increases the
output variable (production value) by a certain number of output units. Hence, a high
parameter value indicates a larger impact of the respective factor on labour productivity
changes. All parameters are statistically significantly different from zero at the 5%
significance level
48
, except non-ICT capital intensity.
49
The analysis led to the following
principal results:
The high output elasticity of 0.87 for intermediate input intensity is the dominant
feature of the analysis. This may be related to outsourcing of retailing activities
which implies a growing importance of intermediate input intensities.
50
For example,
retail supply-chains may be restructured by outsourcing activities upstream to
wholesale as well as transport and logistics service providers. A concrete example
may be a retail company that does no longer employ drivers and own lorries itself
but buys transport services on demand.
The ICT-capital intensity together with the medium-skilled labour intensity
contributes nearly at the same degree of 0.04, i.e. about 4% output elasticity. It
cannot be confirmed from our analysis if this co-movement is accidentally or
necessary. However, since high- and low-skilled labour intensities were found to
have no impact on labour productivity,
51
ICT-capital and medium-skilled-labour
inputs could even be necessary ingredients – in the sense of capital-skill
complementarily – to raise labour productivity growth.
For the individual values, the lowest output elasticity was calculated for non-ICT
capital stock intensity, however statistically insignificant. The parameter for non-ICT
capital was even negative, indicating that an increase of non-ICT capital may have
led to a decrease of productivity.
4.2.4 Conclusions: Minor ICT impact on growth of value added and
labour productivity
With regard to the three hypotheses concerning the role of ICT-capital that were
formulated in section 4.2.1, the analyses led to a twofold outcome. On the one hand the
growth accounting exercise confirms that ICT-capital played a positive role for value
added growth in all countries. On the other hand, the analysis based on a stochastic
possibility frontier revealed that probably the direct positive link between ICT-capital
investments and labour productivity growth is weak. Both exercises revealed that factors
other than pure ICT-capital growth appear to play a predominant role for labour
productivity growth in retailing: human capital inputs, organisational changes incorporated
in the total factor productivity growth, and outsourcing of non-core activities included in
the intermediate inputs. The key findings can be summarised as follows:
48
t-values above 2 assure by a rule of thumb this 5%-signficance threshold of the test.
49
Parameters for low- and high-skilled labour were also insignificant but left out because they
deteriorated the quality of the estimation.
50
See section 3.2, Exhibit 3.6-2 for findings about ICT outsourcing in retail firms.
51
Considering high- and low-skilled labour intensities did not simply yield insignificant parameter
estimates. In fact, the study team found that including them into the estimation even
deteriorated the overall fit or the estimations. Thus, they are not considered in the estimation
results as presented in Exhibit 4.2-7.
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Results for Hypotheses P.1-3:
ICT-capital investments were no key drivers for growth of real value added in
the European retail industry between 1980 and 2004. Growth accounting suggests
that the key drivers to value added growth in retailing came from total factor
productivity (TFP) growth, e.g. organisational changes.
The intensity of investments in intermediate inputs was found to be the main
component of labour productivity growth. Investments in ICT capital as well as
an increasing share of medium-skilled labour had a positive but small impact on
labour productivity growth.
Considering literature findings, this outcome is not surprising. There may be significant
delays between the introduction of new technologies and related organisational changes
on the one hand and impacts on productivity on the other. For example, an analysis for
the telecommunications industry (Erber 2005; Aral, Brynjolfsson et al. 2006) showed that
ICT-impacts on total factor productivity growth happen at a later stage than when the
initial investments take place. The hypothesis that there is an instantaneous impact of
ICT-capital investments on total factor productivity growth has to be refuted with regard to
the empirical analysis.
With respect to the hypotheses formulated in section 4.2.1, the following conclusions can
be drawn:
52
Exhibit 4.2-8: Results economic analysis ICT and value added growth
Hypotheses Result
P.1 ICT-capital investment has become a
main element in value added and
productivity growth in the retail industry,
while other capital inputs summarised as
non-ICT-capital have diminished in their
respective importance.
Not confirmed. Growth accounting
indicates that TFP changes played a
dominant role while ICT and non-ICT
capital inputs are less important
A production possibility frontier
analysis points at intermediate inputs
as key drivers of labour productivity
growth.
=> ICT is a small driver, not the key
driver of growth in this sector
(no)
P.2 TFP growth in the retail industry has
accelerated together with increased
investment in ICT-capital.
Not confirmed. There is no
instantaneous impact of ICT
investment on TFP growth.
no!
P.3 ICT and high- and medium-skilled labour
have a positive impact on labour
productivity growth.
Weakly confirmed. ICT capital and
medium-skilled labour have a positive
impact on labour productivity growth,
but the impact is small. The impact of
high-skilled labour was found to be
insignificant in statistical terms.
(yes)
52
For an overview of findings in other sectors see SeBW Report No. 10/2008 “an Economic
Assessment of ICT Adoption and its Impact on Innovation and Performance”, section 2.4,
Exhibit 2.4.1.
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4.3 ICT and innovation
This section analyses ICT-related innovation activity. It focuses on two questions. First,
what are the characteristics of firms that introduce ICT-enabled innovations? In terms of
the extended SCM paradigm, this question is related to the effects of industry structure
on firm conduct. Second, how do ICT-enabled innovations affect firm performance and
organisational change? This question is related to the effects of firm conduct on
performance and industry structure.
Exhibit 4.3-1: Scope of the analysis in Section 4.3
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
turnover)
ICT enabled
innovation
Section
4.3.2.
Section
4.3.3.
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
turnover)
ICT enabled
innovation
Section
4.3.2.
Section
4.3.3.
Source: DIW/empirica
Section 4.3.1 provides empirical evidence on innovation from the e-Business Survey
2007. The following sections offer further insights to what degree specific factors are
linked with ICT-enabled innovation in the retail industry (4.3.2), and whether companies
which conduct ICT-enabled innovation are likely to exhibit superior performance (4.3.3).
In the Structure-Conduct-Performance framework (see introduction to this section), this
analysis explores links between ICT adoption and ICT-enabled innovation, links between
innovation and performance.
4.3.1 Survey findings about ICT and innovation
Introduction to the importance of ICT for innovation
The growing diffusion of ICT in all areas of business is a major enabler of technological
change, innovation and ultimately economic development. ICT-driven innovation activity
is central to the subsequent effects of ICT economic impact. As a general purpose
technology, ICT can have effects on all innovation at all stages of the supply chain in the
retail industry. RFID, for example, is a technology innovation that is transforming
warehouse management in retail firms.
The links between the adoption of new e-business technologies and innovation are
broadly recognised. ICT investments in general and e-business applications in particular,
enable and drive both product and process innovation. They are drivers of process
innovation, because ICT implementation, to be successful, typically requires changes in
working routines. In micro-economic terms, a product innovation corresponds to the
generation of a new production function. A process innovation, on the other hand, can be
viewed as an outward shift of an existing supply function, which corresponds to lower
variable costs in the production of an existing product or service, and is therefore a
productivity increase. Thus, ICT-driven technological change moves firms towards new
technological trajectory.
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The capability for innovation is an important factor in the retail industry due to macro-
economic issues including the excessive dependence on consumers and micro economic
issues such as high competitive pressures. Considering these strong economically-driven
factors, retailers should have incentive to use e-business and ICT to compete and better
react to consumer desires. As the products sold are not transformed by the retailers, the
innovation potential within the industry is expected to originate mainly from process
innovations.
Data from the e-Business Survey 2007
In order to receive evidence about the role of ICT for innovation, the Sectoral e-Business
Watch asked companies from the sectors studied in 2007 whether they had "launched
any new or substantially improved products or services" during the past twelve months,
and if they had introduced "new or significantly improved internal processes" in the same
period of time. Those firms that had introduced innovations, the so-called ‘Innovators’
were then asked follow-up questions with the focus being on whether the innovation(s)
had been enabled by ICT.
21% of retail enterprises (representing 32% of sector employment) said that they had
launched new or improved products in 2006/07. Firms representing 70% of
employment, i.e. almost two thirds of those that reported product/service innovations,
said that their innovations had been directly related to or enabled by ICT (see Exhibit 4.3-
1). This high share indicates the important role ICT plays for innovative behaviour. With
60% and 67% respectively, micro and large firms are the types of firms benefiting most
from ICT enabling innovative behaviour (although the 67% for the large firms is indicative
due to a small number of respondents). Overall though, fewer SMEs than large firms
have launched new products and services in the 12 months preceding the interview: 44%
of large firms, 30% of medium-sized firms, 25% of small firms and 21% of micro firms.
Hence product/service innovations are firm-size dependent although there are more
opportunities for innovation in larger firms due to them being bigger than smaller ones.
It was a consistent finding in e-Business Watch sector studies that ICT play a crucial
role to support process innovation, in manufacturing as well as in services industries.
This can be confirmed for the retail industry. Firms representing 45% of the industry’s
employment said they introduced process innovation in the past twelve months. In firms
representing 32% of employment, 36% of the process innovations were ICT-related, and
in only 9% the process innovations were not ICT-related (see Exhibit 4.3-2). In micro
firms again the share of firms innovating with ICT was smaller than in small, medium-
sized and large firms. Hence, there appears to be evidence for a relatively higher
importance of ICT for business processes innovations in larger companies. Compared
the transport and logistics sector, the levels of overall process innovation and of ICT-
related process innovation in the retail industry were found to be along the same lines.
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Exhibit 4.3-2: % of companies having introduced product or process innovation (ICT enabled
versus non-ICT enabled, 2007)
Product/Service innovations
10
6
22
19
0 20 40 60 80 100
Retail (EU-7)
Transport
(EU-7)
non-ICT enabled product innovation
ICT-enabled product innovation
Process innovations
9
11
36
32
0 20 40 60 80 100
Retail (EU-7)
Transport
(EU-7)
non-ICT enabled process innovation
ICT-enabled process innovation
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%) = companies with at least 10 employees and using computers; N (Retail, EU-7) = 1151.
Weighting: Figures are weighted by employment ("firms representing x% of employment in the sector").
Questionnaire reference: D1-D4.
Source: e-Business Survey 2007 by the SeBW
In addition to the above discussed kinds of innovation, the e-Business Survey 2007
asked companies about four types of organisational innovation: changes in corporate
strategy, management techniques, organisational structure, and marketing concepts.
These types of innovation may need to accompany product or process innovation in order
to implement such innovations successfully, or they may be introduced self-sustained.
Between 24% and 36% of retail firms report that they have introduced organisational
innovations – see Exhibit 4.3-2. Of those innovations questioned, marketing and
structural innovations are most prevalent more than 1/3 of firms reporting changes in the
preceding twelve months. Due to its competitive nature and reliance on consumers,
marketing innovation seems to play more of role in the retail industry than in the transport
and logistics sector where only 18% of firms weighed by employment (compared to 30%
in the retail sector) report innovations of this kind. The numbers in the transport/logistics
sector are also lower than in the retail industry in the other three organisational innovation
categories (see Exhibit 4.3-2). The non-food group is introducing most of the innovations:
firms in this group are ahead of many others in the other two groups.
The survey also found that the levels of organisational innovation were similar in small
and medium-sized firms, while the levels for large firms were higher across all four
categories.
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Exhibit 4.3-3: ICT and organisational innovation (2007)
Companies having introduced major changes ...
in their
corporate
strategy in
the past 12
months
in their
management
techniques in
the past 12
months
in their
organisation
al structure
in the past 12
months
in their
marketing
concepts in
the past 12
months
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail – 2007 total (EU-7) 24 16 25 18 36 24 30 23
NACE 52.12, 52.3-5 (non-food) 26 13 28 16 38 23 38 23
NACE 52.11, 52.2 (food) 25 22 23 23 32 28 18 22
NACE 50.5, 52.6 (other) 17 25 15 28 35 26 12 19
Retail – by size (EU-7)
Micro (1-9 employees) 15 18 24 22
Small (10-49 employees) 20 23 30 29
Medium (50-249 empl.) 26 24 36 31
Large (250+ employees) 35 32 48 38
Other sectors
Transport & Logistics 21 17 19 14 37 23 18 13
Base (100%) all firms all firms all firms all firms
N (Retail, 2007, EU-7+USA) 1151 1151 1151 1151
Questionnaire reference D5a D5b D5c D5d
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Source: e-Business Survey 2007
In a cross-sector comparison, the share of ICT-enabled process innovation within all
process innovation is broadly in line (but at the lower end) with findings for other
manufacturing sectors. Exhibit 4.3-3 shows that results for various sectors studied by e-
Business Watch over the past three years are fairly consistent. The role of ICT for
process innovation was found to be most important in the publishing and automotive
industries. Differences are more pronounced for product innovation, obviously depending
on the nature of the goods and services produced. Notably in service industries such as
telecommunications and transport and logistics, ICT are essential for the development of
new products or services.
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Exhibit 4.3-4: Cross-sector comparison: percentage of product and process innovations that
are ICT-enabled
Sector Product innovation:
% ICT-linked
Process innovation:
% ICT-linked
Year of
survey*
Manufacturing
Chemical, rubber, plastics 36% ˜ ˜ 73% ˜ ˜ ˜ 2007
Food 15% ˜ 62% ˜ ˜ ˜ 2006
Pulp and paper 34% ˜ ˜ 59% ˜ ˜ ˜ 2006
ICT manufacturing 54% ˜ ˜ ˜ 70% ˜ ˜ ˜ 2006
Steel 48% ˜ ˜ 64% ˜ ˜ ˜ 2007
Furniture 44% ˜ ˜ 67% ˜ ˜ ˜ 2007
Automotive 21% ˜ 86% ˜ ˜ ˜ ˜ 2005
Pharmaceutical 18% ˜ 72% ˜ ˜ ˜ 2005
Machinery & equipment 25% ˜ 66% ˜ ˜ ˜ 2005
Publishing 65% ˜ ˜ ˜ 83% ˜ ˜ ˜ ˜ 2005
Retail and services
Retail 70% ˜ ˜ ˜ 81% ˜ ˜ ˜ ˜ 2007
Transport and logistics 76% ˜ ˜ ˜ ˜ 75% ˜ ˜ ˜ 2007
Telecommunications 86% ˜ ˜ ˜ ˜ 92% ˜ ˜ ˜ ˜ 2006
* Surveys of 2005 and 2006 as well as Retail & transport/logistics 2007 include micro-firms with up to 9
employees
Data weighted by employment. Reading example: "Out of those companies in the food industry which said they
had introduced new or significantly improved internal processes in the past 12 months, 62% said that at least
some of these process innovations were enabled by ICT."
Source: e-Business Surveys 2005, 2006 and 2007 by the SeBW
4.3.2 Links between skills, e-collaboration and ICT-enabled innovation
Internal capacity
Knowledge stock and skills found a firm’s absorptive capacity to adopt new technologies
(Cohen and Levinthal 1989). This, in turn, has a positive impact on a firm’s innovation
performance. Thus, in order to develop marketable products or feasible production
processes based on GPT, a firm needs to build up its knowledge stock and expertise, i.e.
complementary assets. The most obvious example of investments in complementary
assets include investments in software, training and organisational transformations that
accompany ICT investments. In other words, firms that combine high levels of ICT and
high levels of worker skills have better firm innovation performance. Thus, the following
hypothesis can be formulated:
Hypothesis I.1: Retail firms characterised by a higher share of employees with a
university degree are more likely to conduct ICT-enabled innovations, in comparison with
their peer-group in the same sector.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Question D2: "Have any of these product or service innovations been directly
related to or enabled by information or communication technology?" (asked to
companies having introduced new products / services)
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Question D4: "Have any of these process innovations been directly related to or
enabled by information or communication technology?" (asked to companies having
introduced new processes)
The main explanatory variable is the share of employees with a university degree. To
additionally account for the effect of internal capacity on innovation, a variable controlling
for the presence of ICT practitioners was added. This should control for the effect of ICT-
specific skills on a company’s innovative potential. The variables are based on the
following survey questions:
Question G11: "Please estimate the percentage share of employees with a college
or university degree in your company."
Question E1: "Does your company currently employ ICT practitioners?"
To analyse the relationship between ICT-enabled innovation and the share of employees
with a university degree, a probit regression was run.
53
Exhibit 4.5-3 reports the results.
54
Result for Hypothesis I.1:
Skills matter: Changes in share of employees with a higher university degree positively
affect the likelihood of conducting ICT-enabled innovations. Similarly, employing IT
practitioners significantly increases firm’s propensity to use ICT to develop new products
and services. This finding provides further evidence that the success of the ICT-driven
innovative process depends on the availability and quality of complementary assets.
Firm size is an advantage: Whereas firm age does not have any implications for
conducting ICT-enables innovations, being an SME negatively affects the likelihood of a
firm conducting such innovations. In other words, a large scale of operations might create
an advantage that allows a firm to overcome the cost barrier associated with innovative
activity.
Exhibit 4.3-5: Effect of employee skills on ICT-enabled innovation activity
Independent variable
a
Coefficient Standard Error
% of employees with higher university
degree (G11)
0.004** 0.002
IT practitioners (E1)
0.864*** 0.106
Less than 249 employees (Z2b) -0.343* 0.198
Firm founded before 1998 (G2) 0.060 0.092
Model diagnostics
N = 973
R-squared = 0.09
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: D2 and D4
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculations
53
Probit regressions are used to estimate the effect of a set of explanatory variables on a
dependent variable that only takes on values of 0 or 1 (binary indicator variable).
54
Coefficient estimates indicate how changes of dependent variables influence the dependent
variable. The estimation results do not allow for conclusions about the direction of causality,
mainly because the dependent and the independent variables are reported for the same time
period.
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Intra and inter-firm collaboration
There are indications that ICT has a direct impact on process innovation in companies by
facilitating links between different companies (Lee 2000). ICT-enabled inter-
organisational systems integration and collaboration may enhance the innovation
capabilities of companies by providing opportunities for shared learning, transfer of
technical knowledge and exchange of information.
The most obvious benefit of information exchange and integration with the help of ICT is
the optimisation of the value chain. Other, less obvious consequences for firms’
innovativeness can be found in tacit and knowledge-based processes. There ICT allows
creating communication infrastructures facilitating production networks of knowledge
workers or enables business partners to align the incentives of multiple players by
creating joint business units or facilitating the work of teams on the same tasks (McAfee
2006).
The use of electronic networks may lead to a higher probability of firms collaborating in
innovative activities and it may increase the amount of collaborative relations they have
(European Commission 2004). In other words, it can be said that the use of ICT
applications supporting information exchange and inter-firm collaboration constitutes
necessary input for ICT-enabled innovative output, i.e. re-engineered processes, new
products or distribution channels.
The e-Business Survey 2007 included a relevant question about inter-firm collaboration: it
regards information sharing about inventory levels with business partners. In 2007,
retailers comprising 15% of the sample population (employment weighed) said that they
share information online about inventory levels with business partners (see Exhibit 3.3-7).
Thus, the following hypothesis was formulated to test the assumed importance of
collaborative applications for innovative output:
Hypothesis I.2: Retail firms that use ICT applications to exchange information or
collaborate with business partners are more likely to introduce ICT enabled innovations,
compared with their peer-group in the same sector.
The hypothesis is tested on the basis of data from the e-Business Survey 2007. Again,
the analysis focuses only on ICT-enabled innovations (see questions D2 and D4 in
previous section). Independent variables control for the use of the following:
55
Question A7: "Does your company use a Supply Chain Management system?"
Question B9: "Does your company share information on inventory levels or
production plans electronically with business partners?"
Question B10: "Does your company use software applications other than e-mail to
collaborate with business partners in the design of new products or services?"
Exhibit 4.3-6 reports the results of the regression. An analysis of the results leads to the
following conclusions:
55
One could suspect that this hypothesis is tautological because the independent variables may
be included in the dependent ones. For example, if a company implemented an SCM system in
the past twelve months it would also state that it introduced new ICT-related processes in the
past twelve months. However, the share of such companies is unlikely to be large enough to
considerably influence significance level, direction and strength of the relationship.
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103
Results for Hypothesis I.2
e-Collaboration increases innovative output: The use of applications and practices
supporting the electronic exchange of information between companies positively affects
the likelihood of conducting ICT-enabled innovations.
Firm size is an advantage: Again, whereas firm age does not have any implications for
conducting ICT-enables innovations, small firm size negatively affects the likelihood of
conducting such innovations. The latter effect supports the finding of the previous e-
Business W@tch reports about the existence of the digital divide between large and small
firms. This result might indicate that the prevailing technology gap in terms of ICT usage
might negatively affect companies’ innovative capabilities.
Exhibit 4.3-6: Effect of electronic collaboration with business partners on ICT-enabled
innovation activity
Independent variable
a
Coefficient Standard Error
Use of SCM (A7) 0.410*** 0.112
Share information electronically (B9) 0.489*** 0.101
Less than 249 employees (Z2b) -0.453*** 0.160
Firm founded before 1998 (G2) 0.063 0.083
Model diagnostics
N = 1144
R-squared = 0.06
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: D2 and D4
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculation
4.3.3 ICT innovation, firm performance and organisational change
ICT-enabled innovation and firm performance
The effects of ICT on corporate performance are not clear because not all studies have
demonstrated clear payoffs from ICT investments (Chan 2000; Kohli and Devaraj 2003).
In addition, the results vary depending on how performance and ICT payoffs are
measured and analysed. For example, one empirical study finds positive impacts of ICT
investments on productivity, but not on profits (Brynjolfsson and Hitt 1996). Another study
did not find positive effects of ICT capital on productivity, while ICT labour positively
contributed to output and profitability (Prasad and Harker 1997).
These somewhat ambiguous results of the impact of ICT on corporate performance can
be explained if one drops the assumption that there is a direct link between ICT
investments and corporate performance. The key to understanding the impacts of ICT on
performance is to view ICT as an enabler of innovation (Koellinger 2006).
Indeed, Clayton and Waldron (2003), in a study on e-commerce adoption and business
impact, find that businesses maintaining higher levels of new and improved product sales
relative to turnover achieve above sector average rates of sales growth, i.e. they increase
e-Business in the Retail Sector
104
market share. The effect is present in both manufacturing and service sectors. Thus, the
following hypothesis can be formulated:
Hypothesis I.3: ICT-enabled innovations are correlated with retail firms’ turnover.
The hypothesis was tested on the basis of data from the e-Business Survey 2007.
Question G9 was: "Has the turnover of your company increased, decreased or stayed
roughly the same when comparing the last financial year with the year before?" For
questions D2 and D4 about innovation see the section related to Hypothesis I.1 above.
Exhibit 4.3-7 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis I.3
ICT-enabled output positively related with turnover increase: ICT-enabled innovative
activity positively affects the likelihood of a firm reporting a turnover increase. In other
words, firms that introduced ICT-enabled innovations were more likely to have
experienced a sales growth.
Firm size and age irrelevant for positive turnover development: Firm age and size do
not have any implications for positive turnover change. In light of the previous finding,
ICT-enables innovations have a stronger impact on positive turnover development than
the size and age of a firm.
Exhibit 4.3-7: Effect of ICT-enabled innovation activity on turnover increase
Independent variable
a
Coefficient Standard Error
ICT enabled innovation (D2, D4) 0.245*** 0.081
Less than 249 employees (Z2b) -0.149 0.156
Firm founded before 1998 (G2) -0.031 0.081
Model diagnostics
N = 1144
R-squared = 0.06
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: G9
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, DIW Berlin (2008)
ICT diffusion and organisational change
ICT diffusion may impact on a company’s organisation, i.e. the structure of and the
relationships between departments within an enterprise. Organisational changes may
relate to a rearrangement of functions, workflows and importance of departments and
employees working in them. Outsourcing also implies organisational changes; this
subject is however dealt with in the section about value chains below.
ICT transformed the process of replicating business innovations across
organisations(Brynjolfsson, McAfee et al. 2006).Traditionally, deploying business
innovation on a larger scale took time and required considerable involvement of
resources and employees. Today, ICT allows companies to embed business innovations
and then implement them across the organisation at a much lower cost than before
without compromising on quality. Every location or unit implements and follows all steps
of the new process in a way specified in the software design.
e-Business in the Retail Sector
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The copy-exactly strategy is particularly beneficial if the initial understanding of the
process is low, the lifecycle is short and the process is difficult to improve(Terwiesch and
Wu 2004).This is true for manufacturing industries with rapidly changing production
technologies and intensive technological competition. In such industries the speed of
adoption of new production processes plays a decisive role for remaining at the cutting
edge. On the other hand, tools, such as email, knowledge management systems, wikis or
instant messaging, considerably improve the process of innovation in knowledge-
intensive and service-oriented sectors with informal, unstructured and spontaneous type
of work, such as banking (McAfee 2006). ICT facilitates firms’ innovativeness by
propagating innovations that are less structured than business processes. This leads to
the following hypothesis:
Hypothesis I.4: ICT use in retail firms is positively correlated with organisational
changes.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Questions D5a-d: "During the past 12 months, has your company introduced major
changes in its corporate strategy / management techniques / organisational
structure / marketing concepts?"
56
In order to account for various effects of different ICT components on organisations,
explanatory variables include:
Infrastructure endowment index that comprises of hardware components used by a
firm and includes the share of employees with an internet access at their workplace,
internet connection capacity and the use of LAN, Intranet and Extranet.
Software endowment index that comprises of software applications used by a firm.
The index includes the following applications: a software application to manage the
placing or receipt of orders, ERM, SCM, CRM and the use of the internet to buy and
sell goods.
ICT human capital variable that controls for the presence of ICT practitioners.
In addition, the regression includes dummy variables controlling for the percentage of
employees with a higher university degree, firm size, age and country of origin. To
analyse the relationship between ICT-enabled innovation and the use of electronic data
and information exchange between business partners, an ordered logit regression was
run.
57
Exhibit 4.3-8 reports the results of the regression. An analysis of the results leads to the
following conclusions:
56
For each positive answer a firm scores one point. Consequently, the dependent variable takes a
value between “0”, if a company did not carry out any of the listed changes, and “4” if it
undertook all of them.
57
Similar to probit/logit regressions, ordered logit model is used when the dependent variable is
ordinal. In contrast, however, to probit/logit an ordered logit model can be applied if the
dependent variable has more than two levels.
e-Business in the Retail Sector
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Results for Hypothesis I.4
ICT hardware of decreasing importance for organisational changes: Compared to
software, hardware endowment, measured in terms of network infrastructure usage and
internet access, does not have a large impact on the likelihood of introducing
organisational changes.
Software use and IT practitioners drive organisational changes: The intensity of ICT
applications use and in particular IT-skilled employees are the major drivers of
organisational changes. This together with the previous result indicates that ICT skills,
soft- and hardware have different implications for companies’ conduct and performance.
Whereas hardware is a necessary condition for an efficient ICT use, it is not a sufficient
condition for business transformation. These are rather human skills combined with
innovative software that enable firms to rearrange their operations, functions and
workflows, i.e. find innovative ways of doing business. Hardware infrastructure, in
contrast, is already a commodity that does not offer companies any potential to create a
competitive advantage.
Exhibit 4.3-8: ICT use and organizational change
Independent variable
a
Coefficient Standard Error
Infrastructure index (A2, A3, A4) 0.005** 0.002
Software index (A6, A7, B1, B3) 0.275*** 0.059
IT practitioners (E1) 0.843*** 0.177
% of employees with higher university
degree (G11)
0.002 0.003
Less than 249 employees (G2) 0.021 0.328
Firm founded before 1998 (Z2b) -0.212 0.156
Model diagnostics
N = 706
R-squared = 0.04
Note: Ordered logit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: D5
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculation
e-Business in the Retail Sector
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4.3.4 Overview of results on ICT and innovation
Summarising the results of the econometric testing of hypotheses on ICT and innovation,
all hypotheses were confirmed. The following table provides an overview of the results.
Exhibit 4.3-9: Results economic analysis ICT and innovation
Hypotheses Result
I.1 Retail firms characterised by a higher
share of employees with a university
degree are more likely to conduct ICT-
enabled innovations, in comparison with
their peer-group in the same sector.
Confirmed: Changes in share of
employees with a higher university
degree as well as employing IT
practitioners positively affect the
likelihood of conducting ICT-enabled
innovations.
Yes!
I.2 Retail firms that use ICT applications to
exchange information or collaborate with
business partners are more likely to
introduce ICT enabled innovations,
compared with their peer-group in the
same sector.
Confirmed: The use of applications and
practices supporting the electronic
exchange of information between
companies positively affects the
likelihood of conducting ICT-enabled
innovations.
Yes!
I.3 ICT-enabled innovations are correlated
with retail firms’ turnover.
Confirmed: ICT-enabled innovative
activity positively affects the likelihood
of a firm reporting a turnover increase.
Yes!
I.4 ICT use in retail firms is positively
correlated with organisational changes.
Partly confirmed: network infrastructure
usage and internet access does not
have a large impact on the likelihood of
introducing organisational changes,
but software has.
(yes)
4.4 ICT and market structure
This section analyses ICT diffusion with respect to market structure. It focuses on two
questions. First, does the structure of product markets and, in particular, the competition
affect the pace of ICT adoption, i.e. firm conduct? Second, how does firm conduct with
respect to the technology adoption affect corporate performance in terms of the firm’s
market position?
Exhibit 4.4-1: Scope of the analysis in Section 4.4
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(market share)
ICT enabled
innovation
Section
4.4.2
Section
4.4.3
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators
(market share)
ICT enabled
innovation
Section
4.4.2
Section
4.4.3
Source: Sectoral e-Business Watch /DIW
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4.4.1 Survey findings on ICT and competition
Findings on the general competitive environment
The e-Business Survey 2007 included a set of questions about the companies’
perception of competition. 76% of the retail firms (representing 78% of employment) said
that rivalry in the market is increasing – see Exhibit 4.4-2. There were no considerable
differences between NACE groups and size classes in this assessment, and the values
for the chemicals and furniture industries are similar. However, the share of US steel
firms reporting increasing rivalry in the market was smaller, only 49%. The majority of EU-
7 steel firms (54%) also reported that market demand is not predictable. For the other
items asked, less than half of the steel firms agreed: “competitors’ actions are not
predictable” (41%), “production technologies change rapidly” (37%), “market position is
threatened by new entrants” (36%), “products and services become quickly obsolete in
the market” (17%).
Exhibit 4.4-2: Retail market characteristics (2007)
Companies which agree that their…
competitor
s’ actions
are not
predictable
market
position is
threatened
by new
entrants
products and
services
become
quickly
obsolete in
their market
market
demand is
not
predictable
rivalry in
the market
is
increasing
Weighting scheme:
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
% of
empl.
% of
firms
Retail –total (EU-7) 41 47 45 49 30 36 52 60 78 76
Non-food stores 43 50 50 49 38 40 54 61 82 77
Food stores 42 35 36 45 16 24 48 55 75 75
Other retailing 31 55 37 60 23 27 48 67 63 78
Retail – USA 63 48 38 32 21 23 39 42 64 51
Retail – by size (EU-7)
Micro (1-9 empl.) 47 49 36 61 76
Small (10-49 empl.) 50 49 35 50 85
Medium (50-249 empl.) 45 38 36 46 80
Large (250+ empl.) 38 40 30 44 77
Other sectors (EU-7)
Transport & logistics 47 54 44 55 21 22 48 55 73 75
Base (100%) all firms all firms all firms all firms all firms
N (2007, EU-7+USA) 1151 1151 1151 1151 1151
Questionnaire reference G8a-a G8a-b G8a-c G8a-d G8a-e
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Source: e-Business Survey 2007
ICT impact on competition
Besides the questions about the general competitive nature of the retail sector, retail
firms were asked about the effects of ICT on competition. Almost half of retail firms (48%,
weighed by employment) questioned report that ICT affects competition in the sector.
Competitive pressures from ICT are notably more prevalent in the non-food sub-sector
e-Business in the Retail Sector
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with 54% compared to 38% of the food stores and 37% of firms in the other retailing
group (see Exhibit 4.4-3). Retail firms of different sizes are affected on a similar level with
slightly fewer small firms reporting an impact. Compared to the USA, European retail
firms report higher levels of competition in the sector due to ICT: 48% in the EU versus
37% in the US.
Exhibit 4.4-3: Retail firms stating that ICT has an impact on competition in the sector
54
38
37
48
39
52
50
37
48
0 10 20 30 40 50 60
Retail (EU-7)
Non-food stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151
Weighed by employment. Questionnaire reference: F4
Source: e-Business Survey 2007
Firms that stated that ICT affects competition in the sector were further asked about the
extents of this effect. 61% of retail firms said that competition has increased “somewhat”
due to ICT; 34% even said that competition had increased “significantly” due to ICT. The
picture is homogenous across all sub-sectors, firm sizes and in the US. The exceptions
are that only 17% of food stores report that competition has significantly increased due to
ICT and 78% of food stores think that competition has somewhat increased. More than
10% of firms in the other retailing group and 12% of firms in the US even think that
competition has decreased due to ICT (see Exhibit 4.4-4).
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Exhibit 4.4-4: Reported influence of ICT on competition (2007)
34
38
17
39
31
34
28
40
37
61
58
78
51
65
65
67
53
51
5
4
4
10
5
1
12
7
5
0 20 40 60 80 100
Retail (EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
USA
competition has signif icantly increased due to ICT competition has somewhat increased due to ICT
competition has rather decreased due to ICT
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%): firms stating impact of ICT on competition (F4=yes); N (2007, EU-7+USA) = 457.
Weighed by employment. Questionnaire reference: F5a, F5b, F5c
Source: e-Business Survey 2007
4.4.2 Market structure and ICT diffusion
Increasing rivalry in the market might be another important factor that drives the adoption
of new technologies and innovation, as companies search for new opportunities to cut
costs by improving process efficiency or develop new products. Firms want to escape
competition by innovating. This can be done by securing a monopoly position, which
might stem from a successful innovation protected from imitating by means of a patent, a
trademark, or a copyright. Furthermore, just by being the first in the market, a firm may
secure an unchallenged position by building up the necessary capacity to enjoy
substantial economies of scale, or strategic know-how.
In order to investigate how strong the effect of market competition on the adoption of ICT
is, the following hypothesis was formulated:
Hypothesis M.1: Increasing rivalry in the retail market is a driver for the adoption of ICT.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Question G8a: "Please describe the type of competition in your main market. Do
you agree that rivalry in the market is increasing?" (Independent variable.)
e-Business in the Retail Sector
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Index on ICT endowment, based on several variables on ICT usage, including: the
use of LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the
internet to sell and buy goods and employing IT practitioners. (Dependent variable.)
Exhibit 4.4-5 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis M.1:
Increasing market rivalry drives ICT usage: The hypothesised relevance of increasing
market competition for the intensity of ICT adoption was confirmed. In other words, more
intense competition forces companies to use innovative technologies to cut costs and
look for more innovative ways of conducting business.
Firm size is an advantage: Again, firm size appears to have a considerably strong effect
on the adoption of ICT.
Exhibit 4.4-5: Market rivalry and the intensity of ICT use
Independent variable
a
Coefficient Standard Error
Increasing rivalry (G8a) 0.502* 0.260
Less than 249 employees (G2) -2.428*** 0.437
Firm founded before 1998 (Z2b) 0.290 0.224
Model diagnostics
N = 1144
R-squared = 0.08
Note: OLS regression. Table does not report country coefficients.
a
Questionnaire reference. Dependent variable: A2, A3, A4, A6, A7, B1 and B3
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, DIW own calculation
Due to intense competition in the retailing industry between smaller traditional shops and
large supermarkets and superstore chains a further concentration in retailing will most
likely continue. Since sophisticated ICT-applications favour large retail chains opposite
small ‘mom-and-pop’ shops, ICT in the retailing industry is changing the market structure
in favour of large corporations. Additionally, the global access via the internet offers large
e-commerce companies like Amazon, Ebay, Apple with iTunes the possibility to grab
increasingly significant market shares by fully integrated e-commerce supply chains from
traditional book or media shops. Additionally, one should keep in mind that the regulatory
environment for the retailing sector still differs in particular for the possibility to set up
larger superstore and shopping centres across Europe. Therefore, some of the observed
heterogeneity in retailing will be attributable to such regulatory impediments in some
countries to adjust to better and more efficient solutions elsewhere.
4.4.3 ICT impact on market structure
Historically, distance to market and transportation cost limited the number of customers a
firm could reach. At the beginning of the internet era, a common believe was that ICT and
e-commerce were to eliminate the limitations of location and enable firms to expand
regardless of geographical locations (Cairncross 1997).
One example of how ICT allows firms to expand their operations and change market
structure of existing markets, or create new ones, are entries of internet start-ups.
e-Business in the Retail Sector
112
Amazon or eBay are already icons of e-commerce that changed the landscape of the
retailing industry. Though of a smaller magnitude, these effects hold for traditional shops
as well.
ICT offers existing firms possibilities to expand their market reach, which consequently
leads to market structure changes as well. This can be illustrated by the way ICT enables
companies to cross boundaries of their markets and industries. An example for blurring
lines between sectors and a possible thread for retailing comes from manufacturing firms
like Dell. These firms use ICT to surpass the whole retailing sector and to sell their goods
directly to customers instead of depending on a network of retailers. This leads to the
following hypothesis:
Hypothesis M.2: ICT endowment is positively correlated with a change of market share.
The hypothesis was tested on the basis of the following data from the e-Business Survey
2007:
Question G7: "Has the share of your company in this market increased, decreased,
or stayed roughly the same over the past 12 months?" (Dependent variable.)
The explanatory variable controlling for a firm’s ICT endowment level is an index
composed of answers to the questions regarding the internet connection type, the use of
LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the internet to sell
and buy goods and employing IT practitioners.
Exhibit 4.4-6 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis M.2
ICT enables firms to expand: The hypothesis that ICT enables firms to extend their
operations was confirmed. Companies that intensively use ICT applications are likely to
take advantage of their potential to increase their market reach and relative position to
the competitors.
Firm age relevant for the positive development of market share: Firm age negatively
affects a firm’s chances to increase its market share. This might indicate that younger
firms tend to grow at the expense of their older competitors.
Exhibit 4.4-6: The intensity of ICT use and change in the market share
Independent variable
a
Coefficient Standard Error
ICT endowment
(A2, A3, A4, A6, A7, B1, B3)
0.044*** 0.017
Firm founded before 1998 (Z2b) -0.371*** 0.131
Less than 249 employees (G2) 0.002 0.263
Model diagnostics
N = 1054
R-squared = 0.02
Note: Ordered logit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: G7
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, own calculation
e-Business in the Retail Sector
113
4.4.4 Overview of results on ICT and market structure
Summarising the results of the econometric testing of hypotheses on ICT and market
structure, the two hypotheses were confirmed. The following table provides an overview
of the results.
Exhibit 4.4-7: Results economic analysis ICT and market structure
Hypotheses Result
M.1 Increasing rivalry in the retail market is a
driver for the adoption of ICT.
More intense competition forces
companies to use innovative
technologies to cut costs and look for
more innovative ways of conducting
business.
Yes!
M.2 ICT endowment is positively correlated
with a change of market share.
Companies that intensively use ICT
applications are likely to take
advantage of their potential to increase
their market reach and relative position
to the competitors.
Yes!
4.5 ICT and the retail sector’s value chain
This section analyses ICT diffusion with respect to the retail industry’s value chain. It
focuses on the question whether ICT use affects the firms’ decisions regarding ‘make or
buy’, i.e. outsourcing decisions. This question is related to the effects of firm conduct on
industry structure.
Exhibit 4.5-1: Scope of the analysis in Section 4.5
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
profits)
ICT enabled
innovation
Section
4.5
Structure Conduct Performance
Market / firm
characteristics
ICT
adoption
Performance
indicators (e.g.
profits)
ICT enabled
innovation
Section
4.5
Source: Sectoral e-Business Watch /DIW
Theoretical background
In light of the transaction cost theory, decreasing costs of search, evaluation and
monitoring of suppliers should lead to a shift away from firms and toward markets as a
form of organizing economic activity (Coase 1937; Williamson 1985). Consequently, the
expectations regarding the potential of ICT as technologies introducing innovative ways
of doing business, re-shaping firm boundaries and changing the constellations of value
chains were enormous (Johnston and Lawrence 1988; Johnston and Vitale 1988;
Milgrom and Roberts 1990; Fulk and DeSanctis 1995). The availability of powerful and
cheap ICT was said to increase the attractiveness of markets (Malone, Joanne et al.
1987; Lucking-Reiley and Spulber 2001). The authors of the move to the market
paradigm argued that companies would reduce their dependency on hierarchy and
outsource business activities.
e-Business in the Retail Sector
114
Survey findings
Retail firms in the sample were asked about their ICT outsourcing activities (see Exhibit
4.5-2).
Exhibit 4.5-2: Outsourcing of ICT services (2007)
58
53
49
45
59
63
67
45
56
0 20 40 60 80
Retail (total, EU-7)
Non-f ood stores
Food stores
Other retailing
Micro (1-9 empl.)
Small (10-49 empl.)
Medium (50-249 empl.)
Large (250+ empl.)
Retail (USA)
The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,
United Kingdom) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151
Weighted by employment. Questionnaire reference: E3
Source: e-Business Survey 2007
Outsourcing of ICT services increases with firm size: 49% of micro firms report that, in the
past 12 months, they have outsourced ICT services to external service providers which
were previously conducted in-house. This number increases to 59% for small firms, 63’%
for medium-sized firms and 67% for large firms. Compared to the US, European retailers
were relatively more active at outsourcing services in the past 12 months: 56% of
European retail firms have outsourced ICT services while 45% of US retailers have done
so in the same period of time. Outsourcing in the non-food store is highest with 58% of
firms doing it compared to 53% in the food store group and 49% in the other retailing
group.
Hypothesis testing
To test whether ICT leads to more market transactions in the analysed sector, the
following hypothesis was formulated:
Hypothesis V.1: ICT endowment in retail firms is positively correlated with outsourcing.
The hypothesis is tested on the basis of the following data from the e-Business Survey
2007:
Question G22: "Has your company outsourced any business activities in the past 12
months which were previously conducted in-house?" (Dependent variable)
e-Business in the Retail Sector
115
Index on ICT endowment, composed of answers to the questions regarding the
internet connection type, the use of LAN, WLAN, WWW, Intranet, Extranet, ERP,
SCM, CRM, the use of the internet to sell and buy goods and employing IT
practitioners.
Exhibit 4.5-3 reports the results of the regression. An analysis of the results leads to the
following conclusions:
Results for Hypothesis V.1
ICT intensity increases the propensity to outsource business activities: The more
advanced a company is in terms of ICT use, the more likely it is to have outsourced some
business activities in the last twelve months. This provides support to the hypothesis that
ICT enables companies to redefine their make-or-buy decisions and to outsource
business activities that were previously done in-house.
Exhibit 4.5-3: The intensity of ICT use and outsourcing
Independent variable
a
Coefficient Standard Error
ICT endowment
(A2, A3, A4, A6, A7, B1, B3)
0.052*** 0.015
Less than 249 employees (G2) -0.332* 0.192
Firm founded before 1998 (Z2b) -0.239** 0.109
Model diagnostics
N = 1144
R-squared = 0.04
Note: Probit estimates. Table does not report country coefficients.
Base: Firms with >250 employees, founded after 1998 and based in the USA
a
Questionnaire reference. Dependent variable: G22
* Significance 90%, ** Significance 95%, *** Significance 99%
Source: Sectoral e-Business Watch, DIW Berlin (2008)
In short, the econometric analysis related to ICT and value chains confirmed the
hypothesis on ICT and outsourcing, as shown in the following table.
Exhibit 4.5-4: Results economic analysis ICT and value chain
Hypotheses Result
V.1 ICT endowment in retail firms is
positively correlated with outsourcing.
ICT intensity increases the propensity
to outsource business activities:
Yes!
4.6 Summary of impact analysis
Findings of chapter 4 confirm that ICT and e-business have considerable impacts on the
retail industry. The analysis in this chapter was conducted along four types of impacts:
productivity, innovation, market structure, and value chains. The following conclusions
were drawn from an econometric analysis, the e-Business Survey 2007, case studies
conducted for this report and literature evaluation:
Productivity: Results from other studies indicate that ICT-induced productivity
effects are most pronounced in the ICT-producing industry as well as in selected
service industry sectors including retailing and wholesale. Evidence from the e-
Business Survey shows that particularly the larger companies in the retail industry
have dynamically adopted ICT (see chapter 3). Growth accounting analysis
conducted for this report (see section 4.2.2) suggests that ICT-capital investments
e-Business in the Retail Sector
116
are not key drivers in the growth of real value added in European retailing
industries. Total Factor Productivity, which includes for example organisational
changes, growth was found to account for much stronger contributions. However,
ICT can be embedded in other capital, so there may be a "hidden ICT-impact"
which cannot be measured by means of the data on ICT-investment available in the
database. As regards labour productivity, intermediate inputs intensity were found
to be the main components of labour productivity growth. This may predominantly
be due to outsourcing activity. ICT capital investments as well as the employment of
a large share of medium-skilled workers play a positive but minor role in labour
productivity growth (section 4.2.3). Overall, these findings indicate that ICT capital
investments alone are insufficient to significantly increase labour productivity. It may
be necessary to also invest into organisational changes and labour force training.
Innovation: In the retail industry, the e-Business Survey 2007 found the impact of
ICT to be mainly on process innovation but it also plays an important role in product
and service innovation. Many case studies conducted for this report confirm that
ICT can be considered as an enabler of innovation and positively impact on firm
performance, even if the impact cannot always be measured concretely. An
econometric analysis found, firstly, that employing people with a university degree
as well as employing IT practitioners significantly increases retail firms’ propensity
to use ICT to develop new products and services (section 4.3.2). Secondly, the use
of applications and practices that support the electronic exchange of information
between companies positively affects the likelihood of conducting ICT-enabled
innovations (section 4.3.2). As regards innovation and firm performance, the
analysis found that ICT-enabled innovation is positively related with turnover
increase irrespective of firm size and age (section 4.3.3). Secondly, ICT software is
an important driver of organisational changes, while hardware apparently is not
(section 4.3.3).
Market structure: As regards the relationship between market structure and ICT
adoption, the hypothesised relevance of increasing market competition for the
intensity of ICT adoption was confirmed. Findings also indicate that ICT and e-
business can be used to open up new markets, to cross boundaries of industries
and markets and to increase the number of customers. In other words, ICT appears
to have notable impact on the retail market’s structure (section 4.4).
Value chains: As regards outsourcing, the general expectations regarding the
potential of ICT to change value chains were enormous. The econometric analysis
found that ICT intensity indeed increased the propensity to outsource business
activities (section 4.5).
The following table (Exhibit 4.6-1) shows an overview of all hypotheses and results. Most
of the hypotheses were confirmed, but two hypotheses about ICT and productivity were
not:
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117
Exhibit 4.6-1: Results economic analysis ICT and market structure
Hypotheses Result
…related to ICT and productivity
P.1 ICT-capital investment has been a main element in value added and productivity
growth in the retail industry.
(no)
P.2 TFP growth in the retail industry has accelerated together with increased
investment in ICT-capital.
no!
P.3 ICT and high- and medium-skilled labour have a positive impact on labour
productivity growth.
(yes)
…related to ICT and innovation
I.1 Retail firms characterised by a higher share of employees with a university
degree are more likely to conduct ICT-enabled innovations.
Yes!
I.2 Retail firms that use ICT applications to exchange information or collaborate with
business partners are more likely to introduce ICT enabled innovations.
Yes!
I.3 ICT-enabled innovations are correlated with retail firms’ turnover. (yes)
I.4 ICT use in retail firms is positively correlated with organisational changes. Yes!
…related to ICT and market share
M.1 Increasing rivalry in the retail market is a driver for the adoption of ICT. Yes!
M.2 ICT endowment is positively correlated with a change of market share. Yes!
…related to ICT and value chains
V.1 ICT endowment in retail firms is positively correlated with outsourcing. Yes!
e-Business in the Retail Sector
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5 Case studies
Introduction and overview
This report presents ten case studies of exemplary e-business practice in the retail
industry. The case studies illustrate and validate findings presented in chapters 3, 4 and
6. References to these case studies are provided in the appropriate sections of these
chapters. Exhibit 5.1-1 provides an overview of the case studies and the topics covered in
these cases (structuring criterions being the supply chain category and firm size).
Exhibit 4.6-1: Retail industry case studies included n this report
No Company Country NACE Firm Size Topic Element
1 Mercator Slovenia 52.1 Large
Competing through
upstream supply chain
management
e-supply
2 Globus Germany
52.12
(47.19)
Large
e-procurement
activities
e-supply
3
Brookland/ Dirk
van den Broek
Netherlands
52.1
(47.1)
Large
Supply chain
management software
e-supply/
e-
operations
4 AMJG Portugal
52.48
(47.42)
Small
Customer relationship
management to better
integrate in-house
operations
e-
operations
5 Casino Group France 52.2 Large
Using customer
relationship
management to
improve sales
e-
operations
6 4fitness Germany
52.48
(47.64)
Micro e-marketing/e-sales
e-
marketing/
e-sales
7
Fleria Floral
Creations
Greece
52.48
(47.76)
Small
Challenges when
adopting e-sales
e-sales
8
Smart
Supermarket
Malta
52.12
(47.11)
Medium
Experiences of
developing an e-sales
application from
scratch
e-sales
9 EMPiK Poland
52.45
(47.63) &
52.47
(47.61,
47.62)
Large Redeveloping e-sales e-sales
10 Cyprus-PC.com Cyprus
52.48
(47.41)
Small
Supply chain
management in a
small firm
e-
supply/e-
sales
Source: Sectoral e-Business Watch (2007)
Rationale for selecting cases to study
The main objective for choosing the cases to study was to be able to learn about the e-
business experiences of retailers in Europe and to examine the impact e-business is
having on these firms. The case studies were also specifically selected to illustrate and
e-Business in the Retail Sector
119
validate topics dealt with in chapters 3 and 4 of this report. In detail, the following
stratified selection criteria
58
were applied:
Firm sizes: all firm sizes should be included due to the firm size characteristics of
the retail industry: by number of enterprises, the majority of firms in the retail
industry are micro and small firms; large firms are important in terms of value added
to sector; medium-sized firms are less important. This objective was achieved by
including one micro (4fitness), three small (AMJG, Fleria Floral Creations and
Cyprus-PC.com), one medium-sized (Smart Supermarket) and five large firms
(Mercator, Gobus, Brookland/Dirk van den Broek, Casino Group, EMPiK). This is a
representative sample structure in terms of firm sizes.
NACE categories: the case studies should cover as many different NACE
categories as possible. Cases from the three main categories should be included:
non-food (NACE 52.12, 52.3, 52.4, 52.5 -- retailers that sell non-food items in
store), food (NACE 52.11, 52.2 -- retail sale of food items in store) and other trade
(NACE 50.5, 52.6 --retail sale of automotive fuel in specialised stores, retail sales
not in-store, stalls or markets). In terms of NACE categories, there is a slight bias
towards the non-food group in terms of number of enterprises with six firms
operating in this area: Cyprus-PC.com, Globus, AMJG, EMPiK, 4fitness and Fleria
Floral Creations. Two firms, Smart Supermarket and the Casino Group, are
specialised food retailers. The two large multinational retailers included in the study,
cover both, food and non-food retail formats hence the various format can be
included in the respective groups. In terms of value added, the split is more even
with the large firms making up for the low numbers in the food-group. No firm from
the other trade group was included, although boundaries with internet trade are
fluid: 4fitness, for example, has a very high percentage of internet sales and could
therefore also be included in the other trade group as an internet firm.
Experiences from different EU countries: a wide spectrum of EU countries should
be covered and especially countries not covered in the survey should be included.
This objective was achieved by including six case studies from countries not
covered by the survey: Cyprus, Greece, Malta, Netherlands, Portugal, and
Slovenia. The remaining case studies were done in countries covered by the
survey: France, Germany and Poland. A secondary country objective was to include
new Member States such as Slovenia and small EU Member States such as Malta
and Cyprus which was also accomplished.
Besides these stratified selection criteria, the case studies embrace the three supply
chain elements (e-supply, in-house e-operations and e-sales) identified in the
conceptual framework. Of the ten case studies conducted, three cover e-supply issues,
two look at in-house e-operations (plus one firm, Brooklands, that includes both, e-supply
and e-operations) four cases explore e-sales and one case, Cyprus-PC.com covers all
three elements. The key argument for conducting the case studies however remains that
the cases selected illustrate and validate topics dealt with in chapters 3 and 4. The
topics are in line with the overall objectives of the SeBW: to (1) study and assess the
58
Stratified sampling is a strategy whereby members of a sample are selected in such a way as to guarantee
appropriate numbers of subjects for subsequent subdivisions and groupings during the analysis of data
(available at:http://education.calumet.purdue.edu/vockell/research/chapter8.htm. (SL: Please format in common
way.)
e-Business in the Retail Sector
120
impact of ICT on individual enterprises, selected industries and the EU economy; to (2)
highlight barriers for ICT uptake; and to (3) identify and discuss public policy challenges.
ICT and e-business impact: the case studies are representative examples
illustrating the impact of ICT and e-business on enterprises. While the impact on the
retail industry is discussed in detail in Chapter 4, the case studies purposively
illustrate effects on individual enterprises. The cases for example show how the
adoption of ICT and e-business solutions can positively affect productivity by
increasing efficiency of employees (e.g. AMJG and Casino Group). The Globus
case study on the other hand illustrates that business process reengineering is
necessary to achieve a measurable return on investment from ICT uptake.
Brookland Plus Products in contrast decided to adapt the ERP solution adopted to
existing business processes rather than adopting business processes to the
solution adopted. The different enterprise-level effects are incorporated in greater
detail in chapter 4.
Barriers to e-business: the case studies illustrate numerous barriers to e-business
and ICT uptake among European retailers. Especially barriers to e-sales are
abundant: the case studies show that all types of firms from small to large (e.g.
Fleria Floral Creations and EMPiK), across different NACE categories (food and
non-food groups) and EU countries (e.g. Cyprus, Poland, and Malta) experience
significant problems with selling over the internet. With the exception of one firm,
4fitness, the proportion of online sales measured by the total sales volume remains
low (usually between 1 % and 10%) in European retail firms. Barriers to increasing
e-sales include cultural issues such as customers not being prepared to order over
the internet (Cyprus-PC.com and Smart Supermarket), problems with integrating
the e-sales channel into the overall business strategy (EMPiK and Fleria Floral
Creations), product suitability for e-sales (Fleria Floral Creations), and finding a
suitable online strategy (Smart Supermarket). The case studies also highlight other
issues that retailers come across when implementing e-business solutions. In large
firms, introducing a unified ERP system may for example speed up the roll-out of e-
commerce significantly as shown by the Mercator case. For in-house operations,
the AMJG case study shows that not having customised solutions could be a barrier
for application usage. Overall, the case studies illustrate barriers for all three
elements of the supply chain supporting the survey findings relating to e-business
barriers presented in Section 3.7.
Public policy challenges: the case studies provide policy makers with real-life
examples of ICT and e-business effects and barriers. Policy makers can use
insights gained from the case studies to, for example, show how policy
recommendations could support individual European enterprises in increasing
productivity which, in turn can positively affect retail industry productivity and the
European economy.
The following sub-sections 5.1 to 5.10 comprise the ten case studies conducted for the
SeBW retail industry sector study.
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5.1 Mercator, Slovenia
Abstract
With a share of 36% in the Slovenian fast moving consumer goods market, Mercator is
one of the largest commercial chains in South-Eastern Europe. In 1999, it launched a
project to introduce e-commerce into its upstream supply chain management. Software
and hardware solutions for the exchange of electronic business messages between
Mercator and its suppliers have been specifically developed for the company. The
electronic exchange of business messages has helped Mercator to improve work
organisation and the efficiency of its procurement process, cooperation with suppliers,
and control over its stocks. One of the solution providers also successfully sells the
solution on the market to other companies. This contributes to the expansion of e-
commerce across Slovenia and abroad. The case study provides an educative lesson
about the importance of having one unified ERP system in a company, its dependant
companies and subsidiaries for an efficient implementation of e-commerce.
Case study fact sheet
Full name of the company: Poslovni sistem Mercator, d.d., (Business
System Mercator Ltd.)
Location (headquarters / main branches): Slovenia
No. of employees: 12.957
Sector Retail trade
Main business activity: Retail sale of food, fast moving consumer goods,
technical equipment, furniture, construction
materials, textile goods, cosmetics and sports
equipment
Primary customers: Consumers, Petrol
59
, Istrabenz Turizem
60
,
Slovenian government
61
Year of foundation: 1949
Turnover in last financial year (€): 1.609.832.000
Most significant market area: Slovenia
Main e-business applications studied: * TIE EP, eb-MANAGER, e-SERVICE Client
5.1.1 Background and objectives
Poslovni sistem Mercator (refererred to as Mercator hereafter) is the controlling company
of the Mercator Group
62
which is one of the largest commercial chains in South-Eastern
Europe. It sells fast moving consumer goods, technical equipment, furniture, construction
materials, textile goods, cosmetics and sports equipment in Slovenia. Mercator has been
confronted by severe market conditions after Slovenia entered the EU in 2004. Foreign
59
Oil company; food products and other items are sold over Petrol filling stations.
60
Tourist company.
61
Mainly the Ministry of Defence and the Ministry of Education and Sport.
62
The Mercator group consists of 8 wholesale and retail trade companies in Slovenia, Croatia,
Serbia, Bosnia and Hercegovina, Montenegro and Macedonia; and 4 Slovene non-trading
companies concerned with the production of food and beverages, market research and market
intervention in the domestic and foreign markets, planning, engineering and technical
counselling on building shopping malls.
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competition has been on the increase since 1991 when Spar, a large Austrian
commercial chain, opened its first stores in Ljubljana, followed in 2000 by Leclerc, a
French commercial chain. Additionally, in 2005, a foreign discount chain Hofer entered
the Slovenian market, followed by the German retailer Lidl in 2007. In 2006, Mercator
held 37% of Slovenian market of fast moving consumer goods, while its main rival Spar
Slovenia held 15,1% of the market and Tuš, another Slovene commercial chain, 12,2%
(Planet Retail)
Against the background of internal restructuring and integration of the Slovenian fast
moving consumer goods and food industry at the end of the 90’s, Mercator started to
introduce e-commerce into its upstream supply chain management. In 1999 it launched a
project called “Introduction of Electronic Data Interchange into Procurement Processes”.
The main goal of the project was to introduce electronic exchange of business documents
between Mercator and (domestic and foreign) suppliers of fast moving consumer goods
and cosmetics. The solution had to be compatible with standards already in use by other
companies in European Union, since many of the company’s business partners are from
abroad. It should enable the exchange of the following six types of documents:
Orders: buyer-generated documents that authorise a purchase transaction; when
accepted by the seller, they become a binding contract between both parties
Inventory reports: lists of goods and materials stocked
Order confirmations: documents informing a purchaser that an order has been
received
Despatch advices: documents sent by a consignor or seller to the consignee or
buyer that the ordered goods are ready to be shipped, or have already been
shipped; also called dispatch notes
Receipt advices: documents sent by the receiver, i.e. buyer, to the seller to confirm
receipt of items and to report on shortages or damaged items and
Invoices: a commercial document issued by a seller to a buyer indicating that
payment is due from the buyer to the seller
According to the plan, business-to-business (B2B) e-commerce should first be
implemented between Mercator and its suppliers, and then between other companies in
the Mercator Group and their suppliers. The aim was to reduce the amount of manual
work needed for data processing; to bring down the number of mistakes made in the
ordering process; to reduce the required warehouse space; and to speed up the flow of
goods between the suppliers and its warehouses. This in turn would increase the
company’s competitiveness, through lower procurement and storage cost. Its
competitiveness would be especially boosted, if it was the first trading company with this
kind of solution on the Slovenian market, since it could make the biggest profit gains from
lower procurement and storage costs compared to its competitors. The company was
initially persuaded to introduce e-commerce by one of its suppliers, Procter & Gamble
Slovenia63. The latter wanted to simplify the exchange of documents with its customers
(including Mercator), because it would help its production planning. It even paid Mercator
a commission for electronic exchange of documents, since it calculated that the savings
63
Slovenian subsidiary of Procter & Gamble, a multinational manufacturer of product ranges
including personal care, household cleaning, laundry detergents, prescription drugs and
disposable nappies.
e-Business in the Retail Sector
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will outweigh the costs. This has later become a common arrangement in e-commerce
between Mercator and its suppliers of fast moving consumer goods and cosmetics.
At the moment only orders, order confirmations and inventory reports have been
introduced in B2B e-commerce between Mercator and its suppliers. They are also used in
e-commerce between Mercator and two non-trading members of Mercator Group - Eta
64
and Mercator Emba
65
, and between Mercator H (another member of Mercator Group) and
its suppliers. The despatch advice has only been used in wholesale business to customer
(B2C) e-commerce between Mercator and Petrol. The introduction of electronic exchange
of despatch advices, receipt advices and invoices in Mercator’s supply chain is still
pending.
5.1.2 e-Business activities
Timing of the activities
The implementation of e-commerce at Mercator was as follows:
1999: ATNET Advanced Technologies together with Mercator and Procter &
Gamble Slovenia start to develop and implement an e-business solution for
automating the procurement process. It enables the transfer of electronic
documents over a private network called ATbizNET/Panteon.net business network.
2000: Mercator launches a pilot, testing the exchange of orders and inventory
reports over ATbizNET/Panteon.net with Procter & Gamble. The test phase is
concluded after one month, after which the solution is put into practical use.
2001: Mercator extends the electronic exchange of orders and inventory reports
over ATbizNET/Panteon.net to 9 other suppliers of fast moving consumer goods
and cosmetics.
2002: Electronic order confirmation is introduced into e-commerce between
Mercator and 10 of its suppliers. At the end of 2002, Mercator conducts B2B e-
commerce with 25 suppliers. Also during this year, e-Service and WEB-EDI are
offered as alternative solutions to the suppliers. e-Service enables automatic
conversion of documents from in-house standards into GS1 EANCOM; and WEB-
EDI is a web portal located on a server connected over ATbizNET/Panteon.net with
information system of Mercator. Suppliers using this service are automatically
alerted via e-mail or SMS whenever Mercator’s ERP system produces an order for
the supplier. The supplier can then view the order over the portal and use the portal
to send order confirmations.
2003: Practice shows that new entry fields (for entering the buyer’s firm, function of
the contact person, name and surname of the contact person etc) are needed for
the electronic business documents. Therefore they are added to GS1 EANCOM
message definitions of electronic order and order confirmation. B2B e-commerce is
implemented between
three other members of Mercator Group (Mercator
Gorenjska, Mercator SVS, Mercator Dolenjska and Mercator Goriška) and their
suppliers. These companies are then annexed by Mercator in 2004 and 2005. At
the end of 2003 the company is involved in B2B e-commerce with 50 suppliers.
64
Food producer.
65
Food producer.
e-Business in the Retail Sector
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2004: Mercator expands electronic document exchange to 100 suppliers. Electronic
data exchange with the Statistical Office of the Republic of Slovenia is also
introduced in 2004. The company’s ERP system automatically compiles reports
about the company’s commerce with other companies within the EU from archived
electronic business documents. These reports are automatically sent over
ATbizNET/Panteon.net to the Statistical Office of the Republic of Slovenia.
2005: Mercator expands electronic document exchange to 125 suppliers.
2006: Despatch advice is introduced in B2C e-commerce between Mercator and
Petrol. Mercator expands electronic exchange of documents to 150 suppliers.
2007: Mercator expands electronic exchange of documents to more than 200
suppliers.
The solutions described have mainly been adopted by suppliers of fast moving consumer
goods and cosmetics. The number of suppliers involved in e-commerce is steadily rising
from year to year, as can be seen from the chronology. At first large suppliers joined e-
commerce with Mercator followed by smaller ones. Mercator has not put any deadlines or
demands to the suppliers that they have to use electronic commerce, if they want to stay
in business. However, it has started to charge suppliers that were invited to join, but still
do not conduct e-commerce, the cost for processing paper documents.
Technology used
This section briefly describes different technological solutions that have been developed
for e-commerce between Mercator and its suppliers. First the EANCOM standards used
for electronic business documents are presented, and then software and hardware
solutions (FULL_EDI, e-Service, WEB-EDI), including the network
(ATbizNET/Panteon.net) over which e-business documents are exchanged.
EANCOM Slovenia subset standard
Message definitions of order, order confirmation and inventory reports that are used in
Mercator’s e-commerce are based on GS1 EANCOM standards. The latter have been
chosen, because they are used by almost every large company in Europe. However, they
are very complicated, since they have been developed to cover the needs of every
branch in every detail. Therefore those EANCOM message definitions were simplified
according to Mercator’s needs. In 2003, GS1 Slovenia formally granted the simplified
version of GS1 EANCOM standards developed for Mercator’s e-commerce the status of
EANCOM Slovenian subset standard.
Full EDI solution
The FULL-EDI solution is based on two applications:
TIE EP, which translates e-business documents (orders and inventory reports) from
in-house standards used by Mercator’s ERP system into corresponding GS1
EANCOM standards and
eb-MANAGER, which performs different supplementary functions to the basic
functionalities of TIE EP such as providing overviews of messages received and
status overviews.
Every order and inventory report produced by Mercator’s ERP system is automatically
translated into the corresponding GS1 EANCOM standard by TIE EP. The document is
then archived in a database on Mercator’s server “Rip_novi” by eb-MANAGER. In
e-Business in the Retail Sector
125
addition it is also archived in another database on another Mercator’s server
“Rip_backup” as a backup copy. Later on, the document is sent over
ATbizNET/Panteon.net to the supplier's mailbox located on a server in
ATbizNET/Panteon.net (if the supplier too uses “FULL EDI” solution). The same is true
for any order confirmation sent by the supplier to Mercator in response to its order.
e-Service solution
This solution has been developed by Panteon Group on Mercator’s initiative for small
suppliers, which do not want (or cannot afford) to invest in expensive software for
conversions like TIE EP, but want to have a solution that is integrated with their ERP
system. The e-Service solution is not suited for suppliers without ERP system.
WEB-EDI solution
The WEB-EDI solution was developed on Mercator’s initiative for suppliers that do not
want or cannot afford to invest in any software or hardware required to conduct e-
commerce. WEB-EDI is also ideally suited for suppliers without ERP system.
Every document sent from Mercator to the supplier, that uses the WEB-EDI solution, is
sent to a web portal named “Enterprise portal” hosted on a server linked to
ATbizNET/Panteon.net. Whenever the portal receives a new document, it creates an e-
mail that is sent to the supplier’s contact person. Alternatively it can also create a text
message (SMS) that alerts the supplier over mobile phone. The supplier can log on to the
portal to view the document and can even send order confirmations to Mercator from the
portal.
ATbizNET/Panteon.net
ATbizNET/Panteon.net is a value-added network (VAN) provided by ATNET Advanced
Technologies and Panteon Group. It is a communications network physically separated
from the internet that provides communication channels and other services, such as
automatic error detection and correction, protocol conversions, and store-and-forward
message services. The network can be accessed over:
Modem access via dial-up line
Modem access via leased line
Modem access via ISDN line
Internet VPN (Extranet) access
Internet VPN Secure Client access
Cost for the system
Cost for building the e-commerce system at Mercator exceeded 35.000€
66
. Mercator also
has a services contract with ATNET Advanced Technologies: it pays a certain fee
67
to
ATNET Advanced Technologies for every document sent over ATbizNET/Panteon.net.
This is a special arrangement reserved for companies that exchange a lot of business
documents with their partners.
66
The total cost of developing the system has not been disclosed by the company. This is an
estimate of total cost that has been made at the beginning of the project however this figure has
been exceeded in the course of the project.
67
The fee has not been disclosed by Mercator.
e-Business in the Retail Sector
126
Important requirements and conditions
Mercator selected the GS1 EANCOM standard because it is compatible with solutions
used by other companies in Slovenia and in the European Union. For the success of the
project the question about the right type of network for the electronic exchange of
business messages was decisive. The internet proved to be too unreliable. When it was
tested for possible use in the early stages of the project, it was discovered, that it could
not handle bigger influxes of business documents. Even the number of 60 messages
proved to be too much to deal with, since it confused them with an attack on the system.
Newer tests have proven again that the contemporary internet is not suited for serious e-
commerce. For comparison, Mercator today exchanges around 7000 business messages
per month over the network. Also, since almost everybody can enter the internet, it is
highly exposed to cyber attacks to which a value-added network such as
ATbizNET/Panteon.net is much less exposed. That’s why it was decided to use
ATbizNET/Panteon.net instead, which is based on more reliable x.400 recommendations.
An important requirement was also the cooperation of suppliers in the development
process. The latter gave Mercator, ATNET Advanced Technologies and Panteon Group
valuable feedback on solutions proposed and developed. It was the feedback from small
suppliers, that the developed FULL-EDI solution is too expensive for them that persuaded
Mercator to initiate further development of e-commerce solutions in the directions of e-
Service and WEB-EDI. Those two solutions were developed by Panteon Group on its
own costs to satisfy market demands. By satisfying the needs of small suppliers, Panteon
Group has contributed significantly to the expansion of its e-commerce solutions in
Slovenia and abroad, making them the norm of the day. This of course is a positive
development for any company interested in e-commerce, since it can rely on one solution
for conducting e-commerce with all the other companies.
The situation today
The e-commerce solution enables the electronic exchange of orders, order confirmations
and inventory reports between Mercator’s warehouses and its suppliers. Dispatch
advices, receipt advices and invoices on the other hand must still be issued on paper.
Moreover, the solution does not enable the direct exchange of electronic business
documents between Mercator’s stores and the suppliers. Instead, the stores exchange
electronic business documents with warehouses using in-house standards. The next step
is to develop direct e-commerce links between the stores and the suppliers. Also, the
solutions for electronic exchange of dispatch advice
68
, receipt advice and invoice still
need to be implemented. Through numerous takeovers of other companies Mercator has
acquired a number of different ERP systems. To solve this problem the company has
decided to replace them with one new ERP system. Mercator is also looking at new
emerging standards for electronic business messages, such as GS1-XML (BMS). If the
usage of GS1-XML (BMS) spreads, the company will probably base its entire e-
commerce on this standard.
5.1.3 Impact
e-Commerce between Mercator and its suppliers not only changed the procurement
processes at the company, but also affect other trading companies in Slovenia that have
adopted the solutions developed (such as Spar Slovenia and Tuš). It also contributed to
68
For now Mercator only exchanges dispatch advices with Petrol.
e-Business in the Retail Sector
127
the overall expansion of e-commerce in Slovenia, since it was promoted by retail
companies among their business partners.
Within Mercator the introduction of e-commerce has had an impact on:
Work organisation: data from business documents used in the procurement
process is entered only once into the company’s ERP system. This automation has
reduced the amount of manual work in the procurement process and thereby the
number of human errors. e-Commerce also demanded classification of products
according to EAN article number, a bar-coding standard defined by the standards
organisation GS1 for marking retail goods. Before the introduction of EAN article
numbers, it was much more difficult to order the desired goods: for example if the
company wanted to order a certain type of cosmetic product, it had to send a
detailed description of the product to the supplier; as a result mistakes were made.
Now, those descriptions are replaced by a simple EAN article number. This has in
turn reduced the number of mistakes in the procurement process and simplified the
communication with suppliers. e-Commerce has not significantly changed the
company’s employment structure. Instead it resulted in redistribution of tasks in
sales department due to automation that not only enables faster issuing of orders
but also handling additional suppliers with the existing work force.
Role of sales representatives: supplier sales representatives no longer need to
control stock level at Mercator warehouses, which frees them to promoting new
products instead. Since the introduction of e-commerce, the employees of Mercator
can check stock levels at any time of the day. Therefore the negative influence of
sales representatives on issuing redundant orders has been diminished: before the
introduction of e-commerce they could easily persuade the company to make
additional purchases of goods that were not based on the low levels of stocks and
served only to increase the sales of the supplier.
Efficiency of inventory management and logistics: e-commerce has sped up the
flow of goods and reduced the required warehouse space. According to the
estimates of Mercator, e-commerce has reduced procurement costs by 10.8%. The
suppliers’ sales representatives do not have to check the level of stocks in
Mercator’s warehouses by hand anymore. Because of inventory reports that are sent
over ATbizNET/Panteon.net by Mercator to its suppliers, the latter can track the level
of the company’s stocks from the distance any time of the day. This in turn helps the
suppliers to plan their production more accurately. e-Commerce as it is now,
however, does not enable just in time inventory strategy, since the ordered goods
still need 24 to 48 hours to arrive in the company’s warehouses. Emergency orders
which have to be resolved in the matter of hours are therefore also resolved over the
telephone.
Business relationships between the company and its suppliers of fast moving
consumer goods and cosmetics: the suppliers can engage in closer cooperation
with Mercator in its clearance sales and discounts, since they can more accurately
track the company’s stocks and plan their production. Now the suppliers are
informed well in advance of incoming clearance sales and possible stock shortages
and can correspondingly adjust their production in time. Before the introduction of e-
commerce, they had to be constantly on guard in order not to be surprised by
unexpected orders.
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5.1.4 Lessons learned
Several lessons can be learned from the e-commerce adoption at Mercator:
The implementation of a unified ERP system in the company, and all of its subsidiaries
and dependent companies before the introduction of e-commerce is paramount to the
speed of the project. Mercator originally planned to end the project by the end of 2001,
however to this day, the project is still incomplete. Its decision to launch the project before
the introduction of a new ERP system, proved to be one of the main reasons for the delay
in the execution of the project.
After launching the project in 1999, Mercator took over many different companies, each
with their own ERP systems. Since every ERP system compiles business documents
according to internal standards, these have to be translated into GS1 EANCOM
standards for e-commerce. The company therefore had to decide between two
alternatives: the first one was to introduce a unified ERP system before implementing e-
commerce; and the second solution to adapt TIE EP application for conversions to each
of those ERP systems and worry about a unified ERP system at a later stage. The
implementation of the first solution would require more time at the beginning, but would
ultimately permanently solve the problem. The second solution on the other hand would
in essence only postpone the problem, but could save the company precious time at the
beginning. The company opted for the second solution. Unfortunately, this proved to be
more costly in the long term, since it took more time than originally anticipated and
caused delays. Consequently, the company was forced to slow down the development of
e-commerce in order to introduce a unified ERP system first. Meanwhile Mercator has
been overtaken in e-commerce by Spar Slovenia. The latter has first introduced a unified
ERP system and then proceeded with implementation of solutions developed by ATNET
advanced Technologies and Panteon Group for Mercator. Now, unlike Mercator, it is
already exchanging electronic despatch advices and receipt advices with its suppliers.
For Spar Slovenia the Panteon Group is also already developing a solution for electronic
exchange of invoices.
Leadership support is paramount to the success of such a large-scale project. According
to Mercator the support of the leadership was vital because it could provide additional
pressure on suppliers to accept the developed e-commerce solution. The introduction of
e-commerce also demanded extensive organisational changes that would normally
generate enormous resistance from the employees, if they were not backed by the
leadership. Such organisational change was a complete redesign of procurement
processes, which required Mercator together with its business partners to define the
quantities of goods that could be ordered through electronic procurement systems, the
terms and conditions under which orders should be fulfilled, and the responsibilities of
business partners in the process.
The simplified EANCOM message definitions should have been implemented all at once.
They have been developed all at the same time, but implemented one after another,
which has caused additional delay. The reasons for this were deficiencies discovered in
practical tests. As a consequence the message definitions had to be updated, which
could only be done in sequence: for example, a repair of deficiency discovered in an
order’s message definition also demanded adaptations in the message definition of order
confirmation, since the second document refers to data in the first one.
The suppliers (especially the smaller ones) should be motivated to take e-commerce
more seriously. In many cases the suppliers are not taking e-commerce seriously
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enough, because they are not checking their mailboxes regularly (i.e. they usually forget
to check them when they go on holidays). This has forced Mercator to employ an
additional employee, whose task (among others) is to remind the suppliers of their
obligation to regularly check for incoming orders. This could be prevented by introducing
penalties for suppliers that fail to meet their obligations. Additionally, this situation may
have been completely avoided if e-commerce solutions used by Mercator would already
support all business documents.
5.1.5 References
Research for this case study was conducted by Darko Štamfelj, University of Ljubljana,
Faculty of Social Sciences on behalf of the Sectoral e-Business Watch. Sources and
references used:
• Face-to-face interview with Martina Hozjan (contact person in Mercator),
3.12.2007 Ljubljana
• Telephone interviews with Martina Hozjan (contact person in Mercator), 10.-
12.12.2007 and 19.-26.1.2008
• Telephone Interviews with Marko Klasek (contact persons in Panteon Group),
10.-20.12.2007 and 19.-26.1.2008
• Ann Apps, Ross MacIntyre: XML - Using an Evolving Standard in Electronic
Publishing.http://citeseer.ist.psu.edu/419656.html
• Websites:
• BusinessDictionary.com,http://www.businessdictionary.com
• Mercator,http://www.mercator.si
• Wikipedia,http://www.wikipedia.org
• Delo,http://www.delo.si
• Panteon Group,http://www.panteongroup.com
• ATNET Advanced Technologies,http://www.atbiznet.net
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5.2 Globus, Germany
Abstract
Globus Holding GmbH & Co. KG is a family-owned retail company, based in Germany.
With a focus on the German market the company operates about 100 stores in this
country. In 2001, Globus implemented an e-procurement system, which has
streamlined the entire process of procuring indirect goods. Moreover, the system has
enabled the firm to procure strategically through pooling demands of single
departments within the various stores and setting up framework contracts with
preferred suppliers. The implementation of e-procurement at Globus illustrates the
need for a holistic approach to e-business adoption. The pure installation of a technical
system bears little return on investment without the re-organisation of business
processes and the full support of management and end-users.
Case study fact sheet
Full name of the company: Globus Holding GmbH & Co. KG
Location (headquarters / main branches): St. Wendel, Germany
No. of employees: 23 000
Sector Retail
Main business activity: Retail, home improvement, consumer electronics
Primary customers: Families
Year of foundation: 1828
Turnover in last financial year (€): 4.7 billion
Most significant market area: Germany with a focus on the South, Czech
Republic and Russia
Main e-business applications studied: * e-Procurement, e-Communication with suppliers
ICT and e-business impacts on work processes
ICT and e-business impacts on market structure
and competition
ICT and e-business impacts on innovation and
productivity
5.2.1 Background and objectives
Globus Holding GmbH & Co. KG is a family-owned retail business that was founded in
1828 in St. Wendel, Germany. It owns 38 self-service department stores, 51 home
improving stores, and 9 stores for electronic consumer goods in Germany. In addition,
Globus has 16 hypermarkets located in the Czech Republic (13) and Russia (3). The
company has a turnover of 4 to 5 billion Euros per year and employs 23,000 people.
Initial situation and objectives of the e-procurement project
In 2001, Globus started to restructure the procurement of indirect goods and introduced a
central electronic procurement system. This restructuring process was strongly driven by
competitive pressures as the retail business in Germany is characterised by fierce
competition coupled with tremendous cost pressure. Particularly hypermarkets, which are
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typically located in the periphery of bigger cities like Globus department stores
increasingly face competition from city stores due to rising prices for petrol.
In order to keep up with competition, searching for sources to cut costs is considered a
basic need within the company. While procurement of direct goods (i.e. goods traded by
Globus) offered little room for improvement as it was already streamlined and well
supported by IT, the procurement of so-called Maintenance Repair and Operation (MRO)
goods was not working at its full potential back in 2001. Purchasing volume of MRO
goods at Globus, which includes e.g. packaging material and cleaning products account
for about 6 to 8 million Euros per annum.
Prior to the introduction of e-procurement in 2001, a centralised system had not been
available and procurement activities had been completely in the responsibility of single
departments. ‘The cheese counter, the bakery or the butcher within each department
store always initialised a completely new and separated ordering procedure whenever
something was needed. Orders were placed via telephone, fax or field service and more
than 1000 employees were involved in these procedures’ (Mr Ortner, manager
responsible for e-procurement activities). In summary, every single department spent a
lot of time on procurement activities rather than concentrating on their core business.
Apart from being time and cost intensive, the processes were not transparent and prone
to errors. Due to the decentralized structure, some articles were ordered in parallel from
different vendors for different terms and conditions. Therefore, it was extremely difficult to
get information needed to analyze procurement activities and buying patterns.
Consequently, Globus could not realise larger order quantities leading to better
conditions.
Hence, the main objectives for the new e-procurement system at Globus was to
streamline and speed up the MRO procurement processes while giving shop floor
employees and managers the opportunity to better focus on their core activities.
Moreover, Globus wanted to increase procurement transparency and, in this way, carry
out the procurement of indirect goods in a more strategic way.
5.2.2 The e-procurement project at Globus
The implementation of the e-procurement system at Globus was accompanied by a
complete change to the existing MRO procurement processes: ‘70 to 80 percent of all
MRO goods buying processes is now executed via the system, even business cards are
ordered electronically’ (Mr. Ortner). Principally, the new system works as shown in Figure
1. Today, the system contains electronic catalogues displaying goods from 20 MRO
suppliers that have framework contracts with Globus.
In each store, between one and three contact persons are responsible for the
procurement of MRO goods and have access to the central e-procurement system.
These contact persons tend to work in the field of EDP (Electronic Data Processing) or
Human Resources.
Departments within the different stores report a need for an MRO good through
customised catalogues in form of excel-sheets. These catalogues are adapted to the
differing needs of each department. Selected members of staff within the departments
chose the MRO goods needed and record the quantities required in the sheets. These
excel sheets can easily be imported to the e-procurement system with a single mouse
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click. The various contact persons at the stores can pool the demand for certain MRO
goods and set up electronic orders.
As order information is recorded by the system, central procurement management at
Globus headquarters is able to monitor and analyse all processes taking place. For
example, various analysis and statistic tools facilitate internal backtracking of MRO
goods. In addition, information gathered provides the basis for strategic procurement
activities, such as negotiating framework contracts with suppliers.
Meanwhile, an invoice process is fully integrated into the system. Whenever MRO goods
are delivered to a store, the respective contact person adds a ‘goods received’ note to the
system. Hence, incoming invoices can be checked easily using the information stored in
the system.
Exhibit 5.2-1: The electronic procedure at Globus
Source: Globus/Sectoral e-Business Watch
The fully integrated electronic MRO procurement system connects the following
stakeholders and provides them with functions facilitating procurement activities: (SL:
Please use Bullet1 format for the following lists.)
MRO suppliers: Depending on their technical status, suppliers´ sales systems are
integrated with the e-procurement system of Globus in three different ways. About
half of all suppliers receive ordering information as pdf- or text-files, attached to e-
mails. Others receive ordering information via emails with attached XcbL69-files,
that can be directly processed into supplier’s sales systems. The e-mails are
generated automatically by the system. One of Globus´ largest suppliers is already
connected to the e-procurement system via EDI (Electronic Interchange), giving the
benefit of fully automated electronic processes.
Any changes in the catalogue data are transmitted electronically and can be
published to all involved parties at Globus without any additional effort. Suppliers
69
XcbL is a subtype of the standard language XML, which is commonly used for the description of
electronic business processes.
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just need to submit Excel sheets with new or changed product data. Then, the data
gets converted into the catalogues´ standard BMEcat and can thus be integrated
into the system.
Contact Persons in charge of the store’s procurement activities have access to a
multi-supplier catalogue that contains information on products and conditions
negotiated with Globus. They are endowed with functionalities to pool the demand
of single departments, to set up orders and to coordinate the ordering process.
Departments within the stores have access to Excel-based catalogues that are
adjusted to the individual needs of the departments and can be easily imported or
exported by the e-procurement system.
Central procurement management at the Globus Headquarter is able to monitor and
control the procurement process using information and statistics functions provided
by the system.
Support of related processes: Information gathered by the system is also used to
support invoice checks, the assignment of procurement costs, and the accounts of
single departments.
As a technical basis Globus uses the software system “Impact Ordering” from Healy
Hudson, a German software manufacturer specialised in e-procurement. The system
works completely web-based and runs on the servers of Healy Hudson. Users have
access to the system via internet. Suppliers receive orders via e-mail or EDI (as
described above). Healy Hudson manages the upload of new or changed product
information, i.e. the conversion of Excel-based data in BMEcat and the integration into
the system. Globus acquired a certain number of user licenses for Impact Ordering.
Costs like hosting, services and support are paid for annually.
Key challenges and success factors
The success of the e-procurement system at Globus depends on several important
factors. Based on the procurement manager’s experience the following challenges
emerge:
In depth-analyses and optimisation of processes is a precondition. The
implementation of an e-procurement system goes far beyond installing a technical
system. In fact, the technical system only supports procurement procedures as
defined by the company. ‘An e-procurement system is of little use, if the processes
behind are not organised in an efficient way’ (Mr Ortner). Thus e-procurement
managers at Globus put much effort into the analyses and optimisation of
procurement processes before implementing the technical solution.
Providers need to listen and meet company-specific requirements. When
choosing the technology, the Globus management did not just look for a standard
software but for a system that fulfils the company’s specific needs. As a retail
company, Globus demands extensive options for recording and analysing
information as well as for processing of complaints. All in all, choosing an e-
procurement system means to choose a technology partner with whom the
company cooperates for years in order to adjust and further develop the software.
‘Therefore it is of outstanding importance that the technology provider shows
industry expertise and – even more important - the willingness and ability to listen to
the customer’s needs’ (Mr. Ortner). Healy Hudson, the provider chosen by Globus
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met these criteria. Globus has now successfully been co-operating with this
technology partner for the last seven years.
Involving stakeholders and close co-operation with the technology provider
helps to ensure user acceptance. Managers at Globus are convinced that the e-
procurement-system only works, if it is fully accepted by the users and fulfils their
specific needs. Therefore, Globus organised several workshops, at which users of
the system and technology partners worked jointly on the specification of the
technical system.
E-procurement is a long-term project and always work in progress. Globus has
come to realise that an e-procurement system is never fully developed,
requirements change continuously and adjustments have to take place at all times.
Moreover, the firm is convinced that the acceptance of a new system increases, if
suggestions for improvements from users are taken into consideration. Therefore,
the procurement managers at Globus are continuously exchanging ideas about
further system development with both users and technology provider.
5.2.3 Impact
Since the implementation of the new electronic system, procurement processes have
changed completely. The new system provides a basis to procure indirect goods in a
much more organised way. Regarding procurement at Globus, Mr. Ortner refers to the
following key benefits:
Streamlined procurement processes. Compared to the former situation, the
procurement of MRO goods at Globus is much more streamlined. Departments just
have to indicate their needs on customised catalogues that can be imported to the
e-procurement system by a single mouse click. Contact persons at the stores can
pool demands and set up orders electronically without any additional paper work.
Suppliers receive orders immediately and can process them directly within their
sales systems. And finally, invoices can be checked automatically by comparing
data on the invoices with the data stored in the system. Thus, less people, less
time, and less manual work are needed to set up an order or to check an invoice.
Focus on core business activities. By means of the new e-procurement system,
single departments within the stores can focus on core business activities. ‘Today
the butcher is focused on running his butchery and the baker is focused on running
his bakery, rather than dealing with suppliers of MRO goods by fax or telephone’.
(Mr. Ortner)
Basis for strategic procurement activities and consolidation of buying power.
Since information about procurement activities is easily available, arising expenses
can be traced back and analysed by various statistic tools. In turn, the findings
provide a proper basis for consolidating the supplier base and negotiating
favourable framework contracts. Due to the pooling of MRO needs, larger order
quantities could be realised and prices were negotiated anew. ‘As a result of
strategic procurement activities, prices came down by about 20% on average’. (Mr.
Ortner)
Advantages for MRO suppliers. Suppliers that are connected to the e-
procurement system benefit as well: electronic orders are directly assigned to the
sales systems of the suppliers. As a consequence of this improved coordination of
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orderings at Globus, the suppliers´ sales and logistic processes are much more
streamlined. Suppliers connected to the system do not need additional sales
people, that visit departments at Globus and present their offers. In addition, all
indirect goods demanded by different departments within a store can be delivered in
one go.
It is difficult to quantify benefits and costs of the MRO e-procurement system due to the
rather unorganised way in which procurement of indirect goods was organised before the
system was installed (comprehensive information on procurement costs prior to 2001 is
not available). In addition, it would be extremely difficult to retrace all time and effort
associated with the introduction of the e-procurement system in detail.
Nevertheless, Globus management argues that the investment into MRO e-procurement
paid off quickly: procurement processes improved significantly, and cost reductions
through strategic buying activities are estimated to amount to a seven-digit number in
Euros. Globus also profits from the fact that running costs, especially for maintenance
and support, are financed by connected suppliers. Thereby expenses incurred are not
charged, but rather compensated through improved terms and conditions.
5.2.4 Lessons learned
This case study illustrates how e-business technologies can positively contribute to
process innovations and affect the way companies operate. At Globus Holding GmbH &
Co. KG, the implementation of the e-procurement system has been the basis for a
complete re-organisation of processes related to the procurement of MRO goods. The e-
procurement system helps to streamline and speed up the entire procurement process,
including procedures related to invoice checking and controlling.
Even more important, the system provides an appropriate basis for consolidating buying
power and setting up favourable framework contracts with suppliers. Of course, the
consolidation of purchasing power improves the position of Globus when negotiating with
the suppliers of MRO goods. MRO suppliers, however, may also benefit from e-
procurement systems as they can streamline sales and delivery processes. In this way,
the e-procurement system drives process innovations at both Globus and its suppliers.
The case study also illustrates some key challenges and success factors when
implementing an e-procurement system. The impact of e-business technologies strongly
depends on a number of environmental factors. For example, it turns out that e-
procurement projects go far beyond the pure installation of a technical system: the
system is only as convenient as the underlying organisational processes. Thus, much
time and effort is needed for the re-organisation of processes before the system is
installed. Another important point raised is the continuous need for adjustment and
improvements in order to ensure an efficient use and the acceptance of users. These
points should be taken into account when discussing the impact of e-business
technologies. They might explain, why similar technologies used in similar companies
may lead to very different outcomes.
5.2.5 References
Research for this case study was conducted by Dr. Andreas Stiehler and Timo Zumbro
(Berlecon Research) on behalf of the Sectoral e-Business Watch.
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Sources and references used:
• Interview with Mr. Ortner, procurement manager at Globus Holding GmbH & Co.
KG and in charge of the e-procurement project, 18
th
April 08
• Success story “Traditionshaus Globus setzt auf zentrale Bestellbündelung”,
www.healy-hudson.com, 2002.
• Websites:
• Globus,http://www.globus.net
• Healy Hudson,http://www.healy-hudson.com
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5.3 Brookland Plus Products/ Dirk van den Broek,
Netherlands
Abstract
This case study analyses Brookland Plus Products' implementation of a supply chain
management software - Aldata G.O.L.D. Stock - for managing supply chain and
logistics operations of its parent company, Dirk van den Broek. Dirk van den Broek is a
Dutch retailer with over 350 stores in the Netherlands. Brookland Plus Products is
responsible for logistics processes of Dirk van den Broek’s stores. Brookland has been
using supply chain management software since 1995 to support its warehouse and
distribution processes, and more recently decided to upgrade its implementation to
achieve business process consolidation and fulfil extended business requirements.
Case study fact sheet
Full name of the company: Dirk van den Broek / Brookland Plus Products
Location (headquarters / main branches): Netherlands
No. of employees: 13,500 / 1,000
Sector: Retail Chain / Logistics Subsidiary
Main business activity: Retail sale
Primary customers: Consumers / Dirk van de Broek's retail chains
Year of foundation: 1942
Turnover in last financial year (€): €1.8 billion
Most significant market area: The Netherlands
Main e-business applications studied: * Supply Chain Management (SCM)
5.3.1 Background and objectives
Dirk van den Broek is a Dutch supermarket chain operating multiple retail formats under
the Dirk, Bas and Digros brands - grocery stores and supermarkets - the drugstore and
personal care chain Dirx Drogist, wine retailer Dirck III, and travel agency D-reizen.
Dirk van den Broek focuses mainly on offering products at low prices through its
discounter chain. With over 13,500 employees and some 363 stores in the Netherlands,
Dirk van den Broek established four support organisations focusing on logistics,
purchasing, acquisition and project development, and professional services.
Logistics operations are managed by Brookland Plus Products (Brookland), a subsidiary
of Dirk van den Broek. Brookland operates several distribution centres in the Netherlands
to support the delivery of products to all of Dirk van den Broek's stores.
In 2001, Dirk van den Broek signed a joint-venture agreement with DekaMarkt, a Dutch
retailer that owns 85 supermarkets. Logistics integration of the DekaMarkt chain is
currently ongoing, after the establishment of shared-service centres for human resources,
IT, and Finance, centralised within the sister company Detailresult Services.
Supply chain management, which comprises supply chain planning and execution,
including logistics and distribution, is one of the most important business processes for
retailers. In fact, logistics efficiencies impact both top-line results, which in essence
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depend on merchandise shelf-availability and selling space, and profit margins, which
largely depend on supply chain efficiencies. Dirk van den Broek's business model,
focusing on convenience and local availability of products, is requiring solid merchandise
intelligence capabilities, robust supply chain execution efficiencies and the ability to
address a variety of logistics requests under a consolidated and centralised process.
With the objective of supporting its expanding retail formats, growth in stock-keeping-
units (SKUs) volumes managed by the Dirk van den Broek chain and integrating
DekaMarkt logistics into Brookland, the company required a major upgrade to its supply
chain management systems' functionalities and stronger integration with its central ERP
system.
5.3.2 e-Business activities
The Process
Brookland operates six warehouses (and another 4 for DekaMarkt) located throughout
the Netherlands in order to ensure fast replenishment efficiencies for all supported stores.
Transport of goods is performed by transport companies working nearly exclusively for
Brookland. Each store in the Dirk van den Broek chain places orders to Brookland using
a store ordering system, which captures actual sales data from the Point of Sale system.
A custom-built forecasting application providing basic analysis of historical demand
patterns contributes to the definition of the store replenishment plan. Brookland receives
and aggregates all orders coming from the stores, and then defines and execute the
delivery schedule in collaboration with value chain partners (Exhibit x.x-1).
Exhibit 5.3-1: Dirk van den Broek's Logistics Process
Source: Brookland/Sectoral e-Business Watch
Warehouse management includes reception of inbound deliveries, allocation to
warehouse racks, goods' pick-up, preparation and dispatch to fulfill delivery orders, and
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eventually goods forwarding when passing through multiple warehouses. Dirk van den
Broek's store selling space is limited to an average of 1,000 square meters, thus in order
to maximise selling space allocation, all stores keep their stock on the shelves. Brookland
manages approximately 12,000 individual articles, and suppliers can perform direct store
deliveries for perishable goods like meat, vegetables, bread, milk and magazines alike.
Brookland operates with high inventory turnover rates and frequent store replenishments,
e.g. between 2 to 4 times per day (from each warehouse, along with direct deliveries this
results in an average of 14 trucks per store per day). This represents a big challenge for
the company in finding the right balance between shelf-availability and replenishment
process efficiency, both at store and warehouse levels. An additional challenge for
Brookland is that replenishments tend to be very fragmented due to the diverse range of
orders received from the stores. Therefore, Brookland needs to run a coherent supply
chain process across different goods' categories in order to efficiently serve different retail
formats of the Dirk van den Broek chain.
Technology and Implementation Details
Since 1995, a legacy version of the Aldata supply chain management software
maintained by a third-party was in place. In 2001, Brookland needed to replace the
existing implementation with a packaged software solution, because support of its legacy
system was discontinued and the company required a new application to better match
their business process requirements. Dirk van den Broek's IT Director and Brookland's
Information Manager were the principal project influencers, but trust from the board
management was essential to fund the initiative. The contribution and support provided
by Line of Business Executives (LOB) was also important, although LOB were not the
main drivers for the implementation.
The selection process of the new system, performed with the support of IBM, was mainly
based on functionalities provided by the different applications under evaluation and
support level. Key users participating in the solution selection process included different
organisational layers, such as a warehouse manager responsible for operations in two
warehouses and order pickers. Brookland decided to deploy Aldata G.O.L.D. Stock 5.01
as this application provided the best fit to Brookland' process requirements, and Aldata
committed to further customise its application in order to fully match Brookland’s
requirements. As of June 2008, Brookland manages six warehouses with the software
solution and upgraded to Aldata G.O.L.D. Stock 5.03, which is a warehouse and logistics
execution management software that is part of a larger supply chain management suite.
In essence, the application provides the following functionalities:
Inbound and outbound management: functionalities include planning (for example
replenishment and routing), goods' reception, storage management, order
preparation, allocation, and dispatch.
Warehouse labor management
Traceability management, including control of information flows and goods
movements in the logistics network and event management (alert detection,
notification and response).
Following a workshop and a vendor evaluation process executed during 2004, Brookland
re-designed its master data management infrastructure based upon stronger ERP
integration and process consolidation in 2005 to optimise their supply chain performance
and accuracy of automated processes. With the objective of minimising supply chain
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errors and, as a result, maximise shelf availability while containing supply chain costs,
product and supplier data integrity is of paramount importance for retailers. Thus, Aldata
G.O.L.D. Central 5.04 was deployed as the central retail ERP platform to manage critical
operational aspects ranging from master data management and merchandising to
suppliers and invoice management. (not yet, all transactional data is not available since
these processes will be included starting 2009).
In 2007, Brookland's management also requested logistics and warehouse management
integration of the DekaMarkt chain, with the objective of achieving further reductions of
supply chain costs.
From a technological standpoint, Aldata G.O.L.D. Stock is a web-enabled application,
based on open standards such as Java and XML. The underlying database is Oracle
running. In the case of Brookland, it is an AIX (Advanced Interactive eXecutive) operating
system, IBM's proprietary version of UNIX.
Exhibit 5.3.2 illustrates the IT structure underlying the logistics process at Dirk cvan den
Broek’s logistics process (Exhibit 5.3.1).
Exhibit 5.3-2: Dirk van den Broek's IT structure underlying the logistics process
Source: Brookland/Sectoral e-Business Watch
Brookland also integrated the Aldata G.O.L.D. Vocal pick-by-voice system by equipping
100 warehouse operators with Vocollect Talkman devices. These are wearable
computers translating textual information into vocal instructions to warehouse workforce.
Pick-by-voice systems usually improve warehouse productivity, due to the fact that
warehouse pickers no longer have to read paper lists or handheld device displays for
instructions, but can use speech to perform their assignments. This capability reduces
orders' error rates and the time needed to prepare a delivery, while providing a safer
environment for warehouse workforce, thanks to hands-free and eyes-free operations. A
pilot project is currently ongoing to expand the pick-by-voice system with the use of
standard PDA (Personal Digital Assistant) handheld devices.
Costs
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Brookland is investing approximately €5 million between 2007 and 2010 for the
implementation of the Aldata G.O.L.D. modules, including licenses, application
development, functional design and system integration. The maintenance fee of the
system is approximately €200,000 per year.
Business process reengineering was not needed throughout the implementation due to
the fact that Brookland insisted on selecting a software application that was fully matching
its business processes. As a result, some adaptation and custom development activity
was required from the software vendor to solve all the identified functionality gaps, based
on a detailed blueprint of warehouse processes performed in a joint project by Brookland
and IBM Global Business Services.
5.3.3 Impact
Brookland did not go through a detailed Return On Investment (ROI) analysis to measure
the financial impact of the SCM implementation. However, a cost-benefit evaluation
project was conducted with the following metrics:
Intangible benefits: included in this category were benefits resulting from consolidation
of business processes and organisational changes. Due to their nature, intangible
benefits are difficult to quantify, but contributed to the attainment of productivity
enhancements. With the close integration of G.O.L.D. Central and G.O.L.D. Stock, for
example, it is now possible to exchange data such DESADV messages from suppliers to
speed up the reception process while also achieving improvements in quality. Another
example for intangible benefits originating from the standard G.O.L.D. Central solution is
that different variances of articles can be set which in turn enables Brookland to better
master articles and article variants.
Tangible benefits: Brookland expected measurable benefits to occur due to the adoption
of the SCM solution. Stock levels for example, were set to decrease as a result.
Furthermore, Brookland expected to better benefit from discounts that suppliers apply
regarding logistic conditions. Being able to operate as a true logistic service provider that
meets organisational demands without having to invest in costly modifications in the
current propriety systems was another tangible benefit expected..
While the aforementioned tangible and intangible benefits were identified in the cost-
benefit evaluation project, the key benefits obtained by Brookland and indirectly by Dirk
van den Broek from the SCM solution include the following:
Higher efficiencies of the replenishment process. Less human intervention is
required to fulfil the replenishment process due to the process automation and
consolidation enabled by the implemented software solution. As a result, accuracy
gains were achieved. The integration with the central back-end system and the
consolidation of the master data management infrastructure were two additional
enablers of optimised replenishments. For example, logistics delivery process
automation includes the use of EDI (Electronic Data Interchange) messages from
the ERP to the warehouse management system to notify delivery receipts. In
addition, Brookland also developed new capabilities that are enabling the company
to timely respond to fragmented store orders, for example the company is now able
to execute order picking at SKU-level in one warehouse.
Reduced out of stock as a result of optimised warehouse replenishment efficiencies
and automated management of the entire set of articles' attributes. Before the
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implementation of the SCM software, and due to the lack of master data
consolidation, it was necessary to create new articles to capture different product
attributes. This was a time consuming process that caused shortages on the store
shelves. The process was no longer necessary following the implementation of the
new SCM solution and the achievement of higher master data integrity thanks to
tight ERP integration.
Enhanced promotion management efficiencies, due to the attainment of full visibility
into stock-levels, purchasing, receiving and delivery processes. By combining these
four processes in a synergic and highly integrated manner, Brookland can ensure a
higher degree of reliability in store shelf availability for promotional campaigns.
Reduced supply chain management costs and logistics productivity enhancements -
Whilst Brookland did not reduce its workforce after the implementation of the SCM
software, the company shifted a significant portion of its warehouse workforce to
quality management and monitoring of SLA (Service Level Agreement) for goods
shipments (currently at 98%). In addition, the company achieved improved
management of suppliers' conditions and incentives due to the procurement
process consolidation, centralisation and integration with the replenishment
process.
Process scalability – Between 2000 and 2008 Brookland experienced a 100%
growth in the number of individual articles managed, e.g. from 6,000 to 12,000
articles. In consideration of the warehouse workforce re-organisation, this
essentially means that Brookland can now manage a larger volume of articles under
the same SLA without requiring additional workforce.
In conclusion, Brookland achieved the ability to execute just-in-time flows of outbound
logistics operations, optimisation of the replenishment process in response to variable
and fragmented demand patterns, improved visibility throughout the logistics network,
logistics costs reductions and more effective transportations to counteract high fuel costs,
and the ability to fulfil extended customer requirements.
Future Directions
In the future, Brookland is looking at the following opportunities that are expected to have
a big potential impact for Dirk van den Broek’s business performance:
Value chain ecosystem – the opportunity to enable stronger collaboration and
intimacy with value chain partners largely depends on trust and on company
cultures and ways of working. For example, Vendor Managed Inventory (VMI)
appears as a concrete opportunity to optimise supply chain performance, as
demonstrated by the likes of WalMart, Home Depot and Carrefour just to mention a
few examples of retailers that have successfully implemented VMI with key
suppliers. VMI is a supply chain business model in which suppliers are responsible
for maintaining the inventory levels required by retailers. Suppliers have access to
the retailer’s inventory data and are responsible for generating purchase orders.
Therefore, VMI requires a higher degree of partnership and sharing of mutual
interests and benefits that are specific to each party, and most importantly sharing
of risks, for example, in situations where the inventory does not sell. From a
technology perspective, it requires the use of EDI between suppliers and retailers,
and the availability of a web portal for suppliers.
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Brookland is also investigating into RFID (Radio Frequency Identification) for
warehouse and distribution operations. However, an initial pilot project was rejected
by the board management as the technology was considered to be too expensive
for item-level implementations. RFID has better potential, according to Brookland,
for pallet and container tracking, as well as for tracking crates that are used for the
delivery of perishable goods. Security and privacy are reported by Brookland as two
addiional concerns related to RFID.
By the end of 2008, Brookland will also implement Aldata G.O.L.D. Topase, a
forecasting and stock replenishment optimisation application that will replace the
custom-built forecasting software that is currently in use. With this new
implementation, Brookland expects to improve its forecasting and replenishment
efficiencies both at store and warehouse levels, because demand forecasts will be
based on an extended historical data range and suppliers' purchasing and logistics
conditions will be automatically taken into consideration during the forecasting
process. As a result, the company expects to further improve shelf-availability while
minimising supply chain costs.
5.3.4 Lessons learned
Among the key lessons learned by Brookland and Dirk van den Broek are:
The effort required on change management shall not be underestimated when
implementing a new SCM solution. In the case of Brookland, the effort required was
significant but highly beneficial for the success of the project.
Training is an important step for successful deployments of new SCM software.
Brookland provided training material for warehouse personnel and conducted
specific training sessions to warehouse supervisors, who in turn trained their team-
members. On the other hand, it was more difficult to perform training of assortment
managers and buyers due to their time constraints. As a result different training
methods are required to match different users' needs and get all users aligned to
the new practices, rules and systems characteristics.
Brookland recognised that the initial design and project scoping phase are
fundamental areas that need to be carefully assessed in order to ensure proper
project execution and alignment of IT with strategic business goals.
Brookland already established a positive working relation with the IT Vendor
selected for the new SCM software implementation. When Aldata consultants joined
the project, knowledge about the G.O.L.D. Suite was rapidly built; and alongside
IBM Global Business Services, Aldata’s partner in the G.O.L.D. implementation, a
strong team is assisting Brookland in the project.
Another important lesson learned at Brookland is that the replacement of any ERP
system does not come by itself: every adjacent system will be affected. A thorough
discussion on data migration is required as well as an impact analysis on the
application landscape.
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5.3.5 References
Research for this case study was conducted by Ivano Ortis, Global Retail Insights, an
IDC Company, on behalf of the Sectoral e-Business Watch. Sources and references
used:
Interview with Gerard Wensink, Information Manager, Brookland, April 24
th
, 2008
Websites:
• Dirk van de Broek,http://www.dirk.nl
• Aldata Solution,http://www.aldata-solution.com
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5.4 AMJ G Comunicações, Portugal
Abstract
The Portuguese telecommunications company AMJG specialises in selling mobile
phones and related services, including internet access. It developed a Customer
Relationship Management (CRM) system which allows it to manage client information
from several sources. The introduction of this system significantly improved the
effectiveness of relationships with company clients, as the storing and analysing of
information allowed AMJG to more easily identify their needs, and thus produce more
effective proposals.
Case study fact sheet
Full name of the company: AMJG Comunicações, S.A.
Location (HQ / main branches): Aveiro
Main business activity: Telecommunications equipment and services
Year of foundation: 1997
Number of employees: 35
Turnover in last financial year: 117,000 €
Primary customers: General public, and companies in all areas
Most significant geographic market: Portuguese regions of Aveiro, Espinho, São João
da Madeira, and Ovar
Main e-business applications studied: Customer Relationship Management
5.4.1 Background and objectives
AMJG Comunicações is an agent for the mobile phone company TMN (and its parent
company, PT Comunicações), promoting and selling the latter’s products. It has twelve
stores around the regions of Aveiro, Espinho, São João da Madeira, and Ovar, Portugal,
where it is one of the largest sellers in the telecommunications area. The twelve stores
are located around the specified regions, and each has an area of around 35 square
meters, with an average of two employees per store (the remaining employees work at
the company’s main office in Aveiro). Each store is connected to the internet (either by
ADSL or cable), a connection which they use primarily to access the e-business solution.
As an agent for a telecommunications company AMJG’s main business activity is in
selling the principal’s equipment and services, for which it receives a sales commission.
Those products consist primarily of mobile phones, access to TMN’s communications
network, internet access kits (which include modems, PDAs, or laptop PCs), as well as
installation and maintenance of related equipment and software. AMJG’s clients are the
general public and other companies. In the latter case, clients are individuals from the
companies, rather than the companies themselves, i.e. the deal is with the company but
the end clients are its employees.
Due to the fact that TMN does not give geographical exclusivity to any one of its agents,
the competition in the telecommunications area is fierce. AMJG’s business strategy rests
upon three principals: good store placement, high quality client service, and solutions
customised to the needs of its company clients.
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Due to the rapid pace of technological change in the telecommunications area, the use of
customer relationship management tools is highly important to keep a competitive edge,
as they allow identification of client needs and shopping trends in a faster way, to access
the latest product information instantly, and to crossover information more efficiently.
5.4.2 e-Business activity
The CRM solution developed for AMJG allows for just such advantages. It consists of a
Web-based (and thus accessible from anywhere where there is an internet connection)
application where the AMJG employees can instantly manage all types of information,
such as:
AMJG client list, with detailed information on each client, including individual
purchase histories;
All sold products, including their present status (delivered, ordered, pre-ordered);
Campaigns currently active or being prepared;
Products available for sale, with detailed information about each product, including
stock levels in the various stores;
Non-client companies that should be or already were the subject of a marketing
contact, plus its results;
Business rules that control the e-mail direct marketing feature;
Several analysis tools with crossover options to examine the information collected
and held by the CRM solution. These tools provide information including what types
of products are sold most (in absolute terms, per region, per campaign, etc.),
chronologically ordered ‘most sold’ product types over a period of time (to identify
trends), and impact of campaigns on types of products sold, etc.
The primary reason behind the decision to stop using a generic commercial application
and build a customised solution was the lack of support for several features specific to
the mobile phone industry (e.g. “purchase points”, where a client accumulates points in
each purchase which can later be used), as well as limitations in that software’s
crossover and analysis tools. Another important issue was the need for an interface with
TMN’s own internal e-business solution (all TMN agents must perform a certain number
of marketing campaigns, whose requirements they must download from that tool, and
later uploading the results).
The new tool is tailor-made to the specific needs of AMJG, with the information (and its
crossover analysis features) being oriented towards its business area, thus greatly
increasing the efficiency and speed of the client management process. It also
communicates directly with TMN’s e-business solution, allowing AMJG employees to
extract/update campaign information directly from the CRM tool.
The CRM project was implemented by the company IAITI, which was chosen based on
previous work it had done for AMJG on the latter’s Web site. The initial planning of the
tool took about two months and was a collaborative process between the two companies,
as IAITI had previous experience in the area and could advise AMJG on the best
approach to the CRM solution they wanted. The implementation of the CRM project took
about six months to achieve basic operational status. Since then the system has been
upgraded to include new features and better interoperability with other systems. The
CRM system consists of PHP pages linked to a MS Access database (upgrade to
Microsoft SQL Server is being considered). The pages are published by the IIS Web
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server, and the whole software is installed in the company’s intranet service, which runs
under the operating system Microsoft Windows Server 2003. The design of the project
was based on a number of requirements it had to fulfil. The most important were:
the system had to be able to gather information from different sources, some of
them external to the company (mainly TMN’s own e-business solution);
every client had to be identified univocally, a task that sometimes is not easy to
accomplish;
data had to be kept up-to-date, but also coherent among the several systems, so
the propagation of changes had to be carefully controlled;
some clients prefer to be anonymous, so there had to be a way to register them;
data had to be kept confidential, an important consideration both for client privacy,
and for competitive reasons.
To reduce cost the system was built over the company’s existing network, and as such no
new hardware was purchased. The CRM was implemented using Open Source
technology (PHP) and runs on top of software that the company already owned. The only
cost was the payment of the implementation service to IAITI, for a total of 7500 Euros.
The tool is used by all employees on different capacities, and for this reason it supports
four levels of access to users:
Store employees: can only access client and product information, but cannot make
changes; they can however insert new clients, register sales, and place orders on
products not currently available on the store;
Salesmen: can do all of the above plus access marketing campaign information (but
not create new campaigns); can also do some limited crossover of client
information;
Senior salesmen: can do all of the above plus create marketing campaigns, as well
as fully crossover and analyse data from clients; can also access campaigns in the
TMN e-business tool and register their results;
Administration: can fully access all features which, besides the above, include
assigning salesmen to specific clients/campaigns, and insert new product/service
information.
To date, the tool has been in use for about eight months. It is fully deployed and on
service in all stores and in AMJG’s headquarters, all of which are now integrated and
access the same database. All employees use it on a daily basis, with the TMN supplier
using it indirectly when it sends updates on its products or receives orders from the
stores.
Some minor new features (like support for importing/exporting Excel files, a format used
in some TMN documents) have been added to the system. Furthermore, it had several
small interface changes based on user feedback, and a few minor technical issues were
solved. It is currently considered reliable and user friendly by its users.
A new feature being already prepared for deployment is the ability to interface directly
with the TMN e-business tool in the few places it still uses Excel documents as a means
to exchange information. As TMN has announced it will change this soon, the CRM tool is
being prepared to access such data in the new format, resulting in a tighter integration
with the latter’s e-business tool. The implementation of this feature was so far simple as
the CRM already has the required database structure and information exchange
mechanism with TMN in place.
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5.4.3 Impact
The proper exploration of the CRM system’s capabilities led to a number of changes on
the working habits of the AMJG staff, such as the requirement to insert and classify all
data gathered about a client. Its introduction significantly improved the effectiveness of
relations with company clients by allowing an easier planning of visits to them, storing
and analysing information about their needs, and preparation of better oriented
proposals. This in turn led to changes in the company’s organisation, as the lesser need
to consult other sources of information led to quicker response time, as well as greater
mobility due to the Web nature of the system allowing it to be consulted from anywhere.
As the tool matured and its use spread to all AMJG employees the efficiency of the client
management process increased. Some of the areas directly affected were:
Company sales: sales for companies are up an estimated 6.4% since the tool
started working; while it is difficult to assert how much of this was a consequence of
using the tool, AMJG sales staff claimed it was the result of the better targeting of
potential clients brought about by the tool’s crossover and analysis features;
Work organisation: the greater efficiency of the new tool allowed to more quickly
process client information and prepare marketing campaigns, allowing salesmen to
spend less time on the office; this has led to a restructuring of job assignments
where salesmen now dedicate a larger share of their time to marketing in
companies;
Sales Staff: allows for a faster planning of visits and update on the status of client
companies, the quick spread of information on new products, and promotes
exchange of information among its members, by crossing over information from
several sources to identify potential new customers, making possible instant access
to updated product information, and set up of warning flags to other tool users to
take notice on specific subjects.
Business relationships with customers: individual clients now get better targeted
marketing campaigns as a result of the tool’s new analysis features; while it is
difficult to know how much is a consequence of adopting the tool, sales to individual
clients increased 12.8% since the tool was installed;
Inventory management and logistics: the tool allowed for increased speed in
placement of orders to TMN and between AMJG stores; delays in delivery of
products decreased by an estimated 1/4 to 1/5.
The CRM tool’s features make it useful not only to AMJG and its employees, it also is
beneficial for TMN and gives more options to AMJG clients. TMN now receives orders
from AMJG’s sales staff more quickly than with the previous methods (fax, or an upload
at the end of each day of an Excel file containing the list of product orders). TMN in turn
can send information on its products to AMJG faster (the previous method consisted of
an once-a-day file download). The CRM tool will also recognize certain information tags
when TMN sends its product information, which enables the latter to set warning flags on
specific items if it so wishes. Clients on the other hand, now have the option to
automatically receive e-mails with information on desired products. Furthermore, clients
can receive targeted e-mails with product offers based on their purchasing habits, the
mechanism of which is controlled by business rules set up by the sales staff.
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5.4.4 Lessons learned
The primary lesson learned at AMJG is about the power of custom-made solutions to
analyse and crossover information in a far more effective way. For example, the previous
generic tool lacked support for “purchase points”, a common feature in the Portuguese
cell-phone market (client receives virtual points every time he purchases a product or
service, and these can than be used as coupons to get a discount in new products). The
new CRM tool thus allowed targeted marketing of new cell phones to clients with a
certain minimum number of points, resulting in approximately a 50% increase in their use
by clients;
Another lesson was the importance of using tools that reduce planning and/or delivery
time. The increased efficiency brought about by the CRM tool decreased the time needed
to prepare marketing campaigns, as well as delivery of ordered products, and this
resulted in salesmen passing more time visiting companies, as well as greater client
satisfaction.
An unexpected issue was the initial difficulty some of the employees had in using some
parts of the tool, which required a few changes to the interface. A lesson drawn from this
is that, when developing a customised tool, the end users should be involved from the
start.
The tool’s information crossover features proved very popular with the sales staff, which
attributes greatly to the increase in sales to companies since the tool was introduced.
This has led to the discussion of the possibility to add even more specialized analysis
features to it, thus providing another lesson: when ordering a custom-made software tool,
always allow for the possibility of future unplanned improvements.
5.4.5 References
Research for this case study was conducted by Alfredo Silva, Inova+, on behalf of the
Sectoral e-Business Watch. Sources and references used:
Questionnaire and e-mail exchanges with José Gustavo, AMJG’s Managing
Director.
Interviews with João Correia, IAITI’s , 26-09-07, 11-10-07, IAITI offices
Company AMJG Web-site:http://www.amjg.pt/
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5.5 Casino Group, France
Abstract
The Casino Group is a leading food retailer in France. Founded in 1898, the firm sells
its products through various channels including different types of stores such as
hypermarkets and discount shops. In 2006, the Casino Group implemented a Customer
Relationship Management (CRM) system at its hypermarket branch. With this solution,
the firm aims to improve relationships with the ‘professional groups’ customers which
include public institutions, large enterprises and associations. Giving sales people
access to a centralised database significantly improved sales operations at the Casino
Group. The solution furthermore has a positive effect on marketing strategies and
activities. Overall, the solution has resulted in efficiency gains for the sales force and
the marketing department; productivity gains for the till employees; and improvement of
logistics, quality, hygiene, security and environment management within the Group.
Case study fact sheet
Full name of the company: Casino group
Location (headquarters / main branches): Sainte Etienne, France
No. of employees: 192 948
Sector: Retail
Main business activity: Food and non food retailer
Primary customers: Consumers
Year of foundation: 1898
Turnover in last financial year (€): €M 22,505
Most significant market area: France, North America, Asia, Indian Ocean
Main e-business applications studied: * Customer Relationship Management
5.5.1 Background and objectives
The Casino Group is strongly driven by its home market with 75% of its net sales
originating from sales in France in 2006. Before expanding into the international market,
the Group strongly consolidated its French home market position. These firm roots are
the source of the Casino Group’s ambitious and sustainable international expansion
which started in the late nineties. Internationally there are two priority markets: South
America and South East Asia. Across these markets, a diversified sales channel portfolio
including hypermarkets, supermarkets, convenience stores and discount stores ensures
that the Casino Group reaches a wide array of consumers.
Strategically, the Casino Group seeks to differentiate its offer from competitors with a
focus on the customer. To accentuate this differentiation in a competitive marketplace
assertive marketing initiatives have been designed to make every aspect of the business
customer-centric. Profoundly affected by this strategy is the hypermarket branch, which
includes 108 stores in France having a market share of 3.7% and representing 36% of
Casino Group’s revenues (€6,294 million in 2006). Marketing activities within this group
are based on the sustained development of the Casino brand, the introduction of new
food and non-food concepts and an ambitious customer loyalty program. An important
driver of both, revenue growth and margin improvement is this customer loyalty program:
purchases paid for with the Casino card continued to rise during 2006, reaching 60% of
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total revenue at year-end; number of active cardholders also increased by 10%. This has
a significant impact on revenue growth since the average value of a cardholder’s basket
is higher than that of customers not participating in the loyalty program. The CRM project,
called ‘E-DEAL’, is part of the differentiation and customer focus strategy.
The hypermarket branches serve the ‘professional groups’ segment which was created in
1998. This segment includes target customers like large companies, schools, and
restaurants. It represents approximately 2% of the income of each hypermarket. To
address this segment, one sales person is assigned to follow up and secure loyal
customers (in collaboration with the marketing department) in each hypermarket of the
Casino Group.
Prior to the implementation of the CRM tool, sales operations targeting the ‘professional
groups’ segment were not computerised and sales people mainly used fax and paper to
manage their customer appointments and to capture sales data. There was no
centralised information system to manage this data. In order to improve data
management and increase profitability of sales operations, the Marketing department of
the hypermarket branches decided to adopt a CRM solution that would:
automate and simplify operational sales processes
simplify in-store operational processes (mainly at the cash desks) and
enable the analysis of consumer habits with the aim to better address the
‘professionals group’ market segment.
5.5.2 e-Business activities
‘e-deal’ is the first CRM solution implemented at the Casino Group. The project was
launched at the end of 2005 and initiated and sponsored
70
by the marketing director of
the hypermarket branch. Following a detailed definition of project specifications, the
Casino Group launched a tender process to find and select a suitable solution provider.
The main requirements for the solution were to:
give marketing and sales personnel a centralised tool to follow up on activities
within the ‘professionals group’ segment
provide a unique customer database to sales personnel, enabling them to target,
follow up and secure loyal customers
comply with budget specifications (small budget)
provide an ergonomic, simple-to-use tool for users and
offer a web based tool which is easy to integrate into the existing information
systems infrastructure.
Following the selection of the solution providers (E-deal for the software and Unilog for
the integration of the solution) a development phase lasting approximately 7 months
allowed the hypermarket branches of Casino to adapt the software to its specific needs
and to engage in various test runs. Before the overall deployment of the solution, a two-
month pilot was done in three hypermarkets in France. These markets were selected due
to their diverse profiles which allowed for testing the solution in different environments.
70
The project sponsor denotes the person in a company committing political capital as well as
resources for a project.
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Following the pilot phase, the solution was deployed progressively: by the end of 2006 it
was installed at 20 stores with another 40 stores added in 2007. The target is to equip all
of the 108 stores by the end of 2008.
The project team consisted of two people from the Casino Computer Innovation
department, one Marketing project manager from the Casino hypermarket branches and
several consultants from the subcontractor company, working on the development and
integration of the solution. From the very beginning, end-users were involved in the
project: three sales representatives with different technical and professional backgrounds
participated in the development, testing and roll-out phases. Their views affected the
choice of tool, interfaces and functionalities; and they actively participated in training the
sales team in charge of the ‘professionals group’ segment. The initial training lasted one
day and is complemented by on-demand half-day refresh training sessions.
The solution deployed, developed with java language, is fully web-based, running on a
tom cat server. Each sales representative has a user login and password and can access
the tool via the Intranet.
Together with the CRM tool, the Casino hypermarket branch deployed a new customer
loyalty card for the ‘professionals group’ segment. The objective is to equip all customers
of the target segment with this card in order to being able to analyse their consumer
habits and perform targeted marketing activities. About 18.000 professional customers
are using the card today.
With the CRM solution, the sales process is as follows:
Sales representatives log into e-deal to see their calendars including customer
meetings scheduled by an external telemarketing company according to the
availability given beforehand.
The representatives access information(held on the database) about customers
with whom they have meetings scheduled in order to prepare these meetings.
All customer information and updates are stored in a central database, including
more than 200.000 contacts. This information can be accessed by the whole
‘professionals group’ segment sales force of all hypermarkets and by the marketing
department.
Before the solution was implemented, the telemarketing company sent customer meeting
proposals to the sales representatives who, as a first step, confirmed availability and
sent, as a second step, a final meeting acceptance or cancellation to the telemarketing
company. All information exchanges were done by fax. This process was significantly
simplified owing to the new CRM system.
The purchasing process of the ‘professionals group’ customer has been eased as well:
the loyalty card enables ‘professionals group’ customers to shop alongside other
consumers in stores while information about the card holders is being collected and
registered during check-out. Final year discounts are allocated to the respective cards
and managed automatically with data about all purchases being sent to the e-deal
system. Before the deployment of the solution, ‘professionals group’ customers had to
identify themselves at the reception of the store and get a specific paper that needed to
be shown at the cash desk. The cash desk employee then had to create a manual bill for
the customer which was a very time consuming activity.
With the purchasing process for the ‘professionals group’ customers now being
automated, accounting processes have also changed: prior to the introduction of the new
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system, the Marketing department received sales figures from individual sales
representatives on Excel sheets at the end of each month and data was manually keyed
into the central accounting system. There was no guarantee that figures were correct at
the time. With the e-deal solution, sales data is automatically transmitted from the tills to
the marketing department on a daily basis. The whole process is therefore now efficiently
organised and automated.
Future developments of the solution, such as the upgrade of the software version as well
as the synchronisation of the Outlook calendar with the e-deal calendar are planned for
2008. Thanks to the success of the project for the ‘professionals group’ segment, the
deployment of CRM tools across other Casino sales departments is envisaged.
5.5.3 Impact
The management of the hypermarket branch is very satisfied with the first results
achieved following implementation of the solution. Users have adopted the tool to suit
their sales process and feedback is very positive especially since the tool is simplifying
daily working processes.
The impacts of the solution can be summarised in efficiency gains for the sales force and
the marketing department, productivity gains for the till employees and in improvement of
logistics, quality, hygiene, security and environment management.
Hypermarket sales representatives in charge of the ‘professionals group’
segment
All customer information is consolidated in a centralised database that sales
representatives can access. 200.000 contacts have already been entered into the
database which is used by sales representatives to get to know customers and target
marketing actions to the specific profile of a customer.
The sales process is eased owing to a reduction of manual processes for scheduling
customer meetings. These meetings are organised to follow-up on existing customers
and to investigate new customers. The meetings are directly managed via an online
calendar shared between the telemarketing company taking the appointments and the
sales representatives.
Sales representatives are able to better match preferences and needs of the customers
thanks to detailed data available on their purchase habits. Representatives can now
negotiate prices, propose specific promotions to customers to reduce stocks or organise
specific events for targeted customers. This will probably have a positive impact on the
relationships with the customer.
Regarding the management of their own activities, sales representatives now have clear
visibility on their daily turnover and their position amongst the national sales force. This
allows them to better manage their sales activity and to exactly know if they are in line
with their sales objective.
Hypermarket branches marketing department
Activities of the entire ‘professionals group’ can now be controlled from an accountancy
and marketing point of view. Sales data of the income generated by the ‘professionals
group’ of each hypermarket is automatically gathered from the tills and represents reliable
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information for accountancy. Marketing personnel can now monitor activities on a daily
basis while they got the information only once a month before the new system was
implemented.
With this new information now available, the marketing department is able to launch
targeted direct marketing campaigns by segmenting the ‘professionals group’ market.
Detailed statistical sales analyses have made it possible to identify the top ten customers
or the top ten products sold. The tool enables marketing personnel to analyse customer
behaviour through detailed purchase data provided by the system. Marketing efforts can
be optimised by putting efforts on specific customers; examples include securing the
loyalty of regular customers or organising awareness and promotional campaigns for
customers that did not use their card for a certain amount of time with specific
promotional actions. Before the new system was deployed, marketing actions like specific
promotional offerings were sent to a very large amount of people and these actions
remained fruitless since they were not adapted to the target public.
Hypermarket logistics
Operations in the hypermarkets to manage the ‘professional groups’ segment have been
completely automated thanks to the introduction of the loyalty card and the CRM system.
This automation saves time for accountants and for customers and led to productivity
gains at the tills.
Another benefit results from the integration of e-deal with SAP allowing a better control of
the customer payments. Before the implementation of the solution there was no control
possible of non-paid bills of the customers who have certain payment facilities. Now a
detailed view of the status of customer payments is provided though the solution.
Hypermarket quality, hygienic, security and environment management
In case of product retirement (for example, removing contaminated products) the Casino
hypermarket branches now can exactly identify the customers who have bought the
product to be retired and be able to quickly inform the customer.
Due to the recent implementation of the system and the absence of any figures before
the CRM solution implementation the quantitative benefits are difficult to measure at this
stage. The Casino Group however now has a tool in place that gives a situational
overview allowing it to rapidly react to emerging quality, hygienic, security and
environmental challenges.
CRM tool usage
The Casino hypermarket branches today count about 200.000 contacts in their central
customer database and that 6.000 customer meetings could already been realised in 20
months allowing the representatives to attract more customers.
18.000 customer loyalty cards have been deployed until today which is considered to be
a great result. Customer satisfaction has also increased due to the simplified shopping
process for loyalty cards owners.
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5.5.4 Lessons learned
This case study illustrates the successful implementation of a CRM solution with a rapid
return on investment in terms of benefits achieved. It is important to highlight that such a
solution is not only suitable for large enterprise but also for small businesses due the
simplicity of the solution and the small budget required to put it in place: the solution is
not a complex system and can easily be adapted to the specific needs of a company.
The company then just needs to pay licence fees on a yearly basis and can outsource the
maintenance of the system to an external company. This makes such a solution
particularly suitable for small firms that do not have an internal IT department.
Several factors have contributed to the success of this project. First of all a company
should carefully analyse its functional needs and distinguish the different functionalities it
wants to deploy. ‘In order to facilitate the adoption, the deployment should be done
functionality by functionality starting with the most basic one’ recommends Stephane
Bayle, the CRM project director. The Casino Group started with the deployment of a
centralised customer database which was the most important functional requirement.
Another important point was the integration of a “representative” panel of users in the
project from its very beginning. Thanks to their active participation in choosing
functionalities and interfaces that meet user expectations the solution is widely used and
accepted by the end-users.
Even if the return of investment of this project cannot yet been calculated, Casino is
convinced that this project will bring great value to their customer-centric strategy in the
near future.
5.5.5 References
Research for this case study was conducted by Caren Hochheimer, Altran, on behalf of
the Sectoral e-Business Watch. Sources and references used:
Interview(s) with Stéphane Bayle, 4/01/08, Sainte Etienne France
Casino group Company annual report 2006
Websites:
•http://www.groupe-casino.fr
•http://www.e-deal.com/
• www.logicacmg.com
•http://www.geant-collectivites.fr/
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5.6 4fitness, Germany
Abstract
e-Marketing is an important, yet often undervalued factor for generating online sales.
4fitness, a small fitness equipment retailer based in Germany, uses e-marketing
activities successfully to generate more than two thirds of its sales from an internet
shop. This case study illustrates online sales and e-marketing activities at 4fitness. The
experiences of 4fitness produce several significant conclusions about e-marketing and
online sales for rurally-based micro firms. Among these are the effects of e-marketing
on the company, the impact of the internet shop on the company’s market reach, and
the role of business partnerships for bridging resource and skill gaps.
Case study fact sheet
Full name of the company: 4Fitness e.K.
Location (headquarters / main branches): Rohrdorf, Germany
No. of employees: Owner-managed firm, no other employees
Sector Retail sale of fitness equipment and accessories
Main business activity: Sales to consumers
Primary customers: Private consumers in Germany
Year of foundation: 2006
Turnover in last financial year (€): n.a.
Most significant market area: Germany
Main e-business applications studied: * e-Sales, e-Marketing
5.6.1 Background and objectives
4fitness (http://www.4fitness.biz/) is a specialist fitness equipment trading company based
in the rural town of Rohrdorf which is located some 70 km South-East of Munich in
Germany. A local entrepreneur founded the company in March 2005. This entrepreneur
decided to set-up his own company following several years of selling equipment as a
sales supervisor in a medium-sized sports shop in a neighbouring town. Trade
commenced in October 2005 when the first pieces of equipment were sold. Products on
sale include large fitness equipment such as exercise machines and treadmills; small
equipment such as heart rate monitors; and accessories such as free weights. The
company sources these products from ten key suppliers and sells them on to customers
all over Germany and German-speaking neighbouring countries including Austria and
South Tyrol in Northern Italy. As of 2008, the main customers of the company are
consumers from all over Germany. A minority of sales (less than 5%) is to hotels, so-
called rehabilitation centres and fitness studios. The majority of the equipment is sold
over the internet and in a brick-and-mortar shop in Rohrdorf. 4fitness is run by its owner;
the company does not have other full-time employees.
The fitness equipment and accessories retail trade is notoriously competitive. For a newly
established firm in a rural location, such as 4fitness, this competitive nature presents a
major problem: it is very difficult to reach customers through a bricks-and-mortar shop
alone – another sales channel reaching a wider audience is essential. During his previous
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work engagements, the owner recognised the growing importance of the internet. Sales
people in the fitness equipment business and manufacturers of fitness equipment also
suggested that the internet is of ever-increasing importance for generating sales. Hence,
the owner decided to sell his equipment and accessories over the internet.
5.6.2 Setting up and establishing the “e”-retail-business
The main initial technology task for the entrepreneur was to get the internet shop up and
running. This was crucial as the bricks-and-mortar shop is in a rural location and the
owner planned to use the internet to generate extra sales. The owner has used
computers in his previous job as a sales supervisor and he is used to using software
programs such as Microsoft Office applications and email programs. Yet, he does not
possess computer programming skills and he was not in a position to develop and launch
an internet shop from scratch without help. He therefore approached one of the directors
of a technology services provider, who lives locally. This technology services provider
agreed to support 4fitness in setting up and launching an internet shop. The online shop
development phase lasted six months in total. During this time, five briefing sessions took
place where the design of the shop and its main objectives were defined and refined.
Following a ‘teething phase’ of approximately six to eight weeks until everything was
running smoothly, it took another three weeks to add all the product information to the
online application. The owner added the product information to the shop while the
technology services provider carried out all the technical work.
e-marketing
Besides setting up the shop, the other major task for 4fitness was to establish the shop
and market it to potential customers. 4fitness engages in a number of e-marketing
activities to achieve this objective. The main activities are Google search engine
optimisation and placing Google online ads. ‘Google is the A&O of online advertising if
someone wants to sell something on the internet. Without it, there is no success!’ (Jakob
Steiner, 4fitness). The owner considers an application called AdWords (available at:https://adwords.google.com/select/Login?hl=en_GB) to be the key application for placing
online ads on Google. He uses this application -which is owend by Google and freely
available over the internet- to place the online ads. With AdWords, 4fitness can create
ads, choose keywords, make ads appear on Google, set budgets for ad campaigns, and
make payment to Google for their e-marketing services. Search engine optimisation
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in
contrast is considered less straight forward by the owner of 4fitness: he thinks the
process of aiming to place the products on offer in his online shop on early search pages
is a complicated procedure. The owner uses the Google Keyword tool to optimise the
search engine results for the products in his online shop.
71
According to Wikipedia (2008) ‘Search engine optimisation’ is the process of improving
the volume and quality of traffic to a web site from search engines via "natural" ("organic"
or "algorithmic") search results for targeted keywords. Usually, the earlier a site is
presented in the search results or the higher it "ranks", the more searchers will visit that
site.
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At the beginning, the owner concentrated his efforts on two search words: ‘Laufband’ and
‘Heimtrainer’ (treadmills and exercise machines respectively). Yet, he felt these efforts
were unsuccessful as, over a period of three months there was no significant move up
the search pages and sales did not increase either. Hence, he shifted his efforts away
from product groups towards advertising specific models of treadmills and exercise
machines such as “Crosstrainer CTR2”. This resulted in an increase of sales of the
specific models advertised as well as a move up the search pages. Overall, the owner
comments, that embarking on e-marketing is a ‘trial-and-error’ process. The technology
services provider was a valuable source of advice for 4fitness especially regarding the
use of AdWords and optimising search engine results. ‘Online advertising is difficult; the
tricky question is what to advertise where’ (Jakob Steiner, 4fitness).
Although Google is the main focus of e-marketing activities at 4fitness, the owner also
registered with price search machines such ashttp://www.guenstiger.de. 4fitness’ owner
decided not to engage in other price search engine activities apart from registering. For
the launch of the shop, online banners were placed over a period of five months on the
online sports pages of the main regional newspapers. These banners appeared on all the
sports-related sections and pages of the newspaper’s websites. This newspaper was
chosen for online advertising by the owner following a short analysis of media data: with
some 40.000 page views a day the owner was of the opinion that online ads on this
newspaper’s websites were suitable.
Technology used and cost for setting up and advertising the online shop
One desktop computer and a high speed internet connection are necessary for running
the online shop and engaging in e-marketing. The shop is hosted on the server of a large
German telecommunications provider and the owner accesses it via the internet
connection. From a software perspective, the desktop computer contains the common
Microsoft Office programs. When an internet order comes in via email, the owner prints
out the transport papers and the bill, attaches these documents to the equipment from the
warehouse and calls the transport firm to pick it up. The customer gets the equipment two
to three days after the order was placed. 4fitness has an ongoing service contract with a
third-party provider, which assembles the equipment bought by the online customers at
the customer’s premises. This equipment assembling activity is included in the online
price.
4fitness paid approximately 5000 Euros to the technology provider for developing and
setting up the online shop. This included all the technical and administrative work. The
partner firm is responsible for the technical maintenance of the online shop while the
owner looks after the content. One of the initial jobs for the owner was to add the different
products and product information (such as pictures and text describing the products on
sale) to the online shop. This activity lasted about three weeks. Initial costs for AdWords
amounted to about 1500 Euros. On top of that, some 2000 Euros were spent on further
optimising the shop and the online advertising. Ongoing costs include the hosting fee for
the server space which is about 160 Euros per annum and reoccurring cost for AdWords.
Cost for AdWords is fluctuating depending on, for example, the level of activities chosen
by the owner and the click rates (how often searchers click on the online ad placed)
achieved.
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5.6.3 Impact of e-marketing and selling online
The effects of e-marketing and selling online at 4fitness are organised into the following
four types: e-marketing, market reach, employment and the ability to concentrate on core
business activities.
e-marketing effects
4fitness generates between 75% and 80% of its sales from the internet shop; and, as far
as the company is concerned, e-marketing is a critical success factor for generating these
sales. Of the various e-marketing techniques employed, Google search engine
optimisation and placing online ads on Google are significant, as online sales are directly
affected by these e-marketing activities: an increase in sales of the specific products
marketed is measurable. Banner advertising in contrast shows no direct effects on online
sales although, according to 4fitness, intangible desired effects such as creating
awareness about the company and raising its image should be taken into consideration.
Besides marketing via Google and banner advertising, 4fitness uses registrations with
internet price search engines as an e-marketing technique. Again, this technique
produced no actual increase in online sales, but the owner reckons that it may have
brought potential customers to the company’s online shop that eventually might purchase
something.
Market reach
Retail trade over the internet, linked with a clear e-marketing strategy, is enabling 4fitness
to sell its products all over Germany and German-speaking neighbouring countries.
4fitness is therefore able to overcome national geographic boundaries; and to benefit
from reaching this national market. National and language borders however are difficult to
overcome as shown by the majority of internet sales originating from within Germany:
less than 1% of online sales at 4fitness come from outside Germany. It has, however to
be taken into consideration that the online shop is only available in the German language.
From a geographical perspective, no particular sales patterns emerge: customers from all
over Germany buy fitness equipment and accessories online at 4fitness. In terms of
products sold, all different types of products on offer sell via the internet shop.
Impact on employment
The online shop and the well-functioning relationships with the partner firms, especially
with the technology and the equipment services providers, enable the owner of 4fitness to
run his business without employees. Another factor besides online shop and partnerships
is that business processes at 4fitness are straightforward: the owner orders products from
suppliers and puts these into a warehouse until the actual sales comes through; or, if out-
of-stock, he asks suppliers to send products directly to customers with the service partner
ensuring that the equipment sold is in good order when it reaches the customer.
Compared to retail trade in a traditional shop, which constitute about 1/3 of sales at
4fitness, there is no need to physically showcase equipment in an online shop. This
saves 4fitness from having to employ sales staff manning the bricks-and-mortar shop in
Rohrdorf during regular opening hours. Hence, selling over the internet is one factor
(besides relationships with partner firms and business processes structure) that is
noticeably affecting employment at 4fitness.
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Ability to concentrate on core business activities
Selling equipment and accessories is the core business activities at 4fitness. This
includes e-marketing activities. The strong relationship with the technology provider
enables the owner of 4fitness to concentrate his efforts on the selling and marketing
activities as the partner firm provides adequate technology support for the online shop
and ample advice regarding e-marketing. The owner even goes as far as commenting
that he has no worries about technical issues because the partner firm is ‘always there’.
Furthermore, 4fitness uses a specialised logistics provider, a globally-operating German
logistics firm, to ship its products; and it uses a dedicated third-party service provider,
assembling equipment sold by 4fitness at customer premises. These partnerships give
the owner space and time to concentrate his efforts on core business activities.
5.6.4 Lessons learned from studying online sales and e-marketing
activities at 4fitness
The owner of 4fitness set-up and established a small retail business trading fitness
equipment and accessories in the rural town of Rohrdorf in Germany. The two main sales
channels for the firm are a bricks-and-mortar store and an internet shop. From the
experiences of 4fitness, the following lessons about e-marketing and selling online can be
learned:
e-Marketing is a complex issue, especially for micro firms
The experiences of 4fitness show that engaging in e-marketing is a complex issue: micro
firms need to make choices about the extent, type and scope of e-marketing. Without the
support from an experienced e-marketing partner firm (the technology provider), the
owner reckons, it would have been very difficult for him to make adequate choices and
grasp the potential of e-marketing. In terms of e-marketing processes, a trial-and-error
approach was, and continues to be, a suitable strategy for approaching e-marketing
activities at 4fitness. The owner however notes that these activities are bounded by
resource capacity such as financial resources available to carry out e-marketing
campaigns and time available for spending on activities.
The effects of e-marketing are difficult to measure
When the owner of 4fitness explored the impact that e-marketing was having on his firm,
he found that effects on actual sales made over the internet are measurable from placing
ads on Google and optimising Google search engine results. Banner advertising and
registering with internet price comparison sites did not produce measurable effects.
Indirectly though, these actions have intangible effects such as creating awareness about
the company. Apart from direct effects on the company’s online sales and indirect effects
on the company’s publicity, 4fitness reports that e-marketing influences the company’s
overall marketing budget and the owner’s schedule in terms of time spent engaging in e-
marketing activities. While a monetary value can be assigned to the marketing budget,
and time can be measured in minutes, these tend to be ad-hoc measures. The owner’s
time is particularly difficult to put into numbers. Hence, overall, it is difficult to measure the
effects of e-marketing.
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Involving Google in e-marketing activities is important for generating
online sales
While many different kinds of e-marketing techniques are generally available, the type
and extent of activity chosen determines the degree of the effect and, indirectly the
activity’s success. 4fitness observed that e-marketing activities involving Google had the
highest impact on actual internet sales of all the e-marketing activities the company
engaged in. These effects could not be observed for other search engines
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. Hence, the
owner of 4fitness intends to continue placing the emphasis of his firm’s e-marketing
activities on advertising via Google.
Relationships with business partners help micro firms to overcome lack of
technology skills and enable owners to focus on core business activities
4fitness is able to benefit from three strong partnerships with specialised services
providers
73
: a technology partner firm supports the owner in technical concerns; a
logistics provider ensures equipment delivery; and an equipment assembling services
provider sets up equipment sold at customer premises. These partnerships enable the
owner of 4fitness to overcome a lack of technology skills; a lack of logistics resources;
and geographical equipment set-up boundaries. Relationships between 4fitness and
these partner firms are established, working-well and sustainable. Preconditions for these
successful partnerships include that these business partners provide the exact skills
respectively resources needed by 4fitness at affordable prices and ensuring a high level
of service quality. Hence, the owner is able to concentrate his efforts on core business
activities.
Regionally-based micro firms can reach national markets through selling
over the internet
The online sales figures at 4fitness show that the company is selling to customers all over
Germany. The internet is therefore giving the company access to an entire national
market. Yet, while it dismantles boundaries within a country
74
, it seldom spreads across
national boundaries: the majority of sales at 4fitness come from within Germany. One
exception from this observation is countries where the same languages are spoken:
4fitness has been able to sell to German-speaking countries over the internet, crossing
national boundaries.
Customer service is an important component for sustainable online sales
The owner of 4fitness indicates that customers, and especially online customers, often
provide positive feedback about 4fitness’ service. Online customers tend to appreciate
that delivery charges and on-the-customer-premises equipment set-up are included in the
price; and that 4fitness is accessible, reacting quickly to customer queries. Specialising
on fitness equipment and accessories also gives 4fitness a competitive edge, as the
owner is able to provide expertise and an informed service to customers.
72
such as Yahoo, Ask Jeeves and Baidu
73
The business’ connection with an accountant is not included as it is considered an essential
partnership
74
Such a crossing regional and provincial boundaries
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Conclusion
The experiences of 4fitness illustrate that e-marketing is a critical success factor for
generating online sales: the type and extent of e-marketing actions chosen matter.
Entrepreneurs and micro firm owners should therefore choose their e-marketing activities
wisely. A potentially useful source for e-marketing support is partner firms. These
partners can provide entrepreneurs and micro firm owners with e-marketing expertise and
guidance, although it is not limited to these activities. Logistics and specialised service
providers, for example, can also be important sources for acquiring resources and skills.
Another important lesson from 4fitness’ experiences is that selling online enables rural
micro firms to reach national market, therefore widening market reach.
5.6.5 References
Research for this case study was conducted by Dr. Maria Woerndl, empirica GmbH on
behalf of the Sectoral e-Business Watch. Sources and references used:
Interview with Jakob Steiner, owner 4fitness, April 2008
Websites:
ohttp://www.4fitness.biz/
ohttp://www.techdivision.com/
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5.7 Fleria Floral Creations, Greece
Abstract
Fleria Floral Creations is among the leading companies in the flower industry in
Greece. The creation of an e-shop was Fleria’s attempt to increase the number of
orders placed through the internet, sell more ready-made floral creations and extend its
market share. This attempt did not reach its potential because of industry-specific and
cultural reasons as well as inadequate attention paid to the organisation of the e-shop.
The case study provides a record of the lessons that Fleria learned and also outlines its
current attempts to overcome the identified barriers to e-business.
Case study fact sheet
Full name of the company: Fleria Floral Creations
Location (HQ / main branches): Athens – Greece
Main business activity: Flower sales, Floral creations
Year of foundation: 1983
Number of employees: 50
Turnover in last financial year: 2.5 million euros
Primary customers: Private customers
Companies in various sectors (hotels, magazines,
newspapers etc.)
Most significant geographic market: Athens, Attica
Main e-business applications studied: Barriers of ICT and e-business, e-Sales
5.7.1 Background and objectives
Fleria Floral Creations was established in 1983 by Nina Ioannidou as a General
Partnership. In 1996 it was turned into an industrial and commercial S.A. because, in
addition to selling ready-made flowers, it became involved in the design and creation of
flower compilations and gifts. From 1996 until 2002 Fleria focussed on the establishment
of a network of shops in Athens and increased them from two to six. It is currently
entering the process of franchising. Fleria positions itself at the upper end of the market
selling high-quality flowers and flower compilations and providing customised service to
private customers and organisations. In 1996, Fleria’s sales were evenly distributed
between private customers and corporations. More recently, a larger proportion of its
sales were directed to private customers. Its clients require distinguished flowers or
flower compilations that are rather uncommon and cannot be easily found elsewhere in
the market. This is the reason that Fleria’s luxurious products are sold at a premium
price. Out of its 20,000 customers, more than 5,000 are estimated to belong to the top-
end of the upper class in terms of their wealth.
There are at least 14 organisations in the flower industry which have created e-shops.
Most of the flower organisations with successful e-shops compete in the mass market,
where cost is the most important criterion for achieving sales. As Fleria positions itself in
an elite niche market by targeting customers which require distinguished or customised
products, it primarily competes with only two other companies.
The principal reason that led Fleria to create an e-shop was to provide its customers with
the opportunity to have on-line access to all its products. The objective was to encourage
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some of them to shop through the internet but also to enable them to see the products
on-line and visit the shops, or place orders to the sales advisors by phone. Another
objective of the e-shop was to encourage clients to buy some ready-made products that
were already listed on-line, rather than order customised products. This would reduce
the extremely high cost of creating customised products for the majority of clients.
5.7.2 e-Business activity
Fleria assigned the creation of its e-shop to a third party in 2003. The e-shop has been
operational since then. The cost for the creation of the website and the set-up of a
central server was 5,000 Euros. The annual maintenance cost for the website and the
central server is 1,500 Euros. The central server operates at Fleria’s headquarters and
provides internet access to all six shops. This enables the sales advisors to know what
products customers refer to when they receive phone orders.
Following the creation of the e-shop, Fleria realised three important barriers that limited
the success of their ICT-based activities. First, only a small minority of Fleria’s customers
decided to place orders through the internet. A key reason behind this phenomenon is
that flowers are a luxurious and sentimental product. Most of the upper-class customers
who pay premium prices for the products do not want to order through the internet but
prefer to have direct contact with sales advisors. ”Our clients like to introduce themselves.
They expect a personalised service. ’You know who I am, I buy so many flowers every
year and I want to be treated in a different way’. They might not even discuss the price,
but they want the sales advisors to commit themselves” (Interview with Mr Tsilias).
Additionally, flowers usually involve a kind of sentimental need, encouraging clients to
contact sales advisors in order to fulfil this need. “When you buy a flower you fulfil a
sentimental need…Customers need to receive that from our sales advisors, and they do
not get that through the net. This is where all the difficulty lies. The sentimental part is
90% of the sale point of Fleria” (Interview with Mr Tsilias). Responding to these emotions
cannot be achieved when clients make a transaction through an electronic, automated,
impersonal system. According to the manager of Fleria, the same problem is faced by
their two key competitors, limiting the potential success of their e-shop. In conclusion, the
e-shop did not have a major impact upon the wealthy clients other than providing them
with some information which speeded up the sale process. These customers are key for
Fleria’s success. Therefore, the organisation does not want to risk taking away from
them the fulfilment of their sentimental needs and the feeling of satisfaction they receive
by speaking to sales advisors.
Second, while the Greek IT market and the broadband connections in particular appear to
be booming from 2004 onwards, consumers’ low trust in on-line transactions was another
reason that limited the success of Fleria’s e-shop. Credit card fraud is an important
reason that discourages Greek internet users from buying products and services on-line.
Fleria’s clients who visit their website prefer to see the products on-line, phone and place
their orders to their sales advisors rather than on-line. Additionally, despite the increasing
number of internet users in Greece, this is still at low levels compared to the European
Union’s average. This phenomenon is not unique to the flower industry, but seems to be
affecting e-shops of leading organisations in several other industries. Low trust in the
internet does not only affect on-line transactions but is also manifested in the trust placed
upon the quality of the products that are on-sale. “Many times the customers say: these
wonderful roses that I see on-line, are they going to be the same? They want to hear that
the flowers will be fresh, that the result will be amazing, that the delivery will be right on
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time, they want to hear that. Greeks do not trust the internet yet. You may see a Ferrari
being sold on E-bay, and an American might buy it quickly to take advantage of the price
bargain. But many Greeks are not like that. They would want to start up the engine,
listen to the car’s noise…This is the game, and it is not distrust to Fleria, it is a general
distrust to e-commerce” (Interview with Mr Tsilias).
Third, one cannot ignore the important limitations related to the set-up of this e-shop.
The website is not continuously upgraded as products created by Fleria are not always
listed on the website. In addition, Fleria did not invest in any e-marketing activities in
order to promote the e-shop. The website was only advertised to existing customers
through leaflets and brochures which listed their products. The lack of e-marketing
activities (advertising, search engine optimisation) limits the e-shop predominantly to its
existing client pool. Also, the payment system was described by Fleria’s manager as
cumbersome. A bank acts as an intermediary between the client and Fleria. The
procedure is as follows. Fleria staff access the ordering system, find the client’s order,
ensure that the order has been delivered and then act to collect the money from the bank.
This procedure is quite costly in terms of time and money, since some delays and
problems occur (e.g. need for frequent communication among sales advisors, drivers,
bank officers etc). Taken together, these facts suggest that Fleria did not place
substantial focus on planning and organising this side of its business.
Given the aforementioned barriers to the success of Fleria’s e-shop, several changes are
planned to take place from November 2007 until March 2008. A key objective underlining
the planned changes is the increase in the number of ready-made flower creations, since
preparing customised products for all customers is too costly. This objective will be
facilitated by continuously upgrading the e-shop with new products. Customers who tend
to phone the shops will be encouraged to view the products on-line and place orders
directly through the internet. This is expected to benefit customers since they will need
less time to place an order and will also view the products rather than listen to their
description. From an organisation’s point of view, Fleria expects to be able to sell more
ready-made floral creations and gifts which will reduce one of their most important costs,
as well as save time by occupying fewer agents on the phone.
Furthermore, the increase in the volume of phone calls (which is partially attributed to the
e-shop) led the company to decide to set-up a central call centre. Receiving all orders in
a central call centre is expected to improve the organisation of deliveries and is likely to
reduce related delays because fewer agents will be involved in receiving calls and
organising deliveries.
Finally, e-marketing activities such as advertising on popular portals is expected to take
place. Fleria will invest in advertising only after the organisation of its production side and
its logistics are improved, since the organisation is already facing a full load of daily
orders. Advertising is currently considered as a longer-term plan, since the company
might risk receiving more orders than those it can handle.
5.7.3 Impact
The creation of the e-shop can be described as a failure in terms of sales achieved,
though financially it had a neutral result. It can nonetheless be described as a success in
the sense that it served an informative role for the company’s clients, which contributed to
overall sales. Also, this ‘experimental’ phase provided important lessons to Fleria which
led the company to invest further in its e-commerce activities.
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The e-shop was not successful in terms of encouraging customers to place orders
and buy on-line. It is estimated that out of 100 visitors, only 5 place orders on-line.
The planned changes are expected to increase the number of sales achieved
through the internet.
The annual turnover of the e-shop is a mere 6,000 Euros per annum. This amounts
to 0.24% of the total annual sales of Fleria, and is equivalent to the daily turnover of
a single shop! From a financial perspective, the e-shop breaks even.
The e-shop was believed to be successful in terms of giving customers the
opportunity to be informed about products and see them. The website also helped
sales agents to serve customers because the latter could see the products
promoted by the former.
Following the above results, the company realised the potential of investing further
in its e-commerce activities, particularly regarding its corporate clients. This will
lead to the set-up of a central call centre, re-organisation of production and logistics
departments so as to cope with increased forecasted demand created through the
e-shop.
5.7.4 Lessons learned
A key learning point is that even an improved version of the e-shop will be faced with
considerable barriers because of the particular niche market that Fleria positions itself.
Buying flowers involves a sentimental process which is not easily experienced through
the internet. Selling floral creations on-line is also hampered by the fact that wealthy
customers prefer to introduce themselves to sales agents and expect personalised
service and customised products. It is hence not unsurprising that Fleria claims that
selling ready-made (rather than customised) floral creations might reduce the company’s
prestige. Nonetheless, they believe that a proportion of their clients, particularly
corporations, could use the internet and place orders on-line since these tend not always
to be emotional purchases.
Continuous investment of time and effort on the e-shop was another key lesson for
Fleria’s managers. Although the e-shop was supposed to be automated to a great degree
and one employee was assigned to check the orders with a certain frequency on a daily
basis, strategic planning regarding the e-shop proved to be inadequate. For instance,
although new products were continuously created at the shops, these were not listed on
the website. Fleria realised that some individuals or a third party need to be continuously
working on it in order to make further use of the available opportunities (e.g. keep clients’
records and use these for marketing activities).
Finally, low trust in products presented in the internet and reluctance to place orders on-
line appears to be linked to the fact that many Greek consumers do not yet trust the
internet. Clearly, this can be related to the fact that the use of the internet is still at its
infancy in this part of Europe. Greece ranks 24
th
out of the 27
th
EU Member States, with
23% of households having internet connections, compared to 49% EU average
(http://www.eett.gr/conference2007/pdf/Tsemperlidis.pdf), while the use of e-commerce in
Greece is 1.1% compared to 4% EU average (ibid.). In spite of the aforementioned
industry and country specific problems, Fleria decided to invest further in its e-shop. By
developing and investing in its e-shop alongside other departments, it foresees an
increase in its sales especially to corporate clients and a lesser extent to private
customers.
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5.7.5 References
Research for this case study was conducted by Dr Konstantinos Tasoulis on behalf of the
Sectoral e-Business Watch.
Interview with Mr Pavlos Tsilias, Director of Fleria, Head of E-shop, 19 September
2007, Athens
Company website,http://www.fleria.com (accessed September 2007)
http://www.go-online.gr/ebusiness/specials/article.html?article_id=549 (accessed
October 2007)
http://www.flowers.org.uk/index.htm (accessed 10 October 2007)
Consumers and broadband connections,http://www.eett.gr/conference2007/pdf/Tsemperlidis.pdf (accessed 18 October
2007)
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5.8 Smart Supermarket, Malta
Abstract
Smart Supermarket is a leading food and household retailer in Malta. In 2001, it
launched its online shopping services, making it the first supermarket in Malta to offer
this facility. The challenges faced were many, but Smart’s board of directors always
tried to find ways and means to address them. Although this solution still does not have
the critical mass of customers needed to attain profitability, Smart’s top management
intends to continue investing in it as they anticipate benefits, in terms of an increase in
online customers, in the longer term.
Case study fact sheet
Full name of the company: Smart Supermarket
Location (HQ / main branches): Balzan, Malta
Main business activity: Food and Household Retailer
Year of foundation: 1981
Number of employees: 120
Turnover in last financial year: n.a.
Primary customers: Food and Household Consumers
Most significant geographic market: Malta
Main e-business applications studied: e-Sales
5.8.1 Background and objectives
Smart Supermarket is a family-run business consisting of one large store situated in the
central part of the island. Its success story goes back to the early 1980s. At that time, the
company used to produce shirts. There was however a shift in the market with most
international manufacturers moving to other countries in search of cheap labour. The late
Carmelo Grech decided that it would make sense to move out of the textiles market
which was facing a slump. Thus, the idea of opening up a supermarket came about
following the slump faced by the textiles market in Malta. Smart supermarket was
eventually opened in Balzan (a central location in Malta) in 1981 in the rather limited
space of the shirt producing factory.
Then, few people believed that the idea would survive as it had to compete with the great
number of small grocers that controlled the market. Small grocers, apart from selling daily
necessities, were seen as social interaction points. On the other hand, it was perceived
that a supermarket would somewhat remove the social aspect from the daily shopping
experience.
However, the availability of a broad selection of goods under a single roof at relatively low
prices, made Smart supermarket increasingly popular with shoppers. The success of
Smart attracted competitors to enter the market. Yet, competition was never perceived as
a threat. On the contrary, it gave the owners of Smart the necessary drive to continue
expanding and improving the services offered to consumers. In 2000, a Lm1.5 million
(€3.5 million) project was inaugurated and this upgraded Smart to become one of the
most important players in the Maltese supermarket area: being situated in a highly-dense
residential area, having upgraded its parking facilities and having increased the floor
e-Business in the Retail Sector
169
space so that everything remains on one floor, made it an ever more convenient place to
buy daily and household necessities.
Following the successes of other foreign retailers engaging in e-commerce solutions to
expand their businesses, such as Tesco and Sainsbury’s in the UK, in 2001 Smart
supermarket extended its operations on to the web; making it the first supermarket in
Malta to offer this facility. Being an established supermarket with many new entrants in
the local market, Smart wanted to gain the coveted first mover advantage, as it had done
in the early years. The idea was that of retaining their original customers and the
possibility of tapping into a new market. Such strategy was seen as a way of giving
customers the flexibility of shopping at the store, as well as ordering via the internet and
pick up their order at the store or having it delivered.
5.8.2 e-Business activity
In order to put their idea into practice, the management and board of directors of Smart
supermarket were in search of a company willing to undertake the challenge. System
providers at the time were not only limited, but it was also very hard to find a company
willing to embark on the development of the proposed e-commerce solution. Finally,
AcrossLimits, a young dynamic Maltese company was approached and its developers
started working hand-in-hand with Smart’s top management to deliver the
aforementioned additional service to customers.
The challenges faced were many. Apart from having thousands of products to upload
online, there were neither photos nor a simple and consistent description of products in
the stock database. The enormous exercise of placing products online was done in
collaboration with suppliers. They have themselves decided how their products should
appear listed (if at all) and they have supplied the details accordingly. Primarily, yearly
charges for uploading products online, distinguished between having solely a description
(Lm0.45 i.e. €0.95) and having both a picture and a description (Lm0.90 i.e. €2.10).
Resistance from the suppliers’ side, however, eventually lead to a standard fee of Lm0.45
(€0.95) per product on a yearly basis, irrespective of how it is listed. This exercise,
besides involving time and money in taking photos and inputting information for each
product, involved a lot of chasing on the part of Smart’s personnel to obtain the
necessary information. It took approximately one year to get the system up and running.
Products of suppliers that were not interested in participating in this e-commerce solution,
where simply not added to the list of online products. However, most products found in
store are available online since big suppliers have thoroughly engaged in this e-
commerce solution.
An unfamiliar customer base with respect to online shopping also needed to be
addressed. Smart launched an event to illustrate how simple online shopping is. For this
purpose, in the first few months a call centre-like system, with 24-hour email support was
offered for customers who were getting lost online. However, the fear of online payments
was still an issue, and scary articles on Maltese newspapers made the matter even
worse. Thus, by general request, cash on delivery was also offered to online shoppers.
Since the site was built with all the necessary security precautions, by time, credit cards
became increasingly popular with online shoppers. In fact, Smart’s SSL (Secure Socket
Layer) server encrypts all the information entered in each order form prior to sending it
from a personal computer to Smart’s server; in this way there is no risk of having
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personal information leakages. Besides, orders reside in a secure area on the server and
only authorized personnel can access the data.
During the implementation phase, costs for such technical solution were exorbitantly high,
reaching circa Lm1,800 (€4,200) monthly for the first two years of operation. These costs,
amongst others, included further alterations to the system to cater for missing
functionality and additional features, and the constant updating of product details, prices
and photos. Instead of subcontracting the latter service, the board of directors eventually
decided to hire the person in charge of the above-mentioned exercise. Such decision
reduced both the time to send and receive information to and from the respective party
and the costs involved. As to training, employees were given a 6-month training period
until they familiarized themselves with the system. The solution did not involve the hiring
of new personnel; it rather shifted employees from one task to another. In this respect,
Smart employs two pickers to fill online orders by shopping the aisles of the store
alongside regular customers and another two drivers to deliver the orders at agreed times
according to Smart’s delivery schedule. In fact whereas before these personnel used to
stack the supermarket’s shelves or do other duties as required, following the introduction
of the e-commerce solution, their duties were redesigned to meet the needs of an online
shopping system.
With 625 categories of food and household goods for the large variety of products
available, Smart supermarket is proud to be the first local supermarket to launch a
complete online shopping experience to customers. This system makes the supermarket
accessible to anyone 24 hours a day, 7 days a week. Supermarkets in Malta open from
Mondays to Saturdays, and they barely stay open till 8 at night. Online shopping is
particularly appealing to persons with busy lifestyles. The fact that Smart is offering an e-
commerce solution that allows customers to shop late at night or on a Sunday can be
considered as a benefit, even though such orders will be then delivered the following day.
First-time users should make sure that they register in order to gain access to the online
shopping section with the password that will be automatically provided via email. Before
starting any order, a customer has to log in the system using his own email and
password. The next step is that of browsing through the virtual aisle adding products to
the shopping cart list and once ready, the customer must click on the Checkout button as
illustrated in Exhibit 1. This will check whether the Smart online shopping criteria are met;
where a customer’s online order meets the minimum amount threshold of Lm30 (€69.88).
If for some reason this criterion is not met, the system will notify the user. When the
needed criterion is met, the customer will then be transferred to a secure communication
link, whereby the credit card details, for those who opt for the online payment system, are
entered. On this last form, users must also confirm whether they would like product
replacements should something be out of stock. Once completed, the order will be sent to
Smart’s server where it will be processed for delivery or pickup service. A copy of the
order will be sent by email for the customer’s own records. Online shoppers can also
save the shopping cart for future use. Besides, all shopping at Smart, whether online or in
store contributes to the Smart Loyalty Card points; which can be exchanged to products
available through the scheme.
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Exhibit 5.8-1: Checkout procedure of the e-sales application
Source:e-business Watch 2007/2008
Online shoppers must always allow 24 hours for deliveries; which are available to all
areas in Malta, excluding Gozo and Comino. Delivery times are agreed telephonically
between the delivery people and the customer on a day to day basis based on Smart’s
delivery schedule, which can be accessed online. The delivery schedule has been based
according to which zone of the island a locality resides in order to ensure efficient and
economical deliveries. However, customers will be given the option to indicate a preferred
day and time on checkout. When orders are submitted online, through a personal user
name and password, authorized personnel responsible for online shopping service will
access the shopping lists sent by online customers. These personnel will then shop
alongside in-store customers to fulfil the online orders on the part of the customers and
once ready the order will be in for delivery.
A comprehensive online help section is also found in the website and this includes many
Frequently Asked Questions. Besides, registered users receive special offers via email,
as well as information of all that is currently happening at the supermarket. Online forms
are also available for those customers requiring further assistance.
Smart’s management and board of directors are planning to invest circa Lm10,000
(€23,294) on marketing activities in the next three years. They in fact intend to enhance
the use of the fields entered by online customers while registering in the e-commerce
solution, so as to use customer information for targeted marketing and personalized
promotions. Currently, only generalised marketing is being used and this mainly involves
special offers sent to registered customers via email and giving out small gifts (such as a
box of chocolates) with online orders during festive seasons; which is thought to be less
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172
effective than targeted advertising. By categorising customers into age groups, gender,
localities and other fields which might be of value, will not only help Smart to analyse
what the buying habits of different customer groups are, but will help them to be more
effective and specific in their marketing activities. Besides, they are also planning to
revamp the appearance of the website and are also working on improving the
classification of goods. Work on these changes is to be awarded to the system providers
with the most innovative and creative solution.
Smart’s management also intends to improve the logistics and target areas which are
further away from the store’s location. Although order deliveries for areas close to the
supermarket store are available every day from Monday to Saturday, customers residing
in these areas are probably more liable to shop at the store. Although in Malta distance is
not much of an issue, Balzan, the area where Smart supermarket is located, is quite busy
and traffic jams are a daily issue. Thus, online customers are more likely to be those who
reside further away from the store’s location and by improving the logistics to cater for
such areas, Smart is likely to attract more online customers. With this investment Smart’s
management forecasts a three- to six-times increase in online sales in the coming years.
5.8.3 Impact
Although home delivery of items purchased online is appealing for those for whom going
out to shop is difficult for various reasons, such as physical disability, the need to care for
small children, the lack of adequate or convenient transportation, and/ or a busy lifestyle,
not everyone has embraced online shopping as a replacement to regular trips at the
supermarket. In fact, even though online shopping for Smart’s products has been growing
since it has been launched, it still only accounts for a very small portion of total grocery
sales; in fact it only accounts for approximately 1% of the total sales volume. As a result,
currently, Smart’s online shopping solution is a loss-making business. In Malta, being a
very small island, this outcome is of no surprise. Apart from the fact that distance is not
an issue for making supermarket errands, shopping for daily food and household
necessities through the internet is a cultural shock for many. However, this has not
discouraged Smart’s visionary board of directors because by offering an additional
service to customers, they anticipate benefits in the longer term.
As to business relationships with customers, in terms of loyalty, one cannot derive any
conclusions at this stage. At present, there is no competition in the area and therefore
only if another local supermarket offers an e-commerce platform, would Smart’s
management be able to test the loyalty of their current online customers.
By involving suppliers in the process, business relationships have improved. During the
initial phase of this process, information to update product descriptions and pictures was
transmitted between Smart and suppliers either via telephone calls or emails. However,
as aforementioned, this created a large burden. By enabling suppliers to do this work
themselves, much of the hassle involved in this process has been lessened. In fact, each
supplier can now log into his personal account, with his own user name and password in
the website and view which of his products are available and how they appear online. As
to already-listed products, suppliers can upload product pictures and change and/or add
product descriptions. Suppliers also have the possibility to see how much of each
particular product has been sold online. Although big suppliers are making use of this
facility, smaller ones are not utilising it as yet. Currently, about 250 suppliers are using
this facility. This not only leads to cost reductions for Smart, but it gives much more
flexibility to suppliers.
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5.8.4 Lessons learned
Until recently, service charges (i.e. the charges for delivery and the service offered by
Smart’s personnel to shop on the part of online customers’ requests) were included in
online product prices. However, the management realised that this may be one of the
reasons hindering online sales. In fact, online product prices, with an exception for daily
necessities, were approximately two percent higher than those found in the store. For this
reason, the management have recently reassessed Smart’s online pricing scheme. A
fixed service charge of Lm2.50 (€5.82) has been introduced. This replaced the previous
mark-up in online prices that used to make up for the online service. Therefore, whereas
before the service charge was proportional to the amount of items bought (the more items
bought, the more a customer was charged), now this service charge is capped at Lm2.50
(€5.82), irrespective of the amount of items bought online. In this way all goods offered in
the store will be available on the website at the guaranteed same price. This will no
longer put a negative perception of products being sold at higher prices online. The
service charge will be conveyed much clearer to the online customer and there will be no
longer queries as to why products online are more expensive than those found in the
store. This has the potential to increase online orders. Since products online and in the
store bear the same price, customers will be more likely to buy products online. They
would now be in a better position to trade off between paying the fixed charge for the
services offered or go to the store to make their shopping themselves.
Besides, until recently, online orders had to contain a minimum of 10 different items and
meet the minimum amount threshold of Lm40 (€93.17). This could have been perceived
as a burden on the part of the customer, especially if they did not need the number of
items as had been specified in the online shopping criteria. For this reason, the new
minimum order value has been lowered from Lm40 (€93.17) to Lm30 (€69.88) and the 10
item minimum quantity has been removed.
The board of directors also realised that currently the delivery schedule can be improved
to the benefit of online shoppers. Most online shoppers hold full-time jobs and thus it is
more likely that they will be at home after office hours. At present, normal delivery times
do not cater much for these circumstances and the idea is that of shifting the delivery
schedule, which is currently from 9:00 till 19:00 (from Mondays to Fridays) and 9:00 till
15:00 (on Saturdays) to one which is more convenient to online shoppers. To better meet
customer needs, through their website, Smart is currently gathering delivery time
preferences in order to improve their delivery time bands. More than eighty percent of the
feedback received from online customers resulted in online customers preferring
deliveries between 16:00 and 20:00hours. It is envisaged that a change in delivery times
resulting from such feedback has the possibility to further increase online sales.
5.8.5 References
Research for this case study was conducted by Sara Buttigieg, Malta Federation of
Industry, on behalf of the Sectoral e-Business Watch. Sources and references used:
Interview with Mr. Joe Grech and Mr. Mark Elroy Ciantar on the 16 of August 2007
at Smart Supermarket offices.
Websites:
Smart Supermarket,http://www.smart.com.mt
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5.9 EMPiK, Poland
Abstract
This report analyses EMPiK’s entry process into the e-commerce market. EMPiK is the
biggest books retail company in Poland. The focus is on the creation and history of the
company’s e-seller Empik.com. The initial growth of e-business and internet use in
Poland is described in order to uncover how selling books brings a mutual learning
effect to the entire EMPiK chain of stores.
The launch of e-business activities at EMPiK has shown that e-commerce is more than
solely selling books: it allows getting strategic information of entire markets and, in
addition, bridges new channels of communication and provides product sale
opportunities to costumers. As a result, EMPiK has been able to evolve together with
the market, using e-business as a means for joining the new economy.
Case study fact sheet
Full name of the company: EMPiK sp. z o.o.
Location (HQ / main branches): Warsaw / 44 largest Polish cities
Main business activity: Retail (books, newspapers and magazines, music,
films, multimedia and stationery)
Year of foundation: 1948
Number of employees: 2000
Turnover in last financial year: 151.8 million euros
Primary customers: Polish consumers
Most significant geographic market: Poland
Main e-business applications studied: e-Sales, e-marketing
5.9.1 Background and objectives
EMPiK is the largest Polish retail network selling books, newspapers and magazines
(local and international titles), music, films, multimedia, stationery and photographic
products. Bookselling, however, remains the main activity of the company. There are
currently 98 EMPiK stores in 44 of the largest Polish cities, the majority of them in high
street locations or main shopping malls. EMPiK employs more than 2000 people and its
turnover in 2006 was around 591.9 million PLN
75
(151.8 million euros). At the moment,
EMPiK does not face tough competition, as it dominates the market of mega book stores
in Poland. However, its e-business attempt, Empik.com, could not achieve a similar
position: while it is the second largest online retailer in this segment, it is still behind the
market leader, Merlin.pl. EMPiK’s principal e-business effort objective is to strengthen its
importance in the virtual market for books and to consolidate its position in the knowledge
and internet era.
75
PLN, is the symbol of Polish zloty, the national currency in Poland.
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Exhibit 5.9-1: Location and number of EMPiK stores in Polish towns and cities
Source: EMPiK/Sectoral e-Business Watch
The origins of EMPiK can be traced back to a network established in 1948: Klub
Midzynarodowej Prasy i Ksi#%ki (Club of International Press and Book), which has been
the only place in post war Poland that provided access to international publications for the
wide public. At the beginning of the 1990s, 36 stores of the around 100 existing Klub
became EMPiK stores and the biggest ones located in the largest Polish cities were
transformed into EMPiK Megastores (with average area over 3500 m² each).
In 1994, EMPiK was sold by the Polish State Treasury to the capital group Eastbridge.
EMPiK and other companies of Eastbridge Group joined the National Investment Fund
Hetman in 2004 and then became NIF Empik Media & Fashion
76
(EM&F), one of
the largest Polish operators of non-food consumer brands with over 270 shops in Central
and Eastern Europe. The portfolio of NIF EM&F brands consists of:
leading Polish trade chains like: EMPiK, Smyk,
77;
the companies Ultimate Fashion and Optimum Distribution, which manages
branded fashion chains like: Zara, Esprit, River Island, Wallis, Evita Peroni, Mexx,
Aldo, Mango and Dior (and others) in Poland.
In 2006 EM&F Group bought the network of Ukrainian bookshops Bukva which were
changed into 23 EMPiK stores. Further plans of EM&F Group include the expansion in
countries as Russia, Kazakhstan, Romania and Germany.
76
National Investment Found has been one of the key-players in the Mass Privatisation Program
that started in Poland in 1997 aiming at privatizing over 400 medium and large size Polish state
owned enterprises.
77
Part of NIF EM&F was also the chain of shopping centres Galeria Centrum (GC) which were
sold in December 2006, the main reasons for selling GC was low profitability and lack of
synergy with other companies in the EM&F Group.
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5.9.2 e-Business activity
The history of Empik.com
The main e-business activity within EMPiK is Empik.com, established in 1999 to enable
virtual access to the products sold by EMPiK. Development of e-commerce is considered
as an important strategic goal within EMPiK and the EM&F Group. However, in 1999 the
internet as a channel of goods distribution was not sufficiently developed in Poland
78
,
thus e-commerce was not a very profitable activity. In 2001, Empik.com was sold to
Elektrim, a company that invested massively in internet activities. But a few months later
the domain Empik.com was closed due to financial difficulties, caused mainly by the
system of settlements between EMPiK and Empik.com. In fact, Empik.com as an external
company was purchasing the majority of goods from EMPiK and thus marked prices up,
making them higher than at EMPiK. As a result, many products in the virtual shop had
higher prices than in traditional EMPiK shops. An additional problem was an invalid
system of financial settlements with the Polish Post Office, which in principle would allow
customers to pay for products after the delivery to their houses. However, the whole
system was not effective and quite often money for delivered goods was lost, thus
influencing Empik.com’s profitability. Market conditions especially the “.com” crisis and
financial difficulties of Elektrim (new owner of Empik.com) led to the collapse of
Empik.com in 2001. All activities were suspended and Empik.com disappeared from the
Polish virtual book selling market. The 2001 agreement between EMPiK and Elektrim
guaranteed the right of using the Empik brand and run Empik.com until 2005 to Elektrim.
However, after initial difficulties in 2001, Elektrim was not able to fully recover and re-
open Empik.com. As a result, the shop and the website were closed between 2001 and
2005, until the agreement between EMPiK and Elektrim expired.
Following the closure of Empik.com, only the large competitor Merlin.pl and a few smaller
sellers survived in the Polish market of virtual book sales. This opportunity enabled
Merlin.pl to build a strong position and at present it is the largest e-bookseller in Poland
with 1.65 million clients monthly (December 2006). Moreover, in 2004 Merlin.pl was the
fastest developing company in the ICT sector in Central Europe.
After the agreement between EMPiK and Elektrim ran out, EMPiK recovered the rights
over the brand and a re-launch of Empik.com became possible in November 2005. The
comeback of Empik.com was accompanied by a substantial advertising campaign.
Nevertheless, it did not threaten the strong position acquired by Merlin, although
Empik.com’s product offer was larger and not limited to books (included recordings, films,
multimedia and stationery). In May 2006, a cooperation between EMPiK and the German
wholesaler Libri was launched to extend Empik.com’s offer from 200,000 to 2 million
overseas titles (books, music, films and multimedia). Empik.com managed to acquire
around 18% of the market within its first year of return to the market (2005-2006). Until
November 2006, the number of customers increased by 300%, reaching 476,000
registered users
79
. Though not the market leader, at the end of 2006 Empik.com won the
position of the most popular Polish e-seller, in the ranking of Money.pl and magazines
‘Wprost’ and Ceneo (Hipermarket 2006). Additionally, a study showed that bookselling
was the biggest e-commerce market in Poland: 64.3 % of respondents declared books to
78
In 2000 only less than 10 % of Polish household had Internet access.
79
Merlin.pl remains the market leader in e-bookselling, with profits of around 63 millions PLN in
2006, whereas Empik.com registered 17.9 millions PLN of revenue that year
.
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be their main internet purchase. In 2007 Empik.com was also among the top five e-
commerce websites in Poland (megapanel/PBI.Gemius).
Empik.com solutions: focus on attractiveness and effectiveness of website
After four years of absence from the Polish e-commerce market, EMPiK wanted to attract
new clients by offering an accessible and easy to use selling tool within Empik.com, as
well as additional services besides book selling. The main focus of Empik.com was on
accessibility of goods; the intention was to allow easy access and shorten search time.
The online purchasing process was limited to three steps: delivery address, summary of
the transaction and payment. The purchased goods could be delivered to the client or
collected in any EMPiK store in Poland without delivery costs. The click-and-mortar
model benefits from the network of EMPiK shops to distribute products around the
country. This strategy has proven to be very popular, as half of the clients in 2006 chose
the click-and-mortar model to buy products. One advantage of this method, especially for
those clients that do not trust internet payments or deliveries, is that it enables clients to
order products online and proceed to full payment in store when picking up the product,
no earlier online payment is required.
At the end of 2006, when the number of Empik.com clients increased significantly (about
300%, see above), it became clear that the existing Empik.com selling platform (which
offered solely basic functions; e.g. choice of product, price calculation accepting choice)
would not be able to cope with the ever increasing number of customers and
transactions. Furthermore, the growing numbers of internet users in Poland alerted the
need for a new technological solution. The issue was addressed by EMPiK’s Board and a
new platform was prepared by a contractor, an American company called ATG
80
, within 9
months. However, its final shape was not clear from the early beginning and it has
changed several times before it was launched in its final form in September 2007. The
new technology is the ATG e-commerce solution, which allows not only online selling but
also enables to build continuous and personalised relationships with consumers by
developing various ways of interactions (via Web, e-mail, phone), and keeping
information of customers. The new platform required specialised implementation, which
was taken on by the Polish consulting company AMG.net SA
81
.
The newly developed Empik.com platform changed the navigation approach: the idea
was based on the concept of EMPiK as a combination of stores and providers of cultural
information to customers. The provision of cultural knowledge was a cornerstone for the
designing of the website. The new navigation solution is divided into three sections:
Shopping: information about products and e-selling tools.
Empikultura: news and information on cultural events connected to EMPiK or other
new or archived events in the whole of Poland.
Empiklopedia: a database of artists containing more than 20,000 records (at the
beginning of platform operation, this number will grow). The content of this section
is provided by Wikipedia and other mainly Polish providers of cultural information.
80
ATG is a leading US Company which designs, monitors and implements e-commerce software
solutions. ATG products were rated on first position in 2006 by two independent analysts (Forrester
Research, Inc. and Gartner, Inc.) in a B2C (business to consumer) segment.
81
Before working with Empik.com, AMG.net had clients among the largest Polish firms in sectors of
telecommunication (like TP SA, PTK Centertel) and finance (BRE Bank, Bank Millenium, mBank,
Multibank, Bank Pekao).
e-Business in the Retail Sector
178
After the implementation of the new platform, an alteration of the cooperation between
Empik.com and other departments of EMPiK was observed. Currently, there is
bidirectional cooperation principally with three departments: sales, logistics and
Marketing, in which Empik.com not only receives support but also offers information
gathered at Empik.com about clients, which are used to modify and verify activities at
these departments.
The service of payment transactions at Empik.com is currently provided by an external
company, PayBack (a limited liability company), which executes payment transactions for
e-commerce activities in Poland. This solution, apart from taking over payment
transactions between Empik.com and its customers, offers additional advantages: there
is no need for customers to engage in a registration procedure (what increases speed of
transaction); EMPiK.com has to take no responsibility for fraudulent intents and for the
system of daily reports of payment for accomplished transactions; the company can
easily monitor sales on a daily basis. Payment can also be done by bank transfer or
during the collection of purchased products in EMPiK stores (click-and-mortar model).
A software connection with warehouses checks the availability of the purchased good in
stock and time of sending, allowing Empik.com to provide additional applications for the
customers, like the estimation of the delivery date. Furthermore, cultural and
entertainment news from all over Poland and a service of used goods for sale (in e-bay
style) are available to Empik.com costumers. An innovation in the Polish bookselling
market is the offer of books taken off the shelves (so-called backorders). This allows
customer to access books that are not available anymore on the market and is also an
additional advantage for the company because it allows to clear old stock gathered in the
warehouses without additional costs.
The webpage is also a means of running various campaigns to attract customers.
A particular group of Empik.com clients are Poles living abroad (at the present moment it
is less than 10 % of all customers but this number is growing). Empik.com enables them
to buy Polish cultural products in other countries. In this sense, Empik.com also engages
in advertising abroad, for instance, last year a campaign in Polish pubs in London was
carried out.
Empik.com moreover indirectly supports traditional sales in EMPiK shops. Special ‘info-
points’ which are located in every store allow customers to buy products that are currently
unavailable in the particular store or its warehouse. Info-points permit customers to
purchase goods from Empik.com, however all transactions are still made by the store’s
staff, thus, the customer does not have to interact with the internet sale tools of
Empik.com, although benefiting from it. Collection of ordered goods is generally possible
after two or three working days at the store where the product was requested. According
to EMPiK management, this method of sale is useful as it expands the products on offer
in medium and small stores in peripheral locations, giving their customers access to the
full range of products available in EMPiK mega-stores without extra spending for storing
goods, though not all clients are happy to wait for ordered product two or three days. In
spite of that, the number of customers accessing goods this way is constant and reaches
approximately 10% of all Empik.com clients.
Since e-commerce requires additional description of the product, special requirements for
suppliers are made by Empik.com. All books on sale through the website need accurate
description provided by the supplier, which has to be much more detailed than for
traditional retail activities. For instance, the description of books has to contain not only
physical features of the product but also comprise information about the content in order
e-Business in the Retail Sector
179
to allow the costumer to see part of the book and make a better-informed purchase
decision. This description of the product is considered by Empik.com management as an
efficient way of allowing clients to get acquainted with the purchased good and it
furthermore encourages him/her to buy the products. For all those reasons, Empik.com is
cooperating with one of the EMPiK suppliers, a company called PolPerfect, which
provides the majority of goods sold via Empik.com’s website.
As of September 2007, the share of Empik.com in EMPiK’s turnover is slightly less than
10%, however, it is expected to grow as the number of monthly customers in low season
2007 (July/August) has reached the level of high season in 2006 (December-Christmas).
Empik.com’s revenue at the end of 2007 may exceed 30 million PLN (around 7.9m Euro),
an increase of about 68% in comparison to 2006 (when sale results amounted to 17.9m
PLN; 4.7m euros).
5.9.3 Impact
Empik.com has an important status within the EMPiK network. Thanks to new tools for
supporting sales, the management of EMPiK has a chance of looking at ‘traditional’ retail
from different perspectives and see both, drawbacks but also advantages. Solutions for
the former can be found in e-commerce (such as: allowing customer to access goods 24
hours a day; knowing better needs and requirements of the customers), although both
areas of retail complement each other mainly as Empik.com uses the EMPiK network of
shops in the click-and-mortar sales and EMPiK shops uses Empik.com tools to sell
through info-points. In this sense, it allows EMPiK to have wider access to customers
covering both, virtual and traditional markets.
The major impact of Empik.com on the management and organisation of EMPiK is to
bring it into the knowledge-based economy; and to support its modernisation and pave
the way to reach a larger number of customers, by activities including the following.
Empik.com provides the entire company with ‘real time’ information regarding
market needs, owing to an application that measures the activities of customers on
the website. Therefore, crucial information about e-customers is available to support
strategic decisions in the entire company, for instance: the number of clients, time
taken to choose products, products sold and those looked at but not sold as well as
popularity of products even before they are on the market (through “pre-order”). It
shapes not only Empik.com’s retail activities but also influences strategies
developed for traditional EMPiK stores.
A closer relation with costumers is achieved through Empik.com, which supplies
costumers with “real time” information about products available at EMPiK including
prices and other useful data on shops and the company.
EMPiK’s strategic aim of building shops connected with culture and entertainment is
facilitated by Empik.com, as it is a marketing channel to advertise and archive
cultural activities that take place in EMPiK.
Empik.com supports traditional retail in EMPiK shops. When a client cannot find a
product in a shop, it can be ordered at Empik.com via ‘info-points’ that exist in every
EMPiK store, and can be collected in stores after 2-3 days.
The success of Empik.com has a direct influence on EMPiK’s level of sales. The
observed growth of customers’ number spread and strengthens the brand, besides
supplying a tool that facilitates selling in shops.
e-Business in the Retail Sector
180
5.9.4 Lessons learned
One of the most important lessons learned from Empik.com’s experience is the mutual
learning that stands behind the cooperation between traditional retail and e-commerce
activities. Besides EMPiK using knowledge generated at Empik.com, the other way round
is also a reality, as said by the director of Empik.com, Tomasz Cisek: “Empik.com is a
younger brother of EMPiK, a brother who learns from the experience of the older one, but
uses different tools for its own activities”.
Another lesson is the importance of trust and patience when new solutions and tools
connected to e-commerce are introduced in a company. In EMPiK this was made through
empowering the manager of the new department (Empik.com), to become a member of
the EMPiK main board. This gave autonomy and status to e-commerce in the company
context, influencing the entire organisational culture of the corporation. This solution
changed the perspective of looking at internet not only as a technological innovation but
also as a tool for work, a tool that requires investment.
The company also learned to benefit from the complementarities of both ways of selling
books, as, firstly, EMPiK shops use facilities embedded in Empik.com (info-points) to
expand their offer of peripheral shops and save storage and transport costs (as
transported are only the purchased products) and to satisfy clients when they do not find
a particular product available at shop. Secondly, Empik.com can reach more costumers
by relying on the advantages of the large number of EMPiK shops to enhance sales using
the click-and-mortar system. This requires closely interaction with different departments
of EMPiK, especially logistics and marketing with Empik.com. Human-Resources was
also affected as employees had to be trained on how to deal with the “Info-points’ system.
Integration of internal activities of departments was necessary to provide the services.
Furthermore, Empik.com’s system used in info-points presents similarities with a
supportive corporate system, by which staff can order merchandise to satisfy store
demand required at a certain time.
The value of communication with costumers is also discovered. EMPiK is now able to
accomplish a two-way communication with its clients, which is in line with modern
techniques of marketing. The company manages to receive information on costumers,
through messages on the website, email or even phone calls and consolidated
information provided by the measures made by the application in the ICT system;
moreover, it can offer information about the company, its products and cultural events to
every client that accesses Empik.com.
5.9.5 References
Research for this case study was conducted by Dariusz wi#tek, on behalf of
the Sectoral e-Business Watch. Sources and references used:
Interview with Mr. Tomasz Cisek, director of Empik.com, member of the EMPiK
Main Board who is responsible for management, sale and marketing, 25 September
2007, EMPiK Headquarters, Warsaw ul. Krucza 50, Poland
EMPiK annual report 2006 - Grupa EM&F podsumowuje dzia&alno') za 4 kwarta&y
2006 roku (najwa+niejsze wydarzenia, wyniki finansowe, dalsze plany rozwoju),
Warszawa 15.02.2007 [Group EM&F reassuming activity for 4 quartiles of 2006 (the
most important events, financial results, plans of further development)]
Go&.biewski, 0., Rynek ksi#+ki w Polsce. Edycja 2006 – ksi.garstwo hurtowe,
Biblioteka Analiz, Warszawa 2006 [Books market in Poland. Edition 2006 –
wholesale book trade]
e-Business in the Retail Sector
181
Go&.biewski, 0., Rynek ksi#+ki w Polsce. Edycja 2006 – Dystrybucja, Biblioteka
Analiz, Warszawa 2006 [Books market in Poland. Edition 2006 – distribution]
Hipermarket w komputerze, Ranking sklepów internetowych, 2006, Wprost
41/2006, no 1243. (article in Polish weekly magazine Wprost)
Zwierzchowski Z., Merlin kontra Empik – gwiazdkowe starcie, Rzeczpospolita
24.11.2006, (article based on interview with Tomasz Cisek in Polish daily
Rzeczpospolita).
Websites:
Company EMPiK:http://www.empik.com
National Investment Fund EM&F:http://www.emf.pl
National Statistic Office:http://www.stat.gov.pl
Company ATG:http://www.atg.com
Company AMG.net:http://www.amg.net.pl
Megapanel / PBI.Gemius:http://panel.pbi.org.pl
e-Business in the Retail Sector
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5.10 Cyprus-PC.com, Cyprus
Abstract
Cyprus-PC.com is one of the largest online stores in Cyprus, aiming to supply high
quality products and services to Cypriot residents. The company sells its goods online
over the internet, via telephone orders and through traditional sales channels (retail
shop). Those combined methods have been successful, resulting in a rapid increase of
total sales and turnover since the firm was founded. In particular the value of using
combined approaches is illustrated as the most efficient strategy for the case of Cyprus.
The present case provides evidence that supports the need to use those approaches in
relation to a sophisticated supply chain management.
Case study fact sheet
Full name of the company: Cyprus-PC.com
Location (HQ / main branches): Nicosia, Cyprus
Main business activity: Sale of laptops, PC peripherals and accessories
Year of foundation: 2003
Number of employees: 10
Turnover in last financial year: ~684.000 €
Primary customers: Cypriot consumers
Most significant geographic market: Cyprus
Main e-business applications studied: Supply chain management
Multi-channel sales approach
5.10.1 Background and objectives
Cyprus-PC.com was founded in 2003. It was the first Cyprus retailer for laptops. The firm
is now Cyprus’ leading laptop retailer with sales of over £400,000 (about 684,000 Euro)
per annum. Its sales are growing annually at a rate of approximately 10-20%. The firm is
a specialised e-store, selling a large number of laptops, PC peripherals and accessories.
The company’s philosophy is based on one simple idea: combine the comfort and
convenience of laptop selection via online catalogue with the personal contact and after
sale support of high street stores.
The idea of setting up such an e-store started as part of advertising the other company
the two owners have, which provides web development services
(http://www.hyperlife.com.cy). Another critical characteristic was the open mind
philosophy of the company’s managing director, who studied and worked abroad (USA)
for several years. The know-how of web development enabled the fast setup of the e-
store. The same company undertook the responsibility to do all the necessary
modifications that were required to respond to the challenges of the Cypriot market.
Hyperlife’s premises were also used for temporary storage of items ordered, traditional
sales and after sales support services. Hyperlife still maintains and manages the online
activities for Cyprus-PC.com.
For advertising, the company uses a mixture of different channels such as web search
engines (i.e. Google) paid online advertisements, radio, newspapers, magazines and
posters, depending on which is the most effective and efficient from time to time. This
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183
method of buying goods seems to be very appreciated by the Cypriot people. In fact the
majority of deals are done via telephone, after reviewing the products via the website.
Customers call the firm to verify the models they have already seen in the web site,
bargain for extra discount or ask for details of the expected delivery date. It is argued that
Cyprus is not a matured web-sales market and buyers like to talk to someone to verify the
prices, give further explanations even recommendations for models and get further
discount.
5.10.2 e-Business activity
Investing in ICT from the beginning
Since its beginnings in 2003, Cyprus-PC.com has been noticed for its innovative use of
technology. Computer systems along with user-friendly web design have always had a
huge impact on the way it functions as a retailer. Cyprus-PC.com has used ICT systems
to recognise market trends early, to monitor order levels, and to avoid any delays. The
firm senses the trend from the global market and consumers’ electronic questionnaires
and feedback. To accomplish those procedures a custom-made customer relationship
management (CRM) system has been developed, which provides accuracy in the
conduct of financial transactions and quick delivery of products all around Cyprus. The
latter is supported by a respectful courier company that ensures quick delivery.
Moreover, ICT has had a profound impact on the way the company communicates with
its customers. A very important element in this context is the different ways of
communication (online feedback, questionnaires and phone calls) the company offers to
its customers as well as immediate response in less than 24 hours. The systematic use of
e-mail is also characterised as an important communication tool that has increased the
volume of the two-way-communication.
Multi-channel approach
The business model of Cyprus-PC.com is a multi-channel approach: customers are
offered different possibilities for shopping. They can search for available products on the
internet and proceed on the online order. However, the Cypriot market is not yet
characterized as mature regarding e-commerce and online sales. Although the website is
widely used and appreciated, pure online sales presently account for a rather modest
share of 10-15% of total business sales. The rest of them are either confirmed through
phone calls (the majority of them) or customers prefer to visit the firm’s retail shop.
Cypriot customers prefer to talk to someone, find out who is at the other end of the line
and who to contact in case they have a question. Actually, the most common question is
related to after sales support. They want to guarantee that the company provides after
sales support (even friendly advice on how to install software programs). Verification of
prices is a Cypriot characteristic: it is either because companies that have websites do
not update their products and prices very often or because Cypriots like to bargain for
discounts. Lastly the company offers them the option to come and buy the same product
from its premises, but at a higher cost.
Combined approaches are also used for payments and delivery options. Customers can
pay via secure lines on the internet with the use of their credit cards. They can also pay
with cash or cheque on delivery, or they can visit the company’s premises to collect their
goods and pay by all the above mentioned ways.
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Fast technological developments and the spread of high-speed internet access – over the
past five years a vast increase of ADSL connections has been noticed, although Cyprus
is still placed at the last places in Europe 25 - enabled the company to make an early
start in online retailing. The website was one of the first online stores launched in Cyprus
and has been continuously developed since, with many features and services being
added such as online technical support, newsletters, and promotional offers for registered
users. The company is taking great care that the website is user friendly. It is company
philosophy that the services offered need to have real practical value for customers. For
example, the site shows the order status, sends updated e-mails on every change and
provides an identification number with which customers can be informed about the
delivery time of the ordered product.
Products can be delivered to any address in Cyprus with an extra delivery cost charged
at the end of the order. The delivery cost is related to the size and weight of shipment.
There is also an option available to send items abroad, after a call confirmation on behalf
of company. Cyprus-PC.com is concerned about online security: they only accept orders
that are placed using the Secure Socket Layer (SSL) standard to prevent customers from
inadvertently revealing personal information by using insecure connections. Payments
are credited, once the orders have been processed and are on way to be delivered. Due
to the fact of small distances, that means that quite often, customers first receive their
products and then are charged. Credit card details are stored only if customers approve
that option.
Online customers can register to receive an electronic newsletter that informs about
special offers and promotional deals. The company has also implemented a system of
regular customer feedback sessions in which online customers are invited to complete
small scale questionnaires, make suggestions of how services could be improved further
and are rewarded for their commitment to the company with special offers dedicated to
the company’s active users.
The customers can check stock availability and reserve goods by calling the company’s
call centre as well. It is company policy to process orders on the same day as long as the
order has been made before noon. Otherwise the delivery takes place next day.
Market competitiveness
One significant advantage for Cyprus-PC.com is its strong relationship with the web
development company: Hyperlife provides constant updates to the website and it offers
knowledge about internet trends. The continuous development of the user-friendly
website assists customers to easily find what they are looking for. At the same time, the
system collects aggregative details about the time spent and products reviewed. That
allows the company to change marketing policies and give emphasis to the customers’
preferences.
After sales support is considered an important tool for the company’s growth: options of
on-site support, online support and remote support with the customer’s authorization
ensure that the company enjoys a high level of trust among its customers. Furthermore,
customers can place questions online and receive replies, instantly send e-mail and
receive answer in less than 24 hours, or ask for remote technical support. A remote
support software program has been prior installed on their laptop and in case they face a
difficulty, a technician from the site can log it and investigate the faulty situation. However
this requires customers to have access to the internet.
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185
Aggressive marketing techniques are used as well. In particular, other similar online sites
are created giving emphasis only to expert users who do not wish to get any kind of
technical support apart from manufacturer’s guarantee. However, the majority of those
buyers are people who have extensive knowledge of IT systems or foreigners who will
stay in Cyprus for a short period of time. Those techniques are used to increase sales
and keep prices low, as other retail stores are using the firm’s site as a guidance to offer
lower prices.
Managing the supply chain
A major problem for the company to set up its supply chain was to efficiently manage the
flow of merchandising from an extensive number of suppliers and the quick delivery of
products throughout Cyprus. For this purpose, the company selected a solution from DHL
a courier company. This system helps Cyprus-PC.com to ensure merchandise is in the
right place at the right time.
Prior to the introduction of this system, the situation was very tricky and complex,
because every supplier has its own transportation system, its specific method of
documentation and specific standard industry lead times. The decision was therefore to
adopt a single system to assemble all the merchandise from suppliers and have them
presented as only one delivery. Cyprus-PC.com, depending on the kind of order (i.e.
laptops or peripherals), sends the consignment orders to the courier company. This
supply chain solution by DHL receives, validates and handles consignments from several
suppliers, on behalf of the company. It checks that the order is correct, consolidates it
with other orders and then delivers to company’s premises, or schedules the final
delivery. Meanwhile, it informs Cyprus-PC.com about the changed orders’ status and
sends identification numbers to enable tracking status either by Cyprus-PC.com or the
customer. Cyprus-PC.com updates the website and sends additional messages to the
customer including those tracking numbers. DHL also collects the payments in case the
customer decides to pay the amount on delivery and every afternoon aggregates the total
amounts and sends them to the company.
5.10.3 Impact
The CRM backed multi-channel approach combined with the DHL solution gives Cyprus-
PC.com a nearly fully integrated supply chain system. The only non-electronic link in the
chain is the transmission of orders from Cyprus-PC.com to the various hardware
suppliers. While the DHL solution has the capacity to provide this link, the firm is currently
not using it: the amount of daily orders is not high enough to justify this feature. As a
result, orders are transmitted to suppliers over the phone; the suppliers then prepare the
consignment orders. While the integration of the various systems enables Cyprus-
PC.com to operate efficiently and effectively, it also provide fast and efficient customer
services. Apart from that, the various technological elements of the supply chain system
have an impact on the firm, its suppliers and its customers.
The DHL system for example, offers strong financial and organisational advantages to
both Cyprus-PC.com and its suppliers:
It minimizes the necessary time of delivered from suppliers to company’s premises
It reduces the time needed for storage in the company’s premises
Customers can track the goods virtually live
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186
From a subjective point of view, the impact of having a modern control system in place on
firm’s operations is quite substantial. However, a further detailed analysis of the impact
the new system has had has not been performed.
On the customer side, the e-store is based on a custom made CRM system which
enables almost daily updates of thousands of prices with a few clicks. It combines
suppliers’ lists, stock average and customers’ preferences. As less paper-work and
manual processes are now required, orders can be tracked and fulfilled more effectively.
Information is more real-time, thus enabling Cyprus-PC.com to focus on more strategic
issues and new business opportunities, rather than spending time in manual processes
and manual order tracking.
While Cyprus-PC.com has a strong position in the Cypriot market, marketing initiatives,
including e-marketing, are seen as key strategic tools for driving company establishment
and growth. E-Marketing is going to help reach a wide range of targeted potential new
customers while maintaining and increasing the loyalty of existing customers.
The most important challenge for Cyprus-PC.com is to achieve critical mass. In order to
improve its profitability and to survive in the long run, Cyprus-PC.com needs to grow
significantly. In this context, a major challenge to overcome is the rather conservative
attitude of customers, used to passive purchasing, mainly through traditional sales
methods.
5.10.4 Lessons learned
Cyprus-PC.com is an online retail company at the forefront in its sector in using ICT
systems and e-business solutions. The company has reached a high level of system and
process integration both for its supply chain management and for its marketing and sales
operations. Competitive pressure along with increased quality of services drives the firm
to search for opportunities to reduce costs while delivering efficiency of business
processes. In order to succeed, the company has successfully integrated e-business
solutions with the local characteristics. The innovative business solution for the Cyprus
case was the custom-made CRM software that was designed to meet all their needs to
setup and maintain a user-friendly e-store. It also offers to its customers the possibility of
making purchases via a number of channels, including the web, telephone, and store
sales.
Although the director characterised the Cypriot market as developing in online sales, he
believes that e-sales are the future sales channels for laptops and PC peripherals. He
mentioned that although Cypriot customers have started to trust internet sales, there is
still an attitude to meet face-to-face or know who is at the other end of the telephone line.
That creates positive and negative experiences. A positive experience is that close and
constant relationships are built with many more customers that would enable the firm to
move away from competing only on price. At the same time, it causes negative feelings
as it does not reduce dependency on sales persons, space and working hours.
Finally, the system may help to promote knowledge and diffusion of ICT (already used by
Cyprus-PC.com) among independent retailers. This may have a sizeable impact on the
"e-readiness" of the sector in Cyprus in short and long term.
e-Business in the Retail Sector
187
5.10.5 References
Research for this case study was conducted by Despina Cochliou on behalf of the
Sectoral e-Business Watch. Sources and references used:
Interview with Christos Kartsioulis Managing Director, August 2007
Company website:http://www.cyprus-pc.com
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188
6 Conclusions: outlook and policy implications
6.1 Outlook on further developments expected
In the e-Business Survey 2007, the companies were asked about various expected
impacts of ICT and e-business on selected indicators: management and controlling,
administration and accounting, marketing and customer services, and logistics. The
highest expected impacts were found to be on administration and accounting. 43% of
the large retailers, 41% of the medium-sized ones and even 40% of the small ones
expect high impact of ICT in this regard. These expectations may reflect the high
opportunities of e-business for collecting, storing, retrieving and analysing large amounts
of data.
Exhibit 6.1-1: Expected impacts of ICT and e-business on selected indicators by size class
23
24
22
28
20
17
27
27
16
40
13
36
14
34
18
2 5
18
4 1
14
31
13
3 5
15
38
17
43
12
39
8
49
11
19
0 15 30 45 60 75
high impact on management and
controlling
no impact on management and
controlling
high impact on administration and
accounting
no impact on administration and
accounting
high impact on marketing and
customer services
no impact on marketing and
customer services
high impact on logistics
no impact on logistics
Micro (1-9)
Small (10-49)
Medium (50-249)
Large (250+)
The survey was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.
Base (100%) = companies using computers; N (Retail, EU-7 and USA) = 1151.
Weighting: Figures weighted by firms.
Source: e-Business Survey 2007
The expected impacts on logistics are also high, but there are large differences
between, firstly, large firms (49% “high impact”), secondly, medium-sized (35% “high
impact”) and small firms (34% “high impact”), and finally micro firms (17% “high impact”).
e-Business in the Retail Sector
189
The differences in the assessment of the expected impact of ICT on marketing and
customer services were not that large. 39% of the large firms expect high impacts in this
regard, 31% of the medium-sized firms, 36% of the small firms, and even 28% of the
micro firms. This is the largest value for micro firms for all four indicators. These figures
may reflect the widespread experience even of small retailers that internet use has
become important for many customers and that the internet is consequently a viable
means of communicating with customers.
As regards management and controlling, 38% of the large firms expect high impacts of
ICT. Almost the same percentage of medium-sized (25%) and small firms (27%) stated
high impacts in this regard, but only 19% of the micro firms.
For all indicators, the percentage of large firms stating a high expected impact of ICT was
the largest of all four size classes. This may indicate that large firms are going to keep on
investing considerably into ICT, possibly further widening the scissors of ICT use
between large firms and SMEs. The overall low figures for micro firms expecting high
impacts may reflect the generally limited perceived importance of ICT and e-business in
these firms, currently and also in the future.
6.2 Policy implications
6.2.1 Introduction to policy implications
Addressees and policy areas
Findings of research for this report lead to policy implications. The following implications
address in the first instance the European Commission. In second instance, national and
regional governments as well as European and national industry associations are also
addressed.
e-Business developments can have implications for several policy areas, including for
example overall industrial policy, education policy, research and technology transfer
policy. Relevant considerations made in this context can be grouped around two overall
objectives which may to some extent be antagonistic:
Promote ICT adoption: Policy may have an interest in accelerating the adoption
and competent use of ICT and e-business activity among companies, particularly
among SMEs. Such political activity is based on the assumption that ICT are a
driver of productivity and competitiveness, leading to increased economic growth,
wealth and employment.
Counteract ICT induced undesirable effects: At the same time, policy will have to
consider intervention if ICT use or e-business activity causes undesirable effects on
the aggregate level of the industry.
A basic assumption of this report is that it is generally the enterprises’ decision to use or
not use ICT and e-business and the extent to which they invest in it. Policy initiatives
should target areas in which market failures occur, which includes issues related to
research, development and technology transfer, knowledge and skills development,
standardisation, and environment protection.
e-Business in the Retail Sector
190
Principal European Commission policies relevant to the retail industry
The European Commission’s DG Enterprise and Industry does not have a dedicated unit
for the retail industry, but retail plays a role in many policy areas of the EC, including ICT
and e-business policy. Principal policy initiatives relevant for the retail industry include the
following.
SMEs are the main targets of the European Commission’s Competitiveness and
Innovation Framework Programme (CIP).
82
The information communication
technologies policy support program (ICT PSP), which is part of CIP, is particularly
relevant for the Sectoral e-Business Watch. One of the targets of ICT PSP is to
encourage innovation through the wider adoption of and investment in ICT. For example,
by adopting an e-supply application, retail SMEs could benefit from supply chain
processes innovations. Besides businesses, ICT PSP aims to promote the wider uptake
and best use of ICT by citizens which includes consumers. Consumers are the key
customers of retail firms and a wider uptake and use of ICT among consumers could
motivate or even force retailers to engage in more ICT activities.
i2010
83
is the EU policy framework for the information society and media for the years
2005-2010. The i2010 subtitle and objective is “a European Information Society for
growth and employment”. According to the framework’s website, “it promotes the positive
contribution that ICT can make to the economy, society and personal quality of life”. The
i2010 strategy has three aims: (1) to create a Single European Information Space, which
promotes an open and competitive internal market for information society and media
services, (2) to strengthen investment and innovation in ICT research, (3) to support
inclusion, better public services and quality of life through the use of ICT. i2010 is
relevant for the retail industry as the information society is bound to bring about changes
to society that affect consumers and retail firms alike. Consumers for example will
increasingly be exposed to ICT and get acquainted to using ICT in their daily lives
resulting in a change of behaviour and attitudes towards ICT. The retail industry is bound
to react to these changes in consumer behaviour.
The following policy suggestions may contribute to fulfilling the objectives of i2010 and
CIP.
6.2.2 Suggested political activities
Address retail value chains and the whole retail business ecosystem
Research findings for this report suggest that barriers for increased uptake of e-business
in the retail industry can be found along the complete value chain. Consequently, policy
makers may seek to promote ICT and e-business along the whole retail value chain. To
use an even more extensive notion, policy makers should consider the complete retail
business ecosystem, i.e. “the network of buyers, suppliers and makers of related
products or services plus the socio-economic environment, including the institutional and
regulatory framework”
84
. The following suggested political activities reflect this approach.
82
Seehttp://ec.europa.eu/cip/index_en.htm.
83
Seehttp://ec.europa.eu/information_society/eeurope/i2010/index_en.htm.
84
Seehttp://www.digital-ecosystems.org/.
e-Business in the Retail Sector
191
Promote electronic supply chain management among SMEs
ICT and e-business applications may considerably enhance value chains in the retail
industry. Enhancement opportunities apparently exist in all parts of the retail value chain:
e-procurement (section 3.3), in-house e-operations (section 3.4), and electronic
marketing and sales (section 3.5).
Electronic procurement of supply goods can enhance upstream supply chain
efficiency and reduce procurement costs significantly. The case studies of Smart
Supermarket (see section 5.2) and Cyprus-PC.com (see section 5.3) provide
related examples. While the share of retailers who procure electronically increased
from 43% in 2003 to 55% in 2007 (figures employment weighted), there still
appears to be scope for further improvement (see section 3.3). The retail industry
therefore could benefit from the increased adoption of e-supply applications and
access to e-supply networks.
The adoption of e-sales and related downstream supply chain management
practices often presents a challenge for retail firms of all sizes because it requires
particular strategies and operations. Section 3.6 provides a discussion of benefits
and challenges of adopting e-sales practices. The findings from the case studies
indicate that retailers should aim to find an appropriate fit for e-sales with business
strategy, in-house operations, and the cultural context the firm and its customers
are exposed to. The retail industry therefore could benefit from learning about
challenges experienced when adopting e-sales.
The adoption of in-house e-operations systems by SMEs may be of particular
importance. An overall view of the relative difference of ICT use between SMEs and
large firms shows that the gap is largest for in-house operations (see section 3.7).
Barriers to adopt e-business are apparently often related to hampered network effects: In
the e-Business Survey 2007, suppliers and customers not being ready for e-business
was mentioned as the most important reason to not apply e-business more intensely
(section 3.6). Therefore, policy makers may use their portfolio of industry support
activities to foster supply chain development in retail through ICT and e-business use. It
does not appear to be useful to focus initiatives on particular sub-sectors of the retail
industry because food, non-food and other retailing are fairly close together in their e-
business performance (see section 3.7).
While the European Commission should have a focus on cross-border activities, Member
States may naturally promote national or regional activities. In recent years, several EU
Member States have launched initiatives to facilitate e-business exchanges within
specific industry supply chains.
85
A sector focus does not guarantee success, but it
facilitates such policy initiatives as it drives the involvement of experts and associations
with sector background and reputation. A good practice may be to assess or measure the
return-on-investment in ICT and to document project results. This evidence can then be
used for show-casing success stories. In practice, related initiatives often take several
years, first in order to create a critical mass of participants and then to deal with the
complexity of many firms and stakeholders.
85
The information in this paragraph is based on a report of the project “benchmarking sectoral
policy initiatives in support of e-business for SMEs”, see European Commission (2007e).
e-Business in the Retail Sector
192
Promoting e-business on a regional level
Since retailers are generally rooted in the local and regional economy, support to e-
business should predominantly take place at the local and regional level. Retailing
associations or chambers of commerce could take a leading role in promoting the
adoption and extension of e-business practices in retail. Due to the constraints in public
spending, privately funded initiatives by business organisations could be an alternative.
Regional activities can be supplemented by national and EU initiatives, like the European
e-Business Support Network (eBSN,http://ec.europa.eu/enterprise/e-bsn/index_en.html),
the eSkills Forum (http://europa.eu.int/comm/enterprise/ict/policy/ict-skills.htm), the
European e-Business Legal Portal (www.ebusinesslex.net), and the European B2B
marketplaces portal (http://www.emarketservices.com).
Foster the dissemination of e-business knowledge in the retail industry
Many retail firms may consider ICT as a cost factor rather than an investment in benefits.
Improved awareness and knowledge about the effects and sustainability of e-business
technologies would be important to take informed decisions. For example, it may be
instructive for retailers to learn that e-sales practices apparently enable SMEs to extend
their – normally regional – sales focus to the national level. This is a finding from the e-
Business Survey 2007 (see section 3.4.1, geographic origin of online orders). It may also
be instructive to learn that solely adopting ICT capital without arranging for
complementary organisational changes and employee training apparently provides little
return on investment – a finding from the impact analysis for this report (see sections
4.2.4 and 4.3.2). Furthermore, case studies for this report show the benefits of firmly
rooting ICT and e-business in the company’s overall strategy.
European retailers could benefit from enhanced e-business knowledge transparency and
transfer at both European and national levels. Across the Union, dissemination activities
about e-business in the retail industry could be improved. Networks of excellence
involving public research institutions, retail associations and retail companies could be
established and promoted to facilitate a transfer of knowledge about ICT and e-business
practice.
Promote electronic ordering among European consumers
The low level of e-sales penetration in the EU may also be due to a relatively low affinity
towards ordering over the internet on the part of consumers. The circumstance that
“suppliers and customers are not prepared for e-business” appears to be one of the most
important reasons to not apply e-business more intensively: In the e-Business Survey,
across all sub-sectors and across all firms sizes more than half of retail companies
agreed to this statement (section 3.5). A separate assessment only for customers’
preparation is unfortunately not available from the survey. The case study of Cyprus-
PC.com (see section 5.3) shows difficulties related to customers affinity to ordering
electronically.
There are several reasons why consumers do not buy online even if they have a
computer with internet access:
First of all consumers may have security concerns with regard to personal data
and, in particular, payment data. Hence, retail firms selling online should seek to
adopt cachets proving that the e-sales solution is safe in order to overcome such
concerns. They can also offer a range of payment possibilities so that customers
e-Business in the Retail Sector
193
can select the one they prefer. The e-Business Survey 2007 found that EU-7 online
retailers lag behind the US in almost all online payment possibilities (see section
3.7).
Consumers may also find online shops too complicated to use, i.e. not user
friendly enough. Retailers should thus seek to implement solutions that are easy to
use.
Customers may also feel that they need personal contact and advice when they
go shopping. Retailers may need to implement interactive solutions or personalised
website features to overcome this barrier.
While it is solely up to the retailers to improve security and usability of their online shops,
policy makers can support the adoption of appropriate applications by promoting good
practice – see the section above about fostering e-business knowledge among retailers.
Policy makers can also promote examples of secure, simple and personal e-sales
practice among consumers so that reservations against online purchase may be
diminished.
e-Business in the Retail Sector
194
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Annex I: The e-Business Survey 2007 –
methodology report
Background and scope
The Sectoral e-Business Watch collects data relating to the use of ICT and e-business in
European enterprises by means of representative surveys. The e-Business Survey 2007,
the fifth in a series of surveys conducted in 2002, 2003, 2005 and 2006, was based on
5,325 telephone interviews with decision-makers from five industry sectors in nine EU
countries and the USA. Interviews were carried out from August to October 2007, using
computer-aided telephone interview (CATI) technology. The overall survey was divided
into four separate projects (each using a separate questionnaire) focussing on different
sectors and specific topics (see Exhibit A1-1). This document contains methodological
notes for Projects 1 and 2, which accounted for 4,369 of all interviews conducted.
Exhibit A1-1: Components ("projects") of the e-Business Survey 2007
Survey
project
Focus Sectors covered
No. of
interviews
1
e-Business in
manufacturing
• Chemical, rubber and plastics
• Steel
• Furniture
2121
2
e-Business in retail,
transport & logistics
• Retail
• Transport & logistics services
2248
3 RFID adoption
• Manufacturing sectors
• Retail
• Transport services
• Hospitals
434
4
Intellectual Property rights
in ICT SMEs
• ICT manufacturing
• ICT services
• Software publishing
683
Questionnaire
The questionnaires for Projects 1 and 2 contained about 70 questions which were
structured into the following modules:
A: ICT Infrastructure and e-Business software systems
B: Automated data exchange (Project 1) / e-Business with customers and suppliers
(Project 2)
C: e-Standards and interoperability issues (Project 1)
D: Innovation activity of the company
E: ICT Skills requirements and ICT costs
F: ICT Impacts, drivers and inhibitors
G: Background information about the company
Some of the questions were the same or similar to those used in previous surveys in
order to highlight trends in the answers (notably in previously surveyed sectors such as
the chemical and retail industries). Other questions were introduced or substantially
modified, in order to reflect recent developments and priorities. The survey placed
special focus on the degree of process automation in companies, i.e. to what extent
paper-based and manually processed exchanges with business partners had been
substituted by electronic data exchanges. Some questions were filtered, such as follow-
up questions dependent on previous answers, and no open questions were used.
e-Business in the Retail Sector
198
The questionnaires of all e-Business Watch surveys since 2002 can be downloaded from
the project website (www.ebusiness-watch.org/about/methodology.htm).
Population
As in 2005 and 2006, the survey considered only companies that used computers. For
the first time, a cut-off was introduced with regard to company size. When surveying the
manufacturing sector in Project 1, only companies with at least 10 employees were
interviewed. For the retail and transport sector in Project 2, the population also included
micro-companies with fewer than 10 employees, reflecting their important contribution
(see Exhibit A1.2). Sector totals are therefore not directly comparable between the two
projects.
The highest level of the population was the set of all computer-using enterprises (and, in
Project 1, with at least 10 employees) that were active within the national territory of one
of the eight countries covered, and whose primary business activity was covered by one
of the five sectors specified in the NACE Rev. 1.1.
86
Evidence from previous surveys
shows that computer use can be expected to reach 99% or more among medium-sized
and large firms across all sectors.
Exhibit A1-2: Population coverage of the e-Business Survey 2007
No. Sector name NACE Rev. 1.1
activities covered
Population
definition
No. of interviews
conducted
Project 1 – Manufacturing
1.1 Chemicals, rubber
& plastics
24, 25 911
1.2 Steel 27.1-3, 27.51-52 449
1.3 Furniture 36.12-14
Companies which
have at least 10
employees and use
computers
761
Project 2 – Retail and transport
2.1 Retail 52 1,151
2.2 Transport services
and logistics
60.10, 60.21+23+24
63.11+12+40
Companies that
use computers
1,097
Sampling frame and method
For each sector, the sample was drawn randomly from companies within the respective
sector population of each of the countries surveyed. The objective of this approach was
to fulfil minimum strata with respect to company size-bands per country-sector cell (see
Exhibit A1-3).
Exhibit A1-3: Strata by company-size
Target quota specified
Size-band
Project 1
Manufacturing
Project 2
Retail & transport
Micro enterprises (up to 9 employees) -- up to 30%
Small companies (10-49 employees) up to 40-50%* at least 30%
Medium-sized companies (50-250 employees) at least 40-45%* at least 25%
Large companies (250+ employees) at least 10-15%* at least 15%
* depending on sector
86
NACE Rev. 1.1 was replaced by the new version NACE Rev. 2 in January 2008. Nonetheless
when the survey was conducted, sectors still had to be defined on the basis of NACE Rev. 1.1
because business directories from which samples were drawn were based on the older version.
e-Business in the Retail Sector
199
Samples were drawn locally by fieldwork organisations based on official statistical
records and widely recognised business directories such as Dun & Bradstreet (used in
several countries) or Heins und Partner Business Pool.
The survey was carried out as an enterprise survey: data collection and reporting focus
on the enterprise, defined as a business organisation (legal unit) with one or more
establishments. Due to the small population of enterprises in some of the sector-country
cells, the target quota could not be achieved (particularly in the larger enterprise size-
bands) in each country. In these cases, interviews were shifted to the next largest size-
band (from large to medium-sized, from medium-sized to small), or to other sectors.
Fieldwork
Fieldwork was coordinated by the German branch of Ipsos GmbH (www.ipsos.de) and
conducted in cooperation with its local partner organisations (see Exhibit A1-4) on behalf
of the Sectoral e-Business Watch. Pilot interviews prior to the regular fieldwork were
conducted with about ten companies in each sector in Germany in August 2007, in order
to test the questionnaire (structure, comprehensibility of questions, average interview
length).
Exhibit A1-4: Institutes that conducted the fieldwork of the e-Business Survey 2007 and
number of interviews conducted per country (total for Projects 1 and 2)
Country Institute conducting the interviews
No. of interviews
conducted
France IPSOS Insight Marketing, 75628 Paris 551
Germany IPSOS GmbH, 23879 Mölln 555
Italy Demoskopea S.p.A., 20123 Milano 553
Poland IQS and Quant Group Sp.z.o.o, 00-610 Warszawa 546
Spain IPSOS Spain, 28036 Madrid 549
Sweden GfK Sverige AB, 22100 Lund 542
UK Continental Research, London EC1V 7DY 548
USA Market Probe International, Inc, New York, NY 10168 525
TOTAL 4,369
The two sector surveys had a total scope of 4,369 interviews, spread across eight
countries and five industries. In each of the eight countries, all five sectors were covered.
The target was to spread interviews as evenly as possible across sectors; however, due
to the comparatively small population of companies in the steel and (in some countries) in
the furniture industries, some interviews had to be moved either between countries
(within a sector) or between sectors (i.e. from steel or furniture to larger sectors, such as
the retail industry). Exhibit A1-5 shows the final distribution of interviews across sectors
and countries.
Exhibit A1-5: Interviews conducted per sector and country:
Sector Country DE ES FR IT PL SE UK USA Total
Project 1 – Total 305 290 235 303 254 170 264 300 2,121
1.1 Chemical 100 120 135 105 120 105 126 100 911
1.2 Steel 100 50 20 87 24 30 38 100 449
1.3 Furniture 105 120 80 111 110 35 100 100 761
Project 2 – Total 250 259 316 250 292 372 284 225 2,248
2.1 Retail 120 131 166 126 151 184 148 125 1,151
2.2 Transport 130 128 150 124 141 188 136 100 1,097
e-Business in the Retail Sector
200
Non response: In a voluntary telephone survey, in order to achieve the targeted
interview totals, it is always necessary to contact more companies than the number
targeted. In addition to refusals, or eligible respondents being unavailable, any sample
contains a proportion of "wrong" businesses (e.g., from another sector), and wrong and/or
unobtainable telephone numbers. Exhibit A1-6 shows the completion rate by country
(completed interviews as percentage of contacts made) and reasons for non-completion
of interviews. Higher refusal rates in some countries, sectors or size bands (especially
among large businesses) inevitably raise questions about a possible refusal bias: that is,
the possibility that respondents differ in their characteristics from those that refuse to
participate. However, this effect cannot be avoided in any voluntary survey (whether
telephone- or paper-based).
Exhibit A1-6: Interview contact protocol, completion rates and non-response reasons
DE ES FR IT PL SE UK US
1 Sample (gross) 6188 6435 6538 3071 10642 3016 8246 15862
1.1 Telephone number not valid 541 31 53 299 645 38 611 1811
1.2
Not a company (e.g. private
household)
82 209 6 36 327 2 57 431
1.3 Fax machine / modem 19 0 72 9 300 33 69 389
1.4
Quota completed à
address not used
973 2018 1531 101 2492 84 1087 193
1.5 No target person in company 992 267 264 129 975 101 662 821
1.6 Language problems 4 0 6 1 77 6 6 72
1.7 No answer on no. of employees 0 8 0 1 9 1 6 24
1.8
Company does not use
computers
35 75 32 76 35 5 110 398
1.9
Company