ICT and e-Business Impact in the Retail Industry - empirica

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ICT and e-Business Impact in the Retail Industry - empirica

ICT and e-Business Impact in theRetail IndustryStudy reportNo. 04/2008

European Commission, DG Enterprise & Industrye-Mail: entr-innov-ict-ebiz@ec.europa.eu,info@ebusiness-watch.orgImpact Study No. 04/2008ICT and e-Business Impactin the Retail IndustryA Sectoral e-Business Watch study byempirica GmbHFinal ReportVersion 4.0September 2008This report was prepared by empirica on behalf of the European Commission,Enterprise & Industry Directorate General, in the context of the "Sectoral e-BusinessWatch" programme. The Sectoral e-Business Watch is implemented by empiricaGmbH in cooperation with Altran Group, Databank Consulting, DIW Berlin, IDCEMEA, Ipsos, GOPA-Cartermill and Rambøll Management based on a servicecontract with the European Commission.

e-Business in the Retail SectorAbout the Sectoral e-Business Watch and this reportDisclaimerAcknowledgementsContactThe 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 theeconomy in general across different sectors of the economy in the enlarged European Union, EEAand 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 beaccessed 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 theretail industry. The study describes how companies use ICT for conducting business, and, aboveall, assesses implications thereof for firms and for the industry as a whole. The elaborations arebased on an international survey of enterprises on their ICT use, econometric analyses, expertinterviews and case studies.Neither the European Commission nor any person acting on behalf of the Commission isresponsible for the use which might be made of the following information. The views expressed inthis report are those of the authors and do not necessarily reflect those of the EuropeanCommission. Nothing in this report implies or expresses a warranty of any kind. Results from thisreport should only be used as guidelines as part of an overall strategy. For detailed advice oncorporate planning, business processes and management, technology integration and legal or taxissues, the services of a professional should be obtained.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 theSectoral e-Business Watch, which is implemented by empirica GmbH in cooperation with AltranGroup, Databank Consulting, DIW Berlin, IDC EMEA, Ipsos, GOPA-Cartermill and RambøllManagement, based on a service contract with the European Commission (principal contact andcoordination: 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 in2007/2008, for their valued feed-back, comments and contributions to this study.For further information about this Sector Study or the Sectoral e-Business Watch, please contact:empiricaGesellschaft fürKommunikations- undTechnologieforschung mbHOxfordstr. 2, 53111 Bonn,Germanyinfo@empirica.comSectoral e-Business Watchc/o empirica GmbHOxfordstr. 2, 53111 Bonn,Germanyinfo@ebusiness-watch.orgEuropean CommissionEnterprise & Industry Directorate-GeneralICT for Competitiveness andInnovationentr-innov-ict-ebiz@ec.europa.euRights RestrictionsMaterial 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 20082

e-Business in the Retail SectorTable of ContentsExecutive Summary ...................................................................................................51 Introduction...................................................................................................91.1 The Sectoral e-Business Watch.........................................................................................101.2 ICT and e-Business – key terms and concepts..................................................................131.3 Study objectives and methodology.....................................................................................182 Context and background.............................................................................222.1 Sector definition – scope of the study.................................................................................222.2 Industry background..........................................................................................................242.3 Trends and challenges......................................................................................................252.3.1 Macro-economic developments slowing down retail sales................................................................262.3.2 Increasing concentration and strong competition..............................................................................272.3.3 Changing consumer preferences.....................................................................................................283 Deployment of ICT and e-business applications in the retail sector .........303.1 The state-of-play in 2003/04 – review of an earlier retail sector study.................................313.2 ICT infrastructure, networks, expenditure and skills............................................................333.3 The upstream supply chain: e-procurement.......................................................................413.3.1 Introduction to upstream supply chain issues...................................................................................413.3.2 Findings about e-procurement.........................................................................................................423.4 The internal supply chain: in-house electronic operations...................................................493.4.1 Introduction to internal operations....................................................................................................493.4.2 Findings about internal e-operations................................................................................................503.5 The downstream supply chain: electronic marketing and sales...........................................583.5.1 Introduction to downstream supply chain issues...............................................................................583.5.2 Findings about electronic sales........................................................................................................593.5.3 Findings about electronic marketing.................................................................................................673.5.4 Electronic support of logistics and distribution..................................................................................693.6 Barriers and drivers of e-business use...............................................................................693.7 Overall differences between size classes, countries, sub-sectors and industries................743.8 Summary of the state of play of ICT and e-business in retail..............................................784 Drivers and impacts of ICT adoption...........................................................804.1 Conceptual framework: the structure – conduct – performance paradigm...........................804.2 ICT and productivity...........................................................................................................824.2.1 Background and hypotheses...........................................................................................................824.2.2 ICT impact on value added growth..................................................................................................854.2.3 ICT impact on labour productivity growth.........................................................................................884.2.4 Conclusions: Minor ICT impact on growth of value added and labour productivity .............................943

e-Business in the Retail Sector4.3 ICT and innovation............................................................................................................964.3.1 Survey findings about ICT and innovation........................................................................................964.3.2 Links between skills, e-collaboration and ICT-enabled innovation................................................... 1004.3.3 ICT innovation, firm performance and organisational change.......................................................... 1034.3.4 Overview of results on ICT and innovation..................................................................................... 1074.4 ICT and market structure................................................................................................. 1074.4.1 Survey findings on ICT and competition......................................................................................... 1084.4.2 Market structure and ICT diffusion................................................................................................. 1104.4.3 ICT impact on market structure...................................................................................................... 1114.4.4 Overview of results on ICT and market structure............................................................................ 1134.5 ICT and the retail sector’s value chain............................................................................. 1134.6 Summary of impact analysis............................................................................................ 1155 Case studies..............................................................................................1185.1 Mercator, Slovenia........................................................................................................... 1215.2 Globus, Germany............................................................................................................ 1305.3 Brookland Plus Products/Dirk van den Broek, Netherlands.............................................. 1375.4 AMJG Comunicações, Portugal....................................................................................... 1455.5 Casino Group, France..................................................................................................... 1505.6 4fitness, Germany........................................................................................................... 1565.7 Fleria Floral Creations, Greece........................................................................................ 1635.8 Smart Supermarket, Malta............................................................................................... 1685.9 EMPiK, Poland................................................................................................................ 1745.10 Cyprus-PC.com, Cyprus.................................................................................................. 1826 Conclusions: outlook and policy implications ..........................................1886.1 Outlook on further developments expected...................................................................... 1886.2 Policy implications........................................................................................................... 1896.2.1 Introduction to policy implications.................................................................................................. 1896.2.2 Suggested political activities.......................................................................................................... 190References.............................................................................................................194Annex I: The e-Business Survey 2007 – methodology report................................197Annex II: Econometric analysis methodology.......................................................2034

e-Business in the Retail SectorExecutive SummaryKey findingsIncrease of e-business use 2003- 2007: as of2007, firms representing more than half of theindustry’s employment procure electronically,intense use of in-house e-business solutions israre, and more than one third sellelectronically. The share of firms with e-salesactivities doubled between 2003 and 2007.Digital divide owing to firm size continuesto exist: retail SMEs lag behind large retailersin ICT uptake – overall, e-business activitiestend to often increase with firm size.e-Commerce environment less vibrant inthe EU than in the US: EU retailers tend touse less e-business processes than USretailers. There are also signs that the e-business ecosystem differs notably betweenthe EU and the US (e.g. barriers to and driversfor e-business differ).Level of e-business use similar acrossretail industry sub-sectors: the three retailindustry sub-sectors, non-food, food and otherretail, show no significant differences in ICTuptake and e-business use.ICT capital investments alone areinsufficient: without changes to the businessand especially business processes reengineering,there is little return frominvestments in ICT.ICT drive innovation: in the retail industry,ICT mainly drive process innovation but theuse for product and service innovation is largerthan in other industries.ObjectivesThis study explores the effects of informationand communication technology (ICT) and e-business on the retail industry. The objectivesof the study are to illustrate how companies inthis industry use ICT for conducting business;to assess the effects of this development forfirms and for the industry as a whole and tosupply implications for policy. The analysis isbased on an international survey coveringseven European Union (EU) Member Statesand the USA. Additionally, ten case studies,illustrating various issues, were conducted. Aneconometric analysis of ICT impacts, anevaluation of recent literature as well assecondary data sources complete the report.The retail industry covers business activities ofNACE Rev. 2 Division 47: ‘retail trade, exceptof motor vehicles and motorcycles; repair ofpersonal and household goods’ (section 2.1).The retail sector is studied through the lens ofsupply chain management, divided into threeelements: the upstream supply chain (supplierrelationships), in-house supply chain (internale-operations) and downstream supply chain (esalesand marketing).Retailing – a diversified industryRetailing activities form one of the mostimportant industry sectors in the EU in terms ofnumbers of enterprises and employment: in2004, the industry comprised of approximately17 million firms that employed 3.74 millionpeople in EU-27. Employment and turnover isconcentrated on large and small firms;medium-sized firms are less important. Theretail industry covers a very wide array ofenterprises in terms of firm size, businessmodels and goods on sale. Two types of retailtrade activities are particularly important in theEU: the sale of non-food items in storeaccounting for 50% of turnover of the retailsector and the sale of food items in storeaccounting for 44%. The remaining categories,retail sales not in-store and repair of personaland household goods, accounted for together6% of turnover. These patterns are usuallyrepeated across Member States (Section 2.2).Trends and challenges: macroeconomicdevelopments uncertainRetail industry performance is heavilydependent on macro-economic developments.In late 2007, the economic environment for5

e-Business in the Retail Sectorretail has turned to become less favourable:there is uncertainty about the prospects foreconomic growth, mainly due to the turmoil infinancial markets and rising cost for energyand food. Private consumption continues toshow signs of weakness in early 2008.Concentration processes have been takingplace in retail in the past decades, driving outsmaller players and leaving a smaller numberof large chains to fight for profit margins. Largeenterprises from outside Europe are seeking toenter new markets in Europe which is furtherincreasing competition.Regarding customers, there are at least threetrends: demographic changes towards a largershare of older people with particularconsumption needs, customers who areincreasingly well-informed about products andshare such information with other customers,and consumers demanding sustainableproducts. Retailers need to adapt to thesetrends with appropriate strategies andoperations (Section 2.3).General increase of ICT and e-business use since 2003Compared to the 2003 e-Business Watch retailindustry findings, the 2007 results indicate thatICT and e-business use have become moreprevalent in retail firms of all size classes.Nevertheless, the use of e-business in theretail sector was found to be still below theaverage adoption rates in other sectors. The2007 study also confirmed the 2003 conclusionthat the main e-business opportunities in theretail industry, similarly as in other sectors, areefficiency and productivity gains and, thus,cost savings (Section 3.2).The quality of SMEs' internet access hassignificantly improved between 2003 and 2007.However, there is scope for furtherimprovement as only about 45% of the sector'sfirms weighted by employment are connectedvia broadband (>2 Mbit/s). Diffusion of internalW-LANs has been fast. More than 50% oflarge retailers operate a W-LAN, and 35-40%of small and medium-sized retailers. While onlyabout 10% of all retail companies employ ICTspecialists, even among large retailers onlyabout 50% do. Many companies completelyoutsource ICT services to external serviceproviders. The attitude towards ICTinvestments and budgets is more positive thana couple of years ago. A third of retailers planto increase their ICT budgets, only few expectbudget cuts for the forthcoming financialperiod.Electronic procurement prevalentThe function of upstream supply chainmanagement (SCM) is to design and managethe processes, information and material flowsbetween retailers and their suppliers. SCM isof utmost importance to retailers, as it is both amajor cost driver and opportunity forcompetitive advantage. Case studiesdemonstrate that ICT have a high potential inthis context, not only to cut costs, but also toimprove service levels for customers.However, companies have to balanceavailability with inventory levels and associatedcosts. Key findings about e-procurement andSCM include:e-Procurement: Retailers representing morethan 50% of the sector's employment order atleast some of their goods online. The Sectorale-Business Watch estimates the total share ofgoods ordered online ( in those companies thatprocure online) at about 25-30%the averageshare of goods procured online has increasedby 10-15 percentage points compared to 2003.SCM systems: Advanced software systemsspecifically for SCM are still not widely diffused(about 20% of retail companies); however,adoption has seen a dynamic developmentamong large retail firms, where it hasincreased from 7% to 35%.Different levels of integration: The digitalintegration between retailers andmanufacturers can evolve on a step-by-stepbasis. Simple applications such as e-invoicingare widely used already. Advanced forms suchas sharing information about inventory levelsonline are only used by some companies.Benefits also for small firms: Case studiesshow that even small companies can gain6

e-Business in the Retail Sectorsignificantly from ICT-enabled improvements intheir supply chain. However, the potentialbenefits differ between segments and retailbusiness models.Internal e-business systems:intense e-business and RFID rareInternal e-business operations can significantlyenhance workflows and business processesand thus increase productivity. However,companies representing almost half of theindustry’s employment said that they onlyconduct some processes by e-business. 22%even said “none”; a “good deal” was stated by20%, and in 11% most processes areconducted electronically. As regards particularsystems, firms representing 60% ofemployment reported to have a softwareapplication to manage the placing or receipt oforders, 59% a bar-coding system, 51% awarehouse or depot management system, and16% an ERP system. RFID is not yet verycommon in the retail industry. Retail firmsrepresenting 8% of employment reported touse this technology, and RFID use is very rarein micro and small retail firms.Electronic sales and distributiondoubled since 2003Retailers representing 38% of the industry’semployment stated that they sell goods“through the internet or other computermediatednetworks”. Almost half of the largeretail firms (45%) and 35% of the mediumsizedones sell online, but only 24% of thesmall retailers and 26% of the micro retailersdo so. The share of companies that sellsonline doubled from 19% (employmentweighted)in 2003 to 38% in 2007. There wasan apparent increase in all size classes. Therehas also been an increase in the amount ofsales conducted online. Compared to thefigures about general sales areas, it appearsthat online sales helps to extend thegeographic focus slightly from regional tonational sales while the international focusremains on the same low level. The e-Business Survey 2007 also found that retailersrepresenting 20% of the industry’s employmentuse a CRM system, an increase from 8% in2003.Micro and small firms lag behindmedium-sized and large onesMicro, small- and medium-sized firms lagbehind large firms in almost all indicators ofICT and e-business use presented in thisreport. Exceptions include the level of internetaccess which is close to 100% in SMEs, theaverage share of employees with internetaccess which is higher in SMEs than in largefirms, and the practice of sending electronicinvoices to customers which is on the samelevel in all size classes. Nevertheless it isnotable that micro and small firms have beenincreasing their ICT adoption in recent years(Chapter 3). The gap between SMEs and largefirms is most pronounced for internal e-operations, followed by ICT infrastructure. Asregards e-sales, the usage gap is betweenlarge and medium-sized firms on the one handas well as micro and small firms on the other.In e-procurement, SMEs are almost on thesame level as large firms.e-Commerce environment lessvibrant in the EU than in the USOverall, the e-commerce environment is lessvibrant in the EU than in the US: across themajority of variables, EU retail firms lag behindUS retailers. In some cases, the differencesare large, for example for placing online ads onother companies’ websites (43% in the USversus 16% in the EU) and for options offeredto pay online (higher percentages in the US forall options). Exceptions include the share offirms with internet access, the average shareof employees with internet access, and the useof internal systems for which the levels aresimilar or even higher in the EU. Surprisingly,the overall importance of e-business stated bythe firms is very similar between EU-7 and USretailers. The reason may be that US retailersanswered the question about e-businessimportance with a higher reference level inmind.7

e-Business in the Retail SectorResults of an econometricanalysis of ICT impactsProductivity: ICT-capital investments havenot been key drivers in the growth of real valueadded in European retailing. Total FactorProductivity, which includes for exampleorganisational changes, was found to accountfor much stronger contributions. As regardslabour productivity, intermediate inputsintensity were found to be the maincomponents. This may predominantly be dueto outsourcing activity. ICT capital investmentsas well as the employment of a large share ofmedium-skilled workers play a positive butminor role in labour productivity growth.Overall, the findings indicate that ICT capitalinvestments alone are insufficient to increaselabour productivity significantly. It may benecessary to also invest into organisationalchanges and training (Section 4.2).Innovation: In the retail industry, the e-Business Survey 2007 found the impact of ICTto be mainly on process innovation but it alsoplays an important role in product and serviceinnovation. An econometric analysis found,firstly, that employing people with a universitydegree as well as employing IT practitionerssignificantly increases retail firms’ propensity touse ICT to develop new products and services.Secondly, the use of applications and practicesthat support the electronic exchange ofinformation between companies positivelyaffects the likelihood of conducting ICTenabledinnovations. The analysis also foundthat ICT-enabled innovation is positivelyrelated with turnover increase irrespective offirm size and age. Secondly, ICT software is animportant driver of organisational changes,while hardware apparently is not (Section 4.3).Market structure: The relevance of increasingmarket competition for the intensity of ICTadoption was confirmed. Findings also indicatethat ICT and e-business can be used to openup new markets, to cross boundaries ofindustries and markets and to increase thenumber of customers (Section 4.4).Value chains: The econometric analysis foundthat ICT intensity indeed increased thepropensity to outsource business activities(Section 4.5).Policy implicationsBarriers for increased uptake of e-business inretail can be found along the complete valuechain. Consequently, policy makers shouldseek to promote e-business along the wholeretail value chain and business ecosystem.Promote SCM among SMEs: Policy makersmay support supply chain development in retailthrough e-business use. While the EuropeanCommission should have a focus on crossborderactivities, Member States may naturallypromote national or regional activities. A sectorfocus facilitates such policy initiatives as itdrives the involvement of experts andassociations with sector background.Promoting e-business on a regional level:Since retailers are generally rooted in the localand regional economy, support to e-businessshould predominantly take place at the localand regional level. Retailing associations orchambers of commerce could take a leadingrole in promoting the adoption and extension ofe-business practices in retail.Foster dissemination of e-businessknowledge: Many retail firms consider ICT asa cost factor rather than an investment inbenefits. Improved awareness and knowledgeabout the effects of e-business would beimportant. Key findings from this report whichare of interest for retailers include e.g. that ICTinvestment should be complemented byorganisational changes, employee training androoting ICT in the company’s strategy.Dissemination activities about e-business inthe retail industry could be improved.Promote e-ordering by consumers: The lowlevel of e-sales penetration in the EU may alsobe due to a relatively low affinity towardsordering over the internet on the part ofconsumers. They may have security concerns,they may find online shops too complicated,and they may require enhanced personalcommunication. Policy makers can promoteexamples of secure, simple and personal e-sales practice among consumers and retailers.8

e-Business in the Retail Sector1 IntroductionThis study focuses on the adoption and implications of e-business practice in the retailindustry. It describes how companies in this sector use information and communicationstechnology (ICT) for conducting business, assesses the impact of ICT for firmperformance in a context of global competition, and points at possible implications forpolicy. The analysis is based on literature, interviews with industry representatives andexperts, company case studies and a telephone survey among decision-makers inEuropean enterprises from the retail industries. The study takes into account results ofearlier sector studies on the retail industry, published by e-Business W@tch in 2003 and2004 1 .Study structureThis report is structured into six main sections. Chapter 1 explains the background andcontext why the study is being conducted: it introduces the Sectoral e-Business Watch(SebW) program of the European Commission, a conceptual framework for the analysisof e-business, and the specific methodology used for the study. Chapter 2 provides somegeneral information and key figures about the retail industry in Europe. Chapter 3analyses the current state-of-play in e-business in this industry, focusing on specific ICTrelatedissues that are considered to be particularly relevant to the sector. Chapter 4assesses the impact of the developments described in chapter 3 on work processes andemployment, innovation and productivity, and – at sector level – on value chaincharacteristics. Chapter 5 presents company case studies. These have been selected aspractical examples and evidence for the issues discussed in chapters 3 and 4. The finalchapter 6 summarises key findings and draws conclusions on policy implications thatcould arise from the developments observed.Combining descriptive and analytical approachesThe study approach is exploratory, descriptive and explanatory, applying a broadmethodological basis: a qualitative case study approach (Chapter 5) is combined with adescriptive presentation of quantitative survey data (Chapter 3) and an economicanalysis of ICT adoption and its impacts (Chapter 4). This threefold approach is meant toproduce an in-depth understanding of current e-business practice in the industry, whilealso assessing the economic effects of this practice, for instance on firm productivity andinnovation. While the results from these different approaches are presented like selfsustainedpieces of research in separate chapters, they are intertwined and crossreferenced.1The previous study report on the retail industry is available at the Sectoral e-Business Watchwebsite at http://www.ebusiness-watch.org/studies/on_sectors.htm.9

e-Business in the Retail Sector1.1 The Sectoral e-Business WatchMission and objectivesThe "Sectoral e-Business Watch" (SeBW) studies the adoption, implications and impactof electronic business practices in different sectors of the European economy. Itcontinues activities of the preceding "e-Business W@tch" which was launched by theEuropean Commission, Directorate-General (DG) Enterprise and Industry, in late 2001, tosupport policy in the fields of ICT and e-business. The SeBW is based on a FrameworkContract 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 thecompetitiveness of the ICT sector, and to facilitate the efficient uptake of ICT forEuropean enterprises in general." The services of the SeBW are expected to contribute tothese goals. This mission can be broken down into the following main objectives:to assess the impact of ICT on enterprises, industries and the economy ingeneral, including the impacts on productivity and growth, and the role of ICT forinnovation and organisational changes;to highlight barriers for ICT uptake, i.e. issues that are hindering a faster and/ormore effective use of ICT by enterprises in Europe;to identify and discuss policy challenges stemming from the observed developments,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 informedpolicy decision-making in these fields in several policy domains including innovation,competition and structural policy.Policy contextThe initial e-Business W@tch program was rooted in the eEurope Action Plans of 2002and 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 andraising productivity and growth through investment in information and communicationtechnologies, human resources (notably e-skills) and new business models". 2The i2010 policy 3 , a follow-up to eEurope, also stresses the critical role of ICT forproductivity and innovation, stating that "… the adoption and skilful application of ICT isone of the largest contributors to productivity and growth throughout the economy,leading to business innovations in key sectors" (p. 6). The Communication anticipates "anew era of e-business solutions", based on integrated ICT systems and tools, which willlead to an increased business use of ICT. However, it also warns that businesses "stillface a lack of interoperability, reliability and security", which could hamper the realisationof productivity gains (p. 7).23"eEurope 2005: An information society for all". Communication from the Commission,COM(2002) 263 final, 28 May 2002, chapter 3.1.2."i2010 – A European Information Society for growth and employment." Communication from theCommission, COM(2005) 229 final.10

e-Business in the Retail SectorIn February 2005, the European Commission proposed a new start for the LisbonStrategy. While it recommended changes in the governance structures, i.e. the wayobjectives are to be addressed, the overall focus on growth and jobs remainedunchanged. Some of the policy areas of the renewed Lisbon objectives address ICTrelatedissues. Central Policy Area No. 6 deals with facilitating ICT uptake across theEuropean economy. Policy-makers in this area will require thorough analysis of ICTuptake based on accurate and detailed information on the most recent developments.Such evidence-based analysis is also needed when targeting individual sectors to fullyexploit 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 effectivelyaddressed only if actions are based on understanding of the potential for and probableeffectiveness of interventions."ICT are an important tool …""More efforts are needed to improve business processes in Europeanenterprises if the Lisbon targets of competitiveness are to be realised.European companies, under the pressure of their main internationalcompetitors, need to find new opportunities to reduce costs and improveperformance, internally and in relation to trading partners. ICT are animportant tool to increase companies’ competitiveness, but their adoption isnot enough; they have to be fully integrated into business processes."Source: European Commission (2005): Information Society BenchmarkingReportIn 2005, taking globalisation and intense international competition into consideration, theEuropean Commission launched a new industrial policy 5 with the aim to create betterframework conditions for manufacturing industries in the coming years. Some of thepolicy strands described have direct links to ICT usage, recognising the importance ofICT for innovation, competitiveness and growth.The SeBW is one of the policy instruments used by DG Enterprise and Industry tosupport the implementation of the industrial policy and related programmes. Its activitiesare 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 policymakers and business support organisations,the eSkills Forum, a task force established in 2003 to assess the demand andsupply 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 variousactivities aiming to strengthen Europe's ICT sector, and45"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."Implementing the Community Lisbon Programme: A Policy Framework to Strengthen EUManufacturing - towards a more integrated approach for Industrial Policy." Communication fromthe Commission, COM(2005) 474 final, 5.10.200511

e-Business in the Retail Sectoractivities in the areas of ICT standardisation, as part of the generalstandardisation activities of the Commission. 6In parallel to the work of the SeBW, the "Sectoral Innovation Watch" (see www.europeinnova.org)analyses innovation performance and challenges across different EU sectorsfrom an economic perspective. Studies cover, inter alia, the following sectors: chemical,automotive, aerospace, food, ICT, textiles, machinery and equipment.Scope of the programmeSince 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 comprehensivesynthesis reports about the state-of-play in e-business in the European Union, statisticalpocketbooks and studies on specific ICT issues. All publications can be downloaded fromthe program's website at www.ebusiness-watch.org. In 2007/08, the main studies of theSeBW focus on the following 10 sectors and specific topics:Exhibit 1.1-1: Sectors and specific topics covered by the SeBWNo. Sector / topic in focus NACE Rev. 1.1 Reference to earlierstudies by SeBW1 Chemical, rubber and plastics 24, 25 2004, 20032 Steel 27.1-3, 27.51+52 --3 Furniture 36.12-14 --4 Retail 52 2004, 20035 Transport and logistics services 60, 63 (parts thereof) --6 Banking 65.1 20037 RFID adoption and implications (several sectors) --8 Intellectual property rights forICT-producing SMEs9 Impact of ICT and e-business onenergy use10 Economic impact and drivers ofICT adoption30.01+02, 32.1-3, 33.2+3;64.2; 72 (parts thereof)Source: Sectoral e-Business Watch 2007/2008------The SeBW presents a 'wide-angle' perspective on the adoption and use of ICT in thesectors studied. Studies assess how ICTs are having an influence on businessprocesses, notably by enabling electronic data exchanges between a company and itscustomers, suppliers, service providers and business partners. (The underlyingconceptual framework is explained in more detail in the following section.) In addition, thestudies also provide some background information on the respective sectors, includinga briefing on current trends. Readers, however, should not mistakenly consider this partas the main topic of the analysis. The introduction to the sector is neither intended, norcould it be a substitute for more detailed industrial analysis.67The 2006 ICT Standardisation Work Programme complements the Commission's "Action Planfor European Standardisation" of 2005 by dealing more in detail with ICT matters.see overview at www.ebusiness-watch.org/studies/on_sectors.htm.12

e-Business in the Retail Sector1.2 ICT and e-Business – key terms and conceptsA definition of ICTThis study examines the use of information and communication technology (ICT) inEuropean businesses. ICT is an umbrella term that encompasses a wide array ofsystems, devices and services used for data processing (the information side of ICT) aswell as telecommunications equipment and services for data transmission andcommunication (the communication side). The European Information TechnologyObservatory (2007) structures the ICT market into four segments with an estimated totalmarket value of about € 670 billion in 2007 (Exhibit 1.2-1).Exhibit 1.2-1: The EU ICT market according to EITO (2007)MarketsegmentICT equipmentSoftwareproductsProducts / services included (examples)Computer hardware, end-user communicationsequipment (such as mobile phones), office equipment(such as copiers) and data communications and networkequipment (such as switching and routing equipment,cellular mobile infrastructure)System and application softwareMarket value forEU (2007)(EITO estimate)€159 billion€76 billionIT services Consulting, implementation and operations management €140 billionCarrierservicesFixed voice telephone and data services, mobiletelephone services, cable TVSource: EITO 2007€293 billionIn its widest sense, 'e-business' refers to the application of these technologies in businessprocesses, including primary functions (such as production, inbound and outboundlogistics or sales), and support functions (such as administration, controlling, procurementand human resources management). Companies in all sectors use ICT, but they do so indifferent 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-businessdevelopments that will be used in the following analysis of the retail industry.Gaining momentum after a phase of disappointmentWhen the bust phase of the previous economic cycle – commonly referred to as the 'neweconomy' – started in 2001, the former internet hype was suddenly replaced by awidespread disappointment with e-business strategies. Companies adopted a morereserved and sceptical attitude towards investing in ICT. Nevertheless, ICT has proved tobe the key technology of the past decade (OECD 2004, p. 8), and the evolutionarydevelopment of e-business has certainly not come to an end. The maturity of ICT-baseddata exchanges between businesses and their suppliers and customers, fostered byprogress in the definition and acceptance of standards, has substantially increasedacross 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 businessimplications and it is widely recognised that 'e'-elements have become an essentialcomponent of modern business exchanges. In short, e-business has regainedmomentum as a topic for enterprise strategy both for large multinationals and SMEs.13

e-Business in the Retail Sector"Measurement of e-business is of particular interest to policy makersbecause of the potential productivity impacts of ICT use on businessfunctions. However, the ongoing challenges in this measurement field aresignificant and include problems associated with measuring a subject whichis both complex and changing rapidly."OECD (2005): ICT use by businesses. Revised OECD model survey, p. 17Companies use ICT in their business processes mainly for three purposes: to reducecosts, to better serve the customer, and to support growth (e.g. by increasing their marketreach). In essence, all e-business projects in companies explicitly or implicitly addressone or several of these objectives. In almost every case, introducing e-business can beregarded as an ICT-enabled process innovation. Understanding one's business processesand having a clear vision of how they could be improved (be it to save costs or toimprove service quality) are therefore critical requirements for firms to effectively use ICT.The increasing competitive pressure on companies, many of which operate in a globaleconomy, has been a strong driver for ICT adoption. Firms are constantly searching foropportunities to cut costs and ICT holds great promise in this respect as it increases theefficiency of a firm’s business processes, both internally and between trading partnersin 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 deliveringagainst key business objectives. They have integrated ICT into their productionprocesses and quality management and, most recently, in marketing and customerservices. These last sectors are widely considered key to improve competitiveness in thecurrent phase of development of European economies. Competing in mature marketsrequires not only optimised cost structures, maximal efficiency, and products or servicesof excellent quality but also the ability to communicate effectively and cooperate withbusiness partners and potential customers.A definition of e-businessAs part of this maturing process, electronic business has progressed from a specific to avery broad topic. A central element is certainly the use of ICT to accomplish businesstransactions, i.e. exchanges between a company and its suppliers or customers. Thesecan be other companies ('B2B' – business-to-business), consumers ('B2C' – business-toconsumers),or governments ('B2G' – business-to-government). In the broad sense,transactions include commercial as well as other exchanges such as sending tax returnforms to the tax authorities.If transactions are conducted electronically ('e-transactions'), they constitute e-commerce. Transactions can be broken down into different phases and relatedbusiness 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 phasecovers the ordering, invoicing, payment and delivery processes. Finally, the after sale /purchase phase covers all processes after the product or service has been delivered tothe buyer, such as after sales customer services (e.g. repair, updates).14

e-Business in the Retail SectorGlossaryDefinitions by standardisation groups (ISO, ebXML)The term 'business transaction' is a key concept underlying the developmentof e-standards for B2B exchanges. Therefore, definitions have beendeveloped by standards communities to underpin their practical work.Examples include:Business: "a series of processes, each having a clearly understoodpurpose, involving more than one party, realised through the exchange ofinformation 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 ofparties which is initiated by a party to accomplish an explicitly sharedbusiness goal and terminated upon recognition of one of the agreedconclusions by all the involved parties even though some of therecognition may be implicit" [ISO/IEC 14662:2004]e-Business transaction: "a logical unit of business conducted by two ormore parties that generates a computable success or failure state"[ebXML Glossary]Exhibit 1.2-2: Process components of transactionsPre-sale / pre-purchasephaseRequest for offer/proposalOffer deliveryInformation about offerNegotiationsSale / purchase phase After sale /after-purchase phasePlacing an orderInvoicingPaymentDeliveryCustomer serviceGuarantee managementCredit administrationHandling returnsPractically each step in a transaction can either be pursued electronically (online) or nonelectronically(offline), and all combinations of electronic and non-electronicimplementation are possible. It is therefore difficult to decide which components actuallyhave 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, bothof which remain valid and useful today 8 . While the narrow definition focuses on 'internettransactions' alone, the broad definition defines e-commerce as "the sale or purchase ofgoods or services, whether between businesses, households, individuals, governments,and other public or private organisations, conducted over computer-mediatednetworks. The goods and services are ordered over those networks, but the paymentand 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 mentionedabove 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- purchase8In 1999, the OECD Working Party on Indicators for the Information Society (WPIIS) establishedan Expert Group on Defining and Measuring Electronic Commerce, in order to compiledefinitions of electronic commerce which are policy-relevant and statistically feasible. By 2000,work of the Group had resulted in definitions for electronic commerce transactions.15

e-Business in the Retail Sectorphase and focuses instead on the ordering process. The SeBW follows the OECDposition on this issue, 9 while fully recognising the importance of the internet during thepre-purchase phase for the initiation of business.GlossaryDefinition of key terms for this studye-Transactions: commercial exchanges between a company and itssuppliers or customers which are conducted electronically. Participantscan be other companies ('B2B' – business-to-business), consumers('B2C'), or governments ('B2G'). This includes processes during the presaleor pre-purchase phase, the sale or purchase phase, and the aftersale/ purchase phase.e-Commerce: the sale or purchase of goods or services, whetherbetween businesses, households, individuals, governments, and otherpublic or private organisations, conducted over computer-mediatednetworks. (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 ascollaborative business processes,. such as collaborative online designprocesses which are not directly transaction focused.Using the OECD definition, e-commerce is a key component of e-business but not theonly 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 orcollaborative processes between companies that are not necessarily transactionfocused(for example industrial engineers collaborating on a design in an onlineenvironment). The OECD WPIIS 10 proposes a definition of e-business as "automatedbusiness processes (both intra-and inter-firm) over computer mediated networks" (OECD,2004, p. 6). In addition, the OECD proposed that e-business processes should integratetasks and extend beyond a stand-alone or individual application. 'Automation' refers hereto the substitution of formerly manual processes. This can be achieved by replacing thepaper-based processing of documents by electronic exchanges (machine-to-machine)but it requires the agreement between the participants on electronic standards andprocesses for data exchange.e-Business and a company's value chainIn some contexts, the term c-commerce (collaborative commerce) is used. Although thisconcept was mostly abandoned when the 'new economy' bubble burst in 2001, it had themerit of pointing towards the role of ICT in cooperations between enterprises and theincreasing digital integration of supply chains. These developments go beyond simplepoint-to-point exchanges between two companies.910The respective survey questions ask companies whether they "place / accept online orders".Working Party on Indicators for the Information Society.16

e-Business in the Retail SectorDespite dating back 20 years to the pre-e-business era, Michael Porter's framework ofthe company value chain and value system between companies 11 remains useful tounderstand the relevance of e-business in this context. A value chain logically presentsthe main functional areas ('value activities') of a company and differentiates betweenprimary and support activities. However, these are "not a collection of independentactivities but a system of interdependent activities", which are "related by linkages withinthe value chain". 12 These linkages can lead to competitive advantage throughoptimisation and coordination. This is where ICT can have a major impact, in the key roleof optimising linkages and increasing the efficiency of processes.The value system expands this concept by extending its scale beyond the singlecompany. 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 valuesystem. All e-commerce and therefore electronic transactions occur within this valuesystem. 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-deliveryprocesses, not only between a company and its direct suppliers and customers, but alsoaiming at a full vertical integration of the entire supply chain (Tier 1, Tier 2, Tier nsuppliers). In this concept, each basic supply chain is a chain of sourcing, production, anddelivery processes with the respective process interfaces within and betweencompanies. 13 Analysing the digital integration of supply chains in various industries hasbeen an important theme in most sector studies by the SeBW.Applying the concept to the retail industryThe conceptual framework outlined above is fully applicable to e-business in the retailindustry. In this sector, companies use ICT for a broad range of applications along thevalue chain including procurement, warehouse management and logistics, and formarketing, sales and customer services activities. The basic goals of e-businessidentified are highly relevant in this sector: reducing costs by increasing the efficiency ofprocesses, optimally serving customer by innovative means of information provision andcommunication, and enabling growth by increasing market reach. This study shows thate-business developments in the retail industry have been dynamic over the last couple ofyears in particular with regard to achieving process efficiency gains. However, the studyalso points at some of the bottlenecks and challenges for an even wider and fasteradoption of e-business activity.111213Porter, Michael E. (1985). Competitive Advantage. New York: Free Press. Page references inquotations refer to the Free Press Export Edition 2004.ibid., p. 48.cf. SCOR Supply-Chain Council: Supply-Chain Operations Reference-model. SCOR Version7.0. Available at www.supply-chain.org (accessed in March 2006).17

e-Business in the Retail Sector1.3 Study objectives and methodologyResearch objectivesAs 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 chapter2) 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 andservice and retail customers are end-consumers of the goods and services. Hence, whilethe retail industry is not a goods-producing industry, opportunities for improving businessprocesses through ICT and e-business are numerous. Indeed, previous e-businessW@tch studies in 2003 and 2004 have shown that ICTs are a major enabler of processefficiency in the industry. It is to be expected that ICT are (increasingly) being used in allsegments of the value chain, notably by the large players. It remains to be seen to whatextent this leads to changes in business models that go beyond process innovation in thesense of improved existing processes.Based on these general assumptions, and on findings of earlier studies conducted on theretail 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 companiesperceive as the main challenges and barriers?Impact on firm and sector level: What are the main impacts of ICT adoption onfirm performance and on the industry as a whole (e.g. in terms of productivityeffects and skills requirements)?Impact on international competition: Is there a link between e-businessdevelopments and the scenario for international competition?Policy implications: Do the findings on these research questions above haveimplications for policy, for example in the fields of economic, competition or R&Dand innovation policy?The methodological framework of the SeBW builds upon the methodology established forthe preceding "e-Business W@tch" program. It has been adapted to the new focus ofactivity, enabling the progress from monitoring "e-readiness" and "e-activity" to theevidence-based analysis of "e-impact".Conceptual framework for the retail sector studyWith the overall focus on supply chain management, the retail sector study is based uponthe following conceptual framework. The conceptual framework illustrates the elementsstudied in the retail sector study: upstream supply chain management, supply chaininterfaces, downstream supply chain management, and the impact of firm size on e-supply chain management. The upstream supply chain covers retailers’ activities withsuppliers, especially coordination and collaboration with these business partners. Inhousesupply chain management looks at retailers’ internal systems especially foroperations such as logistics and distribution. The downstream supply chain coversretailing firms’ activities related to selling goods to consumers. The impact of firm size on18

e-Business in the Retail Sectore-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 thatretailers come across when managing the different parts of their supply chains.Exhibit 1.3-1: Conceptual framework for the retail sector studyCustomerSupplierCustomerFocal organisationSupplier Tier 1Supplier Tier 2 Supplier Tier 3CustomerSupplierIn-houseSupplierSupplierSupplierSupplierDownstreamS izeUpstreamSupply chain managementSource: e-Business Watch 2007/2008Furthermore, this framework enables drawing conclusions about entire supply chainmanagement issues in the retail sector.The upstream supply chain: e-procurement. Retailers order a vast amount ofdifferent goods from many different suppliers. These A diverse array of supply chainsolutions is available to organisations. Yet, it remains unclear how widespread theadoption of such solutions is among European retailers and what benefits and risksof such systems are for retailers. By enquiring about supply chain solutions (suchas e-procurement and e-storage applications) in use in the retail sector, the studyaims 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 aqualitative level, the study aims to find out what benefits and risks retailers face as aresult of engaging in e-supply.The in-house supply chain: internal ICT systems. One of the many opportunitiesfor retailers is to e-enable in-house processes and operations. One of the classicchallenges faced by organisations include data duplication through lack of systemintegration and misalignment with business strategies. Systems such as EnterpriseResource Planning (ERP), Radio Frequency Identification (RFID), BusinessProcess Management (BPM) and Customer Relationship Management (CRM) aredesigned to reduce these challenges but these systems can be sources of newproblems. 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 suchsystems are the focus in this report, as will be the amalgamation of different inhousesystems.The downstream supply chain: e-retailing including e-marketing. While backin 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-19

e-Business in the Retail Sectorcommerce accounts for approximately 6% of total retail sales (Butler 2007) Thismight indicate that retailers are increasingly being faced with electronically-enableddownstream supply chains. Additionally, virtual enterprises present a threat forexisting retailers. This study investigates benefits and cost of e-sales solutions forretailers; and it will provide indications about e-marketing activities in the retailindustry.Firm size effects on e-business activities in retailing. Considering that the retailindustry is dominated by micro and large firms, the study assesses challengesspecific to micro retail firms and compares them to the situation in large retailchains. The key question is how firm size influences e-supply chain management inthe retail industry.Data collectionThe study is based on a mix of data sources and methodologies, including primary datacollection, desk research and case studies. More specifically, information was collectedfrom the following sources:SeBW Survey (2007): the retail industry is one of two services sectors covered by theSeBW Survey besides the transport & logistics industry. In total, 1151 interviews in sevenEU 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 ICTadoption, business-to-business (B2B) process integration and automation. Detailedinformation about this survey is available in Annex I.Eurostat Community survey on ICT usage in enterprises (2006): results of theEurostat survey are being used as a complementary source for the analysis of ICTadoption in companies from the retail sector.Case studies: ten case studies illustrating ICT and e-business practices in Europeanretail firms were conducted. These cases were selected to demonstrate issues covered inthe topics in focus, with a view to achieve a balanced coverage of countries, businessactivities (sub-sectors) and company size-bands.Key informant interviews: in addition to interviews conducted with firm representativesas part of the case study work, formal and informal interviews with retail industry expertswere conducted to foster understanding about the retail industry as a whole.Sources of industry federations: annual reports and position papers of industryfederations were used, notably from the following European federations: EuroCommerce,the European Distance Selling Trade Association (EMOTA), the Federation of EuropeanDirect and Interactive Marketing (FEDMA). National industry federations sources usedinclude the German “Einzelhandelsverband”, the Austrian “Handelsverbandand the“British Retail Consortium”.EU-KLEMS: Data from the EU KLEMS Growth and Productivity Accounts are used as asecondary data source especially for the economic analysis in chapter 4. The EU-KLEMSGrowth Accounts include measures of economic growth, productivity, employmentcreation, capital formation and technological change at the industry level for 25 EUMember States as well as for the United States 14 .14For more information about the database, see: EU-KLEMS Growth and Productivity Accounts,Version 1.0, Part I Methodology. March 2007, prepared the Groningen Growth and20

e-Business in the Retail SectorData analysisData is analysed using the following descriptive and analytical statistical methods:Descriptive statistics: The discussion of the SeBW survey results in Chapter 3 is mostlybased on descriptive cross-tabular presentation of simple frequencies (typicallypercentages of enterprises with a certain activity). This constitutes the first and mostbasic step in data presentation. The requirement for this step is that micro-data havebeen aggregated and that weighting has been applied. Weighting is considered animportant issue for data presentation. However, weighting is necessary, as due tostratified sampling the sample size in each size-band is not proportional to the populationnumbers. If proportional allocation had been used, the sample sizes in the 250+ sizebandwould have been extremely small, not allowing any reasonable presentation ofresults (see Annex I for details).Analytical statistical methods: Descriptive presentation and discussion of surveyresults, including the use of compound indicators derived from simple frequencies, isuseful 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 betterevidence on the economic impact of ICT. This economic analysis, which is mainlypresented in chapter 4, focuses on links between ICT adoption on the one hand andproductivity growth, innovation dynamics and market characteristics on the other. Itcombines micro-data analysis (using data from the e-Business Survey 2007) and macrodataanalysis (using the EU-KLEMS Growth and Productivity Accounts). More informationabout the econometric analysis methodology is provided in Annex II.Validation of results – the Advisory BoardThe study was conducted in close consultation with an Advisory Board consisting of thefollowing experts (in alphabetical order):Paul Brackel, ECPNL, NetherlandsEnrico Colla, Negocia, FranceCécile Grégoire, EuroCommerce, BelgiumKai Hudetz, ECC Handel, GermanyThree meetings with advisory board members were organised: the first meeting tookplace on May 29 th 2007 in Brussels, during the inception phase. At this meeting, the studyexposé 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 findingspresented in the interim report. The third meeting was held at the e-Business WatchConference in Brussels on May 20 th , 2008. The aim of this third meeting was to discussthe final report and further activities to promote ICT and e-business use in the retailindustry.Development Centre and the National Institute of Economic Research on behalf of the EU-KLEMS consortium, available via www.euklems.net/.21

e-Business in the Retail Sector2 Context and backgroundRetail trade as defined by NACE 52 is the third largest EU-25 NACE division within thenon-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-financialservices economy in terms of value added. In terms of employment, retail trade is thesecond largest contributor to workforce employment in the EU-25 countries (EuropeanCommission 2006). Due to its importance for the European economy, the retail industrywas studied in 2003 and 2004 by e-Business W@tch 15 ; and in order to analyse recentdevelopments in this economically important industry, retail trade is included in the2007/2008 SeBW.2.1 Sector definition – scope of the studyBusiness activities coveredThe European retail industry covers business activities specified in NACE Rev. 1.1Division 52 which corresponds to NACE Rev. 2 Division 47: ‘retail trade, except of motorvehicles and motorcycles’. The activities are classified into nine groups as shown inExhibit 2.1-1.The first order structuring criterion in NACE Rev. 2 is whether or not retail sale isorganised in store or not-in-store. The second main criterion is whether the trade takesplace in specialised or in non-specialised stores. The not-in-store sales activities arefurther 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 bytwo groups: retailers that sell non-food items in store (NACE Rev. 1.1 Class 52.12 andGroups 52.3 to 52.5) and retail sale of food items in store (NACE Rev. 1.1 Class 52.11and Group 52.2). Retailers in the non-food items in store group accounted forapproximately 50% of turnover while the sale of food in store accounted for 44% of totalretail turnover in 2002. The remaining NACE groups are grouped under “other retail” inthis report: retail sales not in-store (NACE Group 52.6) and repair of personal andhousehold goods (NACE Group 52.7) which accounted for 5% and less than 1% ofturnover in 2002 respectively.In order to cover the multi-faceted characteristics of the retail sector and obtain a bestpossible supply chain management overview of the sector, all types of firms from allNACE Rev.2 categories (which includes retail sale of automotive fuel, which is notcovered by NACE Rev. 1, group 52) are included in the study; no category was excluded.15The study report is available at www.ebusiness-watch.org (see "eBiz Studies")22

e-Business in the Retail SectorExhibit 2.1-1: Business activities covered by the retail sector studyNACERev. 2NACERev. 1.1Business activities47 52 Retail trade, except of motor vehicles and motorcycles47.1 52.1 Retail sale in non-specialised stores52.11: Retail sale in non-specialized stores with food, beverages or tobaccopredominating (47.11) e.g. grocery shops, hypermarkets52.12: Other retail sale in non-specialized stores (47.19) e.g. co-operative stores47.2 52.2 Retail sale of food, beverages and tobacco in specialised stores52.21: 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 stores47.4 52.4x Retail sale of ICT equipment in specialised stores47.41: 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 stores47.51: 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. inspecialized stores (52.44 & 52.45)47.6 52.4x Retail sale of cultural and recreation goods in specialised stores47.752.3+4x+547.61: 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)Retail sale of other goods in specialised stores47.71: 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 inspecialised 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 markets47.81: 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 markets47.91: 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)23

e-Business in the Retail SectorA brief definition of retailingThe retail sector study covers firms that resell new and used goods to the general publicfor personal or household use and consumption. Retail firms do not further processgoods but companies that repair personal and household goods are included (NACERev.1, Division 52). Retailers act as an interface between the manufacturers andwholesalers on the one hand and consumers on the other. The retail firm is typically thelast 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 salesefforts towards end-consumers while wholesalers primarily sell to retailers and otherbusinesses.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 theNACE affiliation. The goods are sold to consumers via different distribution channelsincluding brick-and-mortar stores, market stalls, catalogues and the internet. Brick-andmortarstores are key retail outlets.One common characteristic of the retail sector is that the vast majority of the sector’svalue added was generated by large enterprises employing more than 250 people andmicro enterprises employing fewer than 10 persons. German-based Metro and FrenchCarrefour, for example, are globally operating mega-retailers that fall within the categoryas are internet retailers like Amazon.com and local grocery mom-and-pop shops (Mintel2007). This wide variety of organisational forms and sizes is one of the characteristics ofthe retail sector.From a supply chain management perspective, retailing covers all processes of tradebetween suppliers and retailers, in-house operations and trade between retailers andcustomers.2.2 Industry backgroundNumber of enterprisesIn 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 weresmall firms employing between 10 and 49 people; about 12.000 were medium-sized firmsemploying between 50 and 249 people; and some 2900 were large firms with more than250 employees (Eurostat 2006a). The vast majority of the sector’s value added wasgenerated by large enterprises (some 163871 billion Euros for the EU-25 in 2004) andmicro enterprises (126000 billion Euros for the EU-25 in 2004). Large enterprises areparticularly prevalent in the non-specialised stores group (NACE 52.1) and in the retailsales not in stores (NACE 52.6) sub-groups (European Commission 2006).EmploymentThe retail industry is one of the largest economic sectors in Europe providing employmentto more than 16.9 million people in the EU-27 countries in 2004. Retail firms are known toemploy a relatively high proportion of women, 61.3% in 2004in the EU-25; representingthe second highest proportion of female workforce among the relevant NACE sections Cto K (the highest is manufacture of clothing, NACE Division 18). Another employmentcharacteristic of the retail sector is the high proportion of part-time employment (29.3% of24

e-Business in the Retail Sectorthe workforce in 2004) which is in fact the highest among the respective businesseconomies. 18.3% of those employed in 2004 were aged between 15 and 24, which isagain relatively high.Turnover and value addedThe latest available data (European Commission 2006) for the retail sector show that theEU-25 NACE Division 52 firms generated EUR 1.887 billion of turnover in 2002 with avalue added of EUR 351.6 billion. Retail trade of non-food items in-store (NACE 52.12and Groups 52.3 to 52.5) accounted for approximately 50% of the turnover generatedwithin the sector. 44% of turnover was generated with sale of food items in-store (NACEClass 52.11 and Group 52.2) while 5% came from retail sales not in-store (NACE Group52.6) and less than 1% came from activities such as repair of personal and householdsgoods (NACE Group 52.7). In terms of country contributions to the overall value added inthe EU-25, the UK accounted for the largest share (22.3%) in 2002 followed by Germanywith 18.6 %, France (16.5 %, in 2001) and Italy (10.7%).Breakdown by firm sizeOne 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 49employees) dominate in terms of number of enterprises and average number ofemployees while large firms dominate in terms of value added and average number ofpeople employed. On average, 3.7 million micro/small retail firms employed 16.8 millionpeople 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 andvalue added in €Firm SizeNumber of enterprises(EU 27, 2004)Number of employees(EU 27, 2004)Value added in €(EU 25, 2004)1 to 9 3,580,000 7,400,000 126,000,00010 to 49 138,000 2,400,000 61,000,00050 to 249 12,000 1,196,600 31,000,000250+ 2,900 5,869,700 163,871,466Total 3,732,900 16,866,300 381,871,466Source: (Eurostat 2007)Number of enterprises, employment, turnover and value added illustrate the significanceof the retail sector to the European economy. The breakdown by firm size howeverindicates that generalisations about the sector as a whole are difficult to draw due to thewide variety of firms (and products sold) covered by the sector.2.3 Trends and challengesThere are signs that e-business is increasingly transforming elements of supply chainmanagement in the retail sector. Yet, while the diffusion of e-business is continuouslyaffecting retailers, understanding about supply chain management issues in retailers isfragmented: certain ‘pockets of research interest’ result in a split picture about supplychain management as a whole. There is, for example, a rapidly growing body ofknowledge about e-commerce in a business-to-consumer (B2C) context (such as To and25

e-Business in the Retail SectorNgai 2006; Lee 2007) and e-supply in a business-to-business (B2B) context (such asTalluri, Wenming et al. 2006) but only few exploit opportunities to study entire supplychains (such as Rabinovich 2007). The SeBW study aims to address this issue bycombining three elements of the supply chain into one study about e-business in supplychain management: e-supply, e-operations and e-sales.Overview of trends and challengesThis section describes some of the main trends and challenges that retailers acrossEurope currently face, going from general to specific issues. Issues directly related toretailers’ use of ICT and e-business are not included and will be discussed in thefollowing chapters of this report. Firstly, recent macro-economic developmentsdetermining retail turnover are pointed out. Second, a micro-economic view ofcompetition in the sector and consumers’ behaviour is presented. Thirdly, developmentsat the business level are elaborated.While these trends and challenges are evident as of 2008, some predict that ‘the growthof international competition, the increasing concentration in the industry coupled with theslowdown in domestic demand and the direct and indirect effects of the internet andecommerce 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 theinternet and e-commerce are having on the retail industry (see particularly chapters 3 and4).2.3.1 Macro-economic developments slowing down retail salesContinuing growth – but uncertainty about prospectsRetail industry performance is heavily dependent on macro-economic developments: theindustry’s turnover reflects consumer spending habits. Such spending is dependent onnumerous direct and indirect factors; first of all on the level of net income and on theshare of income consumers decide to save. Net income and savings, in turn, aredepending on factors such as macro-economic growth, unemployment, and taxation.In late 2007, continuing into early 2008, the general economic environment for retail hasturned to become less favourable. In its Monthly Bulletin of March 2008, the EuropeanCentral Bank (ECB) states that real growth of General Domestic Product (GDP) in theEuro area is continuing but moderating and that “uncertainty about the prospects foreconomic growth remains unusually high.” 16 This is mainly due to a “high level ofuncertainty resulting from the turmoil in financial markets” that started in August 2007. 17These uncertain trading conditions have continued to exist although as of June 2008inflation is a major concern: in its June 2008 Bulletin, the ECB highlights that the ‘Annualeuro area HICP inflation has remained above 3% for the past seven months’ (p.55) 18which is continuing to put pressure on the economy and the retail industry in particularwith its dependence on consumers.161718ECB (2008), p. 5.ECB (2008), p. 5.Available at: http://www.ecb.de/home/html/index.en.html, last accessed June 24 th , 2008.26

e-Business in the Retail SectorPrivate consumption weakeningDespite positive developments in real disposable income and favourable labour marketconditions, private consumption showed signs of weakness at the end of 2007. 19 Privateconsumption growth declined from 0.5% in the third quarter of 2007 to -0.1% in the fourthquarter. Retail sales in the euro area declined by 1.0% quarter-on-quarter in the fourthquarter of 2007. This partly reflects developments in households’ decisions on saving andspending in Germany, where private consumption declined substantially. However,private consumption growth also decelerated in other countries including France andSpain. The negative development in private consumption may be related to a strong risein food and energy prices but also to declining consumer confidence. The EuropeanCommission’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 recentpast. 20 On the other hand, this indicator remains at a historically high level and itincreased in February 2008. ECB predictions are not negative: “Conditions are favourablein the labour market, implying that the outlook for private consumption in 2008 remainsbroadly positive”. 212.3.2 Increasing concentration and strong competitionOn a micro-economic level, i.e. on the level of companies and consumers, retailersoperate in an environment of generally strong competition and changing customerpreferences. As regards competition, concentration processes have been taking placein many retail sub-sectors in the past decades, driving out smaller players and leaving asmaller number of large chains to fight for profit margins. In the food sub-sector, forexample, 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 consolidationwhere the top five food retailers in the various EU countries continue to grab marketshares from competitors. This consolidation, driven by competition, is evident whenlooking at the market shares of the top five European food retailers: the top five foodretailers in the different countries hold high proportions of each country’s markets. InGermany and France, for example, more than two thirds of total food sales were made bythe 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 andCostco have sought and are still seeking to enter new markets in Europe which is furtherincreasing competition. Currently, seven of the ten largest retailers in the world areEuropean: Carrefour (France), Tesco (UK), Metro (Germany), Ahold (Netherlands), Rewe(Germany), Schwarz Group (Germany), and Aldi (Germany) (EHI Retail Institute 2008). 22The largest retailer in the world is Wal-Mart (US).19202122ECB (2008), p. 71.See http://ec.europa.eu/economy_finance/db_indicators/db_indicators8650_en.htm for the mostrecent issue of business and consumer survey results.ECB (2008), p. 72.Data for 2006 according to EHI Retail Institute (2008), p. 30.27

e-Business in the Retail SectorExhibit 2.3-1: Food sales market share of the top five food retailers in Europe0 20 40 60 80 100Finland91Sw edenLuxembourgIrelandBelgiumDenmarkAustriaGermanyFranceSlovakiaPortugalSpainNetherlandsUnited KingdomHungaryCzech RepublicGreeceItalyRomaniaPoland23253548464342807774717170686762626259Source: Metro Retail Compendium (2007)2.3.3 Changing consumer preferencesAs regards customers, there are at least three broad trends that retailers face:demographic changes towards a larger share of older people with particular consumptionhabits, increasingly well-informed customers, and consumers demanding sustainableproducts. As regards demographic change, older people require different marketingstrategies than younger ones, and retailers may need to consider appropriate strategic oroperative modifications. Related issues may concern legibility of price labels, reachabilityof goods on shelves, possible differences between values of customers and shopassistants, or particular perceptions of advertisements (Kaapke, Bald et al. 2005). In theframework of the European Senior Economy Network (Sen@er), recommendations forretailers and other companies how to best react to demographic changes are beingdeveloped. Another demographic issue is the increasing attention of consumers towardswell-being. Growing concerns over obese people and overweight children in Westerncountries are giving rise to a drive for healthy life styles and attitudes. This affectsretailers 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 theEuropean population and consumers are increasingly asking for healthier products (andservices such as sports) as part of the well-being drive.28

e-Business in the Retail SectorFurthermore, many retailers are confronted with an increased level of product informationon the part of customers, i.e. more well-informed customers. This is largely a result ofthe internet that offers consumers facilitated opportunities to search for information aboutparticular goods, compare goods, and to exchange information within user groups. Inparticular, discussion forums about certain products may increase consumers’ sensibilityand influence sales – positively or negatively (Drösser 2008). This is partly giving rise tomulti-channel activities among European retail firms, where retailers aim to integrate thevarious 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 anincreased demand for sustainability and sustainable products. Retailers need to findstrategies to respond to such changing attitudes and behaviour. An example is“sustainable retailing”, 23 a UK retailers’ initiative related to sustainability. There are alsoforums for ecologically correct consumptions such as www.utopia.de in Germany. Thistrend 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. Unlikeconventionally produced goods and services, organic production and services aim toreduce the effects on the environment by, for example, not using pesticides and sellinglocally produced goods to avoid travel services. Consumer demand for these productsand services is increasing rapidly and the retail industry has started to respond to thesedemands. With these types of products increasingly gaining market share across Europethe need for approved and consumer-accepted ‘trustmarks’ is becoming ever important.23See http://www.sustainable-retailing.co.uk/homepage.asp.29

e-Business in the Retail Sector3 Deployment of ICT and e-business applicationsin the retail sectorAs part of their efforts to cope with the challenging business environment described in theprevious section, retail companies need to take decisions regarding their ICT and e-business strategies. This includes decisions about investments in ICT, organisationalchanges and e-skills requirements among others. This chapter explores the current useof ICT as well as e-business activities in the retail industry. It presents recent data on thediffusion of ICT systems and standards for e-business in the retail sector, wherecompanies see the main drivers and barriers for e-business, and discusses issues suchas 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 ofthe e-business state-of-play in the retail sector and to outline major developments in theframework conditions for ICT usage, taking into account (to the extent possible) thedifferent requirements of small and large companies and of various value-systems withinthe industry. This broad picture of sectoral e-business activities is the basis for theanalytical 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 the2003/2004 e-Business Watch study on the retail industry in light of the currentstudy. The results of the 2003/2004 study serve as a benchmark to assess thedynamics of ICT and e-business developments between 2003/2004 and 2007.Specific findings related to the various supply chain elements are presented in therespective sections. Comparisons between e-procurement activities in 2003/2004and 2007 are, for example, included in the procurement section 3.3.e-Readiness: ICT infrastructure, networks, expenditure and skills. Section 3.2looks at the existing ICT infrastructure of retail companies' including access to ICTnetworks. Other general ICT and e-business issues covered in this section are ICTexpenditure and skills, especially e-skills. The objective of this section is to assessthe 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 theSectoral e-Business Watch survey related to the retail industry’s electronicinteractions with suppliers of goods and services. It covers issues such aspercentage of retail companies ordering online from suppliers and the percentage oforders placed online in relation to total orders placed to suppliers.The internal supply chain: in-house e-operations: Section 3.4 explores activitiesrelated to operating a retail business and the effects of ICT and e-business thereon.Examples include the use of Radio Frequency Identification (RFID), barcoding andCustomer Relationship Management (CRM) applications among retail firms.The downstream supply chain – electronic marketing and sales. Section 3.5covers the sale of retail products and services over the internet and other computermediatednetworks to consumers. It includes information about the proportion ofretail firms selling over the internet and geographic origins of online customers. e-Marketing, the second focus in this section, covers issues such as search engineoptimisation and online ads placed.30

e-Business in the Retail SectorBarriers to and drivers of e-business use. Section 3.6 assesses barriers to ICTand e-business adoption and use reported by retail companies. Yet, this sectionalso looks at ‘the other side of the coin’ by providing information about the driversof 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 industrybring this chapter 3 to a close.3.1 The state-of-play in 2003/04 – review of an earlierretail sector studyThis section briefly reviews the findings of the 2003/2004 e-Business Watch study 24 onthe retail industry in light of the 2007 SeBW study. The results of the 2003/2004 study 25were collected by questioning retail firms in five European countries. These countries areFrance, Germany, Italy, Spain and the UK. The 2007 survey was extended to include anadditional two countries: Poland and Sweden. This section discusses the general ICT/ebusinesssituation back in 2003/2004. In cases where specific variables of the 2003survey can be compared directly with 2007 data, findings from 2003 regarding thesevariables are presented in the respective sections 3.2 to 3.6. Overall, the results of the2003/2004 study serve as a benchmark to assess the dynamics of ICT and e-businessdevelopments between 2003/2004.The general picture: the retail industry’s e-readiness in 2003/2004The study of 2003/2004 concluded that ICTs are a "secondary consideration" for retailcompanies. Yet, the study emphasised the dichotomy in this sector between micro andsmall retailers on the one hand, and large retail chains on the other. Most of the largeretail chains, and perhaps some of the medium-sized firms, embodied a fairlytechnological vision of innovation. The majority of the smaller firms, by contrast, seemedto prioritise the use of efficient tools in the sense that profitability was a majorprecondition 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 findingse-Business in the retail sector: the digital divide"The use of electronic business in the retail sector is far from being apervasive reality and is below the average adoption rates in other sectors.One of the main reasons for this situation is that, in contrast with mostmanufacturing sectors, micro enterprises and SMEs still play a dominantrole."Source: e-Business W@tch sector study on the retail sector, August 2004, p. 15 (Introduction toChapter 2)2425European 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 ofICT and e-business in 2003/04 (May 2004). Report II: Key issues, case studies, conclusions(August 2004).Data presented in the e-Business W@tch sector study on the retail sector of 2004 is based on asurvey conducted in 2003.31

e-Business in the Retail SectorPurchasing online was found to be the most widely adopted e-business activity.Customer facing e-commerce strategies including e-sales activities were still very limitedin 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 beindirect and intangible: e-commerce would typically not help retailers to increase thevolume or value of their sales, but rather create marketing advantages (e.g. in terms ofcustomer loyalty due to improvements in service).Both online purchasing and sales were mainly conducted on the website of the retailer orsupplier. Computer-mediated networks other than the internet were not widely used, withthe exception of EDI usage by large retail firms. For smaller retail companies, internetmarketplaces operated by third parties had some importance as an additional distributionchannel. 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 alsosuccessful examples of "pure (online) players", which were typically highly focused andspecialised.However, the study concluded that there was no single “best practice” model for themulti-channel approach. Practitioners emphasised that this approach required innovationin services, the introduction of new pricing models, a re-organisation of work processesand the integration of existing with new ICT systems. The main challenge for retailers inthis process was often the organisational innovation part; many companies had neglectedthis aspect because of the high costs involved.Opportunities and risks, drivers and barriersIn 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, costsavings. e-Business could help retailers to reduce costs related to commercialtransactions; e-procuring via marketplaces or buying groups would open up costadvantages to small retailers. Moreover, the study concluded that e-business enabledcompanies to reduce the quantity of goods to be stocked under the same salesconditions, and to accelerate supply flows, leading to better customer service. The studyalso pointed at "clear growth prospects for B2C e-commerce in retail", notwithstandingthat the percentage of companies that sold online was still limited, and also the averageshare of sales made online (as percent of total sales). Exhibit 3.1-1 summarisesopportunities, challenges, drivers and barriers of e-Business identified in August 2004.Exhibit 3.1-1: e-Business related opportunities and challenges for retail companiese-Business related opportunities• Cost savings• Efficiency and productivity gains• Increasing information about the market andthe customers (e-marketing)• Online selling and multi-channel approache-Business drivers• Trends in demography and lifestyle• Improved systems for increasing theefficiency of supply chain relationships• New private labelse-Business related challenges• Lack of awareness• Increasing market competition, whereretailers are highly concentrated• Economic return of e-businesse-Business barriers• Lack of interest in internet basedapplications and sales systems among alarge number of retailers• ICT skills gap• Trust and security issuesSource: e-Business W@tch sector study on the retail sector (August 2004)32

e-Business in the Retail SectorA challenge was seen in the lack of awareness about ICT-related opportunities, notablyamong the majority of small retailers. Furthermore, improved access to marketinformation for customers due to the internet was found to involve risks for retailers. Thisunprecedented market transparency increased competition levels, even in markets whereconcentration was already high, leading to eroding profit margins.With regard to drivers and barriers, the study found that "current dynamics indemography, 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 issuesin online retailing.Policy implications: better information for SMEs & standardisationThe 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 competitiveenvironment 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, forexample the promotion and coordination of technology buying groups, and consultancysupport dedicated to the implementation of e-business; second, initiatives to educatesmall retailers about opportunities of using basic internet applications.Besides specific support for SMEs, standardisation issues were considered as highlyrelevant, in particular in the context of supply chain management. The study proposedthat standardisation of computer languages should be promoted.3.2 ICT infrastructure, networks, expenditure and skillsThis section looks at the ICT infrastructure of retail companies including access to ICTnetworks. Other focal points in the section are ICT expenditure and skills. The objectivesare to assess:the sector's overall "e-readiness", i.e. to what extent the basic ICT infrastructure fordoing business electronically is in placethe adoption dynamics since the last point of measurement in 2003trends in ICT budgeting.Internet access – the deployment of broadbandAs in most industries, doing business in the retail sector without having internet accessis practically no longer possible. The only exception is small family-led shops, some ofwhom are still operated without even using a computer. 26 Of those retail companies thatuse computers, the vast majority (95%) is connected to the internet (see Exhibit 3.2-1),even among the smallest of firms.26In 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% withoutcomputers are typically small family businesses ("mama-and-papa-shops") which operate in avery traditional, "no-tech" environment. In the survey of 2007, these businesses were no longerincluded; the population only covered retailers with computers.33

e-Business in the Retail SectorExhibit 3.2-1: % of companies / employees with internet access (2007)Companies withinternet accessCompanies withinternet access>2 Mbit/sAverage share ofemployees withinternet access infirmsWeighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firmsRetail – 2007 total (EU-7) 97 95 44 32 48 68Non-food stores 97 95 47 32 59 72Food stores 96 91 36 31 27 52Other retailing 100 99 42 29 43 62Retail – USA 97 89 63 53 50 65Retail – by size (EU-7)Micro (1-9 empl.) 95 31 69Small (10-49 empl.) 96 44 46Medium (50-249 empl.) 99 45 32Large (250+ empl.) 100 61 37Other sectors (EU-7)Transport & logistics 99 97 41 31 39 53Retail – 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 firmsfirms with internetaccess, excl. DKall firms, excl. DKN (Retail, 2007, EU-7+USA) 1151 839 1105Questionnaire reference A1 A3c A2The 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 SeBWExhibit 3.2-2: % of companies havinginternet access with > 2 Mbit/s (2003 / 2007)1008060402003116 14Micro (1-9)2003 2007Small(10-49)44 4523Medium(50-249)4061Large(250)Base: companies with internet access,excl. "don't know". N (2007, total) = 839.In % of firms.While internet access was already commonin 2003, the quality of companies' internetaccess has significantly improved since,notably among SMEs. The share of microretailers(with 1-9 employees) that say theyare connected with broadband 27 hasdoubled from about 15% to 30%; amongsmall and medium-sized retailers,broadband diffusion has increased to about45%. Broadband adoption among largeretailers has increased from 40% to 60%.At the same time, the percentage of companieswhich still access the internet withlow-bandwidth connections (of less than144 kbit/s) has decreased to only about 5-10%.Source: e-Business Surveys 2003 / 200727Broadband is defined in this study as internet connection with a bandwidth of at least 2 Mbit/s.34

e-Business in the Retail SectorBack in 2003, about 30% of micro-retailers companies still said that they used analoguedial-up for connecting to the internet, typically at a rate of 56 kbit/s. However, there is stillscope for improvement. Broadband internet access should be considered as basicinfrastructure and become the norm for the majority of companies, at least for mediumsizedand large firms.The maximum available bandwidth is an ICT infrastructure indicator, but this does notprovide information about the actual usage. Another indicator is how many employeesuse the internet as part of their daily work. In retail companies, the average share ofemployees 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 steeland furniture sectors (about 25-30%) and the chemical industries (45%). The percentageis higher among smaller companies; this reflects that in the retail industry the internet ismainly used for procurement and management tasks, but not by cashiers and normallynot by simple shop assistants 28 in their daily routines. As large retail stores have a higherpercentage of employees with such tasks, the total share of employees with internetaccess is lower than in small shops where the manager and shop assistant is often thesame person.Use of internal networksSimilarly to internet access, the use of ICT to connect computers internally to a companynetwork (Local Area Networks – LAN) has become a commonplace, at least for mediumsizedand large retailers. The adoption of LAN infrastructure has significantly increasedsince 2003 (see Exhibit 3.2-3).The diffusion of Wireless LAN (W-LAN) technology has surged in recent years. Thistechnology was not much used back in 2003; in the meantime, about 40% of employeeswork in retail companies that operate a W-LAN. In large firms, the adoption rate hasreached close to 60%. These are similar adoption levels as in the transport and logisticsservices sector, but lower than in most manufacturing industries, e.g. in the chemicalindustry. 29 W-LAN is used to facilitate network access within a site or building: at certainaccess points, distributed throughout various buildings and sites, W-LAN provides secureInternet 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 ofusing W-LAN to further business process reengineering. Yet, they are lacking behindother industries which might originate from the diversity and specific employmentstructure within the industry: retail is labour intensive at the shop floor with a highproportion of part-time employees and low skilled labour force.2829In specialised non-food stores, however, internet access in the shop has become quite commonto support the work of shop assistants: they can quickly check information online (e.g. specialtechnical features of a product) and thus better respond to enquiries of customers.In the chemical industry, close to 60% of employees work in companies with a W-LAN (seeSectoral e-Business Watch study on the chemical, rubber and plastics industry, 2008).35

e-Business in the Retail SectorExhibit 3.2-3: Internal networks used (2003 / 2007)LAN W-LAN IntranetRemoteaccess tocompanynetwork% of % of % of % of % of % of % of % ofWeighting scheme:empl. firms empl. empl. empl. firms empl. firmsRetail – 2007 total (EU-7) 66 49 40 25 50 28 45 22Non-food stores 62 49 39 29 43 29 46 24Food stores 69 50 36 17 63 25 39 17Other retailing 78 49 56 16 55 33 53 25Retail – USA 57 50 51 30 56 43 44 20Retail – by size (EU-7)Micro (1-9 empl.) 48 25 27 22Small (10-49 empl.) 65 34 41 28Medium (50-249 empl.) 80 44 56 45Large (250+ empl.) 87 57 73 68Other sectors (EU-7)Transport & logistics 75 50 39 22 52 24 49 24Retail – 2003 (EU-5) 56 32 n.a. 41 27 29 16Micro (1-9 empl.) 31 n.a. 27 16Small (10-49 empl.) 52 n.a. 26 24Medium (50-249 empl.) 75 n.a. 56 36Large (250+ empl.) 81 n.a. 60 38Base (100%) all firms all firms all firms all firmsN (Retail, 2007, EU-7+USA) 1151 1151 1151 1151Questionnaire reference A4a A4b A4d A5The 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 SeBWExhibit 3.2-4: % of companies enabling remoteaccess to their computer network (2003 / 2007)1008060402001622Micro (1-9)2003 20072428Small(10-49)4536 38Medium(50-249)Base: companies using computers,N (2007, total) = 1151. In % of firms.68Large(250)Source: e-Business Surveys 2003 / 2007A useful indicator for "e-readiness" isthe share of companies that enableremote access to their computernetwork. This means that employeescan access data from a company'snetwork remotely, e.g. when workingfrom home or travelling. In the retailsector, companies comprising 45% ofthe sector's employment enable remoteaccess, up from about 30% in 2003(see Exhibit 3.34). Diffusion of thisfunctionality increased in particularamong medium-sized and largeretailers, but only to a lesser extentamong small retailers. This is incontrast to manufacturing sectors,where the diffusion has increasednotably among SMEs in the sameperiod.36

e-Business in the Retail SectorAn explanation is that working from home or entering the system from abroad is probablyless relevant for employees of smaller retail shops than in other sectors, for example forsalesmen 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 nearto its saturation level. This may indicate that the significance of having an intranet is notvery 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 (retailin non-food stores, food stores and other retailing, see Section 2.1). Diffusion is typicallymost advanced among other retailers although this group includes the pure onlineretailers such as Amazon.com which is quite different from market stalls which are alsoincluded in this group. Hence, on the aggregate level, these variations partly reflectstructural differences between the sub-sectors, including the numerical dominance ofSMEs and the importance of large multi-national retail corporations in terms ofemployment and value added.Use of open source technologiesOpen source technologies are continuing to take away market share from more traditionalforms of pay-for technologies. The three specific open source technologies enquiredabout 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 technologies45403530252015105022 2231Retail(EU-7)201738Non-foodstores272413Foodstores3533 33Otherretailing4240 4033272724222120171412971-9 10-49 50-249 250+ USAOpen Source operating system Open Source databases Open Source browsersBase: companies using computers, N (2007, total) = 1151. In % of firms.Source: e-Business Survey 200731% of retailers are using open source browsers while only 22% use open sourcedatabases 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 browserswith 38% closely followed by other retailing with 36% while food stores have the lowest37

e-Business in the Retail Sectorshare with 13% of open source browsers. A higher number of food stores in contrast useopen source operating systems and databases. By far the heaviest users of all threeopen source technologies are sample firms in the other retailing group. Open sourcetechnologies are more commonly used by retailers in Europe when compared to USwhere 12% of operating systems, 14% of databases and 27% of retailers use opensource. While micro firms lag behind their larger counterparts with only 9% using opensource operating systems and 7% using open source databases, the levels of opensource browser usage are not lagging behind. Overall, large firms with more than 250employees are the types of firms mostly employing open source technologies.ICT skills requirementsImproving e-business skills, especially among SMEs, has been identified as a relevantconcern for policy in various studies by e-Business Watch and by the eBSN. A cleardistinction has to be made in this context between (larger) companies that can affordemploying ICT practitioners, i.e. staff with the specialised skills and tasks of planning,implementing and maintaining ICT infrastructure, 30 and (typically smaller) retailers that donot employ practitioners.The critical divide here is between SMEs and the large retail chains. In total, only aboutone in ten retail companies said that they employed ICT practitioners in 2007 (see Exhibit3.2-6). However, this percentage is heavily determined by the vast number of micro-retailcompanies with up to 9 employees, which obviously cannot employ and do not need aspecialist just to take care of their simple ICT infrastructure (which will typically consist ofa computer and an internet access, if at all). Among medium-sized firms, about a third ofall firms have specialists for ICT tasks. What comes as a surprise and raises questions isthat even among large retailers (with at least 250 employees) only about 50% employ ICTpractitioners. Retail companies not employing ICT staff seem to have completelyoutsourced all ICT maintenance tasks to external service providers. On the other hand,the term "ICT practitioner" in itself can be misleading in time-constrained telephoneinterviews; some companies may not count their PC and network administrator(s) as ICTpractitioners, although they are mainly charged with ICT tasks.But outsourcing is certainly a valid explanation for the low percentage of firms with ICTpractitioners. About 40% of the retailers interviewed in 2007 said that they hadoutsourced ICT functions to external service providers which they had previouslyconducted in-house in the past 12 months (prior to the interview). Outsourcing can meana 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 ishosted and operated by the service provider, rather than purchasing the software to beinstalled within the company. It can also mean that whole business processes areoutsourced to specialised intermediaries. The importance of outsourcing in large firms isdemonstrated in the Casino Group and the Mercator case studies. In both firms, close cooperationwith external IT providers was crucial during the solution development phases.The relationship went beyond the development phase with the IT vendors continuing torun solutions for the case firms. In the Mercator case study, the firm providing the30The European eSkills Forum, established by the EC in March 2003, defined "ICT practitionerskills" as the "capabilities required for researching, developing and designing, managing,producing, consulting, marketing and selling, integrating, installing and administrating, maintaining,supporting and service of ICT systems." Cf. eSkills For Europe: The Way Forward",Synthesis Report by the eSkills Forum, September 2004.38

e-Business in the Retail Sectoroutsourced service even benefits from being able to sell the application developed withthe case firm to other retailers across Europe.Exhibit 3.2-6: ICT skills requirements and outsourcing (2007)Employ ICTpractitionersHave outsourcedICT servicespreviouslyconducted in housein past 12 monthsSay that e-businesshas a significantimpact on skillsrequirementsWeighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firmsRetail – 2007 total (EU-7) 23 11 56 46 49 41Non-food stores 26 9 58 47 54 41Food stores 16 13 53 51 40 35Other retailing 20 18 49 28 41 54Retail – USA 42 8 45 24 25 31Retail – by size (EU-7)Micro (1-9 empl.) 10 45 41Small (10-49 empl.) 15 59 44Medium (50-249 empl.) 32 63 50Large (250+ empl.) 48 67 58Other sectors (EU-7)Transport & logistics 35 8 56 45 45 33Base (100%) all firms all firms all firmsN (Retail, 2007, EU-7+USA) 1151 1151 1151Questionnaire reference E1 E3 E5The 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 SeBWICT investment and budget trendsThe general climate for ICT investments has significantly improved over the past fewyears. This has a number of reasons: first, the positive economic framework conditionssince 2004 have made it easier for companies to make investments 31 ; second, the widespreaddistrust of ICT for some years after the crash of the "new economy" in 2001 hasmostly faded away; and third, ICT solutions have become more mature and betteradapted to the requirements of specific firms. It may also help that there are plenty ofbusiness cases which demonstrate that well-planned investments in ICT can generatereturn-on-investment even in the short term, often within less than two years. 32The Sectoral e-Business Watch asked companies in 2007 whether they had madeinvestments in ICT during the past 12 months (prior to the interview), for example for newhardware, software or networks. About 70% of small and medium-sized firms and morethan 90% of large firms said that they had done so (see Exhibit 3.2-7). Companies werealso asked whether, in the forthcoming financial year, they intend to increase, decreaseor roughly keep their ICT budget. The majority of companies, about 60%, expected tomaintain the ICT budget at about the same level. About 35% of companies said they3132It remains to be seen whether the risk of an economic downturn / recession in the wake of thefinancial market crisis of late 2007 will have a sizable impact on companies' ICT expenditure.See, for example, business cases of ICT investments by SMEs documented by the German"PROZEUS" initiative (www.prozeus.de).39

e-Business in the Retail Sectorwould increase their budget, and only a few companies (3%) said they planned todecrease it (see Exhibit 3.3-7).The finding that companies expect to either maintain or increase their budgets is confirmedby other market studies. Some of them are even more "bullish" in their forecasts:IDC, an ICT market research company, estimates that German enterprises spent about76 billion euros for ICT hardware, software and services in 2007, and forecasts that thisfigure would increase by 7.5% in 2008. 33However, 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 foundthat companies with a high turnover and profit spend on average 17% less for IT thantheir competitors. Typically, these companies have specified clear priority areas for theirICT investments and implemented sophisticated reporting systems to keep control of theirICT budgets. 34 This holds true as a general recommendation, in particular for SMEs: theyshould carefully think about ICT priorities, and then focus their resources on these areas.Exhibit 3.2-7: % of companies that madeinvestments in ICT hardware or software in2006/07Exhibit 3.2-8: % of companies planning toincrease / maintain / decrease their ICT budgetin the forthcoming financial year0 20 40 60 80 100Retail (total, EU-7)Non-food storesFood storesOther retailing7459466258%3%34%increasemaintaindecreasedon't knowMicro (1-9)56Small (10-49)Medium (50-249)Large (250+)697391Reading example: "34% of all companies (by theirshare of employment) said that they expected toincrease their ICT budget in the forthcomingfinancial year."Retail (USA)54The 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% ofemployment in the sector / country"), figures for size-bands in % of firms.Source: e-Business Survey 2007 by the SeBW3334quoted from: "Pflicht und Kür", in: WirtschaftsWoche, No. 10/2008, 3 March 2008, p. 98ibid.40

e-Business in the Retail Sector3.3 The upstream supply chain: e-procurement3.3.1 Introduction to upstream supply chain issuesUpstream SCM functionsThe function of upstream supply chain management (SCM) is to design and manage theprocesses, information and material flows between retailers and their suppliers. SCM is ofutmost importance to retailers. According to Accenture (2004), the supply chain canrepresent 40% to 70% of a retailer's operating costs, and may comprise half of all thecompany’s assets. Thus, it is one of the main cost drivers in this sector. Technologyenabledimprovements in SCM promise a high potential not only to cut costs, but also toimprove service levels for customers. Therefore, particularly for large retail chains, supplychain management is a highly strategic issue and can be a critical factor for theircompetitiveness.In retail, suppliers can be grouped into three main categories:the manufacturers of those goods which are sold by retail companies (whether instores, through mail order or e-commerce)wholesalers, who resell new and used goods to retailersand providers of goods or services which retailers need to run their business, suchas store equipment, office supplies and ICT hardware and services.The particular role of ICTICTs are critical for efficient SCM, notably for larger retailers that have to managecomplex supply chains. The use of ICT-based systems for upstream supply chainmanagement enables retail firms to increase the transparency of processes andinformation 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 towhat extent European retailers make use of ICT for managing their upstream supplychain, and if the use of ICT in exchanges with suppliers has increased in the past 4-5years. The section will then assess what kind of benefits retailers experience from SCM.These benefits need to be weighed against risks associated with integrated supplychains. To make SCM work, firms need to share at least some data with their supplychain 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 isimportant to understand that this activity is closely linked with "downstream" activities inmarketing and sales (see Section 3.7). For example, analytical sales data collected at thestore level are an important input for planning the supply chain. Vice versa, an optimisedsupply chain (e.g. with reduced out of stocks) enables a company to provide bettercustomer service.41

e-Business in the Retail Sector3.3.2 Findings about e-procurementPreferred ways of data exchange with suppliersAs a starting point to assess how business data are typically exchanged betweenretailers and their suppliers, a question that was newly introduced in the e-BusinessSurvey 2007 provides some insight: the SeBW asked retailers to assess which of thefollowing statements would best describe the way they exchanged data with theirbusiness partners, offering four options: data are (a) mostly transmitted verbally, e.g. viatelephone; (b) mostly processed and exchanged in paper based format, that is by letter orfax; (c) mostly electronically processed internally, but then exchanged in a paper-basedformat; and (d) mostly processed and exchanged electronically.Exhibit 3.3-1 shows that answersare nearly equally spread acrossthe four options. As can be expected,the percentage of companiesthat say they process andexchange data mostly electronically(or at least process themelectronically internally) increasesby firm size. Among mediumsizedretailers, about 50% seethemselves in these more advancede-business categories,among large retailers, close to60%. However, even among themedium and large retailers, thereare still 15-20% that say that theircommunication with businesspartners is mostly "verbally".There are two possible reasonsfor not using ICT-based systemsin the first place: suppliers maynot yet be ready for exchangingdata electronically; or, in specificmarkets, the type of goods andproducts may not lend themselvesfor electronic ordering andSCM.Exhibit 3.3-1: Percentage of retail companies sayingthat they exchange data with business partners …Total retail (EU-7)Non-food storesFood storesOther retailingMicro (1-9)Small (10-49)Medium (50-249)Large (250+)USA221914282320142429mostly electronically0 20 40 60 80 10016222120213025432933303411353130262536362626202520electronical processing, paper-based exchangemostly paper basedmostly verballyBase (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 ("firmsrepresenting x% of employment in the sector / country"), figuresfor size-bands in % of firms.Source: e-Business Surveys 2003 / 2007 by the SeBW151842

e-Business in the Retail Sectore-Procurement: ordering supplies onlineAs vital parts of the supply chain,retailers have to organise forordering goods from suppliers,receiving the goods and paying thesuppliers for the goods. Theseprocesses are increasinglyorganised and managed by e-business. In 2007, retailersaccounting for 55% of employmentin the sector said that they orderedat least some goods from suppliersover the internet or through othercomputer-mediated networks suchas EDI. Their share has increasedsince 2003 (43%); however,adoption has increased mainlyamong SMEs, and to a lesser extentamong large retailers (see Exhibit3.3-2).100806040200Exhibit 3.3-2: Percentage of companies placingorders for supplies online55 5243Retail(total)(2003 / 2007)2003 200728Micro(1-9)6339 43Small(10-49)67Medium(50-249)5853Large(250)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 SeBWEurostat has similar questions in its survey on ICT usage by enterprises, but divides thequestion into two inquiring about placing orders on the internet and through othernetworks. Overall, Eurostat found in its survey of 2006 that 36% of retail firms reportedplacing orders on the internet, and 12% through other networks. Thus, the incidence ofordering supplies online reported by Eurostat is slightly lower than in the survey of theSectoral e-Business Watch. In any case, the results of the Eurostat survey show thatnetworks for data exchange other than the internet play an important role for SCM in theretail industry. Examples of such networks include electronic data interchange (EDI) andextranets of suppliers where retailers can place their orders.While the percentage of companies placing orders online is a measure for the overall "ereadiness",it does not say a lot about the intensity of e-procurement activity. In fact, bothEurostat and the SeBW find that most companies say they use supply-side e-businessonly for a low percentage of their total orders. In the e-Business Watch surveys of 2003and 2007, retail companies were asked to estimate how large a share of their totalpurchases 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 hasdecreased from about 60% in 2003 to 35% in 2007. At the same time, the share ofintensive users (procuring more than 25% of goods online) has increased from 17% in2003 to 40% in 2007 (see Exhibit 3.3-3). A simple computation of answers to this surveyquestion, assuming that the average share will rather be towards the lower end in each ofthe ranges offered as options for their answer, 36 suggests that the total share of orders3536In both surveys, companies were given five options for their answer: "less than 5% of totalsales", "5-10%", "11-25%", "26-50%" and "more than 50% of total sales". To adjust for the largersales volumes of large companies, employment-weighted figures were used.43

e-Business in the Retail Sectorplaced by retailers online (by those companies that actually order online) has increasedfrom 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 hasprobably increased from about 5% (2003) to about 15% (2007).Exhibit 3.3-3: Percentage of retail firmsplacing orders to suppliers online (2007)0 20 40 60 80 100Exhibit 3.3-4: Average percentage of ordersfor supplies placed online (EU-7, 2003 / 2007)2007Total retail (EU-7)55Non-food storesFood storesOther retailing60535126%35%50%GermanySpainFranceItalyPolandSwedenUKUSA67556648478148703%20%20037%10% 50%Base (100%) = companies using computers.N (Retail, EU-7 and USA) = 1151.Weighting: Figures for sector totals andcountries are weighted by employment ("firmsrepresenting x% of employment in the sector /country"), figures for size-bands in % of firms.Reading example:"In 2007, retail companies representing 47% ofemployment (among those that place orders forsupplies online) said that their online ordersaccounted for up to 5% of their total orders fromsuppliers."Base (100%) = companies from 7 EU countries(2007) / 5 EU countries (2003) accepting ordersonline.N (2007) = 699 / N (2003) = 152.Weighting: Figures are weighted byemployment.Source: e-Business Survey 2007 by the SeBWAdvanced forms of data exchange with suppliersSoftware systems specifically developed for supply chain management supportcompanies, not only in the retail industry, to match supply and demand through integratedand collaborative interaction tools. Such SCM systems provide an overview of the flowsof products/materials, information and finances. In the most advanced form, they coverthe whole process and value chain from suppliers/manufacturers to wholesalers, retailers44

e-Business in the Retail Sectorand to consumer. SCM systems help to coordinate and integrate these flows both withinand among companies. One of the key objectives of any effective SCM system is toreduce inventory (with the assumption that products are available when needed).In the retail sector, enterprises representing close to 20% of employment say that theyhave such an SCM system (see Exhibit 3.3-5). The use of SCM systems is clearly adomain of the large retailers: while only about 10%-20% of small and medium-sizedretailers said they had adopted a SCM system, about 35% of large firms did so. Thepotential of these advanced and quite costly systems is obviously much higher for largeretail companies and chains with their complex supply chains. In fact, a comparison withresults for the same question in 2003 shows that SCM systems have seen a dynamicdiffusion among large retailers (from 7% to 35%), but also among medium-sized oneswhere 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)Diffusion dynamics 2003 – 20070 10 20 30 40 50Retail (EU-7) 19Non-food storesFood storesOther retailing201716Micro (1-9) 5Small (10-49) 9Medium (50-249) 18Large (250+)355040302010019186 6 5 5 9 9 7Retail(total)2003 2007Micro(1-9)Small(10-49)Medium(50-249)35Large(250)USA35Base (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 SeBWThe management of retail supply chains requires understanding and balancing of threemain dimensions: availability, inventory and cost (Accenture 2004). SCM can be regardedas a tool to manage the trade-offs between these dimensions in the most efficient andeffective way. Any retail format can act as an example to illustrate this: ideally, all goodsshould be available to customers at all times (no empty shelves) while at the same timethe volume of goods on stock should be as small as possible (to reduce warehousecosts). However, the two goals need to be balanced: the smaller the inventory, the morelikely the occurrence of out-of-stock; similarly reduced costs versus forgone revenues anddissatisfied customers need to be taken into consideration. SCM systems promise retailcompanies to achieve the optimal balance. They typically have modules which supportfunctions including 37 :Strategic network design (support for selecting locations for order and distributionmanagement)37See websites of providers of SCM solutions for retailers, for instance Infor SCM for Retail(http://www.infor.de/loesungen/scm/branchen/retail/)45

e-Business in the Retail SectorDemand planning (analysis and forecast of future demand in cooperation withbusiness partners)Network supply planning (planning distribution on the basis of results from demandplanning)Warehouse managementTransport and logistics (decision on transportation means and routes)Event management (automatic alerts in case of deviations or special situations toenable a proactive dealing with the situation)However, due to the heterogeneity of the retail sector, there is no single solution that fitsall purposes. Retail segments with short lifecycles, for example fashion, need to copewith short lead-times and accelerating time-to-market, which in turn requires tightintegration with the supply base 38 . The supply chain strategy also depends on whetherretailers compete rather on price or on service levels. There is evidence that physicalefficiency is most important in cost-based competition, the ability to flexibly respond tomarket requirements is critical in time-based competition (Gullberg and Lundvall 2004).A more specific indicator for electronic data exchange between companies focuses onthe process of invoicing. It is widely recognised that electronic invoicing promises rathereasy-to-achieve cost savings for both parties involved (i.e. the invoicing entity andreceiving entity), because processing invoices in a standardised, electronic format can beaccomplished much faster compared to the often cumbersome handling of printedinvoices. The cost saving potential obviously depends on the number of invoices thathave to be processed; companies and sectors differ widely in this respect.In the survey of 2007, retailers were asked whether they received e-invoices fromsuppliers, for example in PDF format or through e-mail. In total, close to 50% of theEuropean retail companies interviewed said that they received at least some of theinvoices 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 bysize in this regard. This confirms the dynamic adoption of e-invoicing in recent years. Itcan be assumed that in a few years time, in B2B exchanges, most invoices will bedelivered electronically, notably among companies which do regular business with eachother.The cost saving potential of e-invoicing critically depends on the technical way in whichinvoices are generated, delivered and read. e-Invoicing in its most advanced form meansthat an invoice is electronically generated and sent by the seller, and electronicallyreceived, processed and archived by the paying retailer. In practice, e-invoicing typicallygoes hand in hand with making payments electronically. However, the challenge is thatthere are different technical options for delivering an invoice electronically, and differentviews on which of these ways actually constitutes an "e-invoice". Notably, there isdisagreement whether an invoice sent as a PDF document (typically a scan from apaper invoice) by e-mail is an e-invoice. The counterargument is that this document is notmachine-readable, thus data have to be keyed in manually by the receiver into hissystem. It is only sent electronically, but not processed electronically; savings aretherefore 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.38See e-Business Watch sector study on the textile industry (2005), and accenture (2004)46

e-Business in the Retail SectorExhibit 3.3-6: Percentage of retail companiesreceiving invoices from supplierselectronically (2007)0 15 30 45 60 75Exhibit 3.3-7: Percentage of retail companiessharing information about inventory levelswith business partners online (2007)0 10 20 30 40 50Retail (EU-7)Non-food storesFood storesOther retailing32485271Retail (EU-7)Non-food storesFood storesOther retailing15141717Micro (1-9)Small (10-49)Medium (50-249)Large (250+)43555555Micro (1-9)Small (10-49)Medium (50-249)Large (250+)9162223GermanySpainFranceItalyPolandSwedenUK54364646435469GermanySpainFranceItalyPolandSwedenUK16141816122215USA61USA32The 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% ofemployment in the sector / country"), figures for size-bands in % of firms.Source: e-Business Survey 2007 by the SeBWWhile the introduction of e-invoicing is normally not a big deal, it can be the first steptowards a more intensive ICT-enabled cooperation in the supply chain. A critical issue inthis context is the sharing of information. For optimal supply chain management, it isindispensable that the buyer makes available information about inventory and pendingorders so that the supplier can deliver on time the right amount. This requires trustbetween trading partners, since some of the data that need to be made available may beconfidential. The SeBW asked retail companies whether they share information aboutinventory levels with business partners online. In total, retailers comprising about 15% ofemployment said in 2007 that they did so. Among medium-sized and large retailers, theincidence goes up to 20-25% (see Exhibit 3.43-7). In the USA, it appears that onlineinformation sharing is more widely practiced; here, more than 30% of all retailers say theyshare data about inventory levels with business partners.Benefits and risks of SCM – case study evidenceThe deployment of e-business as shown above drives the vertical integration of playersinvolved in the retail supply chain. e-Business has proven to be a useful tool both forsuppliers and retailers to reduce the quantity of goods to be stocked under the samesales conditions, and to accelerate supply flows to offer better customer service. e-47

e-Business in the Retail SectorBusiness tools such as SCM systems permit information sharing, notably betweenretailers, logistics providers and manufacturers of goods sold. This is frequently referredto as the "e-extended supply chain", where, ideally, demand drives and automaticallydetermines supply flows. The application of this principle, however, can get close to acontract situation between players. This can be an obstacle for an even more intensiveuse of e-business, as the companies involved may not want to get too dependent oneach other. Still, the digital integration notably between retailers and manufacturers hasdynamically evolved in recent years.Two of the case studies conducted for this report illustrate how small and medium-sizedfirms approach upstream supply chain management. Cyprus-PC.com, a young laptopretailer has managed to almost fully integrate its upstream supply chain with in-houseoperations and downstream chain activities. The only manual link within the chain is theorder receipt management process. This link is manual because the current amount oforders does not justify the cost for an electronic link. The upstream supply chain ismanaged by one single system bought by the firm from DHL. Cyprus-PC.com benefitsfrom an owner (who also is manager of the firm) with a high ICT affinity and a strongrelationship with an ICT partner firm. Exhibit 3.2 illustrates the supply chain managementprocess at Cyprus-PC.com.Exhibit 3.3-8: Supply chain management at Cyprus-PC.comCustomerDeliveryMultiple channelsCyprus-PC.comSupplier Tier 1CustomerCustomerTelephonePhysical storese-storeStrongrelationshipManualDHL solutionSupplierSupplierPartner-firmSource: e-Business Watch 2007/2008The supply chain management approach at Cyprus-PC.com shows that small firms canachieve an almost full electronic integration of entire supply chains. Small firmcharacteristics that alleviate or foster electronic integration include a lower degree ofcomplexity and a higher degree of flexibility in comparison to medium-sized and largefirms. Yet, financial constraints are an obstacle to electronic integration in small firmswhich is less of a burden in medium-sized and large firms.The Smart Supermarket case study provides an innovative approach to supply chainmanagement: the Maltese medium-sized, family run supermarket developed an e-commerce solution from scratch involving its suppliers in the daily maintenance of thesolution. This creates a win-win situation where the firm is able to shift some of themaintenance cost to its suppliers by collecting a fee per product placed online and the48

e-Business in the Retail Sectorsuppliers in turn get access to up-to-date market and sales information from the salesdata held on the system. Smart Supermarket even reports that the majority ofrelationships 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 Brooklandshave adopted e-procurement solutions. The Mercator, Slovenia case study illustrates theimportance of having a unified ERP system in a company, its dependant companies andsubsidiaries for an efficient implementation process. An information technology structureconsisting 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 specialistGlobus from Germany has been adopted to streamline business and order processesrelated to indirect goods (goods in the third category, see section 3.3.1). Theimplementation of the new e-procurement system has indeed provided the basis for acomplete re-organisation of processes related to the procurement of Maintenance Repairand Operation (MRO) goods. At Brooklands, achieving better business process efficiencywas also a driver for adopting a new technology application infrastructure supporting itspurchasing logistics activities. Again, change management was an issue affecting thesuccess of the implementation.3.4 The internal supply chain: in-house electronicoperations3.4.1 Introduction to internal operationsImportance of internal e-business systems in retailInternal supply chain management is the management of any aspect related to organisingfor selling goods delivered by suppliers to consumers. As retailers do not transformgoods, operation is not concerned with organising a production process but witharranging the in-house processes of receiving, distributing, and selling goods.Computerised systems that mainly serve processes inside a company, i.e. that are not inthe first instance designed for communication with suppliers, customers or other businesspartners, are considered here as “internal electronic operations”. A study of internaloperations 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. Thismay be highly relevant particularly for the large retail firms with huge amounts of data tobe dealt with and complex processes. However, effective internal operations are alsocrucial for SMEs. In particular, retail enterprises have to balance the cost effectiveness ofamounts of goods to be kept on store against relatively small customer purchases.Business process efficiency, streamlining and related productivity increases are coresubjects whenever ICT and e-business use is analysed. They are also very often implicitor explicit themes in e-Business Watch case studies. Even the very first e-BusinessWatch report in May 2002 argued that the real revolution had occurred and was about totake 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 sectorsthe major impact of e-business has been on reducing costs by making businessprocesses more efficient.49

e-Business in the Retail SectorTypes of internal systemsThere are numerous types of software applications that are relevant for internal electronicoperations:Resource-oriented systems for enterprise resource planning (ERP) and supplychain management (SCM). Knowledge management (KM) systems may also beincluded in this category as they serve the management of human resourcesInventory-oriented systems for warehouse management and barcodingDocumentation-oriented systems for managing the placement and receipt oforders, for document management (DM), and content managementCustomer-oriented systems for customer relationship management (CRM)Radio Frequency Identification (RFID) systems for tracking goodsAll these systems can help to file, structure and process information in their field ofactivity – information that may have huge scope particularly in large enterprises.The SeBW Survey 2007 included systems for ERP and SCM, warehouse managementand barcoding, order placement, CRM and RFID. SCM systems have been discussedabove in section 3.2 because they are closely related to procurement issues3.4.2 Findings about internal e-operationsGeneral level of e-business processesIn 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 gooddeal”, “some”, or “none”. A relative majority of companies representing 47% of theindustry’s employment said that they conduct some processes by e-business – seeExhibit 3.5-1. 22% said “none”; a “good deal” was stated by 20%, and in 11% mostprocesses are conducted electronically.As regards sub-sectors, the findings for non-food and food stores are very similar to theoverall 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 expenseof all other three categories.The most considerable differences between size classes is in the share of firms statingno e-business at all: It is largest in micro firms (35%) and declines with increasing sizeclass. 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 alsolargest 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 isdone by e-business is almost the same: 31% in EU-7 firms and 29% in US retailers. Thelevel of firms reporting no e-business at all is higher in the US (27%) than in the EU-7(22%).50

e-Business in the Retail SectorExhibit 3.4-1: % of companies saying that ... of their businessprocesses are conducted as e-business (2007)Retail (EU-7)Non-food storesFood storesOther retailingMicro (1-9)Small (10-49)Medium (50-249)Large (250+)0 20 40 60 80 100111113202315474651222021779916221618433746503535282415 2248 14The survey in 2007 wasconducted in 7 EUMember States (DE, FR,IT, ES, PL, SE, UK) and inthe USA.Base (100%) = companiesusing computers; N(Retail, EU-7 and USA) =1151.Weighting: Figures forsector totals and countriesare weighted byemployment ("firmsrepresenting x% ofemployment in the sector /country"), figures for sizebandsin % of firms.Source:e-Business2007SurveyUSA8214427most a good deal some noneSpecific software systemsSystems for enterprise resource planning (ERP) help to integrate and cover all majorbusiness activities within a company, including product planning, parts purchasing,inventory management, order tracking, human resources and finance. ERP systems arean important "hub" for much of their e-business activities with other companies. B2B dataexchanges as well as planning and controlling processes are largely based onfunctionalities provided by ERP systems. 11% of the EU-7 retailers, which is firmsrepresenting 16% of the industry’s employment, reported to have an ERP system – seeExhibit 3.5-2. The share of firms is much smaller than in manufacturing sectors such assteel (33%), chemicals (38%) and furniture (21%) for which resources planning is moreimportant as they produce goods. As regards retail sub-sectors, ERP systems are not soprevalent in other retailing, at least when considering the firm-weighted figure (3%). Asregards size classes, medium-sized firms (37%) reported an even higher level of ERPuse 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 SCMsystems instead of ERP: the level of SCM use in US firms (9% of firms, 35% ofemployment) is larger than in the EU-7 (6% of firms, 19% of employment). When addingup figures for both ERP and SCM, EU-7 and US retailers are on a similar level.51

e-Business in the Retail SectorExhibit 3.4-2: % of companies using specific software systems to support operations (2007)Weighting scheme:ERP system% ofempl.% offirmsSoftwareapplication tomanage theplacing orreceipt oforders% ofempl.% offirmsWarehouse ordepotmanagementsystem% ofempl.% offirmsBar-codingsystem% ofempl.% offirmsRetail – 2007 total (EU-7) 16 11 60 48 51 42 59 36Non-food stores 15 11 64 47 52 43 54 35Food stores 17 13 55 52 47 39 71 45Other retailing 23 3 51 43 60 41 58 22Retail – USA 6 2 60 42 46 22 69 39Retail – by size (EU-7)Micro (1-9 empl.) 10 47 42 35Small (10-49 empl.) 29 52 43 53Medium (50-249 empl.) 37 59 52 66Large (250+ empl.) 33 76 65 81Other sectors (EU-7)Transport & logistics 21 6 44 20 42 15 n.a. n.a.Base (100%) all firms all firms all firms all firmsN (Retail, 2007, EU-7+USA) 1151 1151 1151 1151Questionnaire reference A9a A9d A9e A9hThe survey (2007) was conducted in 7 EU Member States (DE, FR, IT, ES, PL, SE, UK) and in the USA.Source: e-Business Survey 2007The Mercator case study is a business example providing several lessons regarding theadoption of an ERP solution in a large European retailer. These lessons include that (a) aunified 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 processand thereby the number of human errors.Warehouse or depot management systems are fairly widely used among EU-7retailers. 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 bealmost the same in the three sub-sectors. Again the share of firms using such systemswas found to increase by size class, with micro firms on a level of 42% and large firms ona level of 65%. In the US (15% of firms, 42% of employment), warehouse or depotmanagement 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 firmsrepresenting 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 shoppingexperience 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%), thanin medium-sized (66%), small (53%) and micro (35%) firms. For many micro firms, theinvestments in bar-coding systems may appear to be too high. The share of firms usingbar-coding systems was found to be almost the same in the US (39%).52

e-Business in the Retail SectorBesides enquiring about these specific applications, retailers were asked whether they, ingeneral, use software applications to manager the placing or receipt of orders (Exhibit3.4-3).Exhibit 3.4-3: Companies using a softwareapplication to manage the placing or receiptof orders (in 2007)Retail (EU-7)Non-food storesFood storesOther retailingMicro (1-9)Small (10-49)Medium (50-249)Large (250+)GermanySpainFranceItalyPolandSwedenUKUSA0 20 40 60 8047465551525452605964656164607076The survey in 2007 was conducted in 7 EU MemberStates (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 areweighted by employment ("firms representing x% ofemployment in the sector / country"), figures for sizebandsin % of firms.Software applications to manage theplacing or receipt of orders carry outparts of the functions a more complex ERPsystem fulfils. EU-7 companiesrepresenting 60% of retail employmentsaid they use such software (see Exhibit3.5-3). 39 This may also include those firmsthat actually have an ERP system. Nosignificant differences between subsectorswere identified.According to Eurostat, the share ofretailers using IT systems to manage theplacement or receipt of orders hasincreased by 10 percentage points from41% in 2004 to 51% in 2006 (Eurostat2006b).However, there are differences betweensize classes: The level of use ofapplications for order managementincreases by size class. 47% of the microretailers reported to have such a systemand 76% of large retailers.The differences between countries are notvery large. The largest level of ordermanagement software use was reportedby French retailers (70%) followed bySpanish (65%) and UK retailers (64%); thelowest level was reported by Swedishretailers (46%).The level of order managementapplications use was found to be exactlythe same in EU-7 and US retailers.Source: e-Business Survey 2007Customer Relationship Management (CRM) systemsCustomer relationship management (CRM) is a business concept seeking to maximisecompetitiveness, revenues, and customer satisfaction (Bligh and Turk 2004) 40 .Computerised systems that support this concept include the capture, storage and3940The Eurostat retail survey in 2006 revealed a level of 51% of firms using such a system, so thefindings were very similar.See Bligh/Turk (2004) for an elaborate concept of CRM53

e-Business in the Retail SectorExhibit 3.4-5: % of retail companies having a CRM system in 2003 and 20075040302003 2007382010020138 3 9 12 15 9Retail(total)Micro(1-9)Small(10-49)23Medium(50-249)Large(250)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% ofemployment in the sector / country"), figures for size-bands in % of firms.Source: e-Business Survey 2007The AMJG case study conducted for this report (see 5.4) focuses on the operationsdomain: the firm has adopted a CRM solution to better organise data and information flowamong its retail outlets and headquarters. AMJG reports that both, efficiency andeffectiveness, have increased noticeably with the introduction of the new solution: delaysin product delivery for example were reduced by one quarter and the number of delayedshippings was cut by approximately a quarter. Furthermore, efficiency and speed of clientmanagement processes have increased. While IT systems provide opportunities forincreasing efficiency and effectiveness, AMJG managers point out that firms should planfor in-house business process changes and human resource effects such as userresistance as a result of introducing new in-house systems. The AMJG case study againgives examples for these challenges: business processes were adjusted to cater for newinformation 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 thesolution’s interface.RFID useRadio Frequency Identification (RFID) is a fairly new technology that allows trackinggoods and people through a wireless network. RFID technology helps to identify andcollect data attributes about a certain object or person, including localisation andenvironmental measurements when integrated with sensor networks. RFID is assignedhigh importance for the competitiveness of the European economy. In the retail industry,RFID can for example be used for enhancing inventory management and speeding upcash-desk check-out by attaching RFID tags to goods on sale.55

e-Business in the Retail SectorExhibit 3.4-6: % of companies using RFID(2007)Retail (EU-7)Non-food storesFood storesOther retailingMicro (1-9) 0Small (10-49)Medium (50-249)Large (250+)USA0 10 20 30 40 504628The survey in 2007 was conducted in 7 EU MemberStates (DE, FR, IT, ES, PL, SE, UK) and in the USA.Base (100%) = companies using computers; N(Retail, EU-7 and USA) = 1151.14Weighting: Figures for sector totals and countries areweighted by employment ("firms representing x% ofemployment in the sector / country"), figures for sizebandsin % of firms.151715RFID use is not yet very common in theretail industry. Retail firms representing 8%the industry’s employment reported to usethis technology. RFID use is much morecommon in the “other retailing” sub-sector(17%) and in food stores (14%) than innon-food stores (4%) – see Exhibit 3.5-6.RFID use is very rare in micro and smallretail firms. Only 0.1 % of the retailers inthe e-Business Survey 2007 said the useRFID, and in small firms it was only 2%.These low levels are due to highinvestment costs for hardware, software,personnel training and also re-organisation.In medium-sized firms the reported shareof RFID users was 6%, while 15% of thelarge firms said they use RFID.Compared to the US, the EU is apparentlylagging behind in RFID use. US retailersrepresenting 15% of the industry’semployment reported to use RFID, a levelalmost twice as high as in the EU-7.Source: e-Business Survey 2007While only indicative due to the low numbers of respondents, the numbers cannevertheless 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 thatthey use RFID to manage goods, products and service in-house. 64% of firms say thatthey use RFID to support the ordering of goods, products and service and 62% say thatthey use it to track and manage the whole organisational value chain. Approximately halfof the firms (49%) use RFID to support customer services. Hence, potentials for RFID areparticularly high for in-house operational purposes such as managing goods andservices.56

e-Business in the Retail SectorExhibit 3.4-7: % of companies using RFID to… (2007)support ordering ofgoods, products andservices100%64%track and managethe wholeorganisationalvalue chain100%62%92% manage goods,100% products andservices inhouse49%100%support customerservicesSource: e-Business Watch 2007While 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 USwhile usage levels in the UK and Spain are along the same lines. Germany, Italy, Polandand Sweden however lag far behind the US. Hence, the RFID results relating to EU-UScomparisons need to be interpreted with caution as wide gaps between the individual EUcountries exist (Exhibit 3.4-8).Exhibit 3.4-8: % of EU-7 retail firms usingRFID: EU-7 vs. USExhibit 3.4-9: % of EU-7 transport & logisticfirms using RFID: EU-7 vs. US30302520151050191514132 2 11252015105025212014 1497 0FranceUSAUnited KingdomSpainSwedenGermanyItalyPolandSpainItalyUSAUnited KingdomGermanyFranceSwedenPoland(N=1151, Data weighed by employment)(N=1097, Data weighed by employment)Source: e-Business Watch 2007Compared to the transport & logistics sector (Exhibit 3.4-9), which does not show thespecific country divergence, these findings might reflect the heterogeneous structure ofthe retail sector in the EU on a country basis.57

e-Business in the Retail Sector3.5 The downstream supply chain: electronic marketing andsales3.5.1 Introduction to downstream supply chain issuesOverview of sales-side issuesThe downstream supply chain covers activities and interactions of retail firms withcustomers. In general, sales side business activities comprise of three aspects. The firstfocus is on actual sales, i.e. transactions, and on related customer support activities, asecond one on marketing activities. Furthermore, logistics and distribution aspects relatedto sales are important. All these activities may take place or may be supported bycomputerised systems.Customer characteristicsEuropean 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% ofthe 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 marketWeighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firmsRetail – 2007 total (EU-7) 59 72 36 25 4 3NACE 52.12, 52.3-5 (nonfood)56 70 39 26 6 3NACE 52.11, 52.2 (food) 72 74 25 23 3 3NACE 50.5, 52.6 (other) 46 80 52 17 2 3Retail – by size (EU-7)Micro (1-9 employees) 72 25 3Small (10-49 employees) 71 22 7Medium (50-249 empl.) 67 26 7Large (250+ employees) 43 48 9Retail – by countryGermany 57 69 33 27 9 4Spain 56 82 28 15 16 3France 81 88 18 10 1 2Italy 77 83 20 14 4 3Poland 58 60 36 36 5 4Sweden 77 76 17 21 6 3United Kingdom 37 66 63 34 1 1USA 47 67 51 26 1 7Other sectors (EU-7)Transport and logistics 41 41 34 34 24 25Base (100%) all firms all firms all firmsN (2007, EU-7+USA) 1139 1139 1139Questionnaire reference G4a G4b G4cThe survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,United Kingdom) and in the USA.Source: e-Business Survey 200758

e-Business in the Retail SectorThe 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 quitesimilar 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 arelargely the same as for the overall retail sector, with small and medium-sized firms (both7%) and large firms (9%) having a slightly higher share of firms selling to internationalmarkets than micro firms (3%).The figures for countries broadly reflect the overall figures. Notable deviations include astronger focus on regional markets in France (88% regional, 10% national) and astronger 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 of25%EU-7 retail companies in 200711%mainly regular customersmainly changing customersboth regular and changing64%The survey in 2007 was conducted in 7 EU MemberStates (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").About half of the retail firms (53%), which isfirms representing 64% of the industry’semployment, reported that they sell mainlyto a regular, i.e. non-changing customerbase see Exhibit 3.4-2. 26% (25%weighted by employment) said that theysell to a changing customer base and theothers (21% of firms, 11% weighted byemployment) spontaneously said that bothregular and changing customers are of thesame importance.The share of companies reporting to havea regular customer base is much smallerthan in manufacturing sectors. Forexample, in the steel industry, 86% of thefirms interviewed in the e-Business Survey2007 reported to sell to regular customers.In the chemicals industry, the share ofregular customers is 80%, in the furnitureindustry it is 66%. For retail firms it is thusimportant to consider how to attract andretain customers.Source: e-Business Survey 20073.5.2 Findings about electronic salesElectronic orders more prevalent than five years ago – large firms leadingThe diffusion of internet technologies among consumers enables retailers to sell theirproducts via the internet to consumers. The share of EU inhabitants who used theinternet to purchase goods for private purposes has increased considerably in recentyears: In 2004, according to Eurostat, 22% of the EU-25 population had used the internet59

e-Business in the Retail Sectorin the twelve months prior to the interview to order goods in the internet. By 2007, theshare had increased to 32%. 41The 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 differentcompany. 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 lessthan in the US where 65% of firms, which is 89% of employment, reported to have awebsite. According to Eurostat, some 52% of European retailers have dedicated websiteson 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 theircatalogues and price lists by customers and 17% provide after sales support through it.Exhibit 3.5-3: % of retail companiesRetail (EU-7)Non-food storesFood storesOther retailingMicro (1-9)Small (10-49)Medium (50-249)Large (250+)selling online in 2007GermanySpainFranceItalyPolandSwedenUKUSA0 15 30 45 60 759262426The survey was conducted in 7EU Member States (DE, FR, IT, ES, PL, SE, UK) and inthe USA.Base (100%) = companiesusing computers; N (Retail, EU-7 and USA) = 1151.Weighting: Figures for sectortotals 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 SeBW37363534343338444145566026% of the EU-7 retailers, representing38% of the industry’s employment, statedthat they sell goods “through the internetor other computer-mediated networks” –see Exhibit 3.4-3. This is similar to theEurostat findings for 2006 (23% ofcompanies). There are no considerabledifferences between the sub-sectors, but“other retailing” (44%) has a slightly highershare than non-food stores (37%) andfood stores (36%). There is a cleardistinction between size classes: Almosthalf of the large retail firms (45%) and35% of the medium-sized ones sell online,but only 24% of the small retailers and26% of the micro retailers do so. However,it is notable that micro firms are notleaving far behind but that they are on thesame level as small firms.Online sales were found to be mostfrequent in the UK, where companiesrepresenting 60% of the industry’semployment sell online. This was by farthe highest percentage within thecountries included in the survey, followedby Germany (41%) and four countries onalmost the same level: France and Poland34%, Sweden 33% and Spain 26%. InItaly, retailers representing only 9% of theindustry’s employment said they sellonline.This finding is in line with Eurostat findings (Eurostat 2006b) that e-sales are particularlyrare in South European countries. On average, the EU-7 countries were found to be waybehind the USA where retailers representing 56% of employment stated to sell online.41Data retrieval from the Eurostat database at http://epp.eurostat.ec.europa.eu in March 2008.60

e-Business in the Retail Sector100806040200Exhibit 3.5-4: % of retail companiesselling online in 2003 and 200745383519 926 22 24 25 27Retail(total)2003 2007Micro(1-9)Small(10-49)Medium(50-249)Large(250)The survey in 2007 was conducted in 7 EU MemberStates (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 byemployment ("firms representing x% of employment inthe sector"), figures for size-bands in % of firms.The share of companies that sells onlinedoubled from 19% (employment-weighted)in 2003 to 38% in 2007 – see Exhibit 3.6-4.There was an apparent increase in all sizeclasses: Micro firms made a big jump from9% of firms to 26%, small retail firmsincreased their share of online sellers from22% to 24% and medium-sized ones from25% to 35%. The largest leap in terms ofpercentage points was made by the largefirms, from 27% to 45%. This means thatwhile the share of online sellers amonglarge firms was found to be only slightlyhigher than in SMEs in 2003, thedifference was found to be much larger in2007.Source: e-Business Surveys 2003 and 2007Share of goods ordered online increased in the past five yearsThose retailers that sell online were further asked about the share of goods sold online intheir total sales volume. Online sellers representing almost half (47%) of the industry’semployment said that they sell less than 5% of their total sales volume online – seeExhibit 3.5-5.Exhibit 3.5-5: Share of goods sold online inretail companies selling online in 2007Exhibit 3.5-6: Share of goods sold online inretail companies selling online in 200312%6%16% 50%34%11%3% 2%51%50%Reading example: "In 2007, 47% of all companies selling online (by their share of employment) said that theshare 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% ofemployment in the sector / country"), figures for size-bands in % of firms.Source: e-Business Surveys 2003 and 200761

e-Business in the Retail Sector19% said they make between 5 and 10% of their sales online, and in 6% the reportedshare was between 11 and 25%. More than a quarter (28%) of the online sellers reportedan online sales volume above 25% of their total sales: 12% said they sell between 26 and50% online, and 16% of the online sellers stated to sell more than 50% online. Comparedto 2003, the share of firms in which online sales account for more than 25% of their salesvolume increased sharply, from 5% to 28% - see Exhibit 3.5-6. Thus, in the past fiveyears there has not only been an increase in the share of online sellers but also in theamount of sales conducted through the internet or other computer networks. This findingmay confirm predictions that the industry will experience growth in online sales (Butler2007).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) areselling a huge amount online: at Fleria Floral Creations, 0.24% of total annual sales aremade online and at Smart Supermarket only about 1% of total sales volume comes fromonline shoppers. The regionally-based micro firm 4fitness in contrast sells more than 2/3of its goods over the internet. Unlike Smart Supermarket and Fleria who are establishedbusinesses that have been trading ‘offline’ for a number of years, 4fitness is a newly setup firm (new in the sense that it has been trading for less than 4 years). The businessmodel of 4fitness has ever since the firm was set-up included the internet sales channelwhereas for Smart Supermarket and Fleria the internet sales channel is a new addition toan existing, successful business model. Furthermore, the products sold by these threefirms differ regarding their suitability for internet sales: selling grocery and flowersrequires a different approach than selling fitness equipment and accessories over theinternet.Geographic origin of online orders: SMEs extend their customer baseRetailers selling online were also asked about the geographic origin of their customers.Retail firms representing approximately half of the industry’s employment (51%) said thattheir online orders are mainly regional, and the share of mainly national orders (46%) wasalmost equally large. In only 3% the orders are mainly international. Compared to thefigures about general sales (see Exhibit 3.5-1 and 3.5-7), it appears that online saleshelps to extend the geographic focus slightly from regional to national sales while theinternational focus remains on the same low level. This was also found to be the case fornon-food stores and other retailing. However, food stores apparently use the internet tofurther extend their regional sales focus: the employment-weighted share of firms sellingmainly to regional customers was found to be 72% and the share of mainly regionalonline sales 79%.Regarding size classes, it is striking that SMEs apparently use the internet to extend theirsales beyond the regional focus to national markets. The share of firms with a nationalsales 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), smallfirms (33% compared to 22%) and medium-sized firms (61% compared to 26%). On theother hand, large firms apparently tend to use the internet to extend their regionalcustomer base. The share of large firms selling mainly to regional customers was foundto be 43% for overall sales and 50% for online sales. However, the figures for large firmsneed to be interpreted with caution because the online sales data are based on a smallnumber of cases.62

e-Business in the Retail SectorThe 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 inforeign retailers, or high shipping costs. Legal issues may be another issue. Conflictinglegal rules between the Member States and matters of jurisdiction are obstacles toincreasing cross-border retail trade (see, for example, Schulte-Nölker 2007). The 4fitnesscase study (Section 5.6) illustrates the difficulties of cross-border online trade.Exhibit 3.5-7: Geographic origin of online orders in 20070 20 40 60 80 100Retail (EU-7)51463Non-food stores44551Food stores79183Other retailing*276211Micro (1-9)47503Small (10-49)58339Medium (50-249)36613Large (250+)*50473USA54398regional national internationalThe 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% ofemployment in the sector / country"), figures for size-bands in % of firms.Source: e-Business Survey 200763

e-Business in the Retail SectorSending invoices electronicallyExhibit 3.5-8: Companies sending invoiceselectronically in 2007Retail (EU-7)Non-food storesFood storesOther retailingMicro (1-9)Small (10-49)Medium (50-249)Large (250+)GermanySpainFranceItalyPolandSwedenUKUSA0 15 30 45 60 7525222016The survey in 2007 was conducted in 7 EU MemberStates (DE, FR, IT, ES, PL, SE, UK) and in theUSA.Base (100%) = companies using computers; N(Retail, EU-7 and USA) = 1151.Weighting: Figures for sector totals and countriesare weighted by employment ("firms representingx% of employment in the sector / country"), figuresfor size-bands in % of firms.282827272926272929343639A further issue of online transactions is thesending of invoices. The e-BusinessSurvey 2007 found that retailersrepresenting 28% of the industry’semployment send invoices electronically tocustomers – see Exhibit 3.5-8. This meansthat the share of companies sending e-invoices is not even as high as the shareof companies selling online (38%,employment-weighted). Apparently, eventhose retailers that sell online prefer tosend invoices via conventional mail or fax,possibly for legal reasons. One canassume that retailers that sell onlineinclude a paper invoice in the parcel of thegoods shipped.The level of firms sending e-invoices isfairly even across sub-sectors, sizeclassesand countries. As regardscountries, the level of retailers sending e-invoices is highest in the UK (36%) andlowest in France (20%) and Sweden(16%). Electronic invoices are much moreprevalent in the US: firms representing39% of the industry’s employment sendinvoices electronically.Source: e-Business Survey 2007Payment methods for online salesOnline orders need to be paid somehow, and the options offered for payment indicatehow easy (or difficult) it is for customers to buy over the internet. In the e-BusinessSurvey 2007, retailers that sell online were asked about seven possible ways forcustomers 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. Debitcards (55%) and cash on delivery (48%) are also quite common. Other options offeredinclude 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 exceptthird-party payments, the levels of firms offering them are higher in the US than in theEU-7. The differences are particularly large for credit cards (96% in the US versus 63% inthe EU-7) and debit cards (86% in the US versus 55% in the EU-7). This may reflect ahigher acceptance of credit and debit cards for paying any kind of purchases in the US,but it also facilitates online payments.64

e-Business in the Retail SectorExhibit 3.5-9: Accepted payment methods for online orders in 20070 20 40 60 80 100credit cards6396debit cards5586cash on delivery4862on account payments4065Retail (EU-7)Retail (USA)advance banktransfers3640cheques2637third-party payment1515The 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 othercomputer-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: B6Source: e-Business Survey 2007Case study findings about benefits and challenges of e-salesCase studies conducted for this report indicate several benefits of e-sales:Enhanced operations: Online sales may induce multi-channel retail synergies andprovide real-time market information. Retailers both large and small are realisingthat benefits from online sales are minimal if the online sales activity is operated asa stand-alone activity. Following little success with online sales, the case firmsEMPIK (Section 5.9) and Fleria Floral Creations (Section 5.7) for example havecome to realise the usefulness of integrating online sales with existing saleschannels and firm operations.Enhanced customer relationships: Improved customer services and betterrelationships with customers. The EMPIK case (Section 5.9) shows that customerservices can be improved dramatically through integrating online sales in a retailbusiness strategy. The Cyprus PC case on the other hand (Section 5.10) illustratesthe 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 thedesire to bargain.Enhanced supplier relationships: Smart Supermarket (Section 5.8), for example,offers suppliers the (paid) privilege to autonomously access and manage data heldwithin the Smart Supermarket e-sales solution.Improved performance: Online sales may lead to efficiency and effectivenessgains and increased competitive advantage. (See case study EMPiK section 5.9)65

e-Business in the Retail SectorHowever, 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 andrelated 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 toreasons such as unwillingness to use computers and internet technology. Someretailers try to overcome this issue through marketing activities. Smart Supermarket(Section 5.8) and EMPiK (Section 5.9), for example, held specifically organisedmarketing events to launch their e-sales activities.Unfavourable customer attitudes: Customers may have attitudes that do notfavour online sales. Finding an appropriate fit between e-commerce practices andbuying habits of customers may be difficult. The companies may be ignorant onhow to overcome these barriers. Cypriot customers, for example, prefer to speak toretailers 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 culturalcharacteristic: it allowed online customers to bargain for discounts by integratingonline 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 toeducate 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 anadequate 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 addresslimitations of selling online. Companies need to evaluate whether their products aresuitable for online sale and they may need to identify necessary changes to makethem suitable for selling online. Integrating e-sales practices with existingoperations and in-house departments may be difficult. They company may have toarrange for and manage business process changes driven by e-commerce (seecase study Fleria Floral Creations, Section 5.7). They also need to organise forlogistic requirements necessary for e-commerce (see case study SmartSupermarket, section 5.8). Another operative challenge is how to provide adequatecustomer service which is important for sustainable online sales as demonstratedby 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 5.9and 5.7 respectively).Technology development challenges: The companies may need to evaluatewhether the application chosen is the best possible match for the firm’s e-salesneeds. Security issues need to be met. There is a neccesity to explore the need forintegration of e-sales applications with existing in-house technology and conductintegration whenever necessary. User-friendliness of the application needs to beensured. (See case study Fleria Floral Creations, section 5.7)Cost challenges: While data about investment required for implementing e-salessolutions is rare, the case studies show significant differences in the costs for e-66

e-Business in the Retail Sectorsales: Smart Supermarket (see section 5.8) had to develop a solution from scratchin close cooperation with an IT provider which was and continues to be costintensive. Fleria Floral Creations (see section 5.7) in contrast paid approximately5000€ for the set-up and 1500€ annual maintenance charge. This figure is quite lowcompared to Smart Supermarket’s cost.The case studies suggest that, in order to reap the benefits and overcome the challengesof 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 marketingA sketch of marketing issues in retailThe term “marketing” describes the objective to direct all business decisions within acompany 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 theprice 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 marketingefforts. Three items of particular importance were included in the e-Business Survey2007: online placement of advertisements, engagement in optimising search engines,and use of mobile services for marketing. Online placement of advertisements is includedin the following; the other two items will be included in the final report.Search engine optimisation and online placement of advertisementsPlacing online advertisements on websites that do not belong to the company itself is ameans of advertising introduced by internet business. It is very important for the businessconcept of many online service providers. The case study of Cyprus-PC.com (Section5.10) and 4fitness (Section 5.6) are examples of companies engaging in paid onlineadvertisements.67

e-Business in the Retail SectorExhibit 3.5-10: % of companies placingonline ads on non-company websites (2007)Exhibit 3.5-11: % of companies engaging insearch engine optimisation (2007)Retail (EU-7)0 10 20 30 40 50160 10 200730 40 50 60Retail (EU-7)47Non-food stores16Food stores19Non-food stores46Other retailing*8Food stores52Other retailing*42Micro (1-9)13Small (10-49)11Micro (1-9)40Medium (50-249)21Small (10-49)45Large (250+)*20Medium (50-249)41Large (250+)*46USA43USA53The 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% ofemployment in the sector / country"), figures for size-bands in % of firms.Source: e-Business Survey 2007Companies representing 16% of the retail industry’s employment in the EU-7 reported toplace online ads on other companies’ websites – see Exhibit 3.5-10. This promotionmethod is more prevalent in food stores (19%) and non-food stores (16%) than in theother retailing sub-sector (8%). Furthermore, online ads on other companies’ websitesare 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 inthe US (43%). This implies that the market for online advertisements appears to belargely untapped in the EU. 47% of European retailers are however engaging in searchengine optimisation with the aim to increase visitors to their company’s website. Foodstores are slightly more active at search engine optimisation than non food stores andother retailing companies: 52% of food stores are engaging in search engine optimisationwhile 46% and 42% of non-food stores and other retailing respectively engage in it. Thereare 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 USretailers engaging in search engine optimisation compared to the 47% in the EU.68

e-Business in the Retail Sector3.5.4 Electronic support of logistics and distributionIntroduction to logistics and distribution issues in retailOne could assume that downstream logistics and distribution are no core issues for theretail sector because the vast majority of goods is bought on-site and the customers carrythem home themselves. In fact, downstream logistics may not be an issue for the majorityof retailers. However, logistics are a core issue for mail order retailers and for retailersselling goods online that need to be shipped to customers. Such companies do not onlyneed to optimise transportation services but also warehousing and distribution centres.Efficient customer-facing logistics are crucially important to keep down the costs of goodssold 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 indemand which may be considerable, for example with regard to Christmas business.Further challenges are reverse logistics, i.e. the return of goods from unsatisfiedcustomers, and trade across borders.Current issues of logistics and distribution in online shoppingComputerised systems may support the logistics of goods sold online. Transport serviceproviders may, for example, give retailers the opportunity to check the current status ofshipping on the internet. Online shops themselves may offer their customers theopportunity 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 statusby 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 implementcentralised delivery for goods ordered online where customers can fetch them in theirneighbourhood. Another trend is an increase in outsourcing of services to specialisedlogistics providers to benefit from their specialised services. The increasing amount oflogistics services demanded by the industry in general is an indicator for the growingimportance of logistics for trade as an increasing number of goods have to be transportedand distributed. This includes transport across national boundaries,3.6 Barriers and drivers of e-business useBarriers for e-business adoptionThe companies that stated that they conduct some or none of their business processesas e-businesses (see section 3.4.2, “general level of e-business processes”) were furtherasked why they do not use e-business more intensively. Seven possible reasons weresuggested and interviewees could answer “yes, important” or “no, not important”. Theresults 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-businessmore intensively: across all sub-sectors and across all firms sizes more than half ofretail companies agreed to this statement. Overall, 64% of firms weighed byemployment (61% of firms weighed by number of firms) agreed. The overall sharein the US was significantly smaller (43%) indicating that the retail business69

e-Business in the Retail Sectorecosystem is more vibrant with regard to ICT use in the US 42 . Nevertheless, onecould 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 theircompany is too small to benefit from e-business. 47% of micro firms also reportthat for them ICT is too expensive (average for the retail sector: 36%). Thesenumbers decrease noticeably with firm size from 29% and 30% for small andmedium-sized firms respectively to only 20% for large firms with more than 250employees. Micro and small firms also consider it to be more difficult to find reliableIT providers than medium-sized and large firms. Security issues in contrast aremore relevant for large (40%) and small (39%) firms while only 28% of micro firmsand 23% of medium-sized firms report this issue to be a factor affecting the lowadoption of e-business. This finding however raises concerns about securityawareness among micro and medium-sized firms who might not be fully aware ofthe exposure to and effects of e-business security issues for their respectivecompanies.Regarding the three sub-categories, trade in food stores, trade in non-food storesand other retailing, the other retailing group appears to be less affected by thesix categories of barriers questioned in the survey as fewer companies in this groupstate that the barriers trouble them. No significant differences emerge between thefood-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) anddifficulties to find reliable IT providers with 28% (20% in food stores) are higher inthe 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 alwayslower than for the EU-7 except for ‘security issues’ where 46% of US retailers facebarriers compared to 36% of retailers in the EU-7. This indicates that overall, USretailers seem to face other or even fewer barriers to e-business than EU -7retailers.Few differences are visible between barriers for the retail sector and the transport &logistics sector. The overall numbers confirm that companies in both servicesectors tend to face similar barriers to e-business.42A business ecosystem is defined here as "the network of buyers, suppliers and makers ofrelated products or services” plus the socio-economic environment, including the institutionaland regulatory framework”. See http://www.digital-ecosystems.org/.70

e-Business in the Retail SectorExhibit 3.6-1: Barriers to e-business adoption as perceived by retail companies (2007)Suppliers/Customers notprepared0 20 40 60 80Company too small0 20 40 60 80Total retail (EU-7)64Total retail (EU-7)49Non-food stores66Non-food stores51Food stores64Food stores54Other retailing54Other retailing33Micro (1-9)61Micro (1-9)64Small (10-49)64Small (10-49)44Medium (50-249)60Medium (50-249)25Large (250+)65Large (250+)28T&L70T&L40USA43USA29ICT too expensive0 20 40 60 80Technology too complicated0 20 40 60 80Total retail (EU-7)36Total retail (EU-7)19Non-food stores39Non-food stores21Food stores41Food stores18Other retailing16Other retailing9Micro (1-9)47Micro (1-9)28Small (10-49)29Small (10-49)27Medium (50-249)30Medium (50-249)15Large (250+)20Large (250+) 4T&L34T&L27USA16USA1071

e-Business in the Retail SectorExhibit 3.6-2: Barriers to e-business adoption as perceived by retail companies (2007) -continued-Security issues0 20 40 60 80Legal challenges0 20 40 60 80Total retail (EU-7)36Total retail (EU-7)25Non-food stores44Non-food stores30Food stores28Food stores16Other retailing18Other retailing17Micro (1-9)28Micro (1-9)29Small (10-49)39Small (10-49)28Medium (50-249)23Medium (50-249)24Large (250+)40Large (250+)18T&L31T&L24USA46USA14Difficult to find reliableproviders0 20 40 60 80Total retail (EU-7)Non-food storesFood storesOther retailingMicro (1-9)Small (10-49)Medium (50-249)Large (250+)T&LUSA2428201726251617236The survey in 2007 was conducted in 7 EU MemberStates (DE, FR, IT, ES, PL, SE, UK) and in the USA.Base (100%) = Companies who stated that some ornone 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: F2T&L = Transport and Logistics industry (SL: Pleasenote in all relevant Exhibits.)Source: e-Business Survey 2007Drivers of e-business adoption: pressure from suppliers and customersThe e-Business Survey 2007 enquired whether retail companies experienced pressuresfrom customers and suppliers to adopt ICT solutions. These questions were posed asthose 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-consumersof the goods sold, few pressures from these individual consumers are expected to occur.72

e-Business in the Retail SectorHence, in order to explore the intangible role that these individual consumers can have asa group, the question was reformulated to ask whether the companies have experiencedpressures 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 haveexperienced pressure from customers to adopt e-commerce. This phenomenon is mostprevalent in the non-food group with 13% of firms reporting this issue, closely followed bythe other retailing group with 12%. The lowest number with 9% comes from the foodgroup 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 saleschannels provided by retailers. The lack of pressure from consumers could also beinterpreted as a hint that e-commerce in the retail industry is not as important a saleschannel as often advocated. Firm size does not play and overarching role either withnumbers ranking from 8% for small firms to 15% for medium-sized firms – see Exhibit3.6-3.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’semployment, reported to have experienced pressure from suppliers to adapt their ICT.These numbers are similar to the pressures for retailers to adopt e-commerce, indicatingthat there is neither strong pressure on either sides of the supply chain, i.e. there is littlepressure 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 between10% 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 theretail 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 theirbuying power to demand from their suppliers new ICT or changes to the supplier existingICT structure. This power over suppliers decreases with firm size from 22% of mediumsizedfirms to 15% of small firms and only 9% of micro firms putting pressures onsuppliers. The non-food group which for example includes the large hypermarkets is theone 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 firmsrespectively reporting that they put ICT pressure on suppliers.73

e-Business in the Retail SectorExhibit 3.6-3: Customer and supplier e-business/ICT pressures (2007)Customerpressures to adopte-commercee-Business pressureSupplier pressuresto adapt ICTPut pressure on /Demand fromsuppliers to adapt /implement newICTWeighting scheme: % of empl. % of firms % of empl. % of firms % of empl. % of firmsRetail – 2007 total (EU-7) 11 9 12 10 20 10NACE 52.12, 52.3-5 (non-food) 13 9 13 11 23 11NACE 52.11, 52.2 (food) 9 7 10 5 15 5NACE 50.5, 52.6 (other) 12 18 11 15 14 12Retail – by size (EU-7)Micro (1-9 employees) 9 10 9Small (10-49 employees) 8 12 15Medium (50-249 empl.) 15 14 22Large (250+ employees) 13 13 37Base (100%) All firms All firms All firmsN (2007, EU-7+USA) 1151 1151 1151Questionnaire reference B11a B13 B15The survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden, UnitedKingdom) and in the USA.Source: e-Business Survey 20073.7 Overall differences between size classes, countries, subsectorsand industries“Lagmark” calculationsIn the previous sections of Chapter 3, findings from the e-Business Survey 2007 for theretail industry were presented by sub-sectors and size classes as well as EU incomparison with the US. The figures indicated that in the EU-7, SME retail companies lagbehind large ones and that EU-7 retail firms tend to lag behind the US. There were noobvious overall differences between sub-sectors. In the following, these differences willbe analysed with average values in order to provide a more concrete overview.Average values for groups of indicators were calculated for four principal domains: ICTinfrastructure, e-procurement, internal systems, and e-sales. Taking the group of mostadvanced firms as a benchmark, the results can be considered as “lagmarks”. Forexample, the “lagmark” calculations for size classes indicate how much SMEs lag behindlarge firms.74

e-Business in the Retail SectorSMEs lag behind large firms – most in internal operations and e-salesAnalysing differences between firms of different size classes, the average values showthe same ranking for all domains: micro retail firms lag behind small ones, small firms lagbehind medium-sized ones, and medium-sized ones in turn lag behind large firms – seeExhibit 3.8-1. The differences between micro and large retail firms are most pronouncedfor 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, largefirms 65%. For e-procurement, micro firms (34%) are close to small (38%), mediumsized(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 pronounceddifference between micro (20%) and small firms (22%) on the one hand as well asmedium-sized (31%) and large ones (38%) on the other.Exhibit 3.7-1: “Lagmarks” for size class differences in ICT and e-business performance inEU retail (2007)Micro (1-9empl.)Small (10-49empl.)Medium (50-249 empl.)Large (250+empl.)ICT infrastructure0 20 40 60 80 10041465265Micro (1-9empl.)Small (10-49empl.)Medium (50-249 empl.)Large (250+empl.)e-Procurement0 20 40 60 80 10034383942Indicators:Firms with internet access, average share ofemployees with internet access, broadband internetaccess, LAN, WLAN, intranet, extranet, remoteaccess to company’s computer network.Indicators:Firms procuring online, firms procuring more than50% of purchases online, SCM, e-invoices fromcustomers.Internal e-operations0 20 40 60 80 100e-Sales0 20 40 60 80 100Micro (1-9empl.)25Micro (1-9empl.)20Small (10-49empl.)30Small (10-49empl.)22Medium (50-249 empl.)38Medium (50-249 empl.)31Large (250+empl.)49Large (250+empl.)38Indicators:ERP, CRM, software to manage placement orreceipt of orders, warehouse management systems,bar-coding systems, RFID.Indicators:Own website, firms selling online, e-sellers sellingmore than 50% of turnover online, credit cards foronline payment, sending e-invoices, placing onlineads on other companies’ websites, mobilemarketing.Reading example: For the eight indicators of ICT infrastructure, micro retail firms (i.e. firms with 1-9employees) 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 200775

e-Business in the Retail SectorEU lags behind US – most in e-sales and e-procurementThe “lagmark” analysis revealed that EU retail firms lag behind US retailers in all fourdomains. The US lead is strongest in e-sales, quite strong in e-procurement, and small inICT infrastructure and internal e-operations. As regards ICT infrastructure, EU retailersreach 51% of the possible maximum value, US retailers 55%. In e-procurement, EUretail 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, onlythree percentage points. However, US retailers are much more advanced in e-sales: theyreach 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 infrastructuree-Procurement0 20 40 60 80 1000 20 40 60 80 100EU51EU37US55US49Indicators:Firms with internet access, average share ofemployees with internet access, broadband internetaccess, LAN, WLAN, intranet, extranet, remoteaccess to company’s computer network.Indicators:Firms procuring online, firms procuring more than50% of purchases online, SCM, e-invoices fromcustomers.Internal e-operations0 20 40 60 80 100e-Sales0 20 40 60 80 100EU36EU34US39US52Indicators:ERP, CRM, software to manage placement orreceipt of orders, warehouse management systems,bar-coding systems, RFID.Indicators:Own website, firms selling online, e-sellers sellingmore than 50% of turnover online, credit cards foronline payment, sending e-invoices, placing onlineads on other companies’ websites, mobilemarketing.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 2007Overall, the e-commerce environment is less vibrant in the EU than in the US. The oneindicator used for highlighting barriers “suppliers and customers not prepared for e-business” which is considerable higher in the EU than in the US, furthermore indicatesthat the e-business ecosystem in the EU is different from the US ecosystem. Europeanretail firms seem to be less electronically bound, yet the question arises whether this isnecessarily a disadvantage for the EU economy. The economic analysis presented inChapter 4 indicates that productivity gains in the US retail sector, for example, are notnecessarily directly related to ICT.76

e-Business in the Retail SectorSub-sectors: other retailing slightly more advanced than food and non-foodThe “lagmark” analysis confirms that there are only minor differences between the threeretail sub-sectors in ICT and e-business performance. “Other retailing” appears to bemost advanced, having a slight lead over food and non-food in ICT infrastructure, internale-operations and e-sales. The food-sub-sector tends to perform the lowest values. Asregards ICT infrastructure, non-food (51%) and food (50%) are similar, while otherretailing leads with 57%. In e-procurement, non-food (39%) and other retailing (38%) areclose by, while food (31%) lags behind. The values for internal e-operations are quitesimilar 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 infrastructuree-Procurement0 20 40 60 80 1000 20 40 60 80 100Non-food51Non-food39Food50Food31Other57Other38Indicators:Firms with internet access, average share ofemployees with internet access, broadband internetaccess, LAN, WLAN, intranet, extranet, remoteaccess to company’s computer network.Indicators:Firms procuring online, firms procuring more than50% of purchases online, SCM, e-invoices fromcustomers.Internal e-operations0 20 40 60 80 100e-Sales0 20 40 60 80 100Non-food34Non-food33Food38Food34Other40Other41Indicators:ERP, CRM, software to manage placement orreceipt of orders, warehouse management systems,bar-coding systems, RFID.Indicators:Own website, firms selling online, e-sellers sellingmore than 50% of turnover online, credit cards foronline payment, sending e-invoices, placing onlineads on other companies’ websites, mobilemarketing.Reading example: For the eight indicators of ICT infrastructure, retail companies from the non-food subsectorreach 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 200777

e-Business in the Retail Sector3.8 Summary of the state of play of ICT and e-business inretailThis chapter has shown that ICT and e-business can be beneficial for the whole supplychain of the retail industry. It can support procurement, internal operations as well assales and distribution. However, there are challenges related to e-business use, forexample related to ICT use in SMEs and with regard to a generally higher level of ICTand 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 surveycan 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 frombeing 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 prevalentin firms of all size classes. The 2003 study argued that the main opportunitiesstemming from e-business, similarly as in other sectors, were efficiency andproductivity gains and, thus, cost savings. This was found to be still the same in2007.ICT infrastructure, skills and investments improved: The quality of SMEs'internet access has significantly improved between 2003 and 2007. However, thereis scope for further improvement. Currently, retailers comprising about 45% of thesector's employment are connected by broadband (>2 Mbit/s). Diffusion of internalW-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 allretail companies employ ICT specialists; even among large retailers, only about50% do. Many companies completely outsource ICT services to external serviceproviders. The attitude towards ICT investments and budgets is more positive thana 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 costreduction benefits to the retail industry, mainly through process streamlining andimproved purchasing conditions. The level of retail firms ordering online increasedfrom 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 thatprocure goods through the internet or computer-mediated networks, the share ofgoods actually ordered online increased, too. The use of Supply ChainManagement (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 ofSCM use in medium-sized and large firms.Internal e-business systems: Internal e-business operations can significantlyenhance workflows and business processes and thus increase productivity.However, companies representing almost half of the industry’s employment saidthat 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 conductedelectronically. As regards particular systems, firms representing 60% of theindustry’s employment reported to have a software application to manage theplacing or receipt of orders, 59% a bar-coding system, 51% a warehouse or depotmanagement system, and 16% an ERP system. RFID is not yet very common in78

e-Business in the Retail Sectorthe retail industry. Retail firms representing 8% of employment reported to use thistechnology, and RFID use is very rare in micro and small retail firms.Electronic sales and distribution: Retailers representing 38% of the industry’semployment stated that they sell goods “through the internet or other computermediatednetworks”. Almost half of the large retail firms (45%) and 35% of themedium-sized ones sell online, but only 24% of the small retailers and 26% of themicro 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 increasein all size classes. There has also been an increase in the amount of salesconducted online. Compared to the figures about general sales areas, it appearsthat online sales helps to extend the geographic focus slightly from regional tonational 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’semployment use a CRM system, an increase from 8% in 2003.Micro and small firms lag behind medium-sized and large ones: Micro andsmall firms lag behind medium-sized and large firms in almost all indicators of ICTand e-business use presented in this chapter. Exceptions include the level ofinternet access which is close to 100%, the average share of employees withinternet access which is higher than in large firms, and the practice of sendingelectronic 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 recentyears.EU retailers lag behind US: In most indicators discussed in this chapter, EU-7retailers are lagging behind the US. In some cases the differences are large, forexample for placing online ads on other companies’ website (43% in the US versus16% in the EU) and for options offered to pay online (higher percentages in the USfor all options). Exceptions include the share of firms with internet access, theaverage share of employees with internet access, and the use of internal systemsfor which the levels are similar or even higher in the EU. Surprisingly, the overallimportance of e-business stated by the firms is very similar between EU-7 and USretailers. The reason may be that US retailers answered the question about e-business importance with a higher reference level in mind.79

e-Business in the Retail Sector4 Drivers and impacts of ICT adoption4.1 Conceptual framework: the structure – conduct –performance paradigmAdding an analytical perspectiveChapter 3 presented a descriptive assessment of the state-of-play of ICT and e-businessuse in the retail industry. It focused on the diffusion of ICT-based applications and on howthey are used by companies, both for internal processes and for exchanges with otherorganisations or consumers. This Chapter 4 adds a more analytical perspective on thedrivers and impact of ICT adoption in retail, based on an econometric analysis. Thesection is organised as follows. First, it outlines a conceptual framework to assess theeconomic drivers and impacts of the ICT adoption. Second, it includes four sections witheconometric analysis on of the relationship between ICT and five business dimensions,i.e. productivity, employment, innovation dynamics, market structure and value chain. Inthe analysis data from the e-Business Survey 2007 and EU KLEMS are used. Thechapter concludes with a summary of the main results.The standard “structure – conduct – performance” paradigmThe conceptual framework of this sectional is a common analytical way for all sectorstudies included in the Sectoral e-Business Watch project. Therefore references on thespecific sector outcomes like retailing are based on this joint concept to make itcomparable with other sector reports and to make them comparable in the cross-sectionreport as well.Economic literature suggests that the ongoing diffusion of ICT and e-businesstechnologies and services among firms in the economy at large is a striking example ofthe possible dynamics of technological change and economic development see, forexample (Bresnahan and Trajtenberg 1995; Helpman and Trajtenberg 1998; Helpmanand Trajtenberg 1998). The adoption and diffusion of new technologies can be spurred bymany different drivers and can have far-reaching consequences. Virtually all economicspheres can be affected by technologically induced changes, including innovationdynamics, productivity and growth, the development of market structures, firmperformance, 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 statesthat 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 goesbeyond market structure characteristics of the original concept. The primary features ofan industry’s structure are related to market structure in the conventional sense: thenumber and size of supplying firms as well as the number and preferences of customers43Following the discussion with Advisory Board members, the SCP paradigm was chosen overother alternatives because it constitutes a comprehensive framework that allows capturing andstudying the interdependencies between sector characteristics and firms’ behaviour.80

e-Business in the Retail Sectorand their size in case of businesses. An important aspect of market structure dynamics isthe level of ease of market entry. Further industry structure characteristics are related toproducts, production and production factors: the degree of product differentiation, thedegree of vertical integration of production, i.e. value chain characteristic, thetechnologies available to the firms, the firms’ cost structure (i.e. the relative importance ofcosts for items such as production facilities, energy, personnel), and finally the workforcecomposition and the demand for labour, most importantly with regard to knowledge andskills. All these characteristics determine the level of competition in the industry.These industry structure components influence a firm’s conduct. The conduct aspectsmost important here are production strategies, particularly with regard to inter-firmcollaboration, as well as investments in ICT and in ICT-enabled innovation. Finally, afirm’s performance is assumed to be the outcome of its conduct. Successful innovationsimprove firm performance by, for example, reducing production cost, increasingproductivity, improving product quality or enabling it to enter new markets. This mayeventually lead to increased sales, turnover and market shares.Extending the SCM paradigm: feedback effectsIn contrast to the standard SCP paradigm, the flow of causality is in fact not onedirectional(Fauchart and Keilbach 2002). As an example of feedback betweenperformance and industry structure, successful and innovative companies are more likelyto grow and increase their market share at the expense of less progressive firms, whichtransforms the market structure. There may also be feedbacks between conduct andindustry structure: For example, depending on the innovation type – i.e. product orprocess innovation, ICT-enabled or not –, innovations influence the choice of productsmanufactured and a firm’s cost structure. Innovations may also change the incentives toperform activities in-house versus outsourcing them and, consequently, may influence thedemand for labour and its composition. It may also further shape the relationships withsuppliers and customers, for example with regard to collaboration intensity. Thus, in thefollowing discussion it is assumed that firm performance may have a feedback effect onboth firm conduct and industry structure, and conduct may have a feedback on structure.This conceptualisation allows for an enhanced economic approach that studies thedrivers 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 adoptionStructureStructureConductConductPerformancePerformanceMarket Market / / firmfirmcharacteristics:characteristics:- - MarketMarketstructurestructure- - TechnologyTechnology- - Value Value chainchainICTICTICT ICT enabledenabledadoptionadoptioninnovationinnovationFeed-back loopsPerformance:Performance:- - ProductivityProductivity- - TurnoverTurnover- - Market Market shareshareSource: e-Business Watch/DIWExhibit 4.4-1 illustrates the SCP paradigm together with the causality relationships of theelements studied in this sector report. The extended SCP paradigm defines the two81

e-Business in the Retail Sectordimensions of the forthcoming analysis. First, the extended SCP paradigm identifiesmarket structure and firm characteristics that drive the diffusion of ICT and the process ofturning ICT use into marketable products and production processes, i.e. ICT-enabledinnovations. 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 impactsThe SCM paradigm allows one to identify firm and industry dimensions that can beconsidered 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 ICTdrivers: market rivalry, supplier-buyer relations and workforce composition. The impact ofICT adoption and ICT enabled innovation is studied through productivity and employmentas proxies for firm performance. This construct enables the understanding of not only unidirectionalcausal relationships but recognises the presence of firm performanceimpacting upon the drivers of ICT adoption.4.2 ICT and productivityThis section will specifically analyse to what extent ICT-capital investments have effectson productivity growth (as compared to other factors) in the retail industry. With referenceto the Structure-Conduct-Performance framework (see introduction to this section), theanalysis in this section focuses on the links between conduct (ICT adoption andinnovation) and performance.Exhibit 4.2-1: Scope of the analysis in Section 4.2Structure Conduct PerformanceMarket / firmcharacteristicsICTadoptionICT enabledinnovationPerformanceindicators(productivity)Section 4.2Source: e-Business Watch/DIW4.2.1 Background and hypothesesEmpirical findings on ICT and productivityIn knowledge-driven and globalised market economies, increasing productivity isconsidered as crucial for sustained competitiveness and growth. Studies on the impact ofICT confirm productivity increasing effects in both the user sectors and in the ICTproducing sectors (Oliner and Sichel 2000). In particular, ICT was found to have positiveeffects on labour productivity and total factor productivity (Pilat 2005). An importantfinding is, however, that ICT-induced productivity effects vary significantly betweensectors and among countries (Nordhaus 2002). Recent research suggests that thelargest productivity growth effect occurs in the ICT-producing sectors themselves, and inselected service industry sectors like banking, wholesale, retailing, and tele-82

e-Business in the Retail Sectorcommunication (Inklaar, Timmer et al. 2007; Jorgenson, Ho et al. 2007; Jorgenson, Ho etal. 2007)Findings from case studiesFindings 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. Casestudies 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 inincreased 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 solutionenabled employees to faster process customer check-outs. The second effect wasfelt by the sales force which was able to increase productivity through betterinformation availability.Productivity gains at Globus (section 5.3) were achieved through streamlinedprocurement processes across the various in-store locations and across the wholegroup of outlets.Brooklands Plus Products/Dirk van den Broek (section 5.3) was also able toincrease productivity mainly through efficiency gains. Examples include enhancedpromotion management efficiencies, due to the attainment of full visibility into stocklevels,purchasing, receiving and delivery processes from the adoption of the stockmanagement solution.ICT-capital investment and total factor productivity growthFor 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 toproductivity growth at firm-level by itself. It depends on how the technology is actuallyused in business processes, i.e. on a company's ability to innovate its work processesand business routines with support of ICT. Thus, only if ICT investment is combined withcomplementary investment in working practices, human capital, and firm restructuring willit have an impact on performance (Brynjolfsson and Hitt 2000). These complementaryinvestments and organisational changes are highly sector and firm-specific; therefore,returns from ICT investments vary strongly across organisations (Pilat 2005). The needfor 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) reportthat the pure installation of a technical system bears little return on investment withoutbusiness process reorganisation and support from users and management. Second, ithas to be considered that outsourcing is an organisational innovation which can changefirm-level productivity (Erber and Sayed-Ahmed 2005).Notwithstanding these considerations, the first step of the analysis is to assess thecontribution 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 andproductivity 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 intoICT but also into complementary items in order to increase productivity. A certain part ofsuch complementary investment is linked with total factor productivity (TFP). TFP83

e-Business in the Retail Sectorrepresents output growth not caused by input growth. The attribute “total” refers to theunknown complete set of influencing factors. TFP effects may be caused by numerousfactors, e.g. organisational changes in the company such as outsourcing that lead toimproved workflows and increased productivity. 44 Thus one can assume that ICT capitalinvestment has become a key driver of total factor productivity (TFP) growth. This will betested as a second hypothesis:Hypothesis P.2: Total factor productivity growth in the retail industry has acceleratedtogether with increased investment in ICT-capital.Another important factor that may influence the extent to which ICT enables productivitygrowth is the complementarity between ICT capital and skills. A large body of literatureon skill-bias in technical change supports the finding that technical change is biasedtowards skilled workers, reducing demand for unskilled labour and increasing wageinequality and polarisation (Acemoglu 2002). The impact is clearly visible in today'sadvanced economies; unskilled jobs have long been declining in absolute terms inEurope and growing only slowly in the US, while skilled jobs for educated workers arebeing created at a faster pace in most countries (Pianta 2004). ICT tends to be a skillbiasedtechnology and, thus, the application of ICT may increase the demand and wagesfor skilled labour and decrease the same for unskilled labour. The analysis will thereforefocus on the interdependence of ICT investments with skills requirements in the retailindustry. This will help to understand the impact on employment dynamics in a morenuanced way than just assessing the net impact on total sector employment. Thefollowing hypothesis addresses this issue.Hypothesis P.3: ICT and high- and medium-skilled labour have a positive impact onlabour 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 ofdifferent factors to it by means of growth accounting (section 4.2.2).An analysis of the development of labour productivity growth and the contributionof 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 confirmedor not (section 4.2.4).Database: EU KLEMSThe empirical analyses are based on data from the EU KLEMS project. KLEMS standsfor “Capital, Labour, Energy, Material and Services”, indicating the domains for which theproject 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 bycountry and only for a subset of the EU-27, typically EU-15 or less. EU KLEMS provides44In terms of calculation, TFP is a residual between growth of an output indicator, like gross valueadded or gross production value, minus an aggregate index of factor inputs such as labour andcapital, weighted by their respective factor shares. TFP is also named ‘Solow residual’, becauseRobert Solow (1957) was one of the first economists who pointed out the significance ofdisembodied technical change for economic growth opposite to the classical view that inparticular capital accumulation, i.e. embodied technical change, is the key driver of growth.84

e-Business in the Retail Sectorcountry 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 thisreport, it is however not insightful to describe and interpret these country findings indetail. Country differences may be due to numerous different characteristics of thenational retail industries, e.g. overall number of firms and employees, number of firmsand employees by size class, composition by sub-sectors, target markets, exceptionalnational business cycles, trade union power, national industry policy, and large-scalemergers in certain periods of time.4.2.2 ICT impact on value added growthGross value added growthExhibit 4.2-2 shows the annual average growth rates of gross value added (GVA) in theretail industry for three different time periods (1980-1995, 1995-2000, 2000-2005).Growth rates were found to be predominantly positive. GVA varies greatly amongcountries and there are few consistent trends. For example, Greece, Sweden and the UKfeature an increasing and positive trend, France a declining but positive one. Anaccelerating retailing boom occurred in Ireland from 1995 onwards with 6% growth in theperiod 1995-2000 and 8.7% in the period 2000-2004. Only four countries haveexperienced negative values, all of them only in one of the three sub-periods andpredominantly 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 addedGrowth accounting is a familiar approach to study the contribution of different factorinputs on overall output growth. Using standard techniques (Jorgenson, Gollop et al.1987) the following decomposition of the real gross value added for eleven EU MemberStates (see Exhibit 4.2-3 below, and Table A-1 in Annex 2) is obtainable. For the period1995-2004, strongest overall growth in value added can be observed in Finland with4.5%, followed by Sweden with 4.2%, the UK with 3.7% and Spain with 3.2%. Austriawith 2.5% and the Netherlands with 1.8% have experienced significantly lower growth. InFrance 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.85

e-Business in the Retail SectorExhibit 4.2-2: Growth of gross value added in retailing, 1980-2004-2 0 2 4 6 8 10Austria0.41.94.0Belgium- Kingdom3.33.44.81980-19951995-20002000-2004Source: EUKLEMS data base, GGDC; own calculation86

e-Business in the Retail SectorExhibit 4.2-3: Retailing in selected EU Member States, growth accounts for gross valueadded for 1995-2004 (contributions in percentage points)-3 -2 -1 0 1 2 3 4 5 60.20.2Austria0.30.51.3Belgium- Kingdom0. hours worked Labour composition ICT capital Non-ICT capital Total factor productivitySource: EUKLEMS data base, GGDC; own calculationThe most dramatic sources for differences relate to the total factor productivity growthdifferentials between the Member States. While Finland and Sweden experienced highTFP-growth with 3.2% and 3% respectively over the nine years, Italy and Denmark facedan average annual decline of 1.4%. For all EU-countries with the exception of Germanywith -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 even87

e-Business in the Retail Sectormore, for example in Luxembourg with 2% and the UK with 1.4%. Overall, non-ICTcapitalinvestments contributed positively on the growth performance in retailing. It wouldbe interesting to study these differences in greater detail, in particular the differentretailing sub-sectors, to understand how much thein-the-box-effect” (discussed above)and shifting expenditures to different consumer goods and service classes contributed tothese results and might explain the differences between the US and European ICTimpacts.Furthermore, stricter regulations on the establishment of superstores and factoryoutlet centres in many European countries might cause impediments towards a moreconcentrated market structure in retailing when compared to the US. These results lendlittle support to the hypothesis that ICT-capital investments contributed most to positiveoutput growth in all European countries.Looking at the impacts of labour compositional change, one observes that the labourquality change component from low-skilled towards medium- and high-skilled labour gavepositive 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% andother countries like Denmark with 0.06%, Germany with 0.03% and Finland with 0.01%. Apotential cause could be the different stages the various countries are in whentransforming their retailing industry.In contrast the change in total working hours gives a mixed picture for the differentcountries: Italy with -0.61%, Germany with -0.35% and Sweden with -0.1% experienced amoderate decline in overall working hours. Only Spain with 2.13% and Denmark with1.37% experienced a significant increase in total working hours resulting in a significantcontribution to the growth of the retailing industry.Conclusion: TFP key driver of retail industry growth – ICT less importantThe results from this growth accounting exercise indicate that the key drivers to industrygrowth come from total factor productivity growth. In some countries it comes fromincreases in total working hours and labour quality changes. ICT-capital investmentsare not key drivers in the growth of real value added in European retailingindustries. The same applies to non-ICT capital investments. The stronger total factorproductivity growth and changes in labour quality composition are, the better is thecountries’ performance in retailing. Extending working hours, most possibly associatedwith longer opening times of shops, e.g. late hours during weekdays or longer openinghours during the weekend, may have played a role in this development wherederegulation might have helped to increase overall growth of gross value added.However, the EU KLEMS database does not offer sufficient data to analyse theseaspects in retailing on a solid empirical basis.4.2.3 ICT impact on labour productivity growthLabour productivity growthAccording to literature, the resurgence of productivity growth in the US economy did notlast beyond the year 2000 or is not directly related to actual ICT investments (Gordon2004; Jorgenson, Ho et al. 2007). Europe overall even did not show any acceleration inproductivity growth similar to that which happened in the US in the second half of the1990s (Inklaar, Mahony et al. 2003). Retailing has been identified as a key driving sector88

e-Business in the Retail Sectorwhere intensifying ICT-capital usage contributed significantly to aggregate labourproductivity growth acceleration in the US (van Ark, Inklaar et al. 2003). Therefore thisstudy analyses the particular developments and factors which led, in the 14 MemberStates included, to fairly different overall outcomes than that expected when the LisbonAgenda was set up in 2000. At this time a similar resurgence of productivity growth due toICT investments as in the US was considered to take place in Europe as a catching-upprocess to the US as leader in development from the year 2000 onwards.Based on the EU-KLEMS-Database a decomposition of annual labour productivity growthrates for 14 EU Member States for the periods of 1980-1995, 1995 -2000 and 2000-2004shows two main characteristics: a significant heterogeneity of growth rates (see Exhibit4.2-4. below, Table A-2 in Annex 2) and positive labour productivity growth in almost allcountries and in all periods. Very high average sustained annual labour productivitygrowth is observed in very few countries like the UK and Sweden and less pronounced inPortugal and Ireland, with average annual rates above 2.5% for the whole time period1980-2004 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 theliterature which focused on the US experience. This gives some evidence that aninsufficient rapidly convergence in the retailing industries in the EU and Eurozone prevailseven after introducing the common currency.Employment growth and average working hours per employeeLabour productivity growth based on working hours can be decomposed in the twocomponents of employment change and changes in average working hours peremployee. As the two following Exhibits 4.2-5 and 4.2-6 show, most countriesexperienced positive employment growth over the whole period 1980 until 2004.However, this was accompanied by significant decreases in average working hours inmost countries.This development is attributable to an increasing tendency in retailing to substitute fulltimeemployment of employees by part-time employment. However, one would needmore 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 inonly 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 1995-2000and in Spain 2000-2004.The low-skilled employees are most likely the ones who had to accept more and morepart-time jobs. By this, the relative skill-premium of medium- und high-skilled employeesin retailing increase is twofold. They have a greater chance to get a full-time job and dueto 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. Thegrowing income gap between low- and medium to high-skilled workers consists thereforeof two components. A higher probability to obtain full-time employment and higher wagesand salaries because of the skill-advantage. The two trends observed in retailing aretherefore amplifying each other.89

e-Business in the Retail SectorExhibit 4.2-4: Labour productivity growth in retail, 1980 – 2004 (annual average growth rates)-4 -2 0 2 4 6 8Austria0.21.83.4Belgium- Kingdom3.12.73.41980-19951995-20002000-2004Source: EUKLEMS data base, GGDC; own calculation90

e-Business in the Retail SectorExhibit 4.2-5: Employment growth in retailing, 1980 – 2004 (annual average growth rates)-1 0 1 2 3 4 5 6Austria0.30.81.2Belgium-0.1-0.21.0Denmark- Kingdom0.41.31.61980-19951995-20002000-2004Source: EUKLEMS data base, GGDC; own calculation91

e-Business in the Retail SectorExhibit 4.2-6: Average working hours per employee in retail, 1980 – 2004 (annual averagegrowth rates)-3 -2 -1 0 1 2Austria-0.7-0.5-0.1Belgium-0.6-0.60.1Denmark0.2-0.41.1Spain-0.6-0.30.1France-0.9-0.7-0.9Germany-0.9-1.1-0.7Greece-0.1-0.10.0Ireland-2.1-0.8Italy-0.4-0.2-0.6Luxembourg- Kingdom-0.3-0.5-0.11980-19951995-20002000-2004Source: EUKLEMS data base, GGDC; own calculation92

e-Business in the Retail SectorCalculating the impact of ICT on labour productivity growthTo analyse the causes for labour productivity change in the retail industry, a stochasticproduction possibility frontier (SPF) was estimated. As for the growth accounting, theanalysis is based on data from the EU KLEMS database, in particular on secondaryintermediate inputs as well as on the two primary input factors capital (broken down intoICT and non-ICT capital stock) and labour (measured by working hours, separatelyreported for high-, medium-, and low-skill categories). In this way the analysts were ableto estimate a stochastic production possibility frontier for the retail industry from 1995 until2004 in 16 EU countries. 45As a particular specification we used the error component model (Battese and Coelli,1992), in which the parameters of a specified production function are estimated whileparts of the observed deviations are also explained by systematic differences in technicalefficiency across different countries (see appendix for details). To ensure constant returnsto scale of the production technology output and input variables were normalised by totalworking hours (TWHs). 46 Thus, the estimated coefficients report the impact that differentfactor intensities (e.g. intermediate inputs per TWH) have on labour productivity,measured as gross output per TWH. To consider the potential impact of autonomoustechnical change a time dummy was included as additional variable. The estimationresults based on a Cobb-Douglas production function are summarised in the followingExhibit. 47Exhibit 4.2-7: Parameter estimates of a Stochastic Production Possibility Frontier (ErrorComponent Models) for the retail industry, 1995 – 2004Explanatory variables Parameters Standard error t-valueIntermediate Input per Total Working Hours 0.869 0.023 37.167ICT-Capital Stock per Total Working Hours 0.041 0.014 2.996Non-ICT-Capital Stock per Total Working Hours -0.034 0.021 -1.622Medium-Skilled WH per Total Working Hours 0.043 0.015 2.914Coefficients:Constant 0.164 0.021 7.717sigma squared 0.161 0.062 2.604gamma 0.976 0.010 98.369eta -0.020 0.006 -3.185Log-Likelihood 180.4No. of iterations 28Endogenous variable: Gross Production Value per Total Working Hour (TWH), based on EU-16 Country Panelincluding 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 (grossproduction 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 calculations454647Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Hungary, Italy,Luxembourg, the Netherlands, Poland, Slovenia, Spain, Sweden and the UK.This leads to an accordingly restricted stochastic production possibility frontier where the realgross production value per working hour is explained by six factor intensities using total workinghours as the denominator.See appendix for more details on technical specifications. For the econometric estimations weused the Frontiers 4.1 software package (Coelli, 1996).93

e-Business in the Retail SectorThe parameter estimates obtained are measures for the output elasticity of the respectiveinput factor, i.e. an increase of one unit of an input factor (e.g. ICT capital) increases theoutput variable (production value) by a certain number of output units. Hence, a highparameter value indicates a larger impact of the respective factor on labour productivitychanges. 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 followingprincipal results:The high output elasticity of 0.87 for intermediate input intensity is the dominantfeature of the analysis. This may be related to outsourcing of retailing activitieswhich implies a growing importance of intermediate input intensities. 50 For example,retail supply-chains may be restructured by outsourcing activities upstream towholesale as well as transport and logistics service providers. A concrete examplemay be a retail company that does no longer employ drivers and own lorries itselfbut buys transport services on demand.The ICT-capital intensity together with the medium-skilled labour intensitycontributes nearly at the same degree of 0.04, i.e. about 4% output elasticity. Itcannot be confirmed from our analysis if this co-movement is accidentally ornecessary. However, since high- and low-skilled labour intensities were found tohave no impact on labour productivity, 51 ICT-capital and medium-skilled-labourinputs could even be necessary ingredients – in the sense of capital-skillcomplementarily – to raise labour productivity growth.For the individual values, the lowest output elasticity was calculated for non-ICTcapital stock intensity, however statistically insignificant. The parameter for non-ICTcapital was even negative, indicating that an increase of non-ICT capital may haveled to a decrease of productivity.4.2.4 Conclusions: Minor ICT impact on growth of value added andlabour productivityWith regard to the three hypotheses concerning the role of ICT-capital that wereformulated in section 4.2.1, the analyses led to a twofold outcome. On the one hand thegrowth accounting exercise confirms that ICT-capital played a positive role for valueadded growth in all countries. On the other hand, the analysis based on a stochasticpossibility frontier revealed that probably the direct positive link between ICT-capitalinvestments and labour productivity growth is weak. Both exercises revealed that factorsother than pure ICT-capital growth appear to play a predominant role for labourproductivity growth in retailing: human capital inputs, organisational changes incorporatedin the total factor productivity growth, and outsourcing of non-core activities included inthe intermediate inputs. The key findings can be summarised as follows:48495051t-values above 2 assure by a rule of thumb this 5%-signficance threshold of the test.Parameters for low- and high-skilled labour were also insignificant but left out because theydeteriorated the quality of the estimation.See section 3.2, Exhibit 3.6-2 for findings about ICT outsourcing in retail firms.Considering high- and low-skilled labour intensities did not simply yield insignificant parameterestimates. In fact, the study team found that including them into the estimation evendeteriorated the overall fit or the estimations. Thus, they are not considered in the estimationresults as presented in Exhibit 4.2-7.94

e-Business in the Retail SectorResults for Hypotheses P.1-3:ICT-capital investments were no key drivers for growth of real value added inthe European retail industry between 1980 and 2004. Growth accounting suggeststhat the key drivers to value added growth in retailing came from total factorproductivity (TFP) growth, e.g. organisational changes.The intensity of investments in intermediate inputs was found to be the maincomponent of labour productivity growth. Investments in ICT capital as well asan increasing share of medium-skilled labour had a positive but small impact onlabour productivity growth.Considering literature findings, this outcome is not surprising. There may be significantdelays between the introduction of new technologies and related organisational changeson the one hand and impacts on productivity on the other. For example, an analysis forthe telecommunications industry (Erber 2005; Aral, Brynjolfsson et al. 2006) showed thatICT-impacts on total factor productivity growth happen at a later stage than when theinitial investments take place. The hypothesis that there is an instantaneous impact ofICT-capital investments on total factor productivity growth has to be refuted with regard tothe empirical analysis.With respect to the hypotheses formulated in section 4.2.1, the following conclusions canbe drawn: 52Exhibit 4.2-8: Results economic analysis ICT and value added growthHypothesesP.1 ICT-capital investment has become amain element in value added andproductivity growth in the retail industry,while other capital inputs summarised asnon-ICT-capital have diminished in theirrespective importance.P.2 TFP growth in the retail industry hasaccelerated together with increasedinvestment in ICT-capital.ResultNot confirmed. Growth accountingindicates that TFP changes played adominant role while ICT and non-ICTcapital inputs are less importantA production possibility frontieranalysis points at intermediate inputsas key drivers of labour productivitygrowth.=> ICT is a small driver, not the keydriver of growth in this sectorNot confirmed. There is noinstantaneous impact of ICTinvestment on TFP growth.(no)no!P.3 ICT and high- and medium-skilled labourhave a positive impact on labourproductivity growth.Weakly confirmed. ICT capital andmedium-skilled labour have a positiveimpact on labour productivity growth,but the impact is small. The impact ofhigh-skilled labour was found to beinsignificant in statistical terms.(yes)52For an overview of findings in other sectors see SeBW Report No. 10/2008 “an EconomicAssessment of ICT Adoption and its Impact on Innovation and Performance”, section 2.4,Exhibit

e-Business in the Retail Sector4.3 ICT and innovationThis 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 ofthe extended SCM paradigm, this question is related to the effects of industry structureon firm conduct. Second, how do ICT-enabled innovations affect firm performance andorganisational change? This question is related to the effects of firm conduct onperformance and industry structure.Exhibit 4.3-1: Scope of the analysis in Section 4.3Structure Conduct PerformanceMarket / firmcharacteristicsICTadoptionSection4.3.2.ICT enabledinnovationSection4.3.3.Performanceindicators (e.g.turnover)Source: DIW/empiricaSection 4.3.1 provides empirical evidence on innovation from the e-Business Survey2007. The following sections offer further insights to what degree specific factors arelinked with ICT-enabled innovation in the retail industry (4.3.2), and whether companieswhich conduct ICT-enabled innovation are likely to exhibit superior performance (4.3.3).In the Structure-Conduct-Performance framework (see introduction to this section), thisanalysis explores links between ICT adoption and ICT-enabled innovation, links betweeninnovation and performance.4.3.1 Survey findings about ICT and innovationIntroduction to the importance of ICT for innovationThe growing diffusion of ICT in all areas of business is a major enabler of technologicalchange, innovation and ultimately economic development. ICT-driven innovation activityis central to the subsequent effects of ICT economic impact. As a general purposetechnology, ICT can have effects on all innovation at all stages of the supply chain in theretail industry. RFID, for example, is a technology innovation that is transformingwarehouse management in retail firms.The links between the adoption of new e-business technologies and innovation arebroadly recognised. ICT investments in general and e-business applications in particular,enable and drive both product and process innovation. They are drivers of processinnovation, because ICT implementation, to be successful, typically requires changes inworking routines. In micro-economic terms, a product innovation corresponds to thegeneration of a new production function. A process innovation, on the other hand, can beviewed as an outward shift of an existing supply function, which corresponds to lowervariable costs in the production of an existing product or service, and is therefore aproductivity increase. Thus, ICT-driven technological change moves firms towards newtechnological trajectory.96

e-Business in the Retail SectorThe capability for innovation is an important factor in the retail industry due to macroeconomicissues including the excessive dependence on consumers and micro economicissues such as high competitive pressures. Considering these strong economically-drivenfactors, retailers should have incentive to use e-business and ICT to compete and betterreact to consumer desires. As the products sold are not transformed by the retailers, theinnovation potential within the industry is expected to originate mainly from processinnovations.Data from the e-Business Survey 2007In order to receive evidence about the role of ICT for innovation, the Sectoral e-BusinessWatch asked companies from the sectors studied in 2007 whether they had "launchedany 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 sameperiod 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 hadlaunched new or improved products in 2006/07. Firms representing 70% ofemployment, 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. With60% and 67% respectively, micro and large firms are the types of firms benefiting mostfrom ICT enabling innovative behaviour (although the 67% for the large firms is indicativedue to a small number of respondents). Overall though, fewer SMEs than large firmshave 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 moreopportunities 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 crucialrole 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’semployment said they introduced process innovation in the past twelve months. In firmsrepresenting 32% of employment, 36% of the process innovations were ICT-related, andin only 9% the process innovations were not ICT-related (see Exhibit 4.3-2). In microfirms again the share of firms innovating with ICT was smaller than in small, mediumsizedand large firms. Hence, there appears to be evidence for a relatively higherimportance of ICT for business processes innovations in larger companies. Comparedthe transport and logistics sector, the levels of overall process innovation and of ICTrelatedprocess innovation in the retail industry were found to be along the same lines.97

e-Business in the Retail SectorExhibit 4.3-2: % of companies having introduced product or process innovation (ICT enabledversus non-ICT enabled, 2007)Product/Service innovationsProcess innovations0 20 40 60 80 1000 20 40 60 80 100Retail (EU-7)1022Retail (EU-7)936Transport(EU-7)619Transport(EU-7)1132non-ICT enabled product innovationICT-enabled product innovationnon-ICT enabled process innovationICT-enabled process innovationThe 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 SeBWIn addition to the above discussed kinds of innovation, the e-Business Survey 2007asked companies about four types of organisational innovation: changes in corporatestrategy, management techniques, organisational structure, and marketing concepts.These types of innovation may need to accompany product or process innovation in orderto implement such innovations successfully, or they may be introduced self-sustained.Between 24% and 36% of retail firms report that they have introduced organisationalinnovations – see Exhibit 4.3-2. Of those innovations questioned, marketing andstructural innovations are most prevalent more than 1/3 of firms reporting changes in thepreceding 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 transportand 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/logisticssector are also lower than in the retail industry in the other three organisational innovationcategories (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 smalland medium-sized firms, while the levels for large firms were higher across all fourcategories.98

e-Business in the Retail SectorExhibit 4.3-3: ICT and organisational innovation (2007)Companies having introduced major changes ...in theircorporatestrategy inthe past 12monthsin theirmanagementtechniques inthe past 12monthsin theirorganisational structurein the past 12monthsin theirmarketingconcepts inthe past 12months% of % of % of % of % of % of % of % ofWeighting scheme:empl. firms empl. firms empl. firms empl. firmsRetail – 2007 total (EU-7) 24 16 25 18 36 24 30 23NACE 52.12, 52.3-5 (non-food) 26 13 28 16 38 23 38 23NACE 52.11, 52.2 (food) 25 22 23 23 32 28 18 22NACE 50.5, 52.6 (other) 17 25 15 28 35 26 12 19Retail – by size (EU-7)Micro (1-9 employees) 15 18 24 22Small (10-49 employees) 20 23 30 29Medium (50-249 empl.) 26 24 36 31Large (250+ employees) 35 32 48 38Other sectorsTransport & Logistics 21 17 19 14 37 23 18 13Base (100%) all firms all firms all firms all firmsN (Retail, 2007, EU-7+USA) 1151 1151 1151 1151Questionnaire reference D5a D5b D5c D5dThe survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,United Kingdom) and in the USA.Source: e-Business Survey 2007In a cross-sector comparison, the share of ICT-enabled process innovation within allprocess innovation is broadly in line (but at the lower end) with findings for othermanufacturing 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 forprocess innovation was found to be most important in the publishing and automotiveindustries. Differences are more pronounced for product innovation, obviously dependingon the nature of the goods and services produced. Notably in service industries such astelecommunications and transport and logistics, ICT are essential for the development ofnew products or services.99

e-Business in the Retail SectorExhibit 4.3-4: Cross-sector comparison: percentage of product and process innovations thatare ICT-enabledSectorManufacturingProduct innovation:% ICT-linkedProcess innovation:% ICT-linkedYear ofsurvey*Chemical, rubber, plastics 36% 73% 2007Food 15% 62% 2006Pulp and paper 34% 59% 2006ICT manufacturing 54% 70% 2006Steel 48% 64% 2007Furniture 44% 67% 2007Automotive 21% 86% 2005Pharmaceutical 18% 72% 2005Machinery & equipment 25% 66% 2005Publishing 65% 83% 2005Retail and servicesRetail 70% 81% 2007Transport and logistics 76% 75% 2007Telecommunications 86% 92% 2006* Surveys of 2005 and 2006 as well as Retail & transport/logistics 2007 include micro-firms with up to 9employeesData weighted by employment. Reading example: "Out of those companies in the food industry which said theyhad introduced new or significantly improved internal processes in the past 12 months, 62% said that at leastsome of these process innovations were enabled by ICT."Source: e-Business Surveys 2005, 2006 and 2007 by the SeBW4.3.2 Links between skills, e-collaboration and ICT-enabled innovationInternal capacityKnowledge 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 innovationperformance. Thus, in order to develop marketable products or feasible productionprocesses 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 complementaryassets include investments in software, training and organisational transformations thataccompany ICT investments. In other words, firms that combine high levels of ICT andhigh levels of worker skills have better firm innovation performance. Thus, the followinghypothesis can be formulated:Hypothesis I.1: Retail firms characterised by a higher share of employees with auniversity degree are more likely to conduct ICT-enabled innovations, in comparison withtheir peer-group in the same sector.The hypothesis was tested on the basis of the following data from the e-Business Survey2007:Question D2: "Have any of these product or service innovations been directlyrelated to or enabled by information or communication technology?" (asked tocompanies having introduced new products / services)100

e-Business in the Retail SectorQuestion D4: "Have any of these process innovations been directly related to orenabled by information or communication technology?" (asked to companies havingintroduced new processes)The main explanatory variable is the share of employees with a university degree. Toadditionally account for the effect of internal capacity on innovation, a variable controllingfor the presence of ICT practitioners was added. This should control for the effect of ICTspecificskills on a company’s innovative potential. The variables are based on thefollowing survey questions:Question G11: "Please estimate the percentage share of employees with a collegeor 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 employeeswith a university degree, a probit regression was run. 53 Exhibit 4.5-3 reports the results. 54Result for Hypothesis I.1:Skills matter: Changes in share of employees with a higher university degree positivelyaffect the likelihood of conducting ICT-enabled innovations. Similarly, employing ITpractitioners significantly increases firm’s propensity to use ICT to develop new productsand services. This finding provides further evidence that the success of the ICT-driveninnovative process depends on the availability and quality of complementary assets.Firm size is an advantage: Whereas firm age does not have any implications forconducting ICT-enables innovations, being an SME negatively affects the likelihood of afirm conducting such innovations. In other words, a large scale of operations might createan advantage that allows a firm to overcome the cost barrier associated with innovativeactivity.Exhibit 4.3-5: Effect of employee skills on ICT-enabled innovation activityIndependent variable a Coefficient Standard Error% of employees with higher universitydegree (G11)0.004** 0.002IT practitioners (E1) 0.864*** 0.106Less than 249 employees (Z2b) -0.343* 0.198Firm founded before 1998 (G2) 0.060 0.092Model diagnosticsN = 973R-squared = 0.09Note: Probit estimates. Table does not report country coefficients.Base: Firms with >250 employees, founded after 1998 and based in the USAaQuestionnaire reference. Dependent variable: D2 and D4* Significance 90%, ** Significance 95%, *** Significance 99%Source: Sectoral e-Business Watch, own calculations5354Probit regressions are used to estimate the effect of a set of explanatory variables on adependent variable that only takes on values of 0 or 1 (binary indicator variable).Coefficient estimates indicate how changes of dependent variables influence the dependentvariable. 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 timeperiod.101

e-Business in the Retail SectorIntra and inter-firm collaborationThere are indications that ICT has a direct impact on process innovation in companies byfacilitating links between different companies (Lee 2000). ICT-enabled interorganisationalsystems integration and collaboration may enhance the innovationcapabilities of companies by providing opportunities for shared learning, transfer oftechnical knowledge and exchange of information.The most obvious benefit of information exchange and integration with the help of ICT isthe optimisation of the value chain. Other, less obvious consequences for firms’innovativeness can be found in tacit and knowledge-based processes. There ICT allowscreating communication infrastructures facilitating production networks of knowledgeworkers or enables business partners to align the incentives of multiple players bycreating joint business units or facilitating the work of teams on the same tasks (McAfee2006).The use of electronic networks may lead to a higher probability of firms collaborating ininnovative 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 ICTapplications supporting information exchange and inter-firm collaboration constitutesnecessary input for ICT-enabled innovative output, i.e. re-engineered processes, newproducts or distribution channels.The e-Business Survey 2007 included a relevant question about inter-firm collaboration: itregards information sharing about inventory levels with business partners. In 2007,retailers comprising 15% of the sample population (employment weighed) said that theyshare information online about inventory levels with business partners (see Exhibit 3.3-7).Thus, the following hypothesis was formulated to test the assumed importance ofcollaborative applications for innovative output:Hypothesis I.2: Retail firms that use ICT applications to exchange information orcollaborate 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 inprevious section). Independent variables control for the use of the following: 55Question A7: "Does your company use a Supply Chain Management system?"Question B9: "Does your company share information on inventory levels orproduction plans electronically with business partners?"Question B10: "Does your company use software applications other than e-mail tocollaborate 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 thefollowing conclusions:55One could suspect that this hypothesis is tautological because the independent variables maybe included in the dependent ones. For example, if a company implemented an SCM system inthe past twelve months it would also state that it introduced new ICT-related processes in thepast twelve months. However, the share of such companies is unlikely to be large enough toconsiderably influence significance level, direction and strength of the relationship.102

e-Business in the Retail SectorResults for Hypothesis I.2e-Collaboration increases innovative output: The use of applications and practicessupporting the electronic exchange of information between companies positively affectsthe likelihood of conducting ICT-enabled innovations.Firm size is an advantage: Again, whereas firm age does not have any implications forconducting ICT-enables innovations, small firm size negatively affects the likelihood ofconducting 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 smallfirms. This result might indicate that the prevailing technology gap in terms of ICT usagemight negatively affect companies’ innovative capabilities.Exhibit 4.3-6: Effect of electronic collaboration with business partners on ICT-enabledinnovation activityIndependent variable a Coefficient Standard ErrorUse of SCM (A7) 0.410*** 0.112Share information electronically (B9) 0.489*** 0.101Less than 249 employees (Z2b) -0.453*** 0.160Firm founded before 1998 (G2) 0.063 0.083Model diagnosticsN = 1144R-squared = 0.06Note: Probit estimates. Table does not report country coefficients.Base: Firms with >250 employees, founded after 1998 and based in the USAaQuestionnaire reference. Dependent variable: D2 and D4* Significance 90%, ** Significance 95%, *** Significance 99%Source: Sectoral e-Business Watch, own calculation4.3.3 ICT innovation, firm performance and organisational changeICT-enabled innovation and firm performanceThe effects of ICT on corporate performance are not clear because not all studies havedemonstrated clear payoffs from ICT investments (Chan 2000; Kohli and Devaraj 2003).In addition, the results vary depending on how performance and ICT payoffs aremeasured and analysed. For example, one empirical study finds positive impacts of ICTinvestments on productivity, but not on profits (Brynjolfsson and Hitt 1996). Another studydid not find positive effects of ICT capital on productivity, while ICT labour positivelycontributed to output and profitability (Prasad and Harker 1997).These somewhat ambiguous results of the impact of ICT on corporate performance canbe explained if one drops the assumption that there is a direct link between ICTinvestments and corporate performance. The key to understanding the impacts of ICT onperformance is to view ICT as an enabler of innovation (Koellinger 2006).Indeed, Clayton and Waldron (2003), in a study on e-commerce adoption and businessimpact, find that businesses maintaining higher levels of new and improved product salesrelative to turnover achieve above sector average rates of sales growth, i.e. they increase103

e-Business in the Retail Sectormarket share. The effect is present in both manufacturing and service sectors. Thus, thefollowing 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 stayedroughly the same when comparing the last financial year with the year before?" Forquestions 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 thefollowing conclusions:Results for Hypothesis I.3ICT-enabled output positively related with turnover increase: ICT-enabled innovativeactivity positively affects the likelihood of a firm reporting a turnover increase. In otherwords, firms that introduced ICT-enabled innovations were more likely to haveexperienced a sales growth.Firm size and age irrelevant for positive turnover development: Firm age and size donot have any implications for positive turnover change. In light of the previous finding,ICT-enables innovations have a stronger impact on positive turnover development thanthe size and age of a firm.Exhibit 4.3-7: Effect of ICT-enabled innovation activity on turnover increaseIndependent variable a Coefficient Standard ErrorICT enabled innovation (D2, D4) 0.245*** 0.081Less than 249 employees (Z2b) -0.149 0.156Firm founded before 1998 (G2) -0.031 0.081Model diagnosticsN = 1144R-squared = 0.06Note: Probit estimates. Table does not report country coefficients.Base: Firms with >250 employees, founded after 1998 and based in the USAaQuestionnaire reference. Dependent variable: G9* Significance 90%, ** Significance 95%, *** Significance 99%Source: Sectoral e-Business Watch, DIW Berlin (2008)ICT diffusion and organisational changeICT diffusion may impact on a company’s organisation, i.e. the structure of and therelationships between departments within an enterprise. Organisational changes mayrelate to a rearrangement of functions, workflows and importance of departments andemployees working in them. Outsourcing also implies organisational changes; thissubject is however dealt with in the section about value chains below.ICT transformed the process of replicating business innovations acrossorganisations(Brynjolfsson, McAfee et al. 2006).Traditionally, deploying businessinnovation on a larger scale took time and required considerable involvement ofresources and employees. Today, ICT allows companies to embed business innovationsand then implement them across the organisation at a much lower cost than beforewithout compromising on quality. Every location or unit implements and follows all stepsof the new process in a way specified in the software design.104

e-Business in the Retail SectorThe copy-exactly strategy is particularly beneficial if the initial understanding of theprocess is low, the lifecycle is short and the process is difficult to improve(Terwiesch andWu 2004).This is true for manufacturing industries with rapidly changing productiontechnologies and intensive technological competition. In such industries the speed ofadoption of new production processes plays a decisive role for remaining at the cuttingedge. On the other hand, tools, such as email, knowledge management systems, wikis orinstant messaging, considerably improve the process of innovation in knowledgeintensiveand service-oriented sectors with informal, unstructured and spontaneous typeof work, such as banking (McAfee 2006). ICT facilitates firms’ innovativeness bypropagating innovations that are less structured than business processes. This leads tothe following hypothesis:Hypothesis I.4: ICT use in retail firms is positively correlated with organisationalchanges.The hypothesis was tested on the basis of the following data from the e-Business Survey2007:Questions D5a-d: "During the past 12 months, has your company introduced majorchanges in its corporate strategy / management techniques / organisationalstructure / marketing concepts?" 56In 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 afirm 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 theplacing or receipt of orders, ERM, SCM, CRM and the use of the internet to buy andsell goods.ICT human capital variable that controls for the presence of ICT practitioners.In addition, the regression includes dummy variables controlling for the percentage ofemployees with a higher university degree, firm size, age and country of origin. Toanalyse the relationship between ICT-enabled innovation and the use of electronic dataand information exchange between business partners, an ordered logit regression wasrun. 57Exhibit 4.3-8 reports the results of the regression. An analysis of the results leads to thefollowing conclusions:5657For each positive answer a firm scores one point. Consequently, the dependent variable takes avalue between “0”, if a company did not carry out any of the listed changes, and “4” if itundertook all of them.Similar to probit/logit regressions, ordered logit model is used when the dependent variable isordinal. In contrast, however, to probit/logit an ordered logit model can be applied if thedependent variable has more than two levels.105

e-Business in the Retail SectorResults for Hypothesis I.4ICT hardware of decreasing importance for organisational changes: Compared tosoftware, hardware endowment, measured in terms of network infrastructure usage andinternet access, does not have a large impact on the likelihood of introducingorganisational changes.Software use and IT practitioners drive organisational changes: The intensity of ICTapplications use and in particular IT-skilled employees are the major drivers oforganisational 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 sufficientcondition for business transformation. These are rather human skills combined withinnovative software that enable firms to rearrange their operations, functions andworkflows, i.e. find innovative ways of doing business. Hardware infrastructure, incontrast, is already a commodity that does not offer companies any potential to create acompetitive advantage.Exhibit 4.3-8: ICT use and organizational changeIndependent variable a Coefficient Standard ErrorInfrastructure index (A2, A3, A4) 0.005** 0.002Software index (A6, A7, B1, B3) 0.275*** 0.059IT practitioners (E1) 0.843*** 0.177% of employees with higher universitydegree (G11)0.002 0.003Less than 249 employees (G2) 0.021 0.328Firm founded before 1998 (Z2b) -0.212 0.156Model diagnosticsN = 706R-squared = 0.04Note: Ordered logit estimates. Table does not report country coefficients.Base: Firms with >250 employees, founded after 1998 and based in the USAaQuestionnaire reference. Dependent variable: D5* Significance 90%, ** Significance 95%, *** Significance 99%Source: Sectoral e-Business Watch, own calculation106

e-Business in the Retail Sector4.3.4 Overview of results on ICT and innovationSummarising 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 innovationHypothesesI.1 Retail firms characterised by a highershare of employees with a universitydegree are more likely to conduct ICTenabledinnovations, in comparison withtheir peer-group in the same sector.I.2 Retail firms that use ICT applications toexchange information or collaborate withbusiness partners are more likely tointroduce ICT enabled innovations,compared with their peer-group in thesame sector.I.3 ICT-enabled innovations are correlatedwith retail firms’ turnover.I.4 ICT use in retail firms is positivelycorrelated with organisational changes.ResultConfirmed: Changes in share ofemployees with a higher universitydegree as well as employing ITpractitioners positively affect thelikelihood of conducting ICT-enabledinnovations.Confirmed: The use of applications andpractices supporting the electronicexchange of information betweencompanies positively affects thelikelihood of conducting ICT-enabledinnovations.Confirmed: ICT-enabled innovativeactivity positively affects the likelihoodof a firm reporting a turnover increase.Partly confirmed: network infrastructureusage and internet access does nothave a large impact on the likelihood ofintroducing organisational changes,but software has.Yes!Yes!Yes!(yes)4.4 ICT and market structureThis section analyses ICT diffusion with respect to market structure. It focuses on twoquestions. First, does the structure of product markets and, in particular, the competitionaffect the pace of ICT adoption, i.e. firm conduct? Second, how does firm conduct withrespect to the technology adoption affect corporate performance in terms of the firm’smarket position?Exhibit 4.4-1: Scope of the analysis in Section 4.4Structure Conduct PerformanceMarket / firmcharacteristicsSection4.4.2ICTadoptionICT enabledinnovationSection4.4.3Performanceindicators(market share)Source: Sectoral e-Business Watch /DIW107

e-Business in the Retail Sector4.4.1 Survey findings on ICT and competitionFindings on the general competitive environmentThe e-Business Survey 2007 included a set of questions about the companies’perception of competition. 76% of the retail firms (representing 78% of employment) saidthat rivalry in the market is increasing – see Exhibit 4.4-2. There were no considerabledifferences between NACE groups and size classes in this assessment, and the valuesfor the chemicals and furniture industries are similar. However, the share of US steelfirms 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 otheritems asked, less than half of the steel firms agreed: “competitors’ actions are notpredictable” (41%), “production technologies change rapidly” (37%), “market position isthreatened by new entrants” (36%), “products and services become quickly obsolete inthe market” (17%).Exhibit 4.4-2: Retail market characteristics (2007)competitors’ actionsare notpredictableCompanies which agree that their…marketposition isthreatenedby newentrantsproducts andservicesbecomequicklyobsolete intheir marketmarketdemand isnotpredictablerivalry inthe marketisincreasing% of % of % of % of % of % of % of % of % of % ofWeighting scheme:empl. firms empl. firms empl. firms empl. firms empl. firmsRetail –total (EU-7) 41 47 45 49 30 36 52 60 78 76Non-food stores 43 50 50 49 38 40 54 61 82 77Food stores 42 35 36 45 16 24 48 55 75 75Other retailing 31 55 37 60 23 27 48 67 63 78Retail – USA 63 48 38 32 21 23 39 42 64 51Retail – by size (EU-7)Micro (1-9 empl.) 47 49 36 61 76Small (10-49 empl.) 50 49 35 50 85Medium (50-249 empl.) 45 38 36 46 80Large (250+ empl.) 38 40 30 44 77Other sectors (EU-7)Transport & logistics 47 54 44 55 21 22 48 55 73 75Base (100%) all firms all firms all firms all firms all firmsN (2007, EU-7+USA) 1151 1151 1151 1151 1151Questionnaire reference G8a-a G8a-b G8a-c G8a-d G8a-eThe survey was conducted in seven EU Member States (Germany, France, Italy, Spain, Poland, Sweden,United Kingdom) and in the USA.Source: e-Business Survey 2007ICT impact on competitionBesides the questions about the general competitive nature of the retail sector, retailfirms 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-sector108

e-Business in the Retail Sectorwith 54% compared to 38% of the food stores and 37% of firms in the other retailinggroup (see Exhibit 4.4-3). Retail firms of different sizes are affected on a similar level withslightly fewer small firms reporting an impact. Compared to the USA, European retailfirms report higher levels of competition in the sector due to ICT: 48% in the EU versus37% in the US.Exhibit 4.4-3: Retail firms stating that ICT has an impact on competition in the sector0 10 20 30 40 50 60Retail (EU-7)48Non-food stores54Food stores38Other retailing37Micro (1-9)48Small (10-49)39Medium (50-249)52Large (250+)50USA37The 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) = 1151Weighed by employment. Questionnaire reference: F4Source: e-Business Survey 2007Firms that stated that ICT affects competition in the sector were further asked about theextents 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. Thepicture is homogenous across all sub-sectors, firm sizes and in the US. The exceptionsare that only 17% of food stores report that competition has significantly increased due toICT and 78% of food stores think that competition has somewhat increased. More than10% of firms in the other retailing group and 12% of firms in the US even think thatcompetition has decreased due to ICT (see Exhibit 4.4-4).109

e-Business in the Retail SectorExhibit 4.4-4: Reported influence of ICT on competition (2007)0 20 40 60 80 100Retail (EU-7)34615Non-food stores38584Food stores17784Other retailing395110Micro (1-9)31655Small (10-49)34651Medium (50-249)28675Large (250+)40537USA375112competition has significantly increased due to ICT competition has somewhat increased due to ICTcompetition has rather decreased due to ICTThe 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, F5cSource: e-Business Survey 20074.4.2 Market structure and ICT diffusionIncreasing rivalry in the market might be another important factor that drives the adoptionof new technologies and innovation, as companies search for new opportunities to cutcosts by improving process efficiency or develop new products. Firms want to escapecompetition by innovating. This can be done by securing a monopoly position, whichmight stem from a successful innovation protected from imitating by means of a patent, atrademark, or a copyright. Furthermore, just by being the first in the market, a firm maysecure an unchallenged position by building up the necessary capacity to enjoysubstantial economies of scale, or strategic know-how.In order to investigate how strong the effect of market competition on the adoption of ICTis, 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 Survey2007:Question G8a: "Please describe the type of competition in your main market. Doyou agree that rivalry in the market is increasing?" (Independent variable.)110

e-Business in the Retail SectorIndex on ICT endowment, based on several variables on ICT usage, including: theuse of LAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of theinternet 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 thefollowing conclusions:Results for Hypothesis M.1:Increasing market rivalry drives ICT usage: The hypothesised relevance of increasingmarket competition for the intensity of ICT adoption was confirmed. In other words, moreintense competition forces companies to use innovative technologies to cut costs andlook for more innovative ways of conducting business.Firm size is an advantage: Again, firm size appears to have a considerably strong effecton the adoption of ICT.Exhibit 4.4-5: Market rivalry and the intensity of ICT useIndependent variable a Coefficient Standard ErrorIncreasing rivalry (G8a) 0.502* 0.260Less than 249 employees (G2) -2.428*** 0.437Firm founded before 1998 (Z2b) 0.290 0.224Model diagnosticsN = 1144R-squared = 0.08Note: OLS regression. Table does not report country coefficients.aQuestionnaire reference. Dependent variable: A2, A3, A4, A6, A7, B1 and B3* Significance 90%, ** Significance 95%, *** Significance 99%Source: Sectoral e-Business Watch, DIW own calculationDue to intense competition in the retailing industry between smaller traditional shops andlarge supermarkets and superstore chains a further concentration in retailing will mostlikely continue. Since sophisticated ICT-applications favour large retail chains oppositesmall ‘mom-and-pop’ shops, ICT in the retailing industry is changing the market structurein favour of large corporations. Additionally, the global access via the internet offers largee-commerce companies like Amazon, Ebay, Apple with iTunes the possibility to grabincreasingly significant market shares by fully integrated e-commerce supply chains fromtraditional book or media shops. Additionally, one should keep in mind that the regulatoryenvironment for the retailing sector still differs in particular for the possibility to set uplarger superstore and shopping centres across Europe. Therefore, some of the observedheterogeneity in retailing will be attributable to such regulatory impediments in somecountries to adjust to better and more efficient solutions elsewhere.4.4.3 ICT impact on market structureHistorically, distance to market and transportation cost limited the number of customers afirm could reach. At the beginning of the internet era, a common believe was that ICT ande-commerce were to eliminate the limitations of location and enable firms to expandregardless of geographical locations (Cairncross 1997).One example of how ICT allows firms to expand their operations and change marketstructure of existing markets, or create new ones, are entries of internet start-ups.111

e-Business in the Retail SectorAmazon or eBay are already icons of e-commerce that changed the landscape of theretailing industry. Though of a smaller magnitude, these effects hold for traditional shopsas well.ICT offers existing firms possibilities to expand their market reach, which consequentlyleads to market structure changes as well. This can be illustrated by the way ICT enablescompanies to cross boundaries of their markets and industries. An example for blurringlines between sectors and a possible thread for retailing comes from manufacturing firmslike Dell. These firms use ICT to surpass the whole retailing sector and to sell their goodsdirectly to customers instead of depending on a network of retailers. This leads to thefollowing 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 Survey2007: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 indexcomposed of answers to the questions regarding the internet connection type, the use ofLAN, WLAN, WWW, Intranet, Extranet, ERP, SCM, CRM, the use of the internet to selland buy goods and employing IT practitioners.Exhibit 4.4-6 reports the results of the regression. An analysis of the results leads to thefollowing conclusions:Results for Hypothesis M.2ICT enables firms to expand: The hypothesis that ICT enables firms to extend theiroperations was confirmed. Companies that intensively use ICT applications are likely totake advantage of their potential to increase their market reach and relative position tothe competitors.Firm age relevant for the positive development of market share: Firm age negativelyaffects a firm’s chances to increase its market share. This might indicate that youngerfirms tend to grow at the expense of their older competitors.Exhibit 4.4-6: The intensity of ICT use and change in the market shareIndependent variable a Coefficient Standard ErrorICT endowment(A2, A3, A4, A6, A7, B1, B3)0.044*** 0.017Firm founded before 1998 (Z2b) -0.371*** 0.131Less than 249 employees (G2) 0.002 0.263Model diagnosticsN = 1054R-squared = 0.02Note: Ordered logit estimates. Table does not report country coefficients.Base: Firms with >250 employees, founded after 1998 and based in the USAaQuestionnaire reference. Dependent variable: G7* Significance 90%, ** Significance 95%, *** Significance 99%Source: Sectoral e-Business Watch, own calculation112

e-Business in the Retail Sector4.4.4 Overview of results on ICT and market structureSummarising the results of the econometric testing of hypotheses on ICT and marketstructure, the two hypotheses were confirmed. The following table provides an overviewof the results.Exhibit 4.4-7: Results economic analysis ICT and market structureHypothesesM.1 Increasing rivalry in the retail market is adriver for the adoption of ICT.M.2 ICT endowment is positively correlatedwith a change of market share.ResultMore intense competition forcescompanies to use innovativetechnologies to cut costs and look formore innovative ways of conductingbusiness.Companies that intensively use ICTapplications are likely to takeadvantage of their potential to increasetheir market reach and relative positionto the competitors.Yes!Yes!4.5 ICT and the retail sector’s value chainThis section analyses ICT diffusion with respect to the retail industry’s value chain. Itfocuses on the question whether ICT use affects the firms’ decisions regarding ‘make orbuy’, i.e. outsourcing decisions. This question is related to the effects of firm conduct onindustry structure.Exhibit 4.5-1: Scope of the analysis in Section 4.5Structure Conduct PerformanceMarket / firmcharacteristicsSection4.5ICTadoptionICT enabledinnovationPerformanceindicators (e.g.profits)Source: Sectoral e-Business Watch /DIWTheoretical backgroundIn light of the transaction cost theory, decreasing costs of search, evaluation andmonitoring of suppliers should lead to a shift away from firms and toward markets as aform of organizing economic activity (Coase 1937; Williamson 1985). Consequently, theexpectations regarding the potential of ICT as technologies introducing innovative waysof doing business, re-shaping firm boundaries and changing the constellations of valuechains were enormous (Johnston and Lawrence 1988; Johnston and Vitale 1988;Milgrom and Roberts 1990; Fulk and DeSanctis 1995). The availability of powerful andcheap 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 marketparadigm argued that companies would reduce their dependency on hierarchy andoutsource business activities.113

e-Business in the Retail SectorSurvey findingsRetail firms in the sample were asked about their ICT outsourcing activities (see Exhibit4.5-2).Exhibit 4.5-2: Outsourcing of ICT services (2007)0 20 40 60 80Retail (total, EU-7)Non-food storesFood storesOther retailing56585349Micro (1-9 empl.)Small (10-49 empl.)Medium (50-249 empl.)Large (250+ empl.)45596367Retail (USA)45The 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) = 1151Weighted by employment. Questionnaire reference: E3Source: e-Business Survey 2007Outsourcing of ICT services increases with firm size: 49% of micro firms report that, in thepast 12 months, they have outsourced ICT services to external service providers whichwere 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 retailerswere relatively more active at outsourcing services in the past 12 months: 56% ofEuropean retail firms have outsourced ICT services while 45% of US retailers have doneso in the same period of time. Outsourcing in the non-food store is highest with 58% offirms doing it compared to 53% in the food store group and 49% in the other retailinggroup.Hypothesis testingTo test whether ICT leads to more market transactions in the analysed sector, thefollowing 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 Survey2007:Question G22: "Has your company outsourced any business activities in the past 12months which were previously conducted in-house?" (Dependent variable)114

e-Business in the Retail SectorIndex on ICT endowment, composed of answers to the questions regarding theinternet 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 ITpractitioners.Exhibit 4.5-3 reports the results of the regression. An analysis of the results leads to thefollowing conclusions:Results for Hypothesis V.1ICT intensity increases the propensity to outsource business activities: The moreadvanced a company is in terms of ICT use, the more likely it is to have outsourced somebusiness activities in the last twelve months. This provides support to the hypothesis thatICT enables companies to redefine their make-or-buy decisions and to outsourcebusiness activities that were previously done in-house.Exhibit 4.5-3: The intensity of ICT use and outsourcingIndependent variable a Coefficient Standard ErrorICT endowment(A2, A3, A4, A6, A7, B1, B3)0.052*** 0.015Less than 249 employees (G2) -0.332* 0.192Firm founded before 1998 (Z2b) -0.239** 0.109Model diagnosticsN = 1144R-squared = 0.04Note: Probit estimates. Table does not report country coefficients.Base: Firms with >250 employees, founded after 1998 and based in the USAaQuestionnaire 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 thehypothesis on ICT and outsourcing, as shown in the following table.Exhibit 4.5-4: Results economic analysis ICT and value chainHypothesesV.1 ICT endowment in retail firms ispositively correlated with outsourcing.ResultICT intensity increases the propensityto outsource business activities:Yes!4.6 Summary of impact analysisFindings of chapter 4 confirm that ICT and e-business have considerable impacts on theretail industry. The analysis in this chapter was conducted along four types of impacts:productivity, innovation, market structure, and value chains. The following conclusionswere drawn from an econometric analysis, the e-Business Survey 2007, case studiesconducted for this report and literature evaluation:Productivity: Results from other studies indicate that ICT-induced productivityeffects are most pronounced in the ICT-producing industry as well as in selectedservice industry sectors including retailing and wholesale. Evidence from the e-Business Survey shows that particularly the larger companies in the retail industryhave dynamically adopted ICT (see chapter 3). Growth accounting analysisconducted for this report (see section 4.2.2) suggests that ICT-capital investments115

e-Business in the Retail Sectorare not key drivers in the growth of real value added in European retailingindustries. Total Factor Productivity, which includes for example organisationalchanges, 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 thedatabase. As regards labour productivity, intermediate inputs intensity were foundto be the main components of labour productivity growth. This may predominantlybe due to outsourcing activity. ICT capital investments as well as the employment ofa large share of medium-skilled workers play a positive but minor role in labourproductivity growth (section 4.2.3). Overall, these findings indicate that ICT capitalinvestments alone are insufficient to significantly increase labour productivity. It maybe necessary to also invest into organisational changes and labour force training.Innovation: In the retail industry, the e-Business Survey 2007 found the impact ofICT to be mainly on process innovation but it also plays an important role in productand service innovation. Many case studies conducted for this report confirm thatICT can be considered as an enabler of innovation and positively impact on firmperformance, even if the impact cannot always be measured concretely. Aneconometric analysis found, firstly, that employing people with a university degreeas well as employing IT practitioners significantly increases retail firms’ propensityto use ICT to develop new products and services (section 4.3.2). Secondly, the useof applications and practices that support the electronic exchange of informationbetween companies positively affects the likelihood of conducting ICT-enabledinnovations (section 4.3.2). As regards innovation and firm performance, theanalysis found that ICT-enabled innovation is positively related with turnoverincrease irrespective of firm size and age (section 4.3.3). Secondly, ICT software isan important driver of organisational changes, while hardware apparently is not(section 4.3.3).Market structure: As regards the relationship between market structure and ICTadoption, the hypothesised relevance of increasing market competition for theintensity 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 industriesand markets and to increase the number of customers. In other words, ICT appearsto have notable impact on the retail market’s structure (section 4.4).Value chains: As regards outsourcing, the general expectations regarding thepotential of ICT to change value chains were enormous. The econometric analysisfound that ICT intensity indeed increased the propensity to outsource businessactivities (section 4.5).The following table (Exhibit 4.6-1) shows an overview of all hypotheses and results. Mostof the hypotheses were confirmed, but two hypotheses about ICT and productivity werenot:116

e-Business in the Retail SectorExhibit 4.6-1: Results economic analysis ICT and market structure…related to ICT and productivityHypothesesP.1 ICT-capital investment has been a main element in value added and productivitygrowth in the retail industry.P.2 TFP growth in the retail industry has accelerated together with increasedinvestment in ICT-capital.P.3 ICT and high- and medium-skilled labour have a positive impact on labourproductivity growth.…related to ICT and innovationI.1 Retail firms characterised by a higher share of employees with a universitydegree are more likely to conduct ICT-enabled innovations.I.2 Retail firms that use ICT applications to exchange information or collaborate withbusiness partners are more likely to introduce ICT enabled innovations.Result(no)no!(yes)I.3 ICT-enabled innovations are correlated with retail firms’ turnover. (yes)Yes!Yes!I.4 ICT use in retail firms is positively correlated with organisational changes. Yes!…related to ICT and market shareM.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 chainsV.1 ICT endowment in retail firms is positively correlated with outsourcing. Yes!117

e-Business in the Retail Sector5 Case studiesIntroduction and overviewThis report presents ten case studies of exemplary e-business practice in the retailindustry. The case studies illustrate and validate findings presented in chapters 3, 4 and6. References to these case studies are provided in the appropriate sections of thesechapters. Exhibit 5.1-1 provides an overview of the case studies and the topics covered inthese cases (structuring criterions being the supply chain category and firm size).Exhibit 4.6-1: Retail industry case studies included n this reportNo Company Country NACE Firm Size Topic Element1 Mercator Slovenia 52.1 Large2 Globus Germany3Brookland/ Dirkvan den BroekNetherlands4 AMJG Portugal52.12(47.19)52.1(47.1)52.48(47.42)LargeLargeSmall5 Casino Group France 52.2 Large6 4fitness Germany78Fleria FloralCreationsSmartSupermarketGreeceMalta9 EMPiK Poland10 Cyprus-PC.com Cyprus52.48(47.64)52.48(47.76)52.12(47.11)52.45(47.63) &52.47(47.61,47.62)52.48(47.41)MicroSmallMediumCompeting throughupstream supply chainmanagemente-procurementactivitiesSupply chainmanagement softwareCustomer relationshipmanagement to betterintegrate in-houseoperationsUsing customerrelationshipmanagement toimprove salese-marketing/e-salesChallenges whenadopting e-salesExperiences ofdeveloping an e-salesapplication fromscratche-supplye-supplye-supply/e-operationse-operationse-operationse-marketing/e-salese-salese-salesLarge Redeveloping e-sales e-salesSmallSource: Sectoral e-Business Watch (2007)Supply chainmanagement in asmall firme-supply/esalesRationale for selecting cases to studyThe 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 ishaving on these firms. The case studies were also specifically selected to illustrate and118

e-Business in the Retail Sectorvalidate topics dealt with in chapters 3 and 4 of this report. In detail, the followingstratified selection criteria 58 were applied:Firm sizes: all firm sizes should be included due to the firm size characteristics ofthe retail industry: by number of enterprises, the majority of firms in the retailindustry are micro and small firms; large firms are important in terms of value addedto sector; medium-sized firms are less important. This objective was achieved byincluding one micro (4fitness), three small (AMJG, Fleria Floral Creations andCyprus-PC.com), one medium-sized (Smart Supermarket) and five large firms(Mercator, Gobus, Brookland/Dirk van den Broek, Casino Group, EMPiK). This is arepresentative sample structure in terms of firm sizes.NACE categories: the case studies should cover as many different NACEcategories 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 instore), 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 salesnot in-store, stalls or markets). In terms of NACE categories, there is a slight biastowards the non-food group in terms of number of enterprises with six firmsoperating in this area: Cyprus-PC.com, Globus, AMJG, EMPiK, 4fitness and FleriaFloral Creations. Two firms, Smart Supermarket and the Casino Group, arespecialised food retailers. The two large multinational retailers included in the study,cover both, food and non-food retail formats hence the various format can beincluded in the respective groups. In terms of value added, the split is more evenwith the large firms making up for the low numbers in the food-group. No firm fromthe other trade group was included, although boundaries with internet trade arefluid: 4fitness, for example, has a very high percentage of internet sales and couldtherefore also be included in the other trade group as an internet firm.Experiences from different EU countries: a wide spectrum of EU countries shouldbe covered and especially countries not covered in the survey should be included.This objective was achieved by including six case studies from countries notcovered by the survey: Cyprus, Greece, Malta, Netherlands, Portugal, andSlovenia. The remaining case studies were done in countries covered by thesurvey: France, Germany and Poland. A secondary country objective was to includenew Member States such as Slovenia and small EU Member States such as Maltaand Cyprus which was also accomplished.Besides these stratified selection criteria, the case studies embrace the three supplychain elements (e-supply, in-house e-operations and e-sales) identified in theconceptual 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-supplyand e-operations) four cases explore e-sales and one case, Cyprus-PC.com covers allthree elements. The key argument for conducting the case studies however remains thatthe cases selected illustrate and validate topics dealt with in chapters 3 and 4. Thetopics are in line with the overall objectives of the SeBW: to (1) study and assess the58 Stratified sampling is a strategy whereby members of a sample are selected in such a way as to guaranteeappropriate 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 commonway.)119

e-Business in the Retail Sectorimpact 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 examplesillustrating the impact of ICT and e-business on enterprises. While the impact on theretail industry is discussed in detail in Chapter 4, the case studies purposivelyillustrate effects on individual enterprises. The cases for example show how theadoption of ICT and e-business solutions can positively affect productivity byincreasing efficiency of employees (e.g. AMJG and Casino Group). The Globuscase study on the other hand illustrates that business process reengineering isnecessary to achieve a measurable return on investment from ICT uptake.Brookland Plus Products in contrast decided to adapt the ERP solution adopted toexisting business processes rather than adopting business processes to thesolution adopted. The different enterprise-level effects are incorporated in greaterdetail in chapter 4.Barriers to e-business: the case studies illustrate numerous barriers to e-businessand ICT uptake among European retailers. Especially barriers to e-sales areabundant: 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 andnon-food groups) and EU countries (e.g. Cyprus, Poland, and Malta) experiencesignificant problems with selling over the internet. With the exception of one firm,4fitness, the proportion of online sales measured by the total sales volume remainslow (usually between 1 % and 10%) in European retail firms. Barriers to increasinge-sales include cultural issues such as customers not being prepared to order overthe internet (Cyprus-PC.com and Smart Supermarket), problems with integratingthe e-sales channel into the overall business strategy (EMPiK and Fleria FloralCreations), product suitability for e-sales (Fleria Floral Creations), and finding asuitable online strategy (Smart Supermarket). The case studies also highlight otherissues that retailers come across when implementing e-business solutions. In largefirms, 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 barrierfor application usage. Overall, the case studies illustrate barriers for all threeelements of the supply chain supporting the survey findings relating to e-businessbarriers presented in Section 3.7.Public policy challenges: the case studies provide policy makers with real-lifeexamples of ICT and e-business effects and barriers. Policy makers can useinsights gained from the case studies to, for example, show how policyrecommendations could support individual European enterprises in increasingproductivity which, in turn can positively affect retail industry productivity and theEuropean economy.The following sub-sections 5.1 to 5.10 comprise the ten case studies conducted for theSeBW retail industry sector study.120

e-Business in the Retail Sector5.1 Mercator, SloveniaAbstractWith a share of 36% in the Slovenian fast moving consumer goods market, Mercator isone of the largest commercial chains in South-Eastern Europe. In 1999, it launched aproject to introduce e-commerce into its upstream supply chain management. Softwareand hardware solutions for the exchange of electronic business messages betweenMercator and its suppliers have been specifically developed for the company. Theelectronic exchange of business messages has helped Mercator to improve workorganisation and the efficiency of its procurement process, cooperation with suppliers,and control over its stocks. One of the solution providers also successfully sells thesolution on the market to other companies. This contributes to the expansion of e-commerce across Slovenia and abroad. The case study provides an educative lessonabout the importance of having one unified ERP system in a company, its dependantcompanies and subsidiaries for an efficient implementation of e-commerce.Case study fact sheetFull name of the company:Location (headquarters / main branches):Poslovni sistem Mercator, d.d., (BusinessSystem Mercator Ltd.)SloveniaNo. of employees: 12.957SectorMain business activity:Retail tradeRetail sale of food, fast moving consumer goods,technical equipment, furniture, constructionmaterials, textile goods, cosmetics and sportsequipmentPrimary customers: Consumers, Petrol 59 , Istrabenz Turizem 60 ,Slovenian government 61Year of foundation: 1949Turnover in last financial year (€): 1.609.832.000Most significant market area:Main e-business applications studied: *SloveniaTIE EP, eb-MANAGER, e-SERVICE Client5.1.1 Background and objectivesPoslovni sistem Mercator (refererred to as Mercator hereafter) is the controlling companyof the Mercator Group 62 which is one of the largest commercial chains in South-EasternEurope. It sells fast moving consumer goods, technical equipment, furniture, constructionmaterials, textile goods, cosmetics and sports equipment in Slovenia. Mercator has beenconfronted by severe market conditions after Slovenia entered the EU in 2004. Foreign59606162Oil company; food products and other items are sold over Petrol filling stations.Tourist company.Mainly the Ministry of Defence and the Ministry of Education and Sport.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-tradingcompanies concerned with the production of food and beverages, market research and marketintervention in the domestic and foreign markets, planning, engineering and technicalcounselling on building shopping malls.121

e-Business in the Retail Sectorcompetition has been on the increase since 1991 when Spar, a large Austriancommercial chain, opened its first stores in Ljubljana, followed in 2000 by Leclerc, aFrench commercial chain. Additionally, in 2005, a foreign discount chain Hofer enteredthe Slovenian market, followed by the German retailer Lidl in 2007. In 2006, Mercatorheld 37% of Slovenian market of fast moving consumer goods, while its main rival SparSlovenia 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 fastmoving consumer goods and food industry at the end of the 90’s, Mercator started tointroduce e-commerce into its upstream supply chain management. In 1999 it launched aproject called “Introduction of Electronic Data Interchange into Procurement Processes”.The main goal of the project was to introduce electronic exchange of business documentsbetween Mercator and (domestic and foreign) suppliers of fast moving consumer goodsand cosmetics. The solution had to be compatible with standards already in use by othercompanies in European Union, since many of the company’s business partners are fromabroad. It should enable the exchange of the following six types of documents:Orders: buyer-generated documents that authorise a purchase transaction; whenaccepted by the seller, they become a binding contract between both partiesInventory reports: lists of goods and materials stockedOrder confirmations: documents informing a purchaser that an order has beenreceivedDespatch advices: documents sent by a consignor or seller to the consignee orbuyer that the ordered goods are ready to be shipped, or have already beenshipped; also called dispatch notesReceipt advices: documents sent by the receiver, i.e. buyer, to the seller to confirmreceipt of items and to report on shortages or damaged items andInvoices: a commercial document issued by a seller to a buyer indicating thatpayment is due from the buyer to the sellerAccording to the plan, business-to-business (B2B) e-commerce should first beimplemented between Mercator and its suppliers, and then between other companies inthe Mercator Group and their suppliers. The aim was to reduce the amount of manualwork needed for data processing; to bring down the number of mistakes made in theordering process; to reduce the required warehouse space; and to speed up the flow ofgoods between the suppliers and its warehouses. This in turn would increase thecompany’s competitiveness, through lower procurement and storage cost. Itscompetitiveness would be especially boosted, if it was the first trading company with thiskind of solution on the Slovenian market, since it could make the biggest profit gains fromlower procurement and storage costs compared to its competitors. The company wasinitially persuaded to introduce e-commerce by one of its suppliers, Procter & GambleSlovenia63. The latter wanted to simplify the exchange of documents with its customers(including Mercator), because it would help its production planning. It even paid Mercatora commission for electronic exchange of documents, since it calculated that the savings63Slovenian subsidiary of Procter & Gamble, a multinational manufacturer of product rangesincluding personal care, household cleaning, laundry detergents, prescription drugs anddisposable nappies.122

e-Business in the Retail Sectorwill outweigh the costs. This has later become a common arrangement in e-commercebetween Mercator and its suppliers of fast moving consumer goods and cosmetics.At the moment only orders, order confirmations and inventory reports have beenintroduced in B2B e-commerce between Mercator and its suppliers. They are also used ine-commerce between Mercator and two non-trading members of Mercator Group - Eta 64and Mercator Emba 65 , and between Mercator H (another member of Mercator Group) andits suppliers. The despatch advice has only been used in wholesale business to customer(B2C) e-commerce between Mercator and Petrol. The introduction of electronic exchangeof despatch advices, receipt advices and invoices in Mercator’s supply chain is stillpending.5.1.2 e-Business activitiesTiming of the activitiesThe 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 forautomating the procurement process. It enables the transfer of electronicdocuments over a private network called ATbizNET/Panteon.net business network.2000: Mercator launches a pilot, testing the exchange of orders and inventoryreports over ATbizNET/Panteon.net with Procter & Gamble. The test phase isconcluded after one month, after which the solution is put into practical use.2001: Mercator extends the electronic exchange of orders and inventory reportsover ATbizNET/Panteon.net to 9 other suppliers of fast moving consumer goodsand cosmetics.2002: Electronic order confirmation is introduced into e-commerce betweenMercator 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 areoffered as alternative solutions to the suppliers. e-Service enables automaticconversion 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 withinformation system of Mercator. Suppliers using this service are automaticallyalerted via e-mail or SMS whenever Mercator’s ERP system produces an order forthe supplier. The supplier can then view the order over the portal and use the portalto send order confirmations.2003: Practice shows that new entry fields (for entering the buyer’s firm, function ofthe contact person, name and surname of the contact person etc) are needed forthe electronic business documents. Therefore they are added to GS1 EANCOMmessage definitions of electronic order and order confirmation. B2B e-commerce isimplemented between three other members of Mercator Group (MercatorGorenjska, Mercator SVS, Mercator Dolenjska and Mercator Goriška) and theirsuppliers. These companies are then annexed by Mercator in 2004 and 2005. Atthe end of 2003 the company is involved in B2B e-commerce with 50 suppliers.6465Food producer.Food producer.123

e-Business in the Retail Sector2004: Mercator expands electronic document exchange to 100 suppliers. Electronicdata exchange with the Statistical Office of the Republic of Slovenia is alsointroduced in 2004. The company’s ERP system automatically compiles reportsabout the company’s commerce with other companies within the EU from archivedelectronic business documents. These reports are automatically sent overATbizNET/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 andPetrol. Mercator expands electronic exchange of documents to 150 suppliers.2007: Mercator expands electronic exchange of documents to more than 200suppliers.The solutions described have mainly been adopted by suppliers of fast moving consumergoods and cosmetics. The number of suppliers involved in e-commerce is steadily risingfrom 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 ordemands to the suppliers that they have to use electronic commerce, if they want to stayin business. However, it has started to charge suppliers that were invited to join, but stilldo not conduct e-commerce, the cost for processing paper documents.Technology usedThis section briefly describes different technological solutions that have been developedfor e-commerce between Mercator and its suppliers. First the EANCOM standards usedfor electronic business documents are presented, and then software and hardwaresolutions (FULL_EDI, e-Service, WEB-EDI), including the network(ATbizNET/Panteon.net) over which e-business documents are exchanged.EANCOM Slovenia subset standardMessage definitions of order, order confirmation and inventory reports that are used inMercator’s e-commerce are based on GS1 EANCOM standards. The latter have beenchosen, because they are used by almost every large company in Europe. However, theyare very complicated, since they have been developed to cover the needs of everybranch in every detail. Therefore those EANCOM message definitions were simplifiedaccording to Mercator’s needs. In 2003, GS1 Slovenia formally granted the simplifiedversion of GS1 EANCOM standards developed for Mercator’s e-commerce the status ofEANCOM Slovenian subset standard.Full EDI solutionThe FULL-EDI solution is based on two applications:TIE EP, which translates e-business documents (orders and inventory reports) fromin-house standards used by Mercator’s ERP system into corresponding GS1EANCOM standards andeb-MANAGER, which performs different supplementary functions to the basicfunctionalities of TIE EP such as providing overviews of messages received andstatus overviews.Every order and inventory report produced by Mercator’s ERP system is automaticallytranslated into the corresponding GS1 EANCOM standard by TIE EP. The document isthen archived in a database on Mercator’s server “Rip_novi” by eb-MANAGER. In124

e-Business in the Retail Sectoraddition it is also archived in another database on another Mercator’s server“Rip_backup” as a backup copy. Later on, the document is sent overATbizNET/Panteon.net to the supplier's mailbox located on a server inATbizNET/Panteon.net (if the supplier too uses “FULL EDI” solution). The same is truefor any order confirmation sent by the supplier to Mercator in response to its order.e-Service solutionThis solution has been developed by Panteon Group on Mercator’s initiative for smallsuppliers, which do not want (or cannot afford) to invest in expensive software forconversions like TIE EP, but want to have a solution that is integrated with their ERPsystem. The e-Service solution is not suited for suppliers without ERP system.WEB-EDI solutionThe WEB-EDI solution was developed on Mercator’s initiative for suppliers that do notwant 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, issent to a web portal named “Enterprise portal” hosted on a server linked toATbizNET/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 textmessage (SMS) that alerts the supplier over mobile phone. The supplier can log on to theportal to view the document and can even send order confirmations to Mercator from theportal.ATbizNET/Panteon.netATbizNET/Panteon.net is a value-added network (VAN) provided by ATNET AdvancedTechnologies and Panteon Group. It is a communications network physically separatedfrom the internet that provides communication channels and other services, such asautomatic error detection and correction, protocol conversions, and store-and-forwardmessage services. The network can be accessed over:Modem access via dial-up lineModem access via leased lineModem access via ISDN lineInternet VPN (Extranet) accessInternet VPN Secure Client accessCost for the systemCost for building the e-commerce system at Mercator exceeded 35.000€ 66 . Mercator alsohas a services contract with ATNET Advanced Technologies: it pays a certain fee 67 toATNET Advanced Technologies for every document sent over ATbizNET/Panteon.net.This is a special arrangement reserved for companies that exchange a lot of businessdocuments with their partners.6667The total cost of developing the system has not been disclosed by the company. This is anestimate of total cost that has been made at the beginning of the project however this figure hasbeen exceeded in the course of the project.The fee has not been disclosed by Mercator.125

e-Business in the Retail SectorImportant requirements and conditionsMercator selected the GS1 EANCOM standard because it is compatible with solutionsused by other companies in Slovenia and in the European Union. For the success of theproject the question about the right type of network for the electronic exchange ofbusiness messages was decisive. The internet proved to be too unreliable. When it wastested for possible use in the early stages of the project, it was discovered, that it couldnot handle bigger influxes of business documents. Even the number of 60 messagesproved 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 messagesper month over the network. Also, since almost everybody can enter the internet, it ishighly exposed to cyber attacks to which a value-added network such asATbizNET/Panteon.net is much less exposed. That’s why it was decided to useATbizNET/Panteon.net instead, which is based on more reliable x.400 recommendations.An important requirement was also the cooperation of suppliers in the developmentprocess. The latter gave Mercator, ATNET Advanced Technologies and Panteon Groupvaluable feedback on solutions proposed and developed. It was the feedback from smallsuppliers, that the developed FULL-EDI solution is too expensive for them that persuadedMercator 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 itsown costs to satisfy market demands. By satisfying the needs of small suppliers, PanteonGroup has contributed significantly to the expansion of its e-commerce solutions inSlovenia and abroad, making them the norm of the day. This of course is a positivedevelopment for any company interested in e-commerce, since it can rely on one solutionfor conducting e-commerce with all the other companies.The situation todayThe e-commerce solution enables the electronic exchange of orders, order confirmationsand inventory reports between Mercator’s warehouses and its suppliers. Dispatchadvices, 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 businessdocuments between Mercator’s stores and the suppliers. Instead, the stores exchangeelectronic business documents with warehouses using in-house standards. The next stepis to develop direct e-commerce links between the stores and the suppliers. Also, thesolutions for electronic exchange of dispatch advice 68 , receipt advice and invoice stillneed to be implemented. Through numerous takeovers of other companies Mercator hasacquired a number of different ERP systems. To solve this problem the company hasdecided to replace them with one new ERP system. Mercator is also looking at newemerging standards for electronic business messages, such as GS1-XML (BMS). If theusage of GS1-XML (BMS) spreads, the company will probably base its entire e-commerce on this standard.5.1.3 Impacte-Commerce between Mercator and its suppliers not only changed the procurementprocesses at the company, but also affect other trading companies in Slovenia that haveadopted the solutions developed (such as Spar Slovenia and Tuš). It also contributed to68For now Mercator only exchanges dispatch advices with Petrol.126

e-Business in the Retail Sectorthe overall expansion of e-commerce in Slovenia, since it was promoted by retailcompanies 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 procurementprocess is entered only once into the company’s ERP system. This automation hasreduced the amount of manual work in the procurement process and thereby thenumber of human errors. e-Commerce also demanded classification of productsaccording to EAN article number, a bar-coding standard defined by the standardsorganisation GS1 for marking retail goods. Before the introduction of EAN articlenumbers, it was much more difficult to order the desired goods: for example if thecompany wanted to order a certain type of cosmetic product, it had to send adetailed 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 inturn reduced the number of mistakes in the procurement process and simplified thecommunication with suppliers. e-Commerce has not significantly changed thecompany’s employment structure. Instead it resulted in redistribution of tasks insales department due to automation that not only enables faster issuing of ordersbut also handling additional suppliers with the existing work force.Role of sales representatives: supplier sales representatives no longer need tocontrol stock level at Mercator warehouses, which frees them to promoting newproducts instead. Since the introduction of e-commerce, the employees of Mercatorcan check stock levels at any time of the day. Therefore the negative influence ofsales representatives on issuing redundant orders has been diminished: before theintroduction of e-commerce they could easily persuade the company to makeadditional purchases of goods that were not based on the low levels of stocks andserved only to increase the sales of the supplier.Efficiency of inventory management and logistics: e-commerce has sped up theflow of goods and reduced the required warehouse space. According to theestimates of Mercator, e-commerce has reduced procurement costs by 10.8%. Thesuppliers’ sales representatives do not have to check the level of stocks inMercator’s warehouses by hand anymore. Because of inventory reports that are sentover ATbizNET/Panteon.net by Mercator to its suppliers, the latter can track the levelof the company’s stocks from the distance any time of the day. This in turn helps thesuppliers to plan their production more accurately. e-Commerce as it is now,however, does not enable just in time inventory strategy, since the ordered goodsstill need 24 to 48 hours to arrive in the company’s warehouses. Emergency orderswhich have to be resolved in the matter of hours are therefore also resolved over thetelephone.Business relationships between the company and its suppliers of fast movingconsumer goods and cosmetics: the suppliers can engage in closer cooperationwith Mercator in its clearance sales and discounts, since they can more accuratelytrack the company’s stocks and plan their production. Now the suppliers areinformed well in advance of incoming clearance sales and possible stock shortagesand 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 byunexpected orders.127

e-Business in the Retail Sector5.1.4 Lessons learnedSeveral 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 subsidiariesand dependent companies before the introduction of e-commerce is paramount to thespeed 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 beforethe introduction of a new ERP system, proved to be one of the main reasons for the delayin the execution of the project.After launching the project in 1999, Mercator took over many different companies, eachwith their own ERP systems. Since every ERP system compiles business documentsaccording to internal standards, these have to be translated into GS1 EANCOMstandards for e-commerce. The company therefore had to decide between twoalternatives: 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 eachof those ERP systems and worry about a unified ERP system at a later stage. Theimplementation of the first solution would require more time at the beginning, but wouldultimately permanently solve the problem. The second solution on the other hand wouldin essence only postpone the problem, but could save the company precious time at thebeginning. The company opted for the second solution. Unfortunately, this proved to bemore costly in the long term, since it took more time than originally anticipated andcaused delays. Consequently, the company was forced to slow down the development ofe-commerce in order to introduce a unified ERP system first. Meanwhile Mercator hasbeen overtaken in e-commerce by Spar Slovenia. The latter has first introduced a unifiedERP system and then proceeded with implementation of solutions developed by ATNETadvanced Technologies and Panteon Group for Mercator. Now, unlike Mercator, it isalready exchanging electronic despatch advices and receipt advices with its suppliers.For Spar Slovenia the Panteon Group is also already developing a solution for electronicexchange of invoices.Leadership support is paramount to the success of such a large-scale project. Accordingto Mercator the support of the leadership was vital because it could provide additionalpressure on suppliers to accept the developed e-commerce solution. The introduction ofe-commerce also demanded extensive organisational changes that would normallygenerate enormous resistance from the employees, if they were not backed by theleadership. Such organisational change was a complete redesign of procurementprocesses, which required Mercator together with its business partners to define thequantities of goods that could be ordered through electronic procurement systems, theterms and conditions under which orders should be fulfilled, and the responsibilities ofbusiness 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 inpractical tests. As a consequence the message definitions had to be updated, whichcould only be done in sequence: for example, a repair of deficiency discovered in anorder’s message definition also demanded adaptations in the message definition of orderconfirmation, since the second document refers to data in the first one.The suppliers (especially the smaller ones) should be motivated to take e-commercemore seriously. In many cases the suppliers are not taking e-commerce seriously128

e-Business in the Retail Sectorenough, because they are not checking their mailboxes regularly (i.e. they usually forgetto check them when they go on holidays). This has forced Mercator to employ anadditional employee, whose task (among others) is to remind the suppliers of theirobligation to regularly check for incoming orders. This could be prevented by introducingpenalties for suppliers that fail to meet their obligations. Additionally, this situation mayhave been completely avoided if e-commerce solutions used by Mercator would alreadysupport all business documents.5.1.5 ReferencesResearch 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 andreferences 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 ElectronicPublishing. 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.net129

e-Business in the Retail Sector5.2 Globus, GermanyAbstractGlobus 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 thiscountry. In 2001, Globus implemented an e-procurement system, which hasstreamlined the entire process of procuring indirect goods. Moreover, the system hasenabled the firm to procure strategically through pooling demands of singledepartments within the various stores and setting up framework contracts withpreferred suppliers. The implementation of e-procurement at Globus illustrates theneed for a holistic approach to e-business adoption. The pure installation of a technicalsystem bears little return on investment without the re-organisation of businessprocesses and the full support of management and end-users.Case study fact sheetFull name of the company:Location (headquarters / main branches):No. of employees: 23 000SectorMain business activity:Primary customers:Globus Holding GmbH & Co. KGSt. Wendel, GermanyRetailRetail, home improvement, consumer electronicsFamiliesYear of foundation: 1828Turnover in last financial year (€):Most significant market area:Main e-business applications studied: *4.7 billionGermany with a focus on the South, CzechRepublic and Russiae-Procurement, e-Communication with suppliersICT and e-business impacts on work processesICT and e-business impacts on market structureand competitionICT and e-business impacts on innovation andproductivity5.2.1 Background and objectivesGlobus Holding GmbH & Co. KG is a family-owned retail business that was founded in1828 in St. Wendel, Germany. It owns 38 self-service department stores, 51 homeimproving 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). Thecompany has a turnover of 4 to 5 billion Euros per year and employs 23,000 people.Initial situation and objectives of the e-procurement projectIn 2001, Globus started to restructure the procurement of indirect goods and introduced acentral electronic procurement system. This restructuring process was strongly driven bycompetitive pressures as the retail business in Germany is characterised by fiercecompetition coupled with tremendous cost pressure. Particularly hypermarkets, which are130

e-Business in the Retail Sectortypically located in the periphery of bigger cities like Globus department storesincreasingly 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 abasic need within the company. While procurement of direct goods (i.e. goods traded byGlobus) offered little room for improvement as it was already streamlined and wellsupported 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 MROgoods at Globus, which includes e.g. packaging material and cleaning products accountfor about 6 to 8 million Euros per annum.Prior to the introduction of e-procurement in 2001, a centralised system had not beenavailable and procurement activities had been completely in the responsibility of singledepartments. ‘The cheese counter, the bakery or the butcher within each departmentstore always initialised a completely new and separated ordering procedure wheneversomething was needed. Orders were placed via telephone, fax or field service and morethan 1000 employees were involved in these procedures’ (Mr Ortner, managerresponsible for e-procurement activities). In summary, every single department spent alot 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 proneto errors. Due to the decentralized structure, some articles were ordered in parallel fromdifferent vendors for different terms and conditions. Therefore, it was extremely difficult toget information needed to analyze procurement activities and buying patterns.Consequently, Globus could not realise larger order quantities leading to betterconditions.Hence, the main objectives for the new e-procurement system at Globus was tostreamline and speed up the MRO procurement processes while giving shop flooremployees and managers the opportunity to better focus on their core activities.Moreover, Globus wanted to increase procurement transparency and, in this way, carryout the procurement of indirect goods in a more strategic way.5.2.2 The e-procurement project at GlobusThe implementation of the e-procurement system at Globus was accompanied by acomplete change to the existing MRO procurement processes: ‘70 to 80 percent of allMRO goods buying processes is now executed via the system, even business cards areordered electronically’ (Mr. Ortner). Principally, the new system works as shown in Figure1. Today, the system contains electronic catalogues displaying goods from 20 MROsuppliers that have framework contracts with Globus.In each store, between one and three contact persons are responsible for theprocurement 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) orHuman Resources.Departments within the different stores report a need for an MRO good throughcustomised catalogues in form of excel-sheets. These catalogues are adapted to thediffering needs of each department. Selected members of staff within the departmentschose the MRO goods needed and record the quantities required in the sheets. Theseexcel sheets can easily be imported to the e-procurement system with a single mouse131

e-Business in the Retail Sectorclick. The various contact persons at the stores can pool the demand for certain MROgoods and set up electronic orders.As order information is recorded by the system, central procurement management atGlobus headquarters is able to monitor and analyse all processes taking place. Forexample, various analysis and statistic tools facilitate internal backtracking of MROgoods. In addition, information gathered provides the basis for strategic procurementactivities, such as negotiating framework contracts with suppliers.Meanwhile, an invoice process is fully integrated into the system. Whenever MRO goodsare delivered to a store, the respective contact person adds a ‘goods received’ note to thesystem. Hence, incoming invoices can be checked easily using the information stored inthe system.Exhibit 5.2-1: The electronic procedure at GlobusSource: Globus/Sectoral e-Business WatchThe fully integrated electronic MRO procurement system connects the followingstakeholders 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 areintegrated with the e-procurement system of Globus in three different ways. Abouthalf 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 aregenerated automatically by the system. One of Globus´ largest suppliers is alreadyconnected to the e-procurement system via EDI (Electronic Interchange), giving thebenefit of fully automated electronic processes.Any changes in the catalogue data are transmitted electronically and can bepublished to all involved parties at Globus without any additional effort. Suppliers69 XcbL is a subtype of the standard language XML, which is commonly used for the description ofelectronic business processes.132

e-Business in the Retail Sectorjust need to submit Excel sheets with new or changed product data. Then, the datagets converted into the catalogues´ standard BMEcat and can thus be integratedinto the system.Contact Persons in charge of the store’s procurement activities have access to amulti-supplier catalogue that contains information on products and conditionsnegotiated with Globus. They are endowed with functionalities to pool the demandof single departments, to set up orders and to coordinate the ordering process.Departments within the stores have access to Excel-based catalogues that areadjusted to the individual needs of the departments and can be easily imported orexported by the e-procurement system.Central procurement management at the Globus Headquarter is able to monitor andcontrol the procurement process using information and statistics functions providedby the system.Support of related processes: Information gathered by the system is also used tosupport invoice checks, the assignment of procurement costs, and the accounts ofsingle departments.As a technical basis Globus uses the software system “Impact Ordering” from HealyHudson, a German software manufacturer specialised in e-procurement. The systemworks completely web-based and runs on the servers of Healy Hudson. Users haveaccess to the system via internet. Suppliers receive orders via e-mail or EDI (asdescribed above). Healy Hudson manages the upload of new or changed productinformation, i.e. the conversion of Excel-based data in BMEcat and the integration intothe 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 factorsThe success of the e-procurement system at Globus depends on several importantfactors. Based on the procurement manager’s experience the following challengesemerge:In depth-analyses and optimisation of processes is a precondition. Theimplementation of an e-procurement system goes far beyond installing a technicalsystem. In fact, the technical system only supports procurement procedures asdefined by the company. ‘An e-procurement system is of little use, if the processesbehind are not organised in an efficient way’ (Mr Ortner). Thus e-procurementmanagers at Globus put much effort into the analyses and optimisation ofprocurement processes before implementing the technical solution.Providers need to listen and meet company-specific requirements. Whenchoosing the technology, the Globus management did not just look for a standardsoftware but for a system that fulfils the company’s specific needs. As a retailcompany, Globus demands extensive options for recording and analysinginformation as well as for processing of complaints. All in all, choosing an e-procurement system means to choose a technology partner with whom thecompany cooperates for years in order to adjust and further develop the software.‘Therefore it is of outstanding importance that the technology provider showsindustry expertise and – even more important - the willingness and ability to listen tothe customer’s needs’ (Mr. Ortner). Healy Hudson, the provider chosen by Globus133

e-Business in the Retail Sectormet these criteria. Globus has now successfully been co-operating with thistechnology partner for the last seven years.Involving stakeholders and close co-operation with the technology providerhelps 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 theirspecific needs. Therefore, Globus organised several workshops, at which users ofthe system and technology partners worked jointly on the specification of thetechnical system.E-procurement is a long-term project and always work in progress. Globus hascome 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, ifsuggestions for improvements from users are taken into consideration. Therefore,the procurement managers at Globus are continuously exchanging ideas aboutfurther system development with both users and technology provider.5.2.3 ImpactSince the implementation of the new electronic system, procurement processes havechanged completely. The new system provides a basis to procure indirect goods in amuch more organised way. Regarding procurement at Globus, Mr. Ortner refers to thefollowing key benefits:Streamlined procurement processes. Compared to the former situation, theprocurement of MRO goods at Globus is much more streamlined. Departments justhave to indicate their needs on customised catalogues that can be imported to thee-procurement system by a single mouse click. Contact persons at the stores canpool demands and set up orders electronically without any additional paper work.Suppliers receive orders immediately and can process them directly within theirsales systems. And finally, invoices can be checked automatically by comparingdata on the invoices with the data stored in the system. Thus, less people, lesstime, 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. ‘Todaythe butcher is focused on running his butchery and the baker is focused on runninghis 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 expensescan be traced back and analysed by various statistic tools. In turn, the findingsprovide a proper basis for consolidating the supplier base and negotiatingfavourable framework contracts. Due to the pooling of MRO needs, larger orderquantities could be realised and prices were negotiated anew. ‘As a result ofstrategic 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 thesales systems of the suppliers. As a consequence of this improved coordination of134

e-Business in the Retail Sectororderings at Globus, the suppliers´ sales and logistic processes are much morestreamlined. Suppliers connected to the system do not need additional salespeople, that visit departments at Globus and present their offers. In addition, allindirect goods demanded by different departments within a store can be delivered inone go.It is difficult to quantify benefits and costs of the MRO e-procurement system due to therather unorganised way in which procurement of indirect goods was organised before thesystem was installed (comprehensive information on procurement costs prior to 2001 isnot available). In addition, it would be extremely difficult to retrace all time and effortassociated with the introduction of the e-procurement system in detail.Nevertheless, Globus management argues that the investment into MRO e-procurementpaid off quickly: procurement processes improved significantly, and cost reductionsthrough strategic buying activities are estimated to amount to a seven-digit number inEuros. Globus also profits from the fact that running costs, especially for maintenanceand support, are financed by connected suppliers. Thereby expenses incurred are notcharged, but rather compensated through improved terms and conditions.5.2.4 Lessons learnedThis case study illustrates how e-business technologies can positively contribute toprocess 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 acomplete 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 buyingpower and setting up favourable framework contracts with suppliers. Of course, theconsolidation of purchasing power improves the position of Globus when negotiating withthe 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 whenimplementing an e-procurement system. The impact of e-business technologies stronglydepends 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: thesystem is only as convenient as the underlying organisational processes. Thus, muchtime and effort is needed for the re-organisation of processes before the system isinstalled. Another important point raised is the continuous need for adjustment andimprovements in order to ensure an efficient use and the acceptance of users. Thesepoints should be taken into account when discussing the impact of e-businesstechnologies. They might explain, why similar technologies used in similar companiesmay lead to very different outcomes.5.2.5 ReferencesResearch for this case study was conducted by Dr. Andreas Stiehler and Timo Zumbro(Berlecon Research) on behalf of the Sectoral e-Business Watch.135

e-Business in the Retail SectorSources 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.com136

e-Business in the Retail Sector5.3 Brookland Plus Products/Dirk van den Broek,NetherlandsAbstractThis case study analyses Brookland Plus Products' implementation of a supply chainmanagement software - Aldata G.O.L.D. Stock - for managing supply chain andlogistics operations of its parent company, Dirk van den Broek. Dirk van den Broek is aDutch retailer with over 350 stores in the Netherlands. Brookland Plus Products isresponsible for logistics processes of Dirk van den Broek’s stores. Brookland has beenusing supply chain management software since 1995 to support its warehouse anddistribution processes, and more recently decided to upgrade its implementation toachieve business process consolidation and fulfil extended business requirements.Case study fact sheetFull name of the company:Dirk van den Broek / Brookland Plus ProductsLocation (headquarters / main branches): NetherlandsNo. of employees: 13,500 / 1,000Sector:Retail Chain / Logistics SubsidiaryMain business activity:Retail salePrimary customers:Consumers / Dirk van de Broek's retail chainsYear of foundation: 1942Turnover in last financial year (€):€1.8 billionMost significant market area:The NetherlandsMain e-business applications studied: * Supply Chain Management (SCM)5.3.1 Background and objectivesDirk van den Broek is a Dutch supermarket chain operating multiple retail formats underthe Dirk, Bas and Digros brands - grocery stores and supermarkets - the drugstore andpersonal 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 itsdiscounter 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 subsidiaryof Dirk van den Broek. Brookland operates several distribution centres in the Netherlandsto 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 Dutchretailer that owns 85 supermarkets. Logistics integration of the DekaMarkt chain iscurrently 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 forretailers. In fact, logistics efficiencies impact both top-line results, which in essence137

e-Business in the Retail Sectordepend on merchandise shelf-availability and selling space, and profit margins, whichlargely depend on supply chain efficiencies. Dirk van den Broek's business model,focusing on convenience and local availability of products, is requiring solid merchandiseintelligence capabilities, robust supply chain execution efficiencies and the ability toaddress a variety of logistics requests under a consolidated and centralised process.With the objective of supporting its expanding retail formats, growth in stock-keepingunits(SKUs) volumes managed by the Dirk van den Broek chain and integratingDekaMarkt logistics into Brookland, the company required a major upgrade to its supplychain management systems' functionalities and stronger integration with its central ERPsystem.5.3.2 e-Business activitiesThe ProcessBrookland operates six warehouses (and another 4 for DekaMarkt) located throughoutthe Netherlands in order to ensure fast replenishment efficiencies for all supported stores.Transport of goods is performed by transport companies working nearly exclusively forBrookland. Each store in the Dirk van den Broek chain places orders to Brookland usinga store ordering system, which captures actual sales data from the Point of Sale system.A custom-built forecasting application providing basic analysis of historical demandpatterns contributes to the definition of the store replenishment plan. Brookland receivesand aggregates all orders coming from the stores, and then defines and execute thedelivery schedule in collaboration with value chain partners (Exhibit x.x-1).Exhibit 5.3-1: Dirk van den Broek's Logistics ProcessSource: Brookland/Sectoral e-Business WatchWarehouse management includes reception of inbound deliveries, allocation towarehouse racks, goods' pick-up, preparation and dispatch to fulfill delivery orders, and138

e-Business in the Retail Sectoreventually goods forwarding when passing through multiple warehouses. Dirk van denBroek's store selling space is limited to an average of 1,000 square meters, thus in orderto maximise selling space allocation, all stores keep their stock on the shelves. Brooklandmanages approximately 12,000 individual articles, and suppliers can perform direct storedeliveries 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 thisresults in an average of 14 trucks per store per day). This represents a big challenge forthe company in finding the right balance between shelf-availability and replenishmentprocess efficiency, both at store and warehouse levels. An additional challenge forBrookland is that replenishments tend to be very fragmented due to the diverse range oforders received from the stores. Therefore, Brookland needs to run a coherent supplychain process across different goods' categories in order to efficiently serve different retailformats of the Dirk van den Broek chain.Technology and Implementation DetailsSince 1995, a legacy version of the Aldata supply chain management softwaremaintained by a third-party was in place. In 2001, Brookland needed to replace theexisting implementation with a packaged software solution, because support of its legacysystem was discontinued and the company required a new application to better matchtheir business process requirements. Dirk van den Broek's IT Director and Brookland'sInformation Manager were the principal project influencers, but trust from the boardmanagement was essential to fund the initiative. The contribution and support providedby Line of Business Executives (LOB) was also important, although LOB were not themain drivers for the implementation.The selection process of the new system, performed with the support of IBM, was mainlybased on functionalities provided by the different applications under evaluation andsupport level. Key users participating in the solution selection process included differentorganisational layers, such as a warehouse manager responsible for operations in twowarehouses and order pickers. Brookland decided to deploy Aldata G.O.L.D. Stock 5.01as this application provided the best fit to Brookland' process requirements, and Aldatacommitted to further customise its application in order to fully match Brookland’srequirements. As of June 2008, Brookland manages six warehouses with the softwaresolution and upgraded to Aldata G.O.L.D. Stock 5.03, which is a warehouse and logisticsexecution 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 examplereplenishment and routing), goods' reception, storage management, orderpreparation, allocation, and dispatch.Warehouse labor managementTraceability management, including control of information flows and goodsmovements in the logistics network and event management (alert detection,notification and response).Following a workshop and a vendor evaluation process executed during 2004, Brooklandre-designed its master data management infrastructure based upon stronger ERPintegration and process consolidation in 2005 to optimise their supply chain performanceand accuracy of automated processes. With the objective of minimising supply chain139

e-Business in the Retail Sectorerrors and, as a result, maximise shelf availability while containing supply chain costs,product and supplier data integrity is of paramount importance for retailers. Thus, AldataG.O.L.D. Central 5.04 was deployed as the central retail ERP platform to manage criticaloperational aspects ranging from master data management and merchandising tosuppliers and invoice management. (not yet, all transactional data is not available sincethese processes will be included starting 2009).In 2007, Brookland's management also requested logistics and warehouse managementintegration of the DekaMarkt chain, with the objective of achieving further reductions ofsupply 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 Oraclerunning. In the case of Brookland, it is an AIX (Advanced Interactive eXecutive) operatingsystem, IBM's proprietary version of UNIX.Exhibit 5.3.2 illustrates the IT structure underlying the logistics process at Dirk cvan denBroek’s logistics process (Exhibit 5.3.1).Exhibit 5.3-2: Dirk van den Broek's IT structure underlying the logistics processSource: Brookland/Sectoral e-Business WatchBrookland also integrated the Aldata G.O.L.D. Vocal pick-by-voice system by equipping100 warehouse operators with Vocollect Talkman devices. These are wearablecomputers translating textual information into vocal instructions to warehouse workforce.Pick-by-voice systems usually improve warehouse productivity, due to the fact thatwarehouse pickers no longer have to read paper lists or handheld device displays forinstructions, but can use speech to perform their assignments. This capability reducesorders' error rates and the time needed to prepare a delivery, while providing a saferenvironment for warehouse workforce, thanks to hands-free and eyes-free operations. Apilot project is currently ongoing to expand the pick-by-voice system with the use ofstandard PDA (Personal Digital Assistant) handheld devices.Costs140

e-Business in the Retail SectorBrookland is investing approximately €5 million between 2007 and 2010 for theimplementation of the Aldata G.O.L.D. modules, including licenses, applicationdevelopment, functional design and system integration. The maintenance fee of thesystem is approximately €200,000 per year.Business process reengineering was not needed throughout the implementation due tothe fact that Brookland insisted on selecting a software application that was fully matchingits business processes. As a result, some adaptation and custom development activitywas required from the software vendor to solve all the identified functionality gaps, basedon a detailed blueprint of warehouse processes performed in a joint project by Brooklandand IBM Global Business Services.5.3.3 ImpactBrookland did not go through a detailed Return On Investment (ROI) analysis to measurethe financial impact of the SCM implementation. However, a cost-benefit evaluationproject was conducted with the following metrics:Intangible benefits: included in this category were benefits resulting from consolidationof business processes and organisational changes. Due to their nature, intangiblebenefits are difficult to quantify, but contributed to the attainment of productivityenhancements. With the close integration of G.O.L.D. Central and G.O.L.D. Stock, forexample, it is now possible to exchange data such DESADV messages from suppliers tospeed up the reception process while also achieving improvements in quality. Anotherexample for intangible benefits originating from the standard G.O.L.D. Central solution isthat different variances of articles can be set which in turn enables Brookland to bettermaster articles and article variants.Tangible benefits: Brookland expected measurable benefits to occur due to the adoptionof the SCM solution. Stock levels for example, were set to decrease as a result.Furthermore, Brookland expected to better benefit from discounts that suppliers applyregarding logistic conditions. Being able to operate as a true logistic service provider thatmeets organisational demands without having to invest in costly modifications in thecurrent propriety systems was another tangible benefit expected..While the aforementioned tangible and intangible benefits were identified in the costbenefitevaluation project, the key benefits obtained by Brookland and indirectly by Dirkvan den Broek from the SCM solution include the following:Higher efficiencies of the replenishment process. Less human intervention isrequired to fulfil the replenishment process due to the process automation andconsolidation enabled by the implemented software solution. As a result, accuracygains were achieved. The integration with the central back-end system and theconsolidation of the master data management infrastructure were two additionalenablers of optimised replenishments. For example, logistics delivery processautomation includes the use of EDI (Electronic Data Interchange) messages fromthe ERP to the warehouse management system to notify delivery receipts. Inaddition, Brookland also developed new capabilities that are enabling the companyto timely respond to fragmented store orders, for example the company is now ableto execute order picking at SKU-level in one warehouse.Reduced out of stock as a result of optimised warehouse replenishment efficienciesand automated management of the entire set of articles' attributes. Before the141

e-Business in the Retail Sectorimplementation of the SCM software, and due to the lack of master dataconsolidation, it was necessary to create new articles to capture different productattributes. This was a time consuming process that caused shortages on the storeshelves. The process was no longer necessary following the implementation of thenew SCM solution and the achievement of higher master data integrity thanks totight ERP integration.Enhanced promotion management efficiencies, due to the attainment of full visibilityinto stock-levels, purchasing, receiving and delivery processes. By combining thesefour processes in a synergic and highly integrated manner, Brookland can ensure ahigher 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 SCMsoftware, the company shifted a significant portion of its warehouse workforce toquality management and monitoring of SLA (Service Level Agreement) for goodsshipments (currently at 98%). In addition, the company achieved improvedmanagement of suppliers' conditions and incentives due to the procurementprocess consolidation, centralisation and integration with the replenishmentprocess.Process scalability – Between 2000 and 2008 Brookland experienced a 100%growth in the number of individual articles managed, e.g. from 6,000 to 12,000articles. In consideration of the warehouse workforce re-organisation, thisessentially means that Brookland can now manage a larger volume of articles underthe same SLA without requiring additional workforce.In conclusion, Brookland achieved the ability to execute just-in-time flows of outboundlogistics operations, optimisation of the replenishment process in response to variableand 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 DirectionsIn the future, Brookland is looking at the following opportunities that are expected to havea big potential impact for Dirk van den Broek’s business performance:Value chain ecosystem – the opportunity to enable stronger collaboration andintimacy with value chain partners largely depends on trust and on companycultures and ways of working. For example, Vendor Managed Inventory (VMI)appears as a concrete opportunity to optimise supply chain performance, asdemonstrated by the likes of WalMart, Home Depot and Carrefour just to mention afew examples of retailers that have successfully implemented VMI with keysuppliers. VMI is a supply chain business model in which suppliers are responsiblefor maintaining the inventory levels required by retailers. Suppliers have access tothe retailer’s inventory data and are responsible for generating purchase orders.Therefore, VMI requires a higher degree of partnership and sharing of mutualinterests and benefits that are specific to each party, and most importantly sharingof risks, for example, in situations where the inventory does not sell. From atechnology perspective, it requires the use of EDI between suppliers and retailers,and the availability of a web portal for suppliers.142

e-Business in the Retail SectorBrookland is also investigating into RFID (Radio Frequency Identification) forwarehouse and distribution operations. However, an initial pilot project was rejectedby the board management as the technology was considered to be too expensivefor 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 thedelivery of perishable goods. Security and privacy are reported by Brookland as twoaddiional concerns related to RFID.By the end of 2008, Brookland will also implement Aldata G.O.L.D. Topase, aforecasting and stock replenishment optimisation application that will replace thecustom-built forecasting software that is currently in use. With this newimplementation, Brookland expects to improve its forecasting and replenishmentefficiencies both at store and warehouse levels, because demand forecasts will bebased on an extended historical data range and suppliers' purchasing and logisticsconditions will be automatically taken into consideration during the forecastingprocess. As a result, the company expects to further improve shelf-availability whileminimising supply chain costs.5.3.4 Lessons learnedAmong the key lessons learned by Brookland and Dirk van den Broek are:The effort required on change management shall not be underestimated whenimplementing a new SCM solution. In the case of Brookland, the effort required wassignificant 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 conductedspecific training sessions to warehouse supervisors, who in turn trained their teammembers.On the other hand, it was more difficult to perform training of assortmentmanagers and buyers due to their time constraints. As a result different trainingmethods are required to match different users' needs and get all users aligned tothe new practices, rules and systems characteristics.Brookland recognised that the initial design and project scoping phase arefundamental areas that need to be carefully assessed in order to ensure properproject execution and alignment of IT with strategic business goals.Brookland already established a positive working relation with the IT Vendorselected for the new SCM software implementation. When Aldata consultants joinedthe project, knowledge about the G.O.L.D. Suite was rapidly built; and alongsideIBM Global Business Services, Aldata’s partner in the G.O.L.D. implementation, astrong team is assisting Brookland in the project.Another important lesson learned at Brookland is that the replacement of any ERPsystem does not come by itself: every adjacent system will be affected. A thoroughdiscussion on data migration is required as well as an impact analysis on theapplication landscape.143

e-Business in the Retail Sector5.3.5 ReferencesResearch for this case study was conducted by Ivano Ortis, Global Retail Insights, anIDC Company, on behalf of the Sectoral e-Business Watch. Sources and referencesused:Interview with Gerard Wensink, Information Manager, Brookland, April 24 th , 2008Websites:• Dirk van de Broek, http://www.dirk.nl• Aldata Solution, http://www.aldata-solution.com144

e-Business in the Retail Sector5.4 AMJG Comunicações, PortugalAbstractThe Portuguese telecommunications company AMJG specialises in selling mobilephones and related services, including internet access. It developed a CustomerRelationship Management (CRM) system which allows it to manage client informationfrom several sources. The introduction of this system significantly improved theeffectiveness of relationships with company clients, as the storing and analysing ofinformation allowed AMJG to more easily identify their needs, and thus produce moreeffective proposals.Case study fact sheetFull name of the company:Location (HQ / main branches):Main business activity:AMJG Comunicações, S.A.AveiroYear of foundation: 1997Number of employees: 35Turnover in last financial year: 117,000 €Primary customers:Most significant geographic market:Main e-business applications studied:Telecommunications equipment and servicesGeneral public, and companies in all areasPortuguese regions of Aveiro, Espinho, São Joãoda Madeira, and OvarCustomer Relationship Management5.4.1 Background and objectivesAMJG Comunicações is an agent for the mobile phone company TMN (and its parentcompany, PT Comunicações), promoting and selling the latter’s products. It has twelvestores 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 storesare located around the specified regions, and each has an area of around 35 squaremeters, with an average of two employees per store (the remaining employees work atthe company’s main office in Aveiro). Each store is connected to the internet (either byADSL 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 inselling the principal’s equipment and services, for which it receives a sales commission.Those products consist primarily of mobile phones, access to TMN’s communicationsnetwork, internet access kits (which include modems, PDAs, or laptop PCs), as well asinstallation and maintenance of related equipment and software. AMJG’s clients are thegeneral public and other companies. In the latter case, clients are individuals from thecompanies, rather than the companies themselves, i.e. the deal is with the company butthe 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 restsupon three principals: good store placement, high quality client service, and solutionscustomised to the needs of its company clients.145

e-Business in the Retail SectorDue to the rapid pace of technological change in the telecommunications area, the use ofcustomer 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 accessthe latest product information instantly, and to crossover information more efficiently.5.4.2 e-Business activityThe CRM solution developed for AMJG allows for just such advantages. It consists of aWeb-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 individualpurchase 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, includingstock levels in the various stores;Non-client companies that should be or already were the subject of a marketingcontact, plus its results;Business rules that control the e-mail direct marketing feature;Several analysis tools with crossover options to examine the information collectedand held by the CRM solution. These tools provide information including what typesof products are sold most (in absolute terms, per region, per campaign, etc.),chronologically ordered ‘most sold’ product types over a period of time (to identifytrends), and impact of campaigns on types of products sold, etc.The primary reason behind the decision to stop using a generic commercial applicationand build a customised solution was the lack of support for several features specific tothe mobile phone industry (e.g. “purchase points”, where a client accumulates points ineach purchase which can later be used), as well as limitations in that software’scrossover and analysis tools. Another important issue was the need for an interface withTMN’s own internal e-business solution (all TMN agents must perform a certain numberof marketing campaigns, whose requirements they must download from that tool, andlater uploading the results).The new tool is tailor-made to the specific needs of AMJG, with the information (and itscrossover analysis features) being oriented towards its business area, thus greatlyincreasing the efficiency and speed of the client management process. It alsocommunicates directly with TMN’s e-business solution, allowing AMJG employees toextract/update campaign information directly from the CRM tool.The CRM project was implemented by the company IAITI, which was chosen based onprevious work it had done for AMJG on the latter’s Web site. The initial planning of thetool 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 bestapproach to the CRM solution they wanted. The implementation of the CRM project tookabout six months to achieve basic operational status. Since then the system has beenupgraded to include new features and better interoperability with other systems. TheCRM system consists of PHP pages linked to a MS Access database (upgrade toMicrosoft SQL Server is being considered). The pages are published by the IIS Web146

e-Business in the Retail Sectorserver, and the whole software is installed in the company’s intranet service, which runsunder the operating system Microsoft Windows Server 2003. The design of the projectwas 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 ofthem 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 toaccomplish;data had to be kept up-to-date, but also coherent among the several systems, sothe 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 nonew hardware was purchased. The CRM was implemented using Open Sourcetechnology (PHP) and runs on top of software that the company already owned. The onlycost 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 supportsfour levels of access to users:Store employees: can only access client and product information, but cannot makechanges; they can however insert new clients, register sales, and place orders onproducts not currently available on the store;Salesmen: can do all of the above plus access marketing campaign information (butnot create new campaigns); can also do some limited crossover of clientinformation;Senior salesmen: can do all of the above plus create marketing campaigns, as wellas fully crossover and analyse data from clients; can also access campaigns in theTMN e-business tool and register their results;Administration: can fully access all features which, besides the above, includeassigning salesmen to specific clients/campaigns, and insert new product/serviceinformation.To date, the tool has been in use for about eight months. It is fully deployed and onservice in all stores and in AMJG’s headquarters, all of which are now integrated andaccess the same database. All employees use it on a daily basis, with the TMN supplierusing it indirectly when it sends updates on its products or receives orders from thestores.Some minor new features (like support for importing/exporting Excel files, a format usedin some TMN documents) have been added to the system. Furthermore, it had severalsmall interface changes based on user feedback, and a few minor technical issues weresolved. It is currently considered reliable and user friendly by its users.A new feature being already prepared for deployment is the ability to interface directlywith the TMN e-business tool in the few places it still uses Excel documents as a meansto exchange information. As TMN has announced it will change this soon, the CRM tool isbeing prepared to access such data in the new format, resulting in a tighter integrationwith the latter’s e-business tool. The implementation of this feature was so far simple asthe CRM already has the required database structure and information exchangemechanism with TMN in place.147

e-Business in the Retail Sector5.4.3 ImpactThe proper exploration of the CRM system’s capabilities led to a number of changes onthe working habits of the AMJG staff, such as the requirement to insert and classify alldata gathered about a client. Its introduction significantly improved the effectiveness ofrelations with company clients by allowing an easier planning of visits to them, storingand analysing information about their needs, and preparation of better orientedproposals. This in turn led to changes in the company’s organisation, as the lesser needto consult other sources of information led to quicker response time, as well as greatermobility 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 clientmanagement process increased. Some of the areas directly affected were:Company sales: sales for companies are up an estimated 6.4% since the toolstarted working; while it is difficult to assert how much of this was a consequence ofusing the tool, AMJG sales staff claimed it was the result of the better targeting ofpotential clients brought about by the tool’s crossover and analysis features;Work organisation: the greater efficiency of the new tool allowed to more quicklyprocess client information and prepare marketing campaigns, allowing salesmen tospend less time on the office; this has led to a restructuring of job assignmentswhere salesmen now dedicate a larger share of their time to marketing incompanies;Sales Staff: allows for a faster planning of visits and update on the status of clientcompanies, the quick spread of information on new products, and promotesexchange of information among its members, by crossing over information fromseveral sources to identify potential new customers, making possible instant accessto updated product information, and set up of warning flags to other tool users totake notice on specific subjects.Business relationships with customers: individual clients now get better targetedmarketing campaigns as a result of the tool’s new analysis features; while it isdifficult to know how much is a consequence of adopting the tool, sales to individualclients increased 12.8% since the tool was installed;Inventory management and logistics: the tool allowed for increased speed inplacement of orders to TMN and between AMJG stores; delays in delivery ofproducts 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 isbeneficial for TMN and gives more options to AMJG clients. TMN now receives ordersfrom AMJG’s sales staff more quickly than with the previous methods (fax, or an uploadat the end of each day of an Excel file containing the list of product orders). TMN in turncan send information on its products to AMJG faster (the previous method consisted ofan once-a-day file download). The CRM tool will also recognize certain information tagswhen TMN sends its product information, which enables the latter to set warning flags onspecific items if it so wishes. Clients on the other hand, now have the option toautomatically receive e-mails with information on desired products. Furthermore, clientscan receive targeted e-mails with product offers based on their purchasing habits, themechanism of which is controlled by business rules set up by the sales staff.148

e-Business in the Retail Sector5.4.4 Lessons learnedThe primary lesson learned at AMJG is about the power of custom-made solutions toanalyse and crossover information in a far more effective way. For example, the previousgeneric tool lacked support for “purchase points”, a common feature in the Portuguesecell-phone market (client receives virtual points every time he purchases a product orservice, and these can than be used as coupons to get a discount in new products). Thenew CRM tool thus allowed targeted marketing of new cell phones to clients with acertain minimum number of points, resulting in approximately a 50% increase in their useby clients;Another lesson was the importance of using tools that reduce planning and/or deliverytime. The increased efficiency brought about by the CRM tool decreased the time neededto prepare marketing campaigns, as well as delivery of ordered products, and thisresulted in salesmen passing more time visiting companies, as well as greater clientsatisfaction.An unexpected issue was the initial difficulty some of the employees had in using someparts of the tool, which required a few changes to the interface. A lesson drawn from thisis that, when developing a customised tool, the end users should be involved from thestart.The tool’s information crossover features proved very popular with the sales staff, whichattributes 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 analysisfeatures 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 ReferencesResearch for this case study was conducted by Alfredo Silva, Inova+, on behalf of theSectoral e-Business Watch. Sources and references used:Questionnaire and e-mail exchanges with José Gustavo, AMJG’s ManagingDirector.Interviews with João Correia, IAITI’s , 26-09-07, 11-10-07, IAITI officesCompany AMJG Web-site: http://www.amjg.pt/149

e-Business in the Retail Sector5.5 Casino Group, FranceAbstractThe Casino Group is a leading food retailer in France. Founded in 1898, the firm sellsits products through various channels including different types of stores such ashypermarkets and discount shops. In 2006, the Casino Group implemented a CustomerRelationship Management (CRM) system at its hypermarket branch. With this solution,the firm aims to improve relationships with the ‘professional groups’ customers whichinclude public institutions, large enterprises and associations. Giving sales peopleaccess to a centralised database significantly improved sales operations at the CasinoGroup. The solution furthermore has a positive effect on marketing strategies andactivities. Overall, the solution has resulted in efficiency gains for the sales force andthe marketing department; productivity gains for the till employees; and improvement oflogistics, quality, hygiene, security and environment management within the Group.Case study fact sheetFull name of the company:Casino groupLocation (headquarters / main branches): Sainte Etienne, FranceNo. of employees: 192 948Sector:RetailMain business activity:Food and non food retailerPrimary customers:ConsumersYear of foundation: 1898Turnover in last financial year (€): €M 22,505Most significant market area:France, North America, Asia, Indian OceanMain e-business applications studied: * Customer Relationship Management5.5.1 Background and objectivesThe Casino Group is strongly driven by its home market with 75% of its net salesoriginating from sales in France in 2006. Before expanding into the international market,the Group strongly consolidated its French home market position. These firm roots arethe source of the Casino Group’s ambitious and sustainable international expansionwhich started in the late nineties. Internationally there are two priority markets: SouthAmerica and South East Asia. Across these markets, a diversified sales channel portfolioincluding hypermarkets, supermarkets, convenience stores and discount stores ensuresthat the Casino Group reaches a wide array of consumers.Strategically, the Casino Group seeks to differentiate its offer from competitors with afocus on the customer. To accentuate this differentiation in a competitive marketplaceassertive marketing initiatives have been designed to make every aspect of the businesscustomer-centric. Profoundly affected by this strategy is the hypermarket branch, whichincludes 108 stores in France having a market share of 3.7% and representing 36% ofCasino Group’s revenues (€6,294 million in 2006). Marketing activities within this groupare based on the sustained development of the Casino brand, the introduction of newfood and non-food concepts and an ambitious customer loyalty program. An importantdriver 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% of150

e-Business in the Retail Sectortotal revenue at year-end; number of active cardholders also increased by 10%. This hasa significant impact on revenue growth since the average value of a cardholder’s basketis 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 in1998. This segment includes target customers like large companies, schools, andrestaurants. It represents approximately 2% of the income of each hypermarket. Toaddress this segment, one sales person is assigned to follow up and secure loyalcustomers (in collaboration with the marketing department) in each hypermarket of theCasino Group.Prior to the implementation of the CRM tool, sales operations targeting the ‘professionalgroups’ segment were not computerised and sales people mainly used fax and paper tomanage their customer appointments and to capture sales data. There was nocentralised information system to manage this data. In order to improve datamanagement and increase profitability of sales operations, the Marketing department ofthe hypermarket branches decided to adopt a CRM solution that would:automate and simplify operational sales processessimplify in-store operational processes (mainly at the cash desks) andenable 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 waslaunched at the end of 2005 and initiated and sponsored 70 by the marketing director ofthe hypermarket branch. Following a detailed definition of project specifications, theCasino 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 activitieswithin the ‘professionals group’ segmentprovide a unique customer database to sales personnel, enabling them to target,follow up and secure loyal customerscomply with budget specifications (small budget)provide an ergonomic, simple-to-use tool for users andoffer a web based tool which is easy to integrate into the existing informationsystems infrastructure.Following the selection of the solution providers (E-deal for the software and Unilog forthe integration of the solution) a development phase lasting approximately 7 monthsallowed the hypermarket branches of Casino to adapt the software to its specific needsand to engage in various test runs. Before the overall deployment of the solution, a twomonthpilot was done in three hypermarkets in France. These markets were selected dueto 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 asresources for a project.151

e-Business in the Retail SectorFollowing the pilot phase, the solution was deployed progressively: by the end of 2006 itwas installed at 20 stores with another 40 stores added in 2007. The target is to equip allof the 108 stores by the end of 2008.The project team consisted of two people from the Casino Computer Innovationdepartment, one Marketing project manager from the Casino hypermarket branches andseveral consultants from the subcontractor company, working on the development andintegration of the solution. From the very beginning, end-users were involved in theproject: three sales representatives with different technical and professional backgroundsparticipated in the development, testing and roll-out phases. Their views affected thechoice of tool, interfaces and functionalities; and they actively participated in training thesales team in charge of the ‘professionals group’ segment. The initial training lasted oneday and is complemented by on-demand half-day refresh training sessions.The solution deployed, developed with java language, is fully web-based, running on atom cat server. Each sales representative has a user login and password and can accessthe tool via the Intranet.Together with the CRM tool, the Casino hypermarket branch deployed a new customerloyalty card for the ‘professionals group’ segment. The objective is to equip all customersof the target segment with this card in order to being able to analyse their consumerhabits and perform targeted marketing activities. About 18.000 professional customersare 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 customermeetings scheduled by an external telemarketing company according to theavailability given beforehand.The representatives access information(held on the database) about customerswith whom they have meetings scheduled in order to prepare these meetings.All customer information and updates are stored in a central database, includingmore than 200.000 contacts. This information can be accessed by the whole‘professionals group’ segment sales force of all hypermarkets and by the marketingdepartment.Before the solution was implemented, the telemarketing company sent customer meetingproposals to the sales representatives who, as a first step, confirmed availability andsent, as a second step, a final meeting acceptance or cancellation to the telemarketingcompany. All information exchanges were done by fax. This process was significantlysimplified 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 otherconsumers in stores while information about the card holders is being collected andregistered during check-out. Final year discounts are allocated to the respective cardsand managed automatically with data about all purchases being sent to the e-dealsystem. Before the deployment of the solution, ‘professionals group’ customers had toidentify themselves at the reception of the store and get a specific paper that needed tobe shown at the cash desk. The cash desk employee then had to create a manual bill forthe customer which was a very time consuming activity.With the purchasing process for the ‘professionals group’ customers now beingautomated, accounting processes have also changed: prior to the introduction of the new152

e-Business in the Retail Sectorsystem, the Marketing department received sales figures from individual salesrepresentatives on Excel sheets at the end of each month and data was manually keyedinto the central accounting system. There was no guarantee that figures were correct atthe time. With the e-deal solution, sales data is automatically transmitted from the tills tothe marketing department on a daily basis. The whole process is therefore now efficientlyorganised and automated.Future developments of the solution, such as the upgrade of the software version as wellas the synchronisation of the Outlook calendar with the e-deal calendar are planned for2008. Thanks to the success of the project for the ‘professionals group’ segment, thedeployment of CRM tools across other Casino sales departments is envisaged.5.5.3 ImpactThe management of the hypermarket branch is very satisfied with the first resultsachieved following implementation of the solution. Users have adopted the tool to suittheir sales process and feedback is very positive especially since the tool is simplifyingdaily working processes.The impacts of the solution can be summarised in efficiency gains for the sales force andthe marketing department, productivity gains for the till employees and in improvement oflogistics, quality, hygiene, security and environment management.Hypermarket sales representatives in charge of the ‘professionals group’segmentAll customer information is consolidated in a centralised database that salesrepresentatives can access. 200.000 contacts have already been entered into thedatabase which is used by sales representatives to get to know customers and targetmarketing actions to the specific profile of a customer.The sales process is eased owing to a reduction of manual processes for schedulingcustomer meetings. These meetings are organised to follow-up on existing customersand to investigate new customers. The meetings are directly managed via an onlinecalendar shared between the telemarketing company taking the appointments and thesales representatives.Sales representatives are able to better match preferences and needs of the customersthanks to detailed data available on their purchase habits. Representatives can nownegotiate prices, propose specific promotions to customers to reduce stocks or organisespecific events for targeted customers. This will probably have a positive impact on therelationships with the customer.Regarding the management of their own activities, sales representatives now have clearvisibility on their daily turnover and their position amongst the national sales force. Thisallows them to better manage their sales activity and to exactly know if they are in linewith their sales objective.Hypermarket branches marketing departmentActivities of the entire ‘professionals group’ can now be controlled from an accountancyand marketing point of view. Sales data of the income generated by the ‘professionalsgroup’ of each hypermarket is automatically gathered from the tills and represents reliable153

e-Business in the Retail Sectorinformation for accountancy. Marketing personnel can now monitor activities on a dailybasis while they got the information only once a month before the new system wasimplemented.With this new information now available, the marketing department is able to launchtargeted direct marketing campaigns by segmenting the ‘professionals group’ market.Detailed statistical sales analyses have made it possible to identify the top ten customersor the top ten products sold. The tool enables marketing personnel to analyse customerbehaviour through detailed purchase data provided by the system. Marketing efforts canbe optimised by putting efforts on specific customers; examples include securing theloyalty of regular customers or organising awareness and promotional campaigns forcustomers that did not use their card for a certain amount of time with specificpromotional actions. Before the new system was deployed, marketing actions like specificpromotional offerings were sent to a very large amount of people and these actionsremained fruitless since they were not adapted to the target public.Hypermarket logisticsOperations in the hypermarkets to manage the ‘professional groups’ segment have beencompletely 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 productivitygains at the tills.Another benefit results from the integration of e-deal with SAP allowing a better control ofthe customer payments. Before the implementation of the solution there was no controlpossible of non-paid bills of the customers who have certain payment facilities. Now adetailed view of the status of customer payments is provided though the solution.Hypermarket quality, hygienic, security and environment managementIn case of product retirement (for example, removing contaminated products) the Casinohypermarket branches now can exactly identify the customers who have bought theproduct 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 beforethe CRM solution implementation the quantitative benefits are difficult to measure at thisstage. The Casino Group however now has a tool in place that gives a situationaloverview allowing it to rapidly react to emerging quality, hygienic, security andenvironmental challenges.CRM tool usageThe Casino hypermarket branches today count about 200.000 contacts in their centralcustomer database and that 6.000 customer meetings could already been realised in 20months allowing the representatives to attract more customers.18.000 customer loyalty cards have been deployed until today which is considered to bea great result. Customer satisfaction has also increased due to the simplified shoppingprocess for loyalty cards owners.154

e-Business in the Retail Sector5.5.4 Lessons learnedThis case study illustrates the successful implementation of a CRM solution with a rapidreturn on investment in terms of benefits achieved. It is important to highlight that such asolution is not only suitable for large enterprise but also for small businesses due thesimplicity of the solution and the small budget required to put it in place: the solution isnot 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 themaintenance of the system to an external company. This makes such a solutionparticularly 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 companyshould carefully analyse its functional needs and distinguish the different functionalities itwants to deploy. ‘In order to facilitate the adoption, the deployment should be donefunctionality by functionality starting with the most basic one’ recommends StephaneBayle, the CRM project director. The Casino Group started with the deployment of acentralised customer database which was the most important functional requirement.Another important point was the integration of a “representative” panel of users in theproject from its very beginning. Thanks to their active participation in choosingfunctionalities and interfaces that meet user expectations the solution is widely used andaccepted by the end-users.Even if the return of investment of this project cannot yet been calculated, Casino isconvinced that this project will bring great value to their customer-centric strategy in thenear future.5.5.5 ReferencesResearch for this case study was conducted by Caren Hochheimer, Altran, on behalf ofthe Sectoral e-Business Watch. Sources and references used:Interview(s) with Stéphane Bayle, 4/01/08, Sainte Etienne FranceCasino group Company annual report 2006Websites:• http://www.groupe-casino.fr• http://www.e-deal.com/• www.logicacmg.com• http://www.geant-collectivites.fr/155

e-Business in the Retail Sector5.6 4fitness, GermanyAbstracte-Marketing is an important, yet often undervalued factor for generating online sales.4fitness, a small fitness equipment retailer based in Germany, uses e-marketingactivities successfully to generate more than two thirds of its sales from an internetshop. This case study illustrates online sales and e-marketing activities at 4fitness. Theexperiences of 4fitness produce several significant conclusions about e-marketing andonline sales for rurally-based micro firms. Among these are the effects of e-marketingon the company, the impact of the internet shop on the company’s market reach, andthe role of business partnerships for bridging resource and skill gaps.Case study fact sheetFull name of the company:4Fitness e.K.Location (headquarters / main branches): Rohrdorf, GermanyNo. of employees:Owner-managed firm, no other employeesSectorRetail sale of fitness equipment and accessoriesMain business activity:Sales to consumersPrimary customers:Private consumers in GermanyYear of foundation: 2006Turnover in last financial year (€):n.a.Most significant market area:GermanyMain e-business applications studied: * e-Sales, e-Marketing5.6.1 Background and objectives4fitness (http://www.4fitness.biz/) is a specialist fitness equipment trading company basedin the rural town of Rohrdorf which is located some 70 km South-East of Munich inGermany. A local entrepreneur founded the company in March 2005. This entrepreneurdecided to set-up his own company following several years of selling equipment as asales supervisor in a medium-sized sports shop in a neighbouring town. Tradecommenced in October 2005 when the first pieces of equipment were sold. Products onsale include large fitness equipment such as exercise machines and treadmills; smallequipment such as heart rate monitors; and accessories such as free weights. Thecompany sources these products from ten key suppliers and sells them on to customersall over Germany and German-speaking neighbouring countries including Austria andSouth Tyrol in Northern Italy. As of 2008, the main customers of the company areconsumers from all over Germany. A minority of sales (less than 5%) is to hotels, socalledrehabilitation centres and fitness studios. The majority of the equipment is soldover 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 newlyestablished firm in a rural location, such as 4fitness, this competitive nature presents amajor problem: it is very difficult to reach customers through a bricks-and-mortar shopalone – another sales channel reaching a wider audience is essential. During his previous156

e-Business in the Retail Sectorwork engagements, the owner recognised the growing importance of the internet. Salespeople in the fitness equipment business and manufacturers of fitness equipment alsosuggested 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-businessThe main initial technology task for the entrepreneur was to get the internet shop up andrunning. This was crucial as the bricks-and-mortar shop is in a rural location and theowner planned to use the internet to generate extra sales. The owner has usedcomputers in his previous job as a sales supervisor and he is used to using softwareprograms such as Microsoft Office applications and email programs. Yet, he does notpossess computer programming skills and he was not in a position to develop and launchan internet shop from scratch without help. He therefore approached one of the directorsof a technology services provider, who lives locally. This technology services provideragreed to support 4fitness in setting up and launching an internet shop. The online shopdevelopment phase lasted six months in total. During this time, five briefing sessions tookplace 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 wasrunning smoothly, it took another three weeks to add all the product information to theonline application. The owner added the product information to the shop while thetechnology services provider carried out all the technical work.e-marketingBesides setting up the shop, the other major task for 4fitness was to establish the shopand market it to potential customers. 4fitness engages in a number of e-marketingactivities to achieve this objective. The main activities are Google search engineoptimisation and placing Google online ads. ‘Google is the A&O of online advertising ifsomeone wants to sell something on the internet. Without it, there is no success!’ (JakobSteiner, 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 placingonline ads on Google. He uses this application -which is owend by Google and freelyavailable over the internet- to place the online ads. With AdWords, 4fitness can createads, choose keywords, make ads appear on Google, set budgets for ad campaigns, andmake payment to Google for their e-marketing services. Search engine optimisation 71 incontrast is considered less straight forward by the owner of 4fitness: he thinks theprocess of aiming to place the products on offer in his online shop on early search pagesis a complicated procedure. The owner uses the Google Keyword tool to optimise thesearch engine results for the products in his online shop.71 According to Wikipedia (2008) ‘Search engine optimisation’ is the process of improvingthe 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 ispresented in the search results or the higher it "ranks", the more searchers will visit thatsite.157

e-Business in the Retail SectorAt the beginning, the owner concentrated his efforts on two search words: ‘Laufbandand‘Heimtrainer’ (treadmills and exercise machines respectively). Yet, he felt these effortswere unsuccessful as, over a period of three months there was no significant move upthe search pages and sales did not increase either. Hence, he shifted his efforts awayfrom product groups towards advertising specific models of treadmills and exercisemachines such as “Crosstrainer CTR2”. This resulted in an increase of sales of thespecific models advertised as well as a move up the search pages. Overall, the ownercomments, that embarking on e-marketing is a ‘trial-and-error’ process. The technologyservices provider was a valuable source of advice for 4fitness especially regarding theuse of AdWords and optimising search engine results. ‘Online advertising is difficult; thetricky question is what to advertise where’ (Jakob Steiner, 4fitness).Although Google is the main focus of e-marketing activities at 4fitness, the owner alsoregistered with price search machines such as http://www.guenstiger.de. 4fitness’ ownerdecided not to engage in other price search engine activities apart from registering. Forthe launch of the shop, online banners were placed over a period of five months on theonline sports pages of the main regional newspapers. These banners appeared on all thesports-related sections and pages of the newspaper’s websites. This newspaper waschosen for online advertising by the owner following a short analysis of media data: withsome 40.000 page views a day the owner was of the opinion that online ads on thisnewspaper’s websites were suitable.Technology used and cost for setting up and advertising the online shopOne desktop computer and a high speed internet connection are necessary for runningthe online shop and engaging in e-marketing. The shop is hosted on the server of a largeGerman telecommunications provider and the owner accesses it via the internetconnection. From a software perspective, the desktop computer contains the commonMicrosoft Office programs. When an internet order comes in via email, the owner printsout the transport papers and the bill, attaches these documents to the equipment from thewarehouse and calls the transport firm to pick it up. The customer gets the equipment twoto three days after the order was placed. 4fitness has an ongoing service contract with athird-party provider, which assembles the equipment bought by the online customers atthe customer’s premises. This equipment assembling activity is included in the onlineprice.4fitness paid approximately 5000 Euros to the technology provider for developing andsetting up the online shop. This included all the technical and administrative work. Thepartner firm is responsible for the technical maintenance of the online shop while theowner looks after the content. One of the initial jobs for the owner was to add the differentproducts and product information (such as pictures and text describing the products onsale) to the online shop. This activity lasted about three weeks. Initial costs for AdWordsamounted to about 1500 Euros. On top of that, some 2000 Euros were spent on furtheroptimising the shop and the online advertising. Ongoing costs include the hosting fee forthe 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 chosenby the owner and the click rates (how often searchers click on the online ad placed)achieved.158

e-Business in the Retail Sector5.6.3 Impact of e-marketing and selling onlineThe effects of e-marketing and selling online at 4fitness are organised into the followingfour types: e-marketing, market reach, employment and the ability to concentrate on corebusiness activities.e-marketing effects4fitness generates between 75% and 80% of its sales from the internet shop; and, as faras the company is concerned, e-marketing is a critical success factor for generating thesesales. Of the various e-marketing techniques employed, Google search engineoptimisation and placing online ads on Google are significant, as online sales are directlyaffected by these e-marketing activities: an increase in sales of the specific productsmarketed is measurable. Banner advertising in contrast shows no direct effects on onlinesales although, according to 4fitness, intangible desired effects such as creatingawareness about the company and raising its image should be taken into consideration.Besides marketing via Google and banner advertising, 4fitness uses registrations withinternet price search engines as an e-marketing technique. Again, this techniqueproduced no actual increase in online sales, but the owner reckons that it may havebrought potential customers to the company’s online shop that eventually might purchasesomething.Market reachRetail trade over the internet, linked with a clear e-marketing strategy, is enabling 4fitnessto sell its products all over Germany and German-speaking neighbouring countries.4fitness is therefore able to overcome national geographic boundaries; and to benefitfrom reaching this national market. National and language borders however are difficult toovercome 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 tobe 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 allover Germany buy fitness equipment and accessories online at 4fitness. In terms ofproducts sold, all different types of products on offer sell via the internet shop.Impact on employmentThe online shop and the well-functioning relationships with the partner firms, especiallywith the technology and the equipment services providers, enable the owner of 4fitness torun his business without employees. Another factor besides online shop and partnershipsis that business processes at 4fitness are straightforward: the owner orders products fromsuppliers and puts these into a warehouse until the actual sales comes through; or, if outof-stock,he asks suppliers to send products directly to customers with the service partnerensuring 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 at4fitness, there is no need to physically showcase equipment in an online shop. Thissaves 4fitness from having to employ sales staff manning the bricks-and-mortar shop inRohrdorf during regular opening hours. Hence, selling over the internet is one factor(besides relationships with partner firms and business processes structure) that isnoticeably affecting employment at 4fitness.159

e-Business in the Retail SectorAbility to concentrate on core business activitiesSelling equipment and accessories is the core business activities at 4fitness. Thisincludes e-marketing activities. The strong relationship with the technology providerenables the owner of 4fitness to concentrate his efforts on the selling and marketingactivities as the partner firm provides adequate technology support for the online shopand ample advice regarding e-marketing. The owner even goes as far as commentingthat he has no worries about technical issues because the partner firm is ‘always there’.Furthermore, 4fitness uses a specialised logistics provider, a globally-operating Germanlogistics firm, to ship its products; and it uses a dedicated third-party service provider,assembling equipment sold by 4fitness at customer premises. These partnerships givethe owner space and time to concentrate his efforts on core business activities.5.6.4 Lessons learned from studying online sales and e-marketingactivities at 4fitnessThe owner of 4fitness set-up and established a small retail business trading fitnessequipment and accessories in the rural town of Rohrdorf in Germany. The two main saleschannels for the firm are a bricks-and-mortar store and an internet shop. From theexperiences of 4fitness, the following lessons about e-marketing and selling online can belearned:e-Marketing is a complex issue, especially for micro firmsThe experiences of 4fitness show that engaging in e-marketing is a complex issue: microfirms need to make choices about the extent, type and scope of e-marketing. Without thesupport from an experienced e-marketing partner firm (the technology provider), theowner reckons, it would have been very difficult for him to make adequate choices andgrasp the potential of e-marketing. In terms of e-marketing processes, a trial-and-errorapproach was, and continues to be, a suitable strategy for approaching e-marketingactivities at 4fitness. The owner however notes that these activities are bounded byresource capacity such as financial resources available to carry out e-marketingcampaigns and time available for spending on activities.The effects of e-marketing are difficult to measureWhen 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 placingads on Google and optimising Google search engine results. Banner advertising andregistering with internet price comparison sites did not produce measurable effects.Indirectly though, these actions have intangible effects such as creating awareness aboutthe company. Apart from direct effects on the company’s online sales and indirect effectson the company’s publicity, 4fitness reports that e-marketing influences the company’soverall 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’stime is particularly difficult to put into numbers. Hence, overall, it is difficult to measure theeffects of e-marketing.160

e-Business in the Retail SectorInvolving Google in e-marketing activities is important for generatingonline salesWhile many different kinds of e-marketing techniques are generally available, the typeand extent of activity chosen determines the degree of the effect and, indirectly theactivity’s success. 4fitness observed that e-marketing activities involving Google had thehighest impact on actual internet sales of all the e-marketing activities the companyengaged in. These effects could not be observed for other search engines 72 . Hence, theowner of 4fitness intends to continue placing the emphasis of his firm’s e-marketingactivities on advertising via Google.Relationships with business partners help micro firms to overcome lack oftechnology skills and enable owners to focus on core business activities4fitness is able to benefit from three strong partnerships with specialised servicesproviders 73 : a technology partner firm supports the owner in technical concerns; alogistics provider ensures equipment delivery; and an equipment assembling servicesprovider sets up equipment sold at customer premises. These partnerships enable theowner of 4fitness to overcome a lack of technology skills; a lack of logistics resources;and geographical equipment set-up boundaries. Relationships between 4fitness andthese partner firms are established, working-well and sustainable. Preconditions for thesesuccessful partnerships include that these business partners provide the exact skillsrespectively resources needed by 4fitness at affordable prices and ensuring a high levelof service quality. Hence, the owner is able to concentrate his efforts on core businessactivities.Regionally-based micro firms can reach national markets through sellingover the internetThe online sales figures at 4fitness show that the company is selling to customers all overGermany. The internet is therefore giving the company access to an entire nationalmarket. Yet, while it dismantles boundaries within a country 74 , it seldom spreads acrossnational boundaries: the majority of sales at 4fitness come from within Germany. Oneexception from this observation is countries where the same languages are spoken:4fitness has been able to sell to German-speaking countries over the internet, crossingnational boundaries.Customer service is an important component for sustainable online salesThe owner of 4fitness indicates that customers, and especially online customers, oftenprovide positive feedback about 4fitness’ service. Online customers tend to appreciatethat delivery charges and on-the-customer-premises equipment set-up are included in theprice; and that 4fitness is accessible, reacting quickly to customer queries. Specialisingon fitness equipment and accessories also gives 4fitness a competitive edge, as theowner is able to provide expertise and an informed service to customers.72 such as Yahoo, Ask Jeeves and Baidu73 The business’ connection with an accountant is not included as it is considered an essentialpartnership74 Such a crossing regional and provincial boundaries161

e-Business in the Retail SectorConclusionThe experiences of 4fitness illustrate that e-marketing is a critical success factor forgenerating online sales: the type and extent of e-marketing actions chosen matter.Entrepreneurs and micro firm owners should therefore choose their e-marketing activitieswisely. A potentially useful source for e-marketing support is partner firms. Thesepartners can provide entrepreneurs and micro firm owners with e-marketing expertise andguidance, although it is not limited to these activities. Logistics and specialised serviceproviders, for example, can also be important sources for acquiring resources and skills.Another important lesson from 4fitness’ experiences is that selling online enables ruralmicro firms to reach national market, therefore widening market reach.5.6.5 ReferencesResearch for this case study was conducted by Dr. Maria Woerndl, empirica GmbH onbehalf of the Sectoral e-Business Watch. Sources and references used:Interview with Jakob Steiner, owner 4fitness, April 2008Websites:o http://www.4fitness.biz/o http://www.techdivision.com/162

e-Business in the Retail Sector5.7 Fleria Floral Creations, GreeceAbstractFleria Floral Creations is among the leading companies in the flower industry inGreece. The creation of an e-shop was Fleria’s attempt to increase the number oforders placed through the internet, sell more ready-made floral creations and extend itsmarket share. This attempt did not reach its potential because of industry-specific andcultural 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 itscurrent attempts to overcome the identified barriers to e-business.Case study fact sheetFull name of the company:Location (HQ / main branches):Main business activity:Year of foundation: 1983Number of employees: 50Turnover in last financial year:Primary customers:Most significant geographic market:Main e-business applications studied:Fleria Floral CreationsAthens – GreeceFlower sales, Floral creations2.5 million eurosPrivate customersCompanies in various sectors (hotels, magazines,newspapers etc.)Athens, AtticaBarriers of ICT and e-business, e-Sales5.7.1 Background and objectivesFleria Floral Creations was established in 1983 by Nina Ioannidou as a GeneralPartnership. In 1996 it was turned into an industrial and commercial S.A. because, inaddition to selling ready-made flowers, it became involved in the design and creation offlower compilations and gifts. From 1996 until 2002 Fleria focussed on the establishmentof a network of shops in Athens and increased them from two to six. It is currentlyentering the process of franchising. Fleria positions itself at the upper end of the marketselling high-quality flowers and flower compilations and providing customised service toprivate customers and organisations. In 1996, Fleria’s sales were evenly distributedbetween private customers and corporations. More recently, a larger proportion of itssales were directed to private customers. Its clients require distinguished flowers orflower compilations that are rather uncommon and cannot be easily found elsewhere inthe market. This is the reason that Fleria’s luxurious products are sold at a premiumprice. Out of its 20,000 customers, more than 5,000 are estimated to belong to the topendof 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 inan elite niche market by targeting customers which require distinguished or customisedproducts, it primarily competes with only two other companies.The principal reason that led Fleria to create an e-shop was to provide its customers withthe opportunity to have on-line access to all its products. The objective was to encourage163

e-Business in the Retail Sectorsome of them to shop through the internet but also to enable them to see the productson-line and visit the shops, or place orders to the sales advisors by phone. Anotherobjective of the e-shop was to encourage clients to buy some ready-made products thatwere already listed on-line, rather than order customised products. This would reducethe extremely high cost of creating customised products for the majority of clients.5.7.2 e-Business activityFleria assigned the creation of its e-shop to a third party in 2003. The e-shop has beenoperational since then. The cost for the creation of the website and the set-up of acentral server was 5,000 Euros. The annual maintenance cost for the website and thecentral server is 1,500 Euros. The central server operates at Fleria’s headquarters andprovides internet access to all six shops. This enables the sales advisors to know whatproducts customers refer to when they receive phone orders.Following the creation of the e-shop, Fleria realised three important barriers that limitedthe success of their ICT-based activities. First, only a small minority of Fleria’s customersdecided to place orders through the internet. A key reason behind this phenomenon isthat flowers are a luxurious and sentimental product. Most of the upper-class customerswho pay premium prices for the products do not want to order through the internet butprefer 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 everyyear 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 tocontact sales advisors in order to fulfil this need. “When you buy a flower you fulfil asentimental need…Customers need to receive that from our sales advisors, and they donot get that through the net. This is where all the difficulty lies. The sentimental part is90% of the sale point of Fleria” (Interview with Mr Tsilias). Responding to these emotionscannot be achieved when clients make a transaction through an electronic, automated,impersonal system. According to the manager of Fleria, the same problem is faced bytheir two key competitors, limiting the potential success of their e-shop. In conclusion, thee-shop did not have a major impact upon the wealthy clients other than providing themwith some information which speeded up the sale process. These customers are key forFleria’s success. Therefore, the organisation does not want to risk taking away fromthem the fulfilment of their sentimental needs and the feeling of satisfaction they receiveby speaking to sales advisors.Second, while the Greek IT market and the broadband connections in particular appear tobe booming from 2004 onwards, consumers’ low trust in on-line transactions was anotherreason that limited the success of Fleria’s e-shop. Credit card fraud is an importantreason 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 placetheir orders to their sales advisors rather than on-line. Additionally, despite the increasingnumber of internet users in Greece, this is still at low levels compared to the EuropeanUnion’s average. This phenomenon is not unique to the flower industry, but seems to beaffecting e-shops of leading organisations in several other industries. Low trust in theinternet does not only affect on-line transactions but is also manifested in the trust placedupon the quality of the products that are on-sale. “Many times the customers say: thesewonderful roses that I see on-line, are they going to be the same? They want to hear thatthe flowers will be fresh, that the result will be amazing, that the delivery will be right on164

e-Business in the Retail Sectortime, they want to hear that. Greeks do not trust the internet yet. You may see a Ferraribeing sold on E-bay, and an American might buy it quickly to take advantage of the pricebargain. 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 generaldistrust 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 alwayslisted on the website. In addition, Fleria did not invest in any e-marketing activities inorder to promote the e-shop. The website was only advertised to existing customersthrough leaflets and brochures which listed their products. The lack of e-marketingactivities (advertising, search engine optimisation) limits the e-shop predominantly to itsexisting client pool. Also, the payment system was described by Fleria’s manager ascumbersome. A bank acts as an intermediary between the client and Fleria. Theprocedure 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 andproblems occur (e.g. need for frequent communication among sales advisors, drivers,bank officers etc). Taken together, these facts suggest that Fleria did not placesubstantial focus on planning and organising this side of its business.Given the aforementioned barriers to the success of Fleria’s e-shop, several changes areplanned to take place from November 2007 until March 2008. A key objective underliningthe planned changes is the increase in the number of ready-made flower creations, sincepreparing customised products for all customers is too costly. This objective will befacilitated by continuously upgrading the e-shop with new products. Customers who tendto phone the shops will be encouraged to view the products on-line and place ordersdirectly through the internet. This is expected to benefit customers since they will needless time to place an order and will also view the products rather than listen to theirdescription. From an organisation’s point of view, Fleria expects to be able to sell moreready-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 thee-shop) led the company to decide to set-up a central call centre. Receiving all orders ina central call centre is expected to improve the organisation of deliveries and is likely toreduce related delays because fewer agents will be involved in receiving calls andorganising deliveries.Finally, e-marketing activities such as advertising on popular portals is expected to takeplace. Fleria will invest in advertising only after the organisation of its production side andits logistics are improved, since the organisation is already facing a full load of dailyorders. Advertising is currently considered as a longer-term plan, since the companymight risk receiving more orders than those it can handle.5.7.3 ImpactThe 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 inthe sense that it served an informative role for the company’s clients, which contributed tooverall sales. Also, this ‘experimental’ phase provided important lessons to Fleria whichled the company to invest further in its e-commerce activities.165

e-Business in the Retail SectorThe e-shop was not successful in terms of encouraging customers to place ordersand 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 achievedthrough the internet.The annual turnover of the e-shop is a mere 6,000 Euros per annum. This amountsto 0.24% of the total annual sales of Fleria, and is equivalent to the daily turnover ofa single shop! From a financial perspective, the e-shop breaks even.The e-shop was believed to be successful in terms of giving customers theopportunity to be informed about products and see them. The website also helpedsales agents to serve customers because the latter could see the productspromoted by the former.Following the above results, the company realised the potential of investing furtherin its e-commerce activities, particularly regarding its corporate clients. This willlead to the set-up of a central call centre, re-organisation of production and logisticsdepartments so as to cope with increased forecasted demand created through thee-shop.5.7.4 Lessons learnedA key learning point is that even an improved version of the e-shop will be faced withconsiderable barriers because of the particular niche market that Fleria positions itself.Buying flowers involves a sentimental process which is not easily experienced throughthe internet. Selling floral creations on-line is also hampered by the fact that wealthycustomers prefer to introduce themselves to sales agents and expect personalisedservice and customised products. It is hence not unsurprising that Fleria claims thatselling ready-made (rather than customised) floral creations might reduce the company’sprestige. Nonetheless, they believe that a proportion of their clients, particularlycorporations, could use the internet and place orders on-line since these tend not alwaysto be emotional purchases.Continuous investment of time and effort on the e-shop was another key lesson forFleria’s managers. Although the e-shop was supposed to be automated to a great degreeand one employee was assigned to check the orders with a certain frequency on a dailybasis, 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 onthe website. Fleria realised that some individuals or a third party need to be continuouslyworking 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 onlineappears to be linked to the fact that many Greek consumers do not yet trust theinternet. Clearly, this can be related to the fact that the use of the internet is still at itsinfancy in this part of Europe. Greece ranks 24 th out of the 27 th EU Member States, with23% of households having internet connections, compared to 49% EU average(http://www.eett.gr/conference2007/pdf/Tsemperlidis.pdf), while the use of e-commerce inGreece is 1.1% compared to 4% EU average (ibid.). In spite of the aforementionedindustry and country specific problems, Fleria decided to invest further in its e-shop. Bydeveloping and investing in its e-shop alongside other departments, it foresees anincrease in its sales especially to corporate clients and a lesser extent to privatecustomers.166

e-Business in the Retail Sector5.7.5 ReferencesResearch for this case study was conducted by Dr Konstantinos Tasoulis on behalf of theSectoral e-Business Watch.Interview with Mr Pavlos Tsilias, Director of Fleria, Head of E-shop, 19 September2007, AthensCompany website, http://www.fleria.com (accessed September 2007)http://www.go-online.gr/ebusiness/specials/article.html?article_id=549October 2007)(accessedhttp://www.flowers.org.uk/index.htm (accessed 10 October 2007)Consumers and broadband connections,http://www.eett.gr/conference2007/pdf/Tsemperlidis.pdf (accessed 18 October2007)167

e-Business in the Retail Sector5.8 Smart Supermarket, MaltaAbstractSmart Supermarket is a leading food and household retailer in Malta. In 2001, itlaunched its online shopping services, making it the first supermarket in Malta to offerthis facility. The challenges faced were many, but Smart’s board of directors alwaystried to find ways and means to address them. Although this solution still does not havethe critical mass of customers needed to attain profitability, Smart’s top managementintends to continue investing in it as they anticipate benefits, in terms of an increase inonline customers, in the longer term.Case study fact sheetFull name of the company:Smart SupermarketLocation (HQ / main branches): Balzan, MaltaMain business activity:Food and Household RetailerYear of foundation: 1981Number of employees: 120Turnover in last financial year:n.a.Primary customers:Food and Household ConsumersMost significant geographic market: MaltaMain e-business applications studied: e-Sales5.8.1 Background and objectivesSmart Supermarket is a family-run business consisting of one large store situated in thecentral part of the island. Its success story goes back to the early 1980s. At that time, thecompany used to produce shirts. There was however a shift in the market with mostinternational manufacturers moving to other countries in search of cheap labour. The lateCarmelo Grech decided that it would make sense to move out of the textiles marketwhich was facing a slump. Thus, the idea of opening up a supermarket came aboutfollowing the slump faced by the textiles market in Malta. Smart supermarket waseventually opened in Balzan (a central location in Malta) in 1981 in the rather limitedspace of the shirt producing factory.Then, few people believed that the idea would survive as it had to compete with the greatnumber of small grocers that controlled the market. Small grocers, apart from selling dailynecessities, were seen as social interaction points. On the other hand, it was perceivedthat a supermarket would somewhat remove the social aspect from the daily shoppingexperience.However, the availability of a broad selection of goods under a single roof at relatively lowprices, made Smart supermarket increasingly popular with shoppers. The success ofSmart attracted competitors to enter the market. Yet, competition was never perceived asa threat. On the contrary, it gave the owners of Smart the necessary drive to continueexpanding 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 themost important players in the Maltese supermarket area: being situated in a highly-denseresidential area, having upgraded its parking facilities and having increased the floor168

e-Business in the Retail Sectorspace so that everything remains on one floor, made it an ever more convenient place tobuy daily and household necessities.Following the successes of other foreign retailers engaging in e-commerce solutions toexpand their businesses, such as Tesco and Sainsbury’s in the UK, in 2001 Smartsupermarket extended its operations on to the web; making it the first supermarket inMalta to offer this facility. Being an established supermarket with many new entrants inthe local market, Smart wanted to gain the coveted first mover advantage, as it had donein the early years. The idea was that of retaining their original customers and thepossibility of tapping into a new market. Such strategy was seen as a way of givingcustomers the flexibility of shopping at the store, as well as ordering via the internet andpick up their order at the store or having it delivered.5.8.2 e-Business activityIn order to put their idea into practice, the management and board of directors of Smartsupermarket were in search of a company willing to undertake the challenge. Systemproviders at the time were not only limited, but it was also very hard to find a companywilling to embark on the development of the proposed e-commerce solution. Finally,AcrossLimits, a young dynamic Maltese company was approached and its developersstarted working hand-in-hand with Smart’s top management to deliver theaforementioned additional service to customers.The challenges faced were many. Apart from having thousands of products to uploadonline, there were neither photos nor a simple and consistent description of products inthe stock database. The enormous exercise of placing products online was done incollaboration with suppliers. They have themselves decided how their products shouldappear listed (if at all) and they have supplied the details accordingly. Primarily, yearlycharges 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 eachproduct, involved a lot of chasing on the part of Smart’s personnel to obtain thenecessary 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 instore 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 beaddressed. Smart launched an event to illustrate how simple online shopping is. For thispurpose, in the first few months a call centre-like system, with 24-hour email support wasoffered for customers who were getting lost online. However, the fear of online paymentswas still an issue, and scary articles on Maltese newspapers made the matter evenworse. 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 cardsbecame increasingly popular with online shoppers. In fact, Smart’s SSL (Secure SocketLayer) server encrypts all the information entered in each order form prior to sending itfrom a personal computer to Smart’s server; in this way there is no risk of having169

e-Business in the Retail Sectorpersonal information leakages. Besides, orders reside in a secure area on the server andonly 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 missingfunctionality and additional features, and the constant updating of product details, pricesand photos. Instead of subcontracting the latter service, the board of directors eventuallydecided to hire the person in charge of the above-mentioned exercise. Such decisionreduced both the time to send and receive information to and from the respective partyand the costs involved. As to training, employees were given a 6-month training perioduntil they familiarized themselves with the system. The solution did not involve the hiringof 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 storealongside regular customers and another two drivers to deliver the orders at agreed timesaccording to Smart’s delivery schedule. In fact whereas before these personnel used tostack the supermarket’s shelves or do other duties as required, following the introductionof the e-commerce solution, their duties were redesigned to meet the needs of an onlineshopping system.With 625 categories of food and household goods for the large variety of productsavailable, Smart supermarket is proud to be the first local supermarket to launch acomplete online shopping experience to customers. This system makes the supermarketaccessible to anyone 24 hours a day, 7 days a week. Supermarkets in Malta open fromMondays to Saturdays, and they barely stay open till 8 at night. Online shopping isparticularly 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 beconsidered 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 onlineshopping section with the password that will be automatically provided via email. Beforestarting any order, a customer has to log in the system using his own email andpassword. The next step is that of browsing through the virtual aisle adding products tothe shopping cart list and once ready, the customer must click on the Checkout button asillustrated 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 theneeded criterion is met, the customer will then be transferred to a secure communicationlink, whereby the credit card details, for those who opt for the online payment system, areentered. On this last form, users must also confirm whether they would like productreplacements should something be out of stock. Once completed, the order will be sent toSmart’s server where it will be processed for delivery or pickup service. A copy of theorder will be sent by email for the customer’s own records. Online shoppers can alsosave the shopping cart for future use. Besides, all shopping at Smart, whether online or instore contributes to the Smart Loyalty Card points; which can be exchanged to productsavailable through the scheme.170

e-Business in the Retail SectorExhibit 5.8-1: Checkout procedure of the e-sales applicationSource:e-business Watch 2007/2008Online shoppers must always allow 24 hours for deliveries; which are available to allareas in Malta, excluding Gozo and Comino. Delivery times are agreed telephonicallybetween the delivery people and the customer on a day to day basis based on Smart’sdelivery schedule, which can be accessed online. The delivery schedule has been basedaccording to which zone of the island a locality resides in order to ensure efficient andeconomical deliveries. However, customers will be given the option to indicate a preferredday and time on checkout. When orders are submitted online, through a personal username and password, authorized personnel responsible for online shopping service willaccess the shopping lists sent by online customers. These personnel will then shopalongside in-store customers to fulfil the online orders on the part of the customers andonce ready the order will be in for delivery.A comprehensive online help section is also found in the website and this includes manyFrequently Asked Questions. Besides, registered users receive special offers via email,as well as information of all that is currently happening at the supermarket. Online formsare 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 enhancethe use of the fields entered by online customers while registering in the e-commercesolution, so as to use customer information for targeted marketing and personalizedpromotions. Currently, only generalised marketing is being used and this mainly involvesspecial offers sent to registered customers via email and giving out small gifts (such as abox of chocolates) with online orders during festive seasons; which is thought to be less171

e-Business in the Retail Sectoreffective 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 analysewhat the buying habits of different customer groups are, but will help them to be moreeffective and specific in their marketing activities. Besides, they are also planning torevamp the appearance of the website and are also working on improving theclassification of goods. Work on these changes is to be awarded to the system providerswith the most innovative and creative solution.Smart’s management also intends to improve the logistics and target areas which arefurther away from the store’s location. Although order deliveries for areas close to thesupermarket store are available every day from Monday to Saturday, customers residingin these areas are probably more liable to shop at the store. Although in Malta distance isnot much of an issue, Balzan, the area where Smart supermarket is located, is quite busyand traffic jams are a daily issue. Thus, online customers are more likely to be those whoreside further away from the store’s location and by improving the logistics to cater forsuch areas, Smart is likely to attract more online customers. With this investment Smart’smanagement forecasts a three- to six-times increase in online sales in the coming years.5.8.3 ImpactAlthough home delivery of items purchased online is appealing for those for whom goingout to shop is difficult for various reasons, such as physical disability, the need to care forsmall 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 thesupermarket. In fact, even though online shopping for Smart’s products has been growingsince it has been launched, it still only accounts for a very small portion of total grocerysales; 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 avery small island, this outcome is of no surprise. Apart from the fact that distance is notan issue for making supermarket errands, shopping for daily food and householdnecessities through the internet is a cultural shock for many. However, this has notdiscouraged Smart’s visionary board of directors because by offering an additionalservice to customers, they anticipate benefits in the longer term.As to business relationships with customers, in terms of loyalty, one cannot derive anyconclusions at this stage. At present, there is no competition in the area and thereforeonly if another local supermarket offers an e-commerce platform, would Smart’smanagement be able to test the loyalty of their current online customers.By involving suppliers in the process, business relationships have improved. During theinitial phase of this process, information to update product descriptions and pictures wastransmitted between Smart and suppliers either via telephone calls or emails. However,as aforementioned, this created a large burden. By enabling suppliers to do this workthemselves, much of the hassle involved in this process has been lessened. In fact, eachsupplier can now log into his personal account, with his own user name and password inthe website and view which of his products are available and how they appear online. Asto already-listed products, suppliers can upload product pictures and change and/or addproduct descriptions. Suppliers also have the possibility to see how much of eachparticular product has been sold online. Although big suppliers are making use of thisfacility, smaller ones are not utilising it as yet. Currently, about 250 suppliers are usingthis facility. This not only leads to cost reductions for Smart, but it gives much moreflexibility to suppliers.172

e-Business in the Retail Sector5.8.4 Lessons learnedUntil recently, service charges (i.e. the charges for delivery and the service offered bySmart’s personnel to shop on the part of online customers’ requests) were included inonline product prices. However, the management realised that this may be one of thereasons hindering online sales. In fact, online product prices, with an exception for dailynecessities, were approximately two percent higher than those found in the store. For thisreason, the management have recently reassessed Smart’s online pricing scheme. Afixed service charge of Lm2.50 (€5.82) has been introduced. This replaced the previousmark-up in online prices that used to make up for the online service. Therefore, whereasbefore the service charge was proportional to the amount of items bought (the more itemsbought, 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 inthe store will be available on the website at the guaranteed same price. This will nolonger put a negative perception of products being sold at higher prices online. Theservice charge will be conveyed much clearer to the online customer and there will be nolonger queries as to why products online are more expensive than those found in thestore. This has the potential to increase online orders. Since products online and in thestore bear the same price, customers will be more likely to buy products online. Theywould now be in a better position to trade off between paying the fixed charge for theservices 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 andmeet the minimum amount threshold of Lm40 (€93.17). This could have been perceivedas a burden on the part of the customer, especially if they did not need the number ofitems as had been specified in the online shopping criteria. For this reason, the newminimum order value has been lowered from Lm40 (€93.17) to Lm30 (€69.88) and the 10item minimum quantity has been removed.The board of directors also realised that currently the delivery schedule can be improvedto the benefit of online shoppers. Most online shoppers hold full-time jobs and thus it ismore likely that they will be at home after office hours. At present, normal delivery timesdo not cater much for these circumstances and the idea is that of shifting the deliveryschedule, which is currently from 9:00 till 19:00 (from Mondays to Fridays) and 9:00 till15:00 (on Saturdays) to one which is more convenient to online shoppers. To better meetcustomer needs, through their website, Smart is currently gathering delivery timepreferences in order to improve their delivery time bands. More than eighty percent of thefeedback received from online customers resulted in online customers preferringdeliveries between 16:00 and 20:00hours. It is envisaged that a change in delivery timesresulting from such feedback has the possibility to further increase online sales.5.8.5 ReferencesResearch for this case study was conducted by Sara Buttigieg, Malta Federation ofIndustry, 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 2007at Smart Supermarket offices.Websites:Smart Supermarket, http://www.smart.com.mt173

e-Business in the Retail Sector5.9 EMPiK, PolandAbstractThis report analyses EMPiK’s entry process into the e-commerce market. EMPiK is thebiggest books retail company in Poland. The focus is on the creation and history of thecompany’s e-seller Empik.com. The initial growth of e-business and internet use inPoland is described in order to uncover how selling books brings a mutual learningeffect to the entire EMPiK chain of stores.The launch of e-business activities at EMPiK has shown that e-commerce is more thansolely selling books: it allows getting strategic information of entire markets and, inaddition, bridges new channels of communication and provides product saleopportunities to costumers. As a result, EMPiK has been able to evolve together withthe market, using e-business as a means for joining the new economy.Case study fact sheetFull name of the company:Location (HQ / main branches):Main business activity:Year of foundation: 1948Number of employees: 2000Turnover in last financial year:Primary customers:Most significant geographic market:Main e-business applications studied:EMPiK sp. z o.o.Warsaw / 44 largest Polish citiesRetail (books, newspapers and magazines, music,films, multimedia and stationery)151.8 million eurosPolish consumersPolande-Sales, e-marketing5.9.1 Background and objectivesEMPiK is the largest Polish retail network selling books, newspapers and magazines(local and international titles), music, films, multimedia, stationery and photographicproducts. Bookselling, however, remains the main activity of the company. There arecurrently 98 EMPiK stores in 44 of the largest Polish cities, the majority of them in highstreet locations or main shopping malls. EMPiK employs more than 2000 people and itsturnover 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 storesin Poland. However, its e-business attempt, Empik.com, could not achieve a similarposition: while it is the second largest online retailer in this segment, it is still behind themarket leader, Merlin.pl. EMPiK’s principal e-business effort objective is to strengthen itsimportance in the virtual market for books and to consolidate its position in the knowledgeand internet era.75PLN, is the symbol of Polish zloty, the national currency in Poland.174

e-Business in the Retail SectorExhibit 5.9-1: Location and number of EMPiK stores in Polish towns and citiesSource: EMPiK/Sectoral e-Business WatchThe origins of EMPiK can be traced back to a network established in 1948: KlubMiędzynarodowej Prasy i Książki (Club of International Press and Book), which has beenthe only place in post war Poland that provided access to international publications for thewide public. At the beginning of the 1990s, 36 stores of the around 100 existing Klubbecame EMPiK stores and the biggest ones located in the largest Polish cities weretransformed 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 FundHetman in 2004 and then became NIF Empik Media & Fashion 76 (EM&F), one ofthe largest Polish operators of non-food consumer brands with over 270 shops in Centraland 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 managesbranded 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 werechanged into 23 EMPiK stores. Further plans of EM&F Group include the expansion incountries as Russia, Kazakhstan, Romania and Germany.7677National Investment Found has been one of the key-players in the Mass Privatisation Programthat started in Poland in 1997 aiming at privatizing over 400 medium and large size Polish stateowned enterprises.Part of NIF EM&F was also the chain of shopping centres Galeria Centrum (GC) which weresold in December 2006, the main reasons for selling GC was low profitability and lack ofsynergy with other companies in the EM&F Group.175

e-Business in the Retail Sector5.9.2 e-Business activityThe history of Empik.comThe main e-business activity within EMPiK is Empik.com, established in 1999 to enablevirtual access to the products sold by EMPiK. Development of e-commerce is consideredas an important strategic goal within EMPiK and the EM&F Group. However, in 1999 theinternet 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 toElektrim, a company that invested massively in internet activities. But a few months laterthe domain Empik.com was closed due to financial difficulties, caused mainly by thesystem of settlements between EMPiK and Empik.com. In fact, Empik.com as an externalcompany 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 hadhigher prices than in traditional EMPiK shops. An additional problem was an invalidsystem of financial settlements with the Polish Post Office, which in principle would allowcustomers to pay for products after the delivery to their houses. However, the wholesystem was not effective and quite often money for delivered goods was lost, thusinfluencing Empik.com’s profitability. Market conditions especially the “.com” crisis andfinancial difficulties of Elektrim (new owner of Empik.com) led to the collapse ofEmpik.com in 2001. All activities were suspended and Empik.com disappeared from thePolish virtual book selling market. The 2001 agreement between EMPiK and Elektrimguaranteed 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 reopenEmpik.com. As a result, the shop and the website were closed between 2001 and2005, until the agreement between EMPiK and Elektrim expired.Following the closure of Empik.com, only the large competitor Merlin.pl and a few smallersellers survived in the Polish market of virtual book sales. This opportunity enabledMerlin.pl to build a strong position and at present it is the largest e-bookseller in Polandwith 1.65 million clients monthly (December 2006). Moreover, in 2004 Merlin.pl was thefastest developing company in the ICT sector in Central Europe.After the agreement between EMPiK and Elektrim ran out, EMPiK recovered the rightsover the brand and a re-launch of Empik.com became possible in November 2005. Thecomeback of Empik.com was accompanied by a substantial advertising campaign.Nevertheless, it did not threaten the strong position acquired by Merlin, althoughEmpik.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 Germanwholesaler Libri was launched to extend Empik.com’s offer from 200,000 to 2 millionoverseas titles (books, music, films and multimedia). Empik.com managed to acquirearound 18% of the market within its first year of return to the market (2005-2006). UntilNovember 2006, the number of customers increased by 300%, reaching 476,000registered users 79 . Though not the market leader, at the end of 2006 Empik.com won theposition 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 booksellingwas the biggest e-commerce market in Poland: 64.3 % of respondents declared books to78In 2000 only less than 10 % of Polish household had Internet access.79Merlin.pl remains the market leader in e-bookselling, with profits of around 63 millions PLN in2006, whereas Empik.com registered 17.9 millions PLN of revenue that year .176

e-Business in the Retail Sectorbe 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 websiteAfter four years of absence from the Polish e-commerce market, EMPiK wanted to attractnew clients by offering an accessible and easy to use selling tool within Empik.com, aswell as additional services besides book selling. The main focus of Empik.com was onaccessibility 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 ofthe transaction and payment. The purchased goods could be delivered to the client orcollected in any EMPiK store in Poland without delivery costs. The click-and-mortarmodel benefits from the network of EMPiK shops to distribute products around thecountry. This strategy has proven to be very popular, as half of the clients in 2006 chosethe click-and-mortar model to buy products. One advantage of this method, especially forthose clients that do not trust internet payments or deliveries, is that it enables clients toorder 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 (about300%, see above), it became clear that the existing Empik.com selling platform (whichoffered 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 andtransactions. Furthermore, the growing numbers of internet users in Poland alerted theneed for a new technological solution. The issue was addressed by EMPiK’s Board and anew platform was prepared by a contractor, an American company called ATG 80 , within 9months. However, its final shape was not clear from the early beginning and it haschanged several times before it was launched in its final form in September 2007. Thenew technology is the ATG e-commerce solution, which allows not only online selling butalso enables to build continuous and personalised relationships with consumers bydeveloping various ways of interactions (via Web, e-mail, phone), and keepinginformation of customers. The new platform required specialised implementation, whichwas taken on by the Polish consulting company AMG.net SA 81 .The newly developed Empik.com platform changed the navigation approach: the ideawas based on the concept of EMPiK as a combination of stores and providers of culturalinformation to customers. The provision of cultural knowledge was a cornerstone for thedesigning 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 othernew or archived events in the whole of Poland.Empiklopedia: a database of artists containing more than 20,000 records (at thebeginning of platform operation, this number will grow). The content of this sectionis provided by Wikipedia and other mainly Polish providers of cultural information.8081ATG is a leading US Company which designs, monitors and implements e-commerce softwaresolutions. ATG products were rated on first position in 2006 by two independent analysts (ForresterResearch, Inc. and Gartner, Inc.) in a B2C (business to consumer) segment.Before working with Empik.com, AMG.net had clients among the largest Polish firms in sectors oftelecommunication (like TP SA, PTK Centertel) and finance (BRE Bank, Bank Millenium, mBank,Multibank, Bank Pekao).177

e-Business in the Retail SectorAfter the implementation of the new platform, an alteration of the cooperation betweenEmpik.com and other departments of EMPiK was observed. Currently, there isbidirectional cooperation principally with three departments: sales, logistics andMarketing, in which Empik.com not only receives support but also offers informationgathered at Empik.com about clients, which are used to modify and verify activities atthese departments.The service of payment transactions at Empik.com is currently provided by an externalcompany, PayBack (a limited liability company), which executes payment transactions fore-commerce activities in Poland. This solution, apart from taking over paymenttransactions between Empik.com and its customers, offers additional advantages: thereis no need for customers to engage in a registration procedure (what increases speed oftransaction); EMPiK.com has to take no responsibility for fraudulent intents and for thesystem of daily reports of payment for accomplished transactions; the company caneasily monitor sales on a daily basis. Payment can also be done by bank transfer orduring the collection of purchased products in EMPiK stores (click-and-mortar model).A software connection with warehouses checks the availability of the purchased good instock and time of sending, allowing Empik.com to provide additional applications for thecustomers, like the estimation of the delivery date. Furthermore, cultural andentertainment news from all over Poland and a service of used goods for sale (in e-baystyle) are available to Empik.com costumers. An innovation in the Polish booksellingmarket is the offer of books taken off the shelves (so-called backorders). This allowscustomer to access books that are not available anymore on the market and is also anadditional advantage for the company because it allows to clear old stock gathered in thewarehouses 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 itis less than 10 % of all customers but this number is growing). Empik.com enables themto buy Polish cultural products in other countries. In this sense, Empik.com also engagesin advertising abroad, for instance, last year a campaign in Polish pubs in London wascarried out.Empik.com moreover indirectly supports traditional sales in EMPiK shops. Special ‘infopoints’which are located in every store allow customers to buy products that are currentlyunavailable in the particular store or its warehouse. Info-points permit customers topurchase goods from Empik.com, however all transactions are still made by the store’sstaff, thus, the customer does not have to interact with the internet sale tools ofEmpik.com, although benefiting from it. Collection of ordered goods is generally possibleafter two or three working days at the store where the product was requested. Accordingto EMPiK management, this method of sale is useful as it expands the products on offerin medium and small stores in peripheral locations, giving their customers access to thefull range of products available in EMPiK mega-stores without extra spending for storinggoods, though not all clients are happy to wait for ordered product two or three days. Inspite of that, the number of customers accessing goods this way is constant and reachesapproximately 10% of all Empik.com clients.Since e-commerce requires additional description of the product, special requirements forsuppliers are made by Empik.com. All books on sale through the website need accuratedescription provided by the supplier, which has to be much more detailed than fortraditional retail activities. For instance, the description of books has to contain not onlyphysical features of the product but also comprise information about the content in order178

e-Business in the Retail Sectorto allow the costumer to see part of the book and make a better-informed purchasedecision. This description of the product is considered by Empik.com management as anefficient way of allowing clients to get acquainted with the purchased good and itfurthermore encourages him/her to buy the products. For all those reasons, Empik.com iscooperating with one of the EMPiK suppliers, a company called PolPerfect, whichprovides 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 than10%, however, it is expected to grow as the number of monthly customers in low season2007 (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 17.9mPLN; 4.7m euros).5.9.3 ImpactEmpik.com has an important status within the EMPiK network. Thanks to new tools forsupporting sales, the management of EMPiK has a chance of looking at ‘traditional’ retailfrom different perspectives and see both, drawbacks but also advantages. Solutions forthe former can be found in e-commerce (such as: allowing customer to access goods 24hours a day; knowing better needs and requirements of the customers), although bothareas of retail complement each other mainly as Empik.com uses the EMPiK network ofshops in the click-and-mortar sales and EMPiK shops uses Empik.com tools to sellthrough info-points. In this sense, it allows EMPiK to have wider access to customerscovering both, virtual and traditional markets.The major impact of Empik.com on the management and organisation of EMPiK is tobring it into the knowledge-based economy; and to support its modernisation and pavethe way to reach a larger number of customers, by activities including the following.Empik.com provides the entire company with ‘real time’ information regardingmarket needs, owing to an application that measures the activities of customers onthe website. Therefore, crucial information about e-customers is available to supportstrategic decisions in the entire company, for instance: the number of clients, timetaken to choose products, products sold and those looked at but not sold as well aspopularity of products even before they are on the market (through “pre-order”). Itshapes not only Empik.com’s retail activities but also influences strategiesdeveloped for traditional EMPiK stores.A closer relation with costumers is achieved through Empik.com, which suppliescostumers with “real time” information about products available at EMPiK includingprices and other useful data on shops and the company.EMPiK’s strategic aim of building shops connected with culture and entertainment isfacilitated by Empik.com, as it is a marketing channel to advertise and archivecultural activities that take place in EMPiK.Empik.com supports traditional retail in EMPiK shops. When a client cannot find aproduct in a shop, it can be ordered at Empik.com via ‘info-points’ that exist in everyEMPiK 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. Theobserved growth of customers’ number spread and strengthens the brand, besidessupplying a tool that facilitates selling in shops.179

e-Business in the Retail Sector5.9.4 Lessons learnedOne of the most important lessons learned from Empik.com’s experience is the mutuallearning that stands behind the cooperation between traditional retail and e-commerceactivities. Besides EMPiK using knowledge generated at Empik.com, the other way roundis also a reality, as said by the director of Empik.com, Tomasz Cisek: “Empik.com is ayounger brother of EMPiK, a brother who learns from the experience of the older one, butuses different tools for its own activities”.Another lesson is the importance of trust and patience when new solutions and toolsconnected to e-commerce are introduced in a company. In EMPiK this was made throughempowering the manager of the new department (Empik.com), to become a member ofthe EMPiK main board. This gave autonomy and status to e-commerce in the companycontext, influencing the entire organisational culture of the corporation. This solutionchanged the perspective of looking at internet not only as a technological innovation butalso as a tool for work, a tool that requires investment.The company also learned to benefit from the complementarities of both ways of sellingbooks, as, firstly, EMPiK shops use facilities embedded in Empik.com (info-points) toexpand their offer of peripheral shops and save storage and transport costs (astransported are only the purchased products) and to satisfy clients when they do not finda particular product available at shop. Secondly, Empik.com can reach more costumersby relying on the advantages of the large number of EMPiK shops to enhance sales usingthe click-and-mortar system. This requires closely interaction with different departmentsof EMPiK, especially logistics and marketing with Empik.com. Human-Resources wasalso 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 asupportive corporate system, by which staff can order merchandise to satisfy storedemand required at a certain time.The value of communication with costumers is also discovered. EMPiK is now able toaccomplish a two-way communication with its clients, which is in line with moderntechniques of marketing. The company manages to receive information on costumers,through messages on the website, email or even phone calls and consolidatedinformation 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 toevery client that accesses Empik.com.5.9.5 ReferencesResearch for this case study was conducted by Dariusz Świątek, on behalf ofthe Sectoral e-Business Watch. Sources and references used:Interview with Mr. Tomasz Cisek, director of Empik.com, member of the EMPiKMain Board who is responsible for management, sale and marketing, 25 September2007, EMPiK Headquarters, Warsaw ul. Krucza 50, PolandEMPiK annual report 2006 - Grupa EM&F podsumowuje działalność za 4 kwartały2006 roku (najważniejsze wydarzenia, wyniki finansowe, dalsze plany rozwoju),Warszawa 15.02.2007 [Group EM&F reassuming activity for 4 quartiles of 2006 (themost important events, financial results, plans of further development)]Gołębiewski, Ł., Rynek książki w Polsce. Edycja 2006 – księgarstwo hurtowe,Biblioteka Analiz, Warszawa 2006 [Books market in Poland. Edition 2006 –wholesale book trade]180

e-Business in the Retail SectorGołębiewski, Ł., Rynek książki w Polsce. Edycja 2006 – Dystrybucja, BibliotekaAnaliz, Warszawa 2006 [Books market in Poland. Edition 2006 – distribution]Hipermarket w komputerze, Ranking sklepów internetowych, 2006, Wprost41/2006, no 1243. (article in Polish weekly magazine Wprost)Zwierzchowski Z., Merlin kontra Empik – gwiazdkowe starcie, Rzeczpospolita24.11.2006, (article based on interview with Tomasz Cisek in Polish dailyRzeczpospolita).Websites:Company EMPiK: http://www.empik.comNational Investment Fund EM&F: http://www.emf.plNational Statistic Office: http://www.stat.gov.plCompany ATG: http://www.atg.comCompany AMG.net: http://www.amg.net.plMegapanel / PBI.Gemius: http://panel.pbi.org.pl181

e-Business in the Retail Sector5.10 Cyprus-PC.com, CyprusAbstractCyprus-PC.com is one of the largest online stores in Cyprus, aiming to supply highquality products and services to Cypriot residents. The company sells its goods onlineover the internet, via telephone orders and through traditional sales channels (retailshop). Those combined methods have been successful, resulting in a rapid increase oftotal sales and turnover since the firm was founded. In particular the value of usingcombined 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 inrelation to a sophisticated supply chain management.Case study fact sheetFull name of the company:Location (HQ / main branches):Main business activity:Year of foundation: 2003Number of employees: 10Cyprus-PC.comNicosia, CyprusTurnover in last financial year: ~684.000 €Primary customers:Most significant geographic market:Main e-business applications studied:Sale of laptops, PC peripherals and accessoriesCypriot consumersCyprusSupply chain managementMulti-channel sales approach5.10.1 Background and objectivesCyprus-PC.com was founded in 2003. It was the first Cyprus retailer for laptops. The firmis 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 isa 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 andconvenience of laptop selection via online catalogue with the personal contact and aftersale support of high street stores.The idea of setting up such an e-store started as part of advertising the other companythe two owners have, which provides web development services(http://www.hyperlife.com.cy). Another critical characteristic was the open mindphilosophy 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 necessarymodifications that were required to respond to the challenges of the Cypriot market.Hyperlife’s premises were also used for temporary storage of items ordered, traditionalsales and after sales support services. Hyperlife still maintains and manages the onlineactivities for Cyprus-PC.com.For advertising, the company uses a mixture of different channels such as web searchengines (i.e. Google) paid online advertisements, radio, newspapers, magazines andposters, depending on which is the most effective and efficient from time to time. This182

e-Business in the Retail Sectormethod of buying goods seems to be very appreciated by the Cypriot people. In fact themajority 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 thatCyprus is not a matured web-sales market and buyers like to talk to someone to verify theprices, give further explanations even recommendations for models and get furtherdiscount.5.10.2 e-Business activityInvesting in ICT from the beginningSince its beginnings in 2003, Cyprus-PC.com has been noticed for its innovative use oftechnology. Computer systems along with user-friendly web design have always had ahuge impact on the way it functions as a retailer. Cyprus-PC.com has used ICT systemsto recognise market trends early, to monitor order levels, and to avoid any delays. Thefirm senses the trend from the global market and consumers’ electronic questionnairesand feedback. To accomplish those procedures a custom-made customer relationshipmanagement (CRM) system has been developed, which provides accuracy in theconduct of financial transactions and quick delivery of products all around Cyprus. Thelatter is supported by a respectful courier company that ensures quick delivery.Moreover, ICT has had a profound impact on the way the company communicates withits customers. A very important element in this context is the different ways ofcommunication (online feedback, questionnaires and phone calls) the company offers toits customers as well as immediate response in less than 24 hours. The systematic use ofe-mail is also characterised as an important communication tool that has increased thevolume of the two-way-communication.Multi-channel approachThe business model of Cyprus-PC.com is a multi-channel approach: customers areoffered different possibilities for shopping. They can search for available products on theinternet and proceed on the online order. However, the Cypriot market is not yetcharacterized as mature regarding e-commerce and online sales. Although the website iswidely used and appreciated, pure online sales presently account for a rather modestshare of 10-15% of total business sales. The rest of them are either confirmed throughphone 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 lineand who to contact in case they have a question. Actually, the most common question isrelated to after sales support. They want to guarantee that the company provides aftersales support (even friendly advice on how to install software programs). Verification ofprices is a Cypriot characteristic: it is either because companies that have websites donot update their products and prices very often or because Cypriots like to bargain fordiscounts. Lastly the company offers them the option to come and buy the same productfrom its premises, but at a higher cost.Combined approaches are also used for payments and delivery options. Customers canpay via secure lines on the internet with the use of their credit cards. They can also paywith cash or cheque on delivery, or they can visit the company’s premises to collect theirgoods and pay by all the above mentioned ways.183

e-Business in the Retail SectorFast technological developments and the spread of high-speed internet access – over thepast five years a vast increase of ADSL connections has been noticed, although Cyprusis still placed at the last places in Europe 25 - enabled the company to make an earlystart in online retailing. The website was one of the first online stores launched in Cyprusand has been continuously developed since, with many features and services beingadded such as online technical support, newsletters, and promotional offers for registeredusers. The company is taking great care that the website is user friendly. It is companyphilosophy that the services offered need to have real practical value for customers. Forexample, the site shows the order status, sends updated e-mails on every change andprovides an identification number with which customers can be informed about thedelivery time of the ordered product.Products can be delivered to any address in Cyprus with an extra delivery cost chargedat 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 behalfof company. Cyprus-PC.com is concerned about online security: they only accept ordersthat are placed using the Secure Socket Layer (SSL) standard to prevent customers frominadvertently revealing personal information by using insecure connections. Paymentsare credited, once the orders have been processed and are on way to be delivered. Dueto the fact of small distances, that means that quite often, customers first receive theirproducts and then are charged. Credit card details are stored only if customers approvethat option.Online customers can register to receive an electronic newsletter that informs aboutspecial offers and promotional deals. The company has also implemented a system ofregular customer feedback sessions in which online customers are invited to completesmall scale questionnaires, make suggestions of how services could be improved furtherand are rewarded for their commitment to the company with special offers dedicated tothe company’s active users.The customers can check stock availability and reserve goods by calling the company’scall centre as well. It is company policy to process orders on the same day as long as theorder has been made before noon. Otherwise the delivery takes place next day.Market competitivenessOne significant advantage for Cyprus-PC.com is its strong relationship with the webdevelopment company: Hyperlife provides constant updates to the website and it offersknowledge about internet trends. The continuous development of the user-friendlywebsite assists customers to easily find what they are looking for. At the same time, thesystem collects aggregative details about the time spent and products reviewed. Thatallows 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 ofon-site support, online support and remote support with the customer’s authorizationensure 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 andreceive answer in less than 24 hours, or ask for remote technical support. A remotesupport software program has been prior installed on their laptop and in case they face adifficulty, a technician from the site can log it and investigate the faulty situation. Howeverthis requires customers to have access to the internet.184

e-Business in the Retail SectorAggressive marketing techniques are used as well. In particular, other similar online sitesare created giving emphasis only to expert users who do not wish to get any kind oftechnical support apart from manufacturer’s guarantee. However, the majority of thosebuyers are people who have extensive knowledge of IT systems or foreigners who willstay in Cyprus for a short period of time. Those techniques are used to increase salesand keep prices low, as other retail stores are using the firm’s site as a guidance to offerlower prices.Managing the supply chainA major problem for the company to set up its supply chain was to efficiently manage theflow of merchandising from an extensive number of suppliers and the quick delivery ofproducts throughout Cyprus. For this purpose, the company selected a solution from DHLa courier company. This system helps Cyprus-PC.com to ensure merchandise is in theright 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 ofdocumentation and specific standard industry lead times. The decision was therefore toadopt a single system to assemble all the merchandise from suppliers and have thempresented 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. Thissupply chain solution by DHL receives, validates and handles consignments from severalsuppliers, on behalf of the company. It checks that the order is correct, consolidates itwith other orders and then delivers to company’s premises, or schedules the finaldelivery. Meanwhile, it informs Cyprus-PC.com about the changed orders’ status andsends identification numbers to enable tracking status either by Cyprus-PC.com or thecustomer. Cyprus-PC.com updates the website and sends additional messages to thecustomer including those tracking numbers. DHL also collects the payments in case thecustomer decides to pay the amount on delivery and every afternoon aggregates the totalamounts and sends them to the company.5.10.3 ImpactThe 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 thechain is the transmission of orders from Cyprus-PC.com to the various hardwaresuppliers. While the DHL solution has the capacity to provide this link, the firm is currentlynot using it: the amount of daily orders is not high enough to justify this feature. As aresult, orders are transmitted to suppliers over the phone; the suppliers then prepare theconsignment orders. While the integration of the various systems enables Cyprus-PC.com to operate efficiently and effectively, it also provide fast and efficient customerservices. Apart from that, the various technological elements of the supply chain systemhave an impact on the firm, its suppliers and its customers.The DHL system for example, offers strong financial and organisational advantages toboth Cyprus-PC.com and its suppliers:It minimizes the necessary time of delivered from suppliers to company’s premisesIt reduces the time needed for storage in the company’s premisesCustomers can track the goods virtually live185

e-Business in the Retail SectorFrom a subjective point of view, the impact of having a modern control system in place onfirm’s operations is quite substantial. However, a further detailed analysis of the impactthe new system has had has not been performed.On the customer side, the e-store is based on a custom made CRM system whichenables almost daily updates of thousands of prices with a few clicks. It combinessuppliers’ lists, stock average and customers’ preferences. As less paper-work andmanual 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 strategicissues and new business opportunities, rather than spending time in manual processesand 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 establishmentand growth. E-Marketing is going to help reach a wide range of targeted potential newcustomers while maintaining and increasing the loyalty of existing customers.The most important challenge for Cyprus-PC.com is to achieve critical mass. In order toimprove its profitability and to survive in the long run, Cyprus-PC.com needs to growsignificantly. In this context, a major challenge to overcome is the rather conservativeattitude of customers, used to passive purchasing, mainly through traditional salesmethods.5.10.4 Lessons learnedCyprus-PC.com is an online retail company at the forefront in its sector in using ICTsystems and e-business solutions. The company has reached a high level of system andprocess integration both for its supply chain management and for its marketing and salesoperations. Competitive pressure along with increased quality of services drives the firmto search for opportunities to reduce costs while delivering efficiency of businessprocesses. In order to succeed, the company has successfully integrated e-businesssolutions with the local characteristics. The innovative business solution for the Cypruscase was the custom-made CRM software that was designed to meet all their needs tosetup and maintain a user-friendly e-store. It also offers to its customers the possibility ofmaking purchases via a number of channels, including the web, telephone, and storesales.Although the director characterised the Cypriot market as developing in online sales, hebelieves that e-sales are the future sales channels for laptops and PC peripherals. Hementioned that although Cypriot customers have started to trust internet sales, there isstill 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 andconstant relationships are built with many more customers that would enable the firm tomove away from competing only on price. At the same time, it causes negative feelingsas 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 byCyprus-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.186

e-Business in the Retail Sector5.10.5 ReferencesResearch for this case study was conducted by Despina Cochliou on behalf of theSectoral e-Business Watch. Sources and references used:Interview with Christos Kartsioulis Managing Director, August 2007Company website: http://www.cyprus-pc.com187

e-Business in the Retail Sector6 Conclusions: outlook and policy implications6.1 Outlook on further developments expectedIn the e-Business Survey 2007, the companies were asked about various expectedimpacts of ICT and e-business on selected indicators: management and controlling,administration and accounting, marketing and customer services, and logistics. Thehighest expected impacts were found to be on administration and accounting. 43% ofthe large retailers, 41% of the medium-sized ones and even 40% of the small onesexpect high impact of ICT in this regard. These expectations may reflect the highopportunities of e-business for collecting, storing, retrieving and analysing large amountsof data.Exhibit 6.1-1: Expected impacts of ICT and e-business on selected indicators by size class0 15 30 45 60 75high impact on management andcontrollingno impact on management andcontrollinghigh impact on administration andaccountingno impact on administration andaccountinghigh impact on marketing andcustomer servicesno impact on marketing andcustomer serviceshigh impact on logisticsno impact on logistics192725382316181724404143221314122836313920141381734354927181511Micro (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 2007The expected impacts on logistics are also high, but there are large differencesbetween, firstly, large firms (49% “high impact”), secondly, medium-sized (35% “highimpact”) and small firms (34% “high impact”), and finally micro firms (17% “high impact”).188

e-Business in the Retail SectorThe differences in the assessment of the expected impact of ICT on marketing andcustomer services were not that large. 39% of the large firms expect high impacts in thisregard, 31% of the medium-sized firms, 36% of the small firms, and even 28% of themicro firms. This is the largest value for micro firms for all four indicators. These figuresmay reflect the widespread experience even of small retailers that internet use hasbecome important for many customers and that the internet is consequently a viablemeans of communicating with customers.As regards management and controlling, 38% of the large firms expect high impacts ofICT. Almost the same percentage of medium-sized (25%) and small firms (27%) statedhigh 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 wasthe largest of all four size classes. This may indicate that large firms are going to keep oninvesting considerably into ICT, possibly further widening the scissors of ICT usebetween large firms and SMEs. The overall low figures for micro firms expecting highimpacts may reflect the generally limited perceived importance of ICT and e-business inthese firms, currently and also in the future.6.2 Policy implications6.2.1 Introduction to policy implicationsAddressees and policy areasFindings of research for this report lead to policy implications. The following implicationsaddress in the first instance the European Commission. In second instance, national andregional governments as well as European and national industry associations are alsoaddressed.e-Business developments can have implications for several policy areas, including forexample overall industrial policy, education policy, research and technology transferpolicy. Relevant considerations made in this context can be grouped around two overallobjectives which may to some extent be antagonistic:Promote ICT adoption: Policy may have an interest in accelerating the adoptionand competent use of ICT and e-business activity among companies, particularlyamong SMEs. Such political activity is based on the assumption that ICT are adriver of productivity and competitiveness, leading to increased economic growth,wealth and employment.Counteract ICT induced undesirable effects: At the same time, policy will have toconsider intervention if ICT use or e-business activity causes undesirable effects onthe aggregate level of the industry.A basic assumption of this report is that it is generally the enterprises’ decision to use ornot use ICT and e-business and the extent to which they invest in it. Policy initiativesshould target areas in which market failures occur, which includes issues related toresearch, development and technology transfer, knowledge and skills development,standardisation, and environment protection.189

e-Business in the Retail SectorPrincipal European Commission policies relevant to the retail industryThe European Commission’s DG Enterprise and Industry does not have a dedicated unitfor the retail industry, but retail plays a role in many policy areas of the EC, including ICTand e-business policy. Principal policy initiatives relevant for the retail industry include thefollowing.SMEs are the main targets of the European Commission’s Competitiveness andInnovation Framework Programme (CIP). 82 The information communicationtechnologies policy support program (ICT PSP), which is part of CIP, is particularlyrelevant for the Sectoral e-Business Watch. One of the targets of ICT PSP is toencourage innovation through the wider adoption of and investment in ICT. For example,by adopting an e-supply application, retail SMEs could benefit from supply chainprocesses innovations. Besides businesses, ICT PSP aims to promote the wider uptakeand best use of ICT by citizens which includes consumers. Consumers are the keycustomers of retail firms and a wider uptake and use of ICT among consumers couldmotivate 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 years2005-2010. The i2010 subtitle and objective is “a European Information Society forgrowth and employment”. According to the framework’s website, “it promotes the positivecontribution that ICT can make to the economy, society and personal quality of life”. Thei2010 strategy has three aims: (1) to create a Single European Information Space, whichpromotes an open and competitive internal market for information society and mediaservices, (2) to strengthen investment and innovation in ICT research, (3) to supportinclusion, better public services and quality of life through the use of ICT. i2010 isrelevant for the retail industry as the information society is bound to bring about changesto society that affect consumers and retail firms alike. Consumers for example willincreasingly be exposed to ICT and get acquainted to using ICT in their daily livesresulting in a change of behaviour and attitudes towards ICT. The retail industry is boundto react to these changes in consumer behaviour.The following policy suggestions may contribute to fulfilling the objectives of i2010 andCIP.6.2.2 Suggested political activitiesAddress retail value chains and the whole retail business ecosystemResearch findings for this report suggest that barriers for increased uptake of e-businessin the retail industry can be found along the complete value chain. Consequently, policymakers may seek to promote ICT and e-business along the whole retail value chain. Touse an even more extensive notion, policy makers should consider the complete retailbusiness ecosystem, i.e. “the network of buyers, suppliers and makers of relatedproducts or services plus the socio-economic environment, including the institutional andregulatory framework” 84 . The following suggested political activities reflect this approach.828384See http://ec.europa.eu/cip/index_en.htm.See http://ec.europa.eu/information_society/eeurope/i2010/index_en.htm.See http://www.digital-ecosystems.org/.190

e-Business in the Retail SectorPromote electronic supply chain management among SMEsICT and e-business applications may considerably enhance value chains in the retailindustry. 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 electronicmarketing and sales (section 3.5).Electronic procurement of supply goods can enhance upstream supply chainefficiency and reduce procurement costs significantly. The case studies of SmartSupermarket (see section 5.2) and Cyprus-PC.com (see section 5.3) providerelated examples. While the share of retailers who procure electronically increasedfrom 43% in 2003 to 55% in 2007 (figures employment weighted), there stillappears to be scope for further improvement (see section 3.3). The retail industrytherefore could benefit from the increased adoption of e-supply applications andaccess to e-supply networks.The adoption of e-sales and related downstream supply chain managementpractices often presents a challenge for retail firms of all sizes because it requiresparticular strategies and operations. Section 3.6 provides a discussion of benefitsand challenges of adopting e-sales practices. The findings from the case studiesindicate that retailers should aim to find an appropriate fit for e-sales with businessstrategy, in-house operations, and the cultural context the firm and its customersare exposed to. The retail industry therefore could benefit from learning aboutchallenges experienced when adopting e-sales.The adoption of in-house e-operations systems by SMEs may be of particularimportance. An overall view of the relative difference of ICT use between SMEs andlarge 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: Inthe e-Business Survey 2007, suppliers and customers not being ready for e-businesswas 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 supportactivities to foster supply chain development in retail through ICT and e-business use. Itdoes not appear to be useful to focus initiatives on particular sub-sectors of the retailindustry 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, MemberStates may naturally promote national or regional activities. In recent years, several EUMember States have launched initiatives to facilitate e-business exchanges withinspecific industry supply chains. 85 A sector focus does not guarantee success, but itfacilitates such policy initiatives as it drives the involvement of experts and associationswith sector background and reputation. A good practice may be to assess or measure thereturn-on-investment in ICT and to document project results. This evidence can then beused for show-casing success stories. In practice, related initiatives often take severalyears, first in order to create a critical mass of participants and then to deal with thecomplexity of many firms and stakeholders.85The information in this paragraph is based on a report of the project “benchmarking sectoralpolicy initiatives in support of e-business for SMEs”, see European Commission (2007e).191

e-Business in the Retail SectorPromoting e-business on a regional levelSince retailers are generally rooted in the local and regional economy, support to e-business should predominantly take place at the local and regional level. Retailingassociations or chambers of commerce could take a leading role in promoting theadoption and extension of e-business practices in retail. Due to the constraints in publicspending, privately funded initiatives by business organisations could be an alternative.Regional activities can be supplemented by national and EU initiatives, like the Europeane-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), theEuropean e-Business Legal Portal (www.ebusinesslex.net), and the European B2Bmarketplaces portal (http://www.emarketservices.com).Foster the dissemination of e-business knowledge in the retail industryMany 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-businesstechnologies would be important to take informed decisions. For example, it may beinstructive for retailers to learn that e-sales practices apparently enable SMEs to extendtheir – 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 alsobe instructive to learn that solely adopting ICT capital without arranging forcomplementary organisational changes and employee training apparently provides littlereturn on investment – a finding from the impact analysis for this report (see sections4.2.4 and 4.3.2). Furthermore, case studies for this report show the benefits of firmlyrooting ICT and e-business in the company’s overall strategy.European retailers could benefit from enhanced e-business knowledge transparency andtransfer at both European and national levels. Across the Union, dissemination activitiesabout e-business in the retail industry could be improved. Networks of excellenceinvolving public research institutions, retail associations and retail companies could beestablished and promoted to facilitate a transfer of knowledge about ICT and e-businesspractice.Promote electronic ordering among European consumersThe low level of e-sales penetration in the EU may also be due to a relatively low affinitytowards 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 mostimportant 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 companiesagreed 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 orderingelectronically.There are several reasons why consumers do not buy online even if they have acomputer with internet access:First of all consumers may have security concerns with regard to personal dataand, in particular, payment data. Hence, retail firms selling online should seek toadopt cachets proving that the e-sales solution is safe in order to overcome suchconcerns. They can also offer a range of payment possibilities so that customers192

e-Business in the Retail Sectorcan select the one they prefer. The e-Business Survey 2007 found that EU-7 onlineretailers lag behind the US in almost all online payment possibilities (see section3.7).Consumers may also find online shops too complicated to use, i.e. not userfriendly enough. Retailers should thus seek to implement solutions that are easy touse.Customers may also feel that they need personal contact and advice when theygo shopping. Retailers may need to implement interactive solutions or personalisedwebsite 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 goodpractice – see the section above about fostering e-business knowledge among retailers.Policy makers can also promote examples of secure, simple and personal e-salespractice among consumers so that reservations against online purchase may bediminished.193

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e-Business in the Retail SectorAnnex I: The e-Business Survey 2007 –methodology reportBackground and scopeThe Sectoral e-Business Watch collects data relating to the use of ICT and e-business inEuropean 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 on5,325 telephone interviews with decision-makers from five industry sectors in nine EUcountries and the USA. Interviews were carried out from August to October 2007, usingcomputer-aided telephone interview (CATI) technology. The overall survey was dividedinto four separate projects (each using a separate questionnaire) focussing on differentsectors and specific topics (see Exhibit A1-1). This document contains methodologicalnotes for Projects 1 and 2, which accounted for 4,369 of all interviews conducted.Exhibit A1-1: Components ("projects") of the e-Business Survey 2007Surveyproject12Focuse-Business inmanufacturinge-Business in retail,transport & logistics3 RFID adoption4Intellectual Property rightsin ICT SMEsSectors covered• Chemical, rubber and plastics• Steel• Furniture• Retail• Transport & logistics services• Manufacturing sectors• Retail• Transport services• Hospitals• ICT manufacturing• ICT services• Software publishingNo. ofinterviews21212248434683QuestionnaireThe questionnaires for Projects 1 and 2 contained about 70 questions which werestructured into the following modules:A: ICT Infrastructure and e-Business software systemsB: 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 companyE: ICT Skills requirements and ICT costsF: ICT Impacts, drivers and inhibitorsG: Background information about the companySome of the questions were the same or similar to those used in previous surveys inorder to highlight trends in the answers (notably in previously surveyed sectors such asthe chemical and retail industries). Other questions were introduced or substantiallymodified, in order to reflect recent developments and priorities. The survey placedspecial focus on the degree of process automation in companies, i.e. to what extentpaper-based and manually processed exchanges with business partners had beensubstituted by electronic data exchanges. Some questions were filtered, such as followupquestions dependent on previous answers, and no open questions were used.197

e-Business in the Retail SectorThe questionnaires of all e-Business Watch surveys since 2002 can be downloaded fromthe project website (www.ebusiness-watch.org/about/methodology.htm).PopulationAs in 2005 and 2006, the survey considered only companies that used computers. Forthe first time, a cut-off was introduced with regard to company size. When surveying themanufacturing sector in Project 1, only companies with at least 10 employees wereinterviewed. For the retail and transport sector in Project 2, the population also includedmicro-companies with fewer than 10 employees, reflecting their important contribution(see Exhibit A1.2). Sector totals are therefore not directly comparable between the twoprojects.The highest level of the population was the set of all computer-using enterprises (and, inProject 1, with at least 10 employees) that were active within the national territory of oneof the eight countries covered, and whose primary business activity was covered by oneof the five sectors specified in the NACE Rev. 1.1. 86 Evidence from previous surveysshows that computer use can be expected to reach 99% or more among medium-sizedand large firms across all sectors.Exhibit A1-2: Population coverage of the e-Business Survey 2007No. Sector name NACE Rev. 1.1activities coveredProject 1 – ManufacturingPopulationdefinitionNo. of interviewsconducted1.1 Chemicals, rubber 24, 25 Companies which911& plasticshave at least 101.2 Steel 27.1-3, 27.51-52 employees and use4491.3 Furniture 36.12-14computers 7612.2 Transport servicesand logisticsProject 2 – Retail and transport2.1 Retail 52 1,151Companies thatuse computers1,09760.10, 60.21+23+2463.11+12+40Sampling frame and methodFor each sector, the sample was drawn randomly from companies within the respectivesector population of each of the countries surveyed. The objective of this approach wasto fulfil minimum strata with respect to company size-bands per country-sector cell (seeExhibit A1-3).Exhibit A1-3: Strata by company-sizeSize-band Project 1ManufacturingTarget quota specifiedMicro enterprises (up to 9 employees) -- up to 30%Project 2Retail & transportSmall 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 sector86NACE Rev. 1.1 was replaced by the new version NACE Rev. 2 in January 2008. Nonethelesswhen the survey was conducted, sectors still had to be defined on the basis of NACE Rev. 1.1because business directories from which samples were drawn were based on the older version.198

e-Business in the Retail SectorSamples were drawn locally by fieldwork organisations based on official statisticalrecords and widely recognised business directories such as Dun & Bradstreet (used inseveral countries) or Heins und Partner Business Pool.The survey was carried out as an enterprise survey: data collection and reporting focuson the enterprise, defined as a business organisation (legal unit) with one or moreestablishments. Due to the small population of enterprises in some of the sector-countrycells, the target quota could not be achieved (particularly in the larger enterprise sizebands)in each country. In these cases, interviews were shifted to the next largest sizeband(from large to medium-sized, from medium-sized to small), or to other sectors.FieldworkFieldwork was coordinated by the German branch of Ipsos GmbH (www.ipsos.de) andconducted in cooperation with its local partner organisations (see Exhibit A1-4) on behalfof the Sectoral e-Business Watch. Pilot interviews prior to the regular fieldwork wereconducted with about ten companies in each sector in Germany in August 2007, in orderto test the questionnaire (structure, comprehensibility of questions, average interviewlength).Exhibit A1-4: Institutes that conducted the fieldwork of the e-Business Survey 2007 andnumber of interviews conducted per country (total for Projects 1 and 2)CountryInstitute conducting the interviewsNo. of interviewsconductedFrance IPSOS Insight Marketing, 75628 Paris 551Germany IPSOS GmbH, 23879 Mölln 555Italy Demoskopea S.p.A., 20123 Milano 553Poland IQS and Quant Group Sp.z.o.o, 00-610 Warszawa 546Spain IPSOS Spain, 28036 Madrid 549Sweden GfK Sverige AB, 22100 Lund 542UK Continental Research, London EC1V 7DY 548USA Market Probe International, Inc, New York, NY 10168 525TOTAL 4,369The two sector surveys had a total scope of 4,369 interviews, spread across eightcountries 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, dueto the comparatively small population of companies in the steel and (in some countries) inthe 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 asthe retail industry). Exhibit A1-5 shows the final distribution of interviews across sectorsand countries.Exhibit A1-5: Interviews conducted per sector and country:Sector Country DE ES FR IT PL SE UK USA TotalProject 1 – Total 305 290 235 303 254 170 264 300 2,1211.1 Chemical 100 120 135 105 120 105 126 100 9111.2 Steel 100 50 20 87 24 30 38 100 4491.3 Furniture 105 120 80 111 110 35 100 100 761Project 2 – Total 250 259 316 250 292 372 284 225 2,2482.1 Retail 120 131 166 126 151 184 148 125 1,1512.2 Transport 130 128 150 124 141 188 136 100 1,097199

e-Business in the Retail SectorNon response: In a voluntary telephone survey, in order to achieve the targetedinterview totals, it is always necessary to contact more companies than the numbertargeted. In addition to refusals, or eligible respondents being unavailable, any samplecontains a proportion of "wrong" businesses (e.g., from another sector), and wrong and/orunobtainable telephone numbers. Exhibit A1-6 shows the completion rate by country(completed interviews as percentage of contacts made) and reasons for non-completionof interviews. Higher refusal rates in some countries, sectors or size bands (especiallyamong large businesses) inevitably raise questions about a possible refusal bias: that is,the possibility that respondents differ in their characteristics from those that refuse toparticipate. However, this effect cannot be avoided in any voluntary survey (whethertelephone- or paper-based).Exhibit A1-6: Interview contact protocol, completion rates and non-response reasonsDE ES FR IT PL SE UK US1 Sample (gross) 6188 6435 6538 3071 10642 3016 8246 158621.1 Telephone number not valid 541 31 53 299 645 38 611 18111.2Not a company (e.g. privatehousehold)82 209 6 36 327 2 57 4311.3 Fax machine / modem 19 0 72 9 300 33 69 3891.4Quota completedaddress not used973 2018 1531 101 2492 84 1087 1931.5 No target person in company 992 267 264 129 975 101 662 8211.6 Language problems 4 0 6 1 77 6 6 721.7 No answer on no. of employees 0 8 0 1 9 1 6 241.8Company does not usecomputers35 75 32 76 35 5 110 3981.9Company

e-Business in the Retail SectorWeighting schemesDue to stratified sampling, the sample size in each size-band is not proportional to thepopulation numbers. If proportional allocation had been used, the sample sizes in the250+ size-band would have been extremely small, preventing any reasonablepresentation of results. Thus, weighting is required so that results reflect the structure anddistribution of enterprises in the population of the respective sector or geographic area.The Sectoral e-Business Watch applies two different weighting schemes: by employment,and by the number of enterprises. 87Weighting by employment: Values that are reported as employment-weightedfigures should be read as "enterprises comprising x% of employees" (in therespective sector or country). The reason for using employment weighting is thepredominance of micro-enterprises over other kinds of firms. If the weights did notfactor in the economic importance of different sized businesses, the results wouldbe dominated by the percentages observed in the micro size-band.Weighting by the number of enterprises: Values that are reported as "x% ofenterprises" show the share of firms irrespective of their size, i.e. a micro-companywith a few employees and a large company with thousands of employees bothcount equally.The use of filter questions in interviewsIn the interviews, not all questions were asked to all companies. The use of filterquestions is a common method in standardised questionnaire surveys to make theinterview more efficient. For example, questions on the type of internet access used wereonly asked to companies that replied affirmatively to having internet access. The questionof whether a company has internet access thus serves as a filter for follow-up questions.The results for follow-up questions can be computed on the basis of enterprises that wereasked the question (e.g. "in % of enterprises with internet access") or on the basis of allcompanies surveyed. In this report, both methods are used, depending on the indicator.The basis (as specified in footnotes of tables and charts) is therefore not necessarilyidentical to the set of companies that were actually asked the filter question.Statistical accuracy of the survey: confidence intervalsStatistics vary in their accuracy, depending on the kind of data and sources. A'confidence interval' is a measure that helps to assess the accuracy that can be expectedfrom data. The confidence interval is the estimated range of values on a certain level ofsignificance. Confidence intervals for estimates of a population fraction (percentages)depend on the sample size, the probability of error, and the survey result (value of thepercentage) itself. Further to this, variance of the weighting factors has negative effectson confidence intervals.Exhibit A1-7 gives some indication of the accuracy that can be expected for EU-7 88industry totals (based on all respondents) according to the weighting scheme used. Theconfidence intervals differ depending on the industry and the respective value; onaverage, they represent a 5 percentile fork around the results (in both weightingschemes). Confidence intervals for employment-weighted data are highest for the steelindustry, due to the small number of observations and because this sector’s structuremakes it more sensitive to data weighting (i.e. large firms dominate in a comparatively8788In the tables of this report, data are normally presented in both ways, except for data by sizebands.These are shown in % of firms within a size-band, where employment-weighting isimplicit.The EU-7 are composed of those countries which were covered by the survey. To ensure datacomparability, only interviews from these countries are included in the aggregated "total" values.201

e-Business in the Retail Sectorsmall population). Employment-weighted data for this industry therefore have lowerstatistical accuracy than for the other sectors.The calculation of confidence intervals is based on the assumption of (quasi-) infinitepopulation universes. In practice, however, in some industries and in some countries thecomplete population of businesses consists of only several hundred or even a few dozenenterprises. In some cases, every enterprise within a country-industry and size-band cellwas contacted and asked to participate in the survey. This means that it is practicallyimpossible to achieve a higher confidence interval through representative enterprisesurveys in which participation is not obligatory. This should be taken into account whencomparing the confidence intervals of e-Business Watch surveys to those commonlyfound in general population surveys.Exhibit A1-7: Confidence intervals for the sector surveys (EU-7)Confidence intervalSurvey if weighted as if weighted byresult "% of firms" employmentunweightedSectors (aggregate, EU-7)Chemical, rubber and plastics 10% 8.0% - 12.4% 6.5% - 15.0% 8.4% - 11.9%Steel 10% 7.5% - 13.2% 4.8% - 19.6% 7.7% - 13.0%Furniture 10% 8.0% - 12.5% 7.1% - 14.0% 8.2% - 12.1%Retail 10% 7.0% - 14.0% 7.0% - 14.1% 8.6% - 11.7%Transport & logistics 10% 7.0% - 14.1% 7.4% - 13.4% 8.5% - 11.7%Sectors (aggregate, EU-7) 30%Chemical, rubber and plastics 30% 26.8% - 33.5% 24.0% - 36.8% 27.4% - 32.7%Steel 30% 25.8% - 34.5% 20.3% - 42.0% 26.1% - 34.2%Furniture 30% 26.7% - 33.5% 25.0% - 35.5% 27.1% - 33.0%Retail 30% 25.0% - 35.6% 24.9% - 35.7% 27.7% - 32.4%Transport & logistics 30% 24.9% - 35.7% 25.7% - 34.7% 27.7% - 32.4%Sectors (aggregate, EU-7) 50%Chemical, rubber and plastics 50% 46.3% - 53.7% 43.0% - 57.0% 47.1% - 52.9%Steel 50% 45.2% - 54.8% 38.2% - 61.8% 45.6% - 54.4%Furniture 50% 46.3% - 53.7% 44.3% - 55.7% 46.8% - 53.2%Retail 50% 44.2% - 55.8% 44.1% - 55.9% 47.4% - 52.6%Transport & logistics 50% 44.1% - 55.9% 45.1% - 54.9% 47.4% - 52.6%Sectors (aggregate, EU-7) 70%Chemical, rubber and plastics 70% 66.5% - 73.2% 63.2% - 76.0% 67.3% - 72.6%Steel 70% 65.5% - 74.2% 58.0% - 79.7% 65.8% - 73.9%Furniture 70% 66.5% - 73.3% 64.5% - 75.0% 67.0% - 72.9%Retail 70% 64.4% - 75.0% 64.3% - 75.1% 67.6% - 72.3%Transport & logistics 70% 64.3% - 75.1% 65.3% - 74.3% 67.6% - 72.3%Sectors (aggregate, EU-7) 90%Chemical, rubber and plastics 90% 87.6% - 92.0% 85.0% - 93.5% 88.1% - 91.6%Steel 90% 86.8% - 92.5% 80.4% - 95.2% 87.0% - 92.3%Furniture 90% 87.5% - 92.0% 86.0% - 92.9% 87.9% - 91.8%Retail 90% 86.0% - 93.0% 85.9% - 93.0% 88.3% - 91.4%Transport & logistics 90% 85.9% - 93.0% 86.6% - 92.6% 88.3% - 91.5%confidence intervals at α=.90202

e-Business in the Retail SectorAnnex II: Econometric analysis methodologyTable A-3-1 Decomposition of gross value added growth by components of labour inputCountriesGross ValueAddedGross value addedper hours workedTotal hours workedTotal personsengagedAverage workinghours per person(1)=(2)+(3) (2) (3)=(4)+(5) (4) (5)average annual growth rates, in %1980-1995Austria 1.9 1.8 0.1 0.8 -0.7Belgium -0.8 -0.1 -0.7 -0.1 -0.6Denmark 0.9 2.5 -1.6 -0.5 -1.2Spain 2.5 2.1 0.4 1.0 -0.6France 3.8 4.5 -0.7 0.2 -0.9Germany 2.1 1.5 0.5 1.5 -0.9Greece 1.5 -2.6 4.1 4.1 0.0Ireland - - - - -Italy 1.7 1.0 0.7 1.1 -0.4Luxembourg 2.1 0.9 1.2 1.2 0.0Netherlands 2.8 2.0 0.8 1.9 -1.1Portugal 1.7 2.0 -0.3 0.2 -0.4Sweden 2.2 2.5 -0.4 -0.5 0.2United Kingdom 3.3 3.1 0.2 0.4 -0.31995-2000Austria 4.0 3.4 0.7 1.2 -0.5Belgium 1.4 1.5 -0.1 -0.2 0.1Denmark 0.9 -1.9 2.9 1.7 1.1Spain 4.3 1.4 2.9 3.3 -0.3France 1.1 0.8 0.3 1.0 -0.7Germany 1.5 1.4 0.1 1.2 -1.1Greece 2.2 1.3 1.0 1.1 -0.1Ireland 5.0 1.9 3.1 5.2 -2.1Italy 0.0 1.2 -1.2 -0.9 -0.2Luxembourg 4.6 2.1 2.5 1.9 0.6Netherlands 3.3 2.2 1.1 2.6 -1.5Portugal 3.8 4.5 -0.7 0.1 -0.7Sweden 3.3 3.4 -0.1 0.2 -0.3United Kingdom 3.4 2.7 0.7 1.3 -0.52000-2004Austria 0.4 0.2 0.2 0.3 -0.1Belgium 2.3 1.9 0.4 1.0 -0.6Denmark 0.7 0.1 0.6 1.0 -0.4Spain 2.0 -0.7 2.7 2.5 0.1France 0.9 -0.1 1.0 1.9 -0.9Germany -0.4 0.8 -1.2 -0.5 -0.7Greece 4.5 2.9 1.6 1.7 -0.1Ireland 8.7 7.7 1.0 1.8 -0.8Italy -1.3 -1.3 0.0 0.6 -0.6Luxembourg 2.1 0.1 2.0 2.1 -0.1Netherlands -0.7 -0.1 -0.6 0.3 -0.9Portugal 2.9 1.2 1.7 1.8 -0.1Sweden 4.8 4.0 0.8 1.5 -0.7United Kingdom 4.8 3.4 1.4 1.6 -0.1203

e-Business in the Retail SectorTable A-3-2 Decomposition of gross value added growth by different factor inputsCountriesgross valueaddedcontributionof labourinputscontribution oftotal workinghourscontributionlabourqualitychangecontributionof capitalcontibutionof ICTcapitalcontributionof Non-ICTcapitalcontributiontotal factorproductivity(1)=(2)+(5)+(8) (2)=(3)+(4) (3) (4) (5)=(6)+(7) (6) (7) (8)average annual growth rates, in %1986-1995Austria 2.7 0.7 0.4 0.3 0.9 0.4 0.5 1.1Belgium -0.6 0.4 -0.4 0.8 0.9 0.3 0.6 -1.8Denmark 1.3 -1.7 -1.7 0.0 1.0 0.9 0.1 2.0Spain 3.8 2.4 1.9 0.5 0.3 0.0 0.3 1.1Finland 0.8 -2.4 -3.0 0.6 0.6 0.3 0.3 2.6France 2.5 0.4 -0.2 0.6 0.4 0.2 0.2 1.8Germany 3.2 1.4 1.1 0.2 -0.4 -0.4 0.0 2.3Italy 1.7 0.3 -0.2 0.5 0.5 0.1 0.4 0.8Luxembourg 1.4 0.2 1.2 -0.4Netherlands 3.2 1.8 1.5 0.3 0.5 0.1 0.4 0.9Sweden 6.7 1.2 0.7 0.6 0.8 0.5 0.3 4.7United Kingdom 3.5 0.7 0.6 0.1 1.3 0.5 0.8 1.41995-2004Austria 2.5 0.5 0.25 0.24 0.7 0.5 0.2 1.3Belgium 0.5 0.4 0.01 0.39 1.2 0.6 0.6 -1.1Denmark 0.9 1.4 1.37 0.06 0.9 0.9 0.0 -1.4Spain 3.2 2.7 2.13 0.53 1.1 0.2 0.9 -0.6Finland 4.5 0.8 0.78 -0.01 0.5 0.4 0.1 3.2France 0.9 0.6 0.26 0.36 0.2 0.0 0.1 0.1Germany 0.7 -0.3 -0.35 0.03 -0.3 -0.3 0.0 1.4Italy -0.5 -0.2 -0.61 0.41 1.1 0.2 1.0 -1.4Luxembourg 2.4 0.4 2.0 -0.9Netherlands 1.8 0.3 0.35 -0.10 0.6 0.3 0.3 1.0Sweden 4.2 0.3 -0.10 0.35 0.9 0.6 0.4 3.0United Kingdom 3.7 1.1 0.7 0.4 2.2 0.8 1.4 0.5VA - Gross Value Added growthL - Contribution of Labour input growthH - Contribution of Total hours workedLC - Contribution of Labour compositionK - Contribution of Capital input growthKIT - Contribution of ICT capitalKNIT - Contribution of Non-ICT capitalTFP Contribution of Total Factor Productivity growthCommon stochastic production possibility frontiers approachA production frontier indicates the maximum possible production in a given period of time,using a given amount of production factors. The frontier may for example refer to aparticular country or industry. The production possibility frontier approach, in contrast tothe more traditional production function approach, allows to disentangle the overallproductivity growth 89 into two components: first, the rate of technological progressexpanding the frontier, and second, the movements of decision-making units (e.g. firmsand, on an aggregate level, industries and countries) towards the frontier, i.e. towardsoptimal usage of production factors (see figure A-8).Exhibit A2-3: Production possibility set and frontier89Measured as changes in the ratio of total output produced over all inputs used in theproduction process.204

e-Business in the Retail SectorK = capital, L = labourSource: DIWThe stochastic production possibility approach is not a method for directly estimatingimpact factors on labour productivity. However, through modifying the variables, i.e.through dividing them by Total Working Hours, a constellation can be created that allowsto draw conclusions about the contribution of single variables on labour productivity.If, given the factor input set, the produced output level stays below the potential maximumlevel, then the respective inefficient use of resources indicates indirectly that the wholeproduction system or, at the micro level the single producer, faces an inability to matchthe best available practice. Farrell (1957) was the first to distinguish between technicaland allocative efficiency. Technical efficiency reflects the ability of a firm to obtainmaximal output from a given set of inputs. Allocative efficiency is used for the ability of afirm to use the inputs in optimal proportions, given their respective prices. Thecombination of both gives a measure of the total economic efficiency.Assuming log-linear production function where i countries produce their output given thetechnological parameter β , the stochastic production possibility frontier is nowdetermined by two types of random errors. The always positive inefficiency randomvariable u , and the new random error term v , which has the usual properties ofiidentical independent normally distributed errors with a mean value of zero and aconstant variance, σ .2vm∑ln( y ) = β + x ⋅ β + v − u for i = 1,..., Ni 0ij j i ij=1iThe production frontier is therefore determined by the deterministic part plus a stochasticpart consisting of a mixture of two probability distributions: a non-negative one, forinstance a positive truncated normal distribution, and the usual normal distribution of theerror term. Estimating a stochastic production possibility frontier therefore involvesestimating the parameters of the two probability distributions simultaneously.The stochastic frontier function is accordingly bounded from above by205

e-Business in the Retail Sectormln( y ) = β + ∑ lnx ⋅ β + v for i = 1,..., N .i 0ij j ij=1The model equation can be estimated by using standard maximum-likelihood methods.This approach requires explicit assumptions on the underlying probability distributions ofthe two random variables. However, the estimation function cannot be derived explicitly,so the maximum likelihood (ML) function has to be optimised numerically. This isachieved in our paper by the Frontier 4.1 program (see Coelli, 1996). For the exactspecification of the ML-function see Battese and Corra (1977). They showed that the MLestimatorsare consistent and asymptotically efficient (Aigner, Lovell, Schmidt, 1977).The model is not limited to a Cobb-Douglas function estimation; it could easily beadjusted to a more flexible functional form of a translog production function. 90m m m∑ ∑∑ln( y ) = β + lnx ⋅ β + β ⋅lnx ⋅ lnx + v − u for i = 1,..., Ni 0ij j juk ik jk i ij= 1 j= 1 k=1One-sided generalized likelihood-ratio-tests for such estimators were derived in laterresearch (Coelli, 1995).In the current paper we use this stochastic production possibility frontier approachto measure the degree of inefficiency of factor inputs between industries in differentcountries. Since we do not estimate a single frontier for each country’s industryseparately but instead assume a common production possibility frontier, this approach isreferred to as a common stochastic production possibility frontiers approach (see e.g.Berger, Humphrey 1997). The production possibility frontier approach does not explainthe causes of the inefficiencies studied. It only indicates that a certain combination offactors is used inefficiently. Organisational or institutional failures are not revealed as theyare not explicitly included in the estimation of the stochastic production possibilityfrontiers.In our analysis we use a panel-data approach because of the modest number ofcountries sampled. The only way a cross-section approach could be used would be bypooling industry and country data. Further trends can be drawn from the stochasticproduction possibility frontier model although a complete analysis is beyond the scope ofthis paper.To incorporate intermediate inputs in our analysis we use the gross production value, gpvof the respective industry instead of the gross value added, gva, as the output variable.This enables us to estimate the output elasticities 91 for intermediate inputs.9091In our econometric analysis translog specification were estimated but the results are notincluded in this report due to limited space. They will be published separately in a forthcomingworking paper. By incorporating the cross-terms of a translog function or other flexible functionalform one is able to determine variable substitutions elasticities between the different factorinputs. Assuming a Cobb-Douglas specification one assumes constant unity substitutionelasticities between all different factor inputs.An output elasticity is a dimensionless measure for the ratio of marginal percentage changes ofoutput with regard to a particular input variable, i.e. a 1% increase in the input variable changesthe output variable by x%.e∂ ln o∂o∂xt t to, x= = = lim∂ ln xtotx ∆→0t∆oott∆xxtt.206

e-Business in the Retail Sectorm∑ln( gpv ) = β + lnx ⋅ β + v − u for i = 1,...,6i 0ij j i ij=1j.{ imi ict nict hswh mswh lswh}with x ∈ , , , , ,Combining the industries production possibility frontiers for each country to one commonproduction possibility frontier for an industry across all countries, we obtain a multicountrydata panel with a common stochastic production possibility frontier.mln( gpv ) = β + lnx ⋅ β + v − u for i = 1,...,6 and j = 1,...,12∑ji , 0 ijj j i ji ,j=1To impose constant returns to scale we normalised the production possibility frontier bysubtracting the natural logarithm of total working hours from both sides of our equation.This normalized common production possibility frontier equates the gross productionvalue labour productivity in working hours on the left hand side with respective factorintensities such as ICT-capital intensity on the right hand side.m* * * *jt ,β ∑ ij, tβj i ji ,j=1ln( gpv ) = + lnx ⋅ + v − u for i = 1,...,6 and j = 1,...,12To include Harrod-neutral technical change in the multi-country industry commonproduction possibility frontier a time trend variable is also included. The respectiveparameter value β7measures the average TFP-growth rate. The long-term rate ofHarrod-neutral technological progress therefore determines the outward shift attributed toa steady technical change in the common production possibility frontier.m** * * * *jt ,β ∑ ij, tβjβ7 i ji ,j=1ln( gpv ) = + lnx ⋅ + ⋅ t+ v − u for i = 1,...,6 and j = 1,...,1292Data sourcesData sources by subject of studyProductivity Employment Innovation Market Structure Value ChainEU KLEMS EU KLEMS EUKLEMS/Zephyr**EUKLEMS/Zephyr**EUKLEMS/ERM**** http://www.euklems.net/ , ** zephyr.bvdep.com/ , *** http://www.eurofound.europa.eu/emcc/index.htmEU KLEMS database: The aim of the EU KLEMS research project is to create adatabase on measures of economic growth, productivity, employment creation, capitalformation and technological change in the European Union’s industrial sector since 1970.The database breaks industries down into 63 categories. It covers the EU (25) MemberStates, the US, Japan and Canada and provides data going back to 1990 for new EUMember States.ZEPHYR is an information solution containing M&A, IPO and venture capital deals withlinks to detailed financial company information. There is no minimum deal value so all92The symbols used denote the following: imi - intermediate inputs, ict – ICT-capital stock, nict –Non-ICT-capital stock, hswh – high-skilled total working hours, mswh – medium-skilled totalworking hours, lswh - low-skilled total working hours.207

e-Business in the Retail Sectordeals can be analyzed in detail, irrespective of the transaction size. All information istranslated into English and the deals are verified by a senior researcher before beingpublished on ZEPHYR to ensure consistently high quality information. The databaseoffers five years of global coverage and includes deals involving European or Americancompanies going back to 1997.The European Restructuring Monitor (ERM) provides up-to-date news and analysis oncompany restructuring activities in Europe and their employment consequences. It offersinformation on individual restructuring cases and allows for the compilation of statisticscomparing countries, sectors and types of restructuring. All information is based on theanalysis of daily newspapers and the business press in the EU27 and Norway. Thedatabase covers restructuring activities from 2001. To date 6,991 restructuring casesfrom most industry sectors have been collected.208