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Prague University of Economics and Business

Bachelor’s thesis

2021 Patrik Blažovský

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Prague University of Economics and Business Faculty of Business Administration

Field of study: Business Administration/Corporate Finance and Management

Title of the Bachelor’s thesis:

Impacts of COVID-19 on the shift in e-commerce paradigm

Author: Patrik Blažovský

Supervisor: Ing. Karel Pernica

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D e c l a r a t i o n o f A u t h e n t i c i t y

I hereby declare that the Bachelor’s thesis presented herein is my own work, or fully and specifically acknowledged wherever adapted from other sources. I duly marked out all quotations, the used literature, and sources. This work has not been published or submitted

elsewhere for the requirement of a degree program.

Prague, 12. 5. 2021 Patrik Blažovský

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A c k n o w l e d g m e n t

I would like to express my sincere gratitude to my thesis supervisor, Ing. Karel Pernica, for his guidance and supervision throughout the process of writing the thesis.

My special thanks go to my family for giving me great foundations throughout my childhood and supporting me all the way throughout my studies.

It is my family to whom I owe the opportunity to participate in this study program at Prague University of Economics and Business, which I am sincerely grateful for.

Without their ongoing support, none of my achievements would be possible.

Last but not least, I would like to thank my girlfriend, “micinke Linduške”, from the bottom of my heart for her infinite emotional support in challenging times,

always standing by me no matter what and giving me her endless love.

It is her to whom I thank for becoming the best version of myself every day, making me happy, always feel appreciated and loved as never before.

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Title of the Bachelor’s thesis:

Impacts of COVID-19 on the shift in e-commerce paradigm

Abstract:

The thesis aims to provide a comprehensive review of the researched topic in the form of a literature review and, by analyzing several available secondary data, draw a complex summary, thus, educate the reader by gaining insights on the environment of global e-commerce from the strategic point of view and analyze the consequences burdened by the global pandemics of COVID-19. Firstly, the author evaluates the global economy before and after massive disruptions following the pandemic outbreak and analyzes data regarding business performance and consumer behavior. The author will introduce and explain long-term strategic measures resulting from business challenges and opportunities for both customers and businesses and identifies critical strategic factors. The author also explains the importance of reshaping the business strategy with digitalization in mind as the essential foundation to become highly adaptive to meet customers’ changing needs. The thesis explains e-commerce as such with an additional focus on the retail sector within the industry. Even though global retail sales decreased significantly, e-commerce has, on the other hand, managed to grow faster than in previous years. The reason is mainly the convenience of online retail that the customers benefit from as a significant portion of added value. Although a shift from traditional commerce to the digital one is already happening, it is believed that the COVID crisis has accelerated the transformation by a couple of years. Should the consumers wanted or not, they have changed their behaviors to adapt to a new situation, so have the merchants. Ongoing trends supported by digitalization, such as the growing number of internet users or the rising usage of mobile devices, laid out perfect foundations for e-commerce to flourish in these difficult times. The thesis, moreover, explains that such a shift in behavior is expected to cause permanent changes, which is, naturally, a positive sign of digital commerce.

Keywords:

e-commerce, COVID-19, pandemic, crisis, strategy, transformation, consumer behavior, business performance, digitalization

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List of figures

Figure 1: Comparison of a traditional marketplace to the next-gen marketspace ... 3

Figure 2: Total retail sales worldwide from 2018 to 2022 (in trillion U.S. dollars) ... 24

Figure 3: Forecast for retail sales growth worldwide from 2018 to 2022 ... 25

Figure 4: Retail e-commerce sales worldwide from 2018 to 2022 (in trillion U.S. dollars) .... 26

Figure 5: Comparison of retail e-commerce sales to retail sales in total ... 26

Figure 6: Annual retail e-commerce sales growth worldwide from 2018 to 2022 ... 27

Figure 7: E-commerce share of total global retail sales from 2018 to 2022 ... 28

Figure 8: Evolution of shoppers' tendency to buy online before and during the pandemic ... 30

Figure 9: Worldwide e-commerce revenue forecast for 2020 before and during COVID ... 31

Figure 10: Anticipated changes to consumer behavior caused by COVID-19 ... 32

Figure 11: Companies' actions taken to support operational continuity during crisis ... 33

Figure 12: Measures to prevent similar business risks during crisis in the future ... 34

Figure 13: Planned industry technology investments in the next 5 years ... 35

Figure 14: Global consumer payment value 2021 - 2025 ... 37

Figure 15: Key opportunities to customer offerings ... 47

Figure 16: Greatest alcoholic drinks e-commerce potential (share) as of 2019 ... 48

Figure 17: Greatest alcoholic drinks e-commerce potential (value) as of 2019... 48

Figure 18: Greatest apparel and footwear e-commerce potential (share) as of 2019 ... 49

Figure 19: Greatest apparel and footwear e-commerce potential (value) as of 2019 ... 49

Figure 20: Greatest beauty and personal care e-commerce potential (share) as of 2019 ... 50

Figure 21: Greatest beauty and personal care e-commerce potential (value) as of 2019 ... 50

Figure 22: Greatest home and garden e-commerce potential (share) as of 2019 ... 51

Figure 23: Greatest home and garden e-commerce potential (value) as of 2019 ... 51

Figure 24: Greatest packaged food e-commerce potential (share) as of 2019 ... 52

Figure 25: Greatest packaged food e-commerce potential (value) as of 2019 ... 52

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1 Introduction

The Bachelor’s thesis aims to educate the reader by gaining insights on the environment of global e-commerce from the strategic point of view and analyze the consequences burdened by the global pandemics of COVID-19.

Living in an era driven by globalization and international collaboration entails both positive and negative consequences for society. In order for the businesses to be successful and remain competitive, it is many times the flexibility to be able to adapt to unexpected conditions and the readiness to different scenarios that might happen, that are the game-changers ensuring the firm keeps its competitive edge and does not sink should any external impact occur. In 2020 such an event in the form of a global COVID-19 pandemics occurred and turned the world upside down. Eventually, a few “winners” have been found among all affected who could transform their businesses to fit the current needs.

In the thesis, we will look at both the theoretical and practical implementation of e- commerce and its strategy. The theoretical work will help us to understand how e-commerce works in general by defining its characteristics and features and analyzing its business models and application in practice. The theoretical part will be based on reviewing the latest expert literature focused on e-commerce from the business perspective and business strategy. In the beginning, we will focus on a general introduction of e-commerce to best understand its different aspects. Further in the thesis, an additional focus will be put on the B2C sector of e- commerce, for the most part, online retail. According to the author, this sector of the e-commerce industry is significantly affected by the current situation and predestined for notable transformation.

The practical part will be dedicated to data analysis carried out on a global scale as well as among retail sectors discovering the direct and indirect implications of COVID-19 on e-commerce. Further, a literature review will be carried out encompassing the latest industry trends regarding the e-commerce strategy that will become a “new normal” upon the end of the worst global suffering since WWII. A proposal of the complex set of guidelines and recommendations will be the capstone summing up the thesis from the practical point of view.

These recommendations will define the general business strategy accelerated by the impact of COVID-19 for the next-gen businesses operating in the e-commerce field that want to gain, rediscover of to keep the competitive edge for the upcoming years to come.

The author has chosen the topic due to personal interests in strategy, sales, and digitization and personal experience in given areas by working in sales and advisory focused on improving the business performance by fine-tuning the business strategy and CRM with the digital approach as one of the main drivers as an intern and part-time employee. Moreover, the author finds the topic and its goal adequately relevant for the present and utterly crucial for the future due to the actual situation.

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2 Theoretical part

2.1 Introduction to e-commerce

In this part, we will look at the fundamentals of e-commerce – we will define the phenomenon of e-commerce and how it works. Further, we will introduce the features present in the e-commerce environment as its cornerstones, and lastly, the general types of e-commerce and their aspects will be presented.

2.1.1 What is e-commerce

The general definition of the OECD (2013) explains e-commerce as selling or purchasing goods and services via methods specifically designed for such purpose. The definition says these methods are organized over computer networks to place and receive the orders for goods and services; however, the payment and delivery do not ultimately have to be conducted in the online environment. Among the users of e-commerce, we can include individuals, households, enterprises, governments, and other private or public organizations.

According to Laudon & Traver (2017, p. 9), the definition of e-commerce is formally formulated as “digitally enabled commercial transactions between and among organizations and individuals.” Based on the definition, it is evident that some kind of media in the digital environment is required for these processes to be carried out and the transactions to be realized.

For that purpose, e-commerce utilizes the Internet through the World Wide Web (WWW) and particular devices (smartphones, computers) to realize business transactions. Each of these components is an essential aspect for the e-commerce transactions to be carried out, thus the e- commerce work as a whole. Via transactions, the e-commerce users exchange one commodity for another – a value is traded in return for products and services. It is important to remember the process of an exchange of value as an aspect setting the boundaries and limits for e- commerce. With no such exchange realized, we cannot consider the e-commerce being concluded.

Although we may find many different explanations, the majority of them is overlapping in several fundamental aspects. As a result, our e-commerce definition might be formulated as a process of purposeful exchange of one commodity for another carried out electronically via the means designed for such purpose between participants placing and receiving the order.

2.1.2 Features of e-commerce

Following the research of Qin, Chang, Li, & Li (2014), e-commerce breaks traditional limits, improves the circulation of goods, information, and capital by altering trade patterns resulting in a more competitive environment by effectively reducing the cost of production.

To understand why we will look at the following features of e-commerce that account for challenging the traditional retail defined and explained by Laudon & Traver (2017). These features explain why the interest in e-commerce is growing over the years by bringing new possibilities along.

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3 Ubiquity

One of the most apparent e-commerce features is its ubiquity. Compared to traditional commerce, where the buyer has to visit the marketplace to buy the goods or services, in e-commerce, the marketplace is replaced by marketspace (see the differences in figure 1).

Figure 1: Comparison of a traditional marketplace to the next-gen marketspace

marketplace marketspace

physical virtual

limited availability available everywhere, anytime higher transaction costs lower transaction costs higher cognitive energy required lower cognitive energy required

Source: Author

As described in figure 1, the e-commerce marketspace offers an “unlimited use,”

liberating the market from its traditional restrictions such as being bound to a physical place or removing temporal and geographic boundaries opposed to the marketplace as known initially (Qin et al., 2014). Thanks to these, e-commerce is available everywhere you are at any time you want. Moreover, transaction costs (the costs of participating in a market) are reduced due to ubiquity. E-commerce can remove the transaction costs of time and money that would typically be realized by traveling to a market to make a transaction (OECD, 2019). From the behavioral point of view, participation in marketspace requires less effort for the cognitive energy made by an individual (Shapiro & Varian, 1999; Tversky & Kahneman, 1981).

Global reach

Due to globalization and the invention of the Internet, e-commerce can cross national borders more cost-effectively and with greater convenience compared to traditional commerce.

The advantage is undoubtedly the potential market size since it equals more or less to the world’s population using the Internet. For that reason, the growth and (inter)national expansion of an e-commerce company is advancing easier and faster than ever in the past, reaching its global audience.

Universal standards

E-commerce is built on the technical standards of the Internet that are universal - the same for all nations worldwide (Kamberi, n.d.). Because the Internet is unified worldwide, it is much easier to create a universal global e-commerce network. Having that in mind the universal standardization lowers both market entry costs for merchants to bring and offer their goods and services at the market, at the same time reduces the search costs for customers, which is the effort that they have to make to find suitable goods for their needs (Laudon & Traver, 2017).

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4 Richness

The information richness, we say, is a degree to which information provides a complex message regarding its content (Evans & Wurster, 1999). The traditional brick-and-mortar stores have an extraordinary richness – thanks to a personal, face-to-face approach, it a powerful tool of a given commercial environment. On the other hand, the media such as print, television, or radio provide a far better reach towards the customer, addressing masses unfortunately at the expense of information richness. The trade-off is being solved by the introduction of e-commerce. The technological potential of e-commerce can provide much more information richness than the mass media because of its interactivity and personalization possibility (Laudon & Traver, 2017). For instance, the customer may be offered to use a live online chat to provide a similar customer experience to the one in a retail store.

Interactivity

As we have outlined in the previous steps, interactivity is, according to Laudon & Traver (2017), an ability to engage in two-way communication between the seller and consumers in the case of e-commerce. Unlike other media, e-commerce’s ability to be interactive brings the user closer to a personalized, face-to-face experience. The customer can start a conversation with the seller or might be asked to input information into a form. Social networking tools and their functions such as commenting, sharing, or participating in different forums support this activity. Another form of interactivity, somewhat less evident though, is the responsiveness of the page regarding the design elements, visual adjustment of the page to be best displayed on the device or the interactive user notifications, autofill, etc.

Information density

The information density, in other words, the total amount and quality of the information provided and available to all market participants, both merchants and consumers, is being gradually increased by the evolution of e-commerce, as researched by Laudon & Traver (2017).

As a result, the quality of information increases while costs decrease. Why so? The e-commerce technology increases the timeliness and accuracy of the information, and at the same time, the demand for costs of information collection, storage, and processing is declining. As a consequence of information density brought by e-commerce, there is a decrease in the information asymmetry (state of a relevant market information disparity among parties participating in a transaction). This situation is beneficial for the market participants as the costs and prices become more transparent. The buyers may also find out the actual costs the sellers pay for their products, and other way round, the merchants can investigate the prices the buyers are willing to pay. That aspect helps the market to stay balanced and ensures competitiveness among its makers and users.

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5 Personalization and customization

By adopting personalization and customization, a unique value proposition can be offered to customers providing the basis for a competitive advantage (de Wit, 2017). Using data for specific targeting and segmentation became an integral part of the business (Deloitte, 2020a). Everything is in marketspace achieved within milliseconds by displaying relevant offers based on the potential client’s user information, preferences, or customer behavior. The relevant data might remain stored online, contributing to the development of information density, as mentioned earlier. Within traditional commerce, such a level of personalization might not be achieved due to the nature of these businesses – a trade-off between information richness, reach, and density is unavoidable (Laudon & Traver, 2017).

Social technology

The e-commerce enables its users to share user-generated content within social networks. Previously existing mass media utilized the one-to-many approach when the content creation was concentrated and centralized in an individual place. E-commerce’s potential is driving the ability to shift from the existing model to a unique many-to-many model of communication by empowering the users to create and share the content on a large scale and choose their way of content consumption (Laudon & Traver, 2017).

2.2 Types of e-commerce

E-commerce may be differentiated into several types according to specific criteria. We will have a closer look and distinguish the division of e-commerce by the general aspect of the nature of relationships on the market – who is selling to whom. In the thesis, we will distinguish the following types of e-commerce, in general – business-to-business (B2B), business-to- customer (B2C), and customer-to-customer (C2C) e-commerce; however, any possible pairing of consumers (C), businesses (B), or governments (G) is possible (OECD, 2019). The thesis will briefly explain the first three of them with additional focus on B2C e-commerce throughout the rest of the work.

2.2.1 B2B e-commerce

According to the OECD (2019), the business-to-business type of e-commerce is considered the largest according to the volume of transactions. B2B e-commerce consists mainly of the businesses selling goods and services to each other in distribution, procurement, exchange, etc., during the manufacturing process.

2.2.2 B2C e-commerce

Business-to-customer e-commerce is the one that is the most commonly known and discussed type. The goal of B2C e-commerce businesses is to reach the individual customers who purchase the retail goods, services, and online content from them. The B2C e-commerce is comparatively smaller than B2B; nevertheless, as analyzed by OECD (2019), its exponential growth and tremendous upside potential with much room to grow cannot be overlooked.

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6 2.2.3 C2C e-commerce

In customer-to-customer e-commerce, the individuals can sell their goods or services to each other with an online marketer acting like an intermediary (platform provider) offering a marketplace for the products and services to be sold at, eventually facilitating the transaction among them for a beforehand agreed reward (OECD, 2019).

2.3 E-commerce business models

This chapter will focus on the characterization and description of an e-commerce model and its use. Moreover, we will identify in detail the key elements of such a model that need to be efficiently addressed to succeed.

2.3.1 What a business model is

The business model is a set of strategies, planned mechanisms, and core business processes the businesses utilize in order to succeed (gain a profit) competitive market (OECD, 2019). We should not confuse the business model with the business strategy even though they are very close in some cases as the business model considers certain aspects of business strategy, such as the competitive environment. The business model is then a part of the business plan. The business plan is a document describing the company’s business model, which is at the center of the business plan. In the case of e-commerce, its business model uses and takes advantage of technologies of the Internet, the Web, and mobile platform (Laudon &

Traver, 2017).

2.3.2 Critical elements of a business model

For successful development of a business model in general, not just in the case of e-commerce, the following aspects should be addressed: value proposition, revenue model, market opportunity, competitive environment, competitive advantage, market strategy, organizational development, and management team. We will explain each of them according to framework of Laudon & Traver (2017). These elements are essential for an evaluation of a business model to understand why a particular company has succeeded or failed:

1. Value proposition

The value propositions us a critical element that is at the very center of the business model. Value proposition identifies the value a firm brings to its customers and how its products and services fulfill their needs and problems (Johnson et al., 2017). For a successful value proposition, understanding why the customer will choose its products and services instead of any other company is essential. In other words, the value proposition states what a company can offer and provide to its customers that other ones do not and cannot. From the customer point of view, the most important aspects of a successful e-commerce value proposition include increasing efficiency and cutting costs while improving the quality of goods and services (Radovilsky, 2015). The value is further created in the personalization and customization of product offerings, reducing product search costs, reducing price discovery costs, and facilitating transactions by managing product delivery (Laudon & Traver, 2017).

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7 2. Revenue model

A revenue model is a tool that describes how a company will earn revenue, generate its profits, and how a superior return on invested capital will be achieved. In this case, the terms revenue model and financial model are interchangeable. According to Porter (1985), generating profits themselves is not sufficient to make the company successful. Another essential aspect to keep in mind is the production of returns exceeding alternative investments. Businesses following such ideology are typically successful; on the contrary, the other that fail this test are likely to go out of existence.

There have been developed many different revenue models for e-commerce, however, the following ones defined by Radovilsky (2015), are the major revenue models that the firms are using standalone or in a particular combination:

a) Advertising revenue model

The idea of the advertising revenue model is for the company besides offering its goods, services or content to provide a space for advertisements to receive additional fees from advertisers for promoting their brands. A different company can charge a different amount of advertising fees depending on its ability to attract the viewership and retain user attention.

b) Subscription revenue model

The subscription revenue model works on a basis of permission of access to some or all of the firm’s offered content or services for charging a subscription fee. To overcome the disinclination of the users to pay for the content, it must be perceived as high-value-added, a kind of content or a service that is not readily available from any other provider nor easily replicated (Laudon & Traver, 2017). This model may be found convenient, especially for goods that are replenished regularly. In this case, revenue stream of the companies last longer-term and they also benefit from lower marginal costs (OECD, 2019).

c) Transaction fee revenue model

The principle of the transaction fee revenue model lays in enabling and execution of a transaction in exchange for a monetary fee. The firm acts like an intermediary on behalf of corresponding parties, helping a demand and a supply side to realize the transaction.

d) Sales revenue model

In the sales revenue model, the revenue is generated by providing and selling the content, goods or services to customers. The sales revenue model might be eventually combined with the subscription revenue model which ensures the customers an ongoing service of obtaining the goods regularly.

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8 e) Affiliate revenue model

The affiliate revenue model is used by businesses connecting companies with potential customers. By steering business to an affiliate, the firms receive a referral fee or a certain percentage of the revenue from the corresponding sales.

3. Market opportunity

The firm’s market opportunity is defined by its intended marketspace (the area of actual or potential commercial value) and the overall available potential financial opportunities in that marketspace (Laudon & Traver, 2017). To get a realistic market idea, Laudon & Traver suggest dividing the overall market opportunity into smaller niches to and assess the revenue potential in each of the market niches the firm assumes to compete in.

4. Competitive environment

The competitive environment represents the presence of other companies operating in the same marketspace selling similar products. Further, it encompasses the threat of substitution, new market entrants and bargaining power of customers and suppliers over the business (Porter, 1985). To discover and assess the aspects of competitive environment a complex analysis shall be carried out.

As outlined above, the competition in not limited to the extent of direct competitors who sell similar products and services into same market segments. It, moreover, includes indirect competitors that, however, are operating in different industries, their products are serving as substitutes to each other, as well.

The degree of competitiveness in the market may be influenced the competitors’

activity, how large their operations are, each competitor’s market share, profitability of prices of their products and services (Laudon & Traver, 2017). To assess the state of market’s competitive environment we use the 5 forces analysis defined by Michael E. Porter (1985).

Resulting from Laudon’s & Traver’s work, we know we may also investigate that the market is well saturated and becoming profitable may be really hard – in case of many competitors fighting for the same segment. On the other hand, a lack of competitors may signalize either an unexploited market niche or too low profit potential for given segment.

5. Competitive advantage

Achieved when producing a superior product, or (and) bringing it to market at a lower price than most or all of the competitors (Porter, 1985) . The advantage can be further developed by the company scope – firms operating on a global scale are truly advantaged compared to those developing only a regional or national market. The companies that have achieved a competitive advantage were able to do so due to their ability to obtain differential access to factors of production that the others were denied of. That results in an asymmetry – a state when one market participant has more resources (finance, knowledge, labor…) than other parties, leading to a competitive edge over them.

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9 6. Market strategy

Apart from company’s products and services, a strong focus shall also be aimed at marketing strategy and its execution to ensure its success. You can have a fantastic product, however, if not communicated properly to your potential customers the whole idea will fall.

Therefore, a sufficient market strategy is needed to analyze the details how the market entry will be performed and how new customers will be attracted.

7. Organizational development

The organizational development is a plan describing how a company organizes its work that needs to be accomplished (Laudon & Traver, 2017). Companies hoping and expecting growth need to have their organizational development plan prepared to efficiently implement their business plans and strategies. Especially in case of fast-growing companies such as e- commerce businesses a plan like this shall be set up. These firms need to get employees and organize a set of business procedures required to build organizational structures, thus evolve to a successful business.

8. Management team

In general, the key to every successful business is in its people. Laudon & Traver (2017) believe, the management team is the most important element in the whole business model, making the model work. A competent management team should be able to change and redefine the business model according to its needs, when it becomes necessary. Strong management team, moreover, gives the business a credibility, required knowledge and experience in business plans implementation. A superior leadership might be a source of a competitive advantage for the business’ success as well.

2.3.3 Major B2C models

The following part describes the major e-commerce models utilized in a business-to- customer environment, providing us with better understanding of how and why certain business models work in a way they do. Additionally, by studying these models we are gaining different insights into internal and external aspects that are influential for business performance. For the description of B2C models we are following Laudon & Traver’s (2017) characteristics:

E-tailer

E-tailer is a name for an online retail store ranging from small local stores to global e-commerce giants. These stores operate online, so the customers only need the Internet connection to make a purchase with no need to visit traditional bricks-and-mortar premises.

However, there is a concept of co called “bricks-and-clicks” which are subsidiaries of existing physical stores selling the same products. This model is product-based which means that the customers are paying for a purchase of a particular item. In this sector, the environment is, however, extremely competitive due to low market entry barriers into the e-tailer market.

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10 Community provider

The model of a community provider creates an online environment for executing transactions of users with similar interests, content sharing, communication and information exchange, removing the geographic and time limitations to hinder participation. To its users, community provider is bringing value of a fast and convenient one-stop site designed to fulfill above-mentioned needs.

The community provider uses a hybrid revenue model including subscription fees, sales revenues, transaction fees, affiliate fees, and advertising fees from other firms that are attracted by a tightly focused audience. Due to a growing interest in engagement in communities and corresponding growth in community online activity, the community provider model aims to utilize the advertising as the main source of income with forming affiliate relationships with retailers as another important revenue stream.

Content provider

The content provides’ main activity is the distribution of digital information content such as news, music, photos, video, and artwork. For revenue generation, they are making use of different revenue models - advertising, subscription fees, and sales of digital goods.

In some cases, the users are required to pay for access to information and services.

However, not all the providers charge the consumers for their content. These online content providers are usually able get their revenue via advertising and through partner promotions.

On their way of becoming a successful content provider, the businesses owning the actual content have a significant advantage over those who are just providing distribution channels and therefore, must pay usually high prices for the content. Besides these 2 examples, there is another way of content provision called the syndication. Providers using this approach are bringing an added value in collecting of information from a wide range and variety of sources and its further aggregation and reselling. In this market dominated by traditional content providers, a competitive advantage is achieved by those who have access to a unique source of information that the others do not.

Portal

The role of a portal is to provide its users with a powerful search tools and offer an integrated package of content and services such as news, messaging, e-mail, calendars, music downloads, video streaming, etc., all in one place. Portals are designed, thus, marketed as places intended for customers to stay there for a long time to find information and entertainment and to meet other people. As of their revenue, portals do not sell anything directly. They instead generate their income through advertisement in the form of ad placement, referral fees incurred for steering customers to other sites or eventually charging their customers for premium content and services.

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11 Transaction broker

Core of business of transaction brokers is the processing of transactions that are typically handled in person, by mail or phone, electronically. These firms operate usually in areas of financial services, travel services or job placement services providing value of saving money and time for their customers. Additionally, they provide timely information and opinions regarding corresponding services.

For transaction brokers, their money is made each time they process a transaction. There are several ways to generate a revenue. Firstly, a fee is charged either on a flat rate basis or according to the size of the transaction. Secondly a revenue can be derived in form of a commission resulting from the sales or goods and services. Lastly, an agreement to pay upfront for the service to be provided can be made between involved parties beforehand.

Attracting new customers and encouraging them to use the services frequently is the key to transaction brokers to succeed. An unfavorable phenomenon present in market occupied by these businesses is, however, the (potential) customers’ resistance against using their services due to certain level of fear of privacy invasion and loss of control over personal information.

To face these issues, transaction brokers companies shall be emphasizing the security and privacy measures using to protect the data of their customers.

Market creator

Market creators establish a digital environment for buyers and sellers to meet, search for and display the products and services. Moreover, the prices for these products and services are established in this environment. Unlike in the past when the market was characterized by a physical space in order to carry out a transaction, the web and the invention of the Internet has removed the need of physical spaces in order to establish a market, making it possible to separate markets from physical space. Market creators generate their revenue by charging a percentage of transactions made on the market or eventually by charging merchants a fee in order to participate in the market.

Business model of market creators may seem similar to the one of transaction brokers.

The difference is in the way of transactions execution when transaction brokers are the ones who actually carry out the transactions for their customers, acting as agents in larger markets while market creators just create the environment, and the parties perform the transactions themselves, acting as their own agents. Market creators have a potentially broad opportunity to generate profit. In order to do so, it is necessary to attract the right – sufficient sellers and buyers to their marketplace. That is possible if the market creators have sufficient financial resources and adequate marketing plan.

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12 Service provider

Service providers’ model is similar to the one of e-tailers, instead of providing goods, service providers provide services online. Some of the services are designed to be provided online, such as the photo or video sharing, however, there are many traditional ones that cannot be provided online. There is, anyhow, a possibility to make arrangements for these services online. The ultimate value service providers are bringing to the society is in offering unique services to their customers or in providing valuable, convenient, time-saving, and low-cost alternatives to traditional service providers.

Service providers are businesses that trade expertise, knowledge and capabilities for revenue. To make money, service providers utilize several revenue models in a form of charging a fee, revenue from subscription, advertising or collecting personal information used in direct marketing. The variety of different services that can be provided and their market opportunity is according to Laudon & Traver considered potentially larger than the market opportunity for physical goods. Accordingly, the market opportunity of service providers is immense, thanks to the demand for convenience from the customers.

2.3.4 Major B2B models

Similar to B2C models, in this section we are getting familiar with the major business models used in business-to-business e-commerce environment as defined by Laudon & Traver (2017). The analysis helps us to understand their nature and functioning as well as identify aspects influential on businesses utilizing given models:

E-distributor

E-distributors are firms that are supplying products and services directly to individual businesses. To fulfill the convenience factor that the customers seek, more distributors might be owned by one company in order to serve the most customers. The more products and services e-distributor offer, the more attractive it becomes for business customers. Instead of visiting numerous sites, a one-stop shopping is preferable to satisfy all the firm’s needs for goods and services.

E-distributors use the sales revenue model to generate their income from the sales of goods to business customers.

E-procurement

The purpose of e-procurement companies is to provide (by creating and selling) an access to digital markets for businesses where the selling and buying parties transact for indirect inputs. E-procurement services help businesses to connect the supply and demand side in a value chain management process. The value brought by e-procurement is reflected in the reduction of supply chain costs and eventually achieving the economies of scale.

E-procurement firms make money via receiving fees for market-making services, supply chain management, and fulfillment services.

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13 Exchanges

Exchange represents a digital marketplace owned by independent businesses designated for conducting transactions between suppliers and commercial purchasers. The focus of exchange is usually on trading of direct production inputs, serving usually a single vertical industry, for example steel, aluminum or polymers industry. The parties are generally bound by short-term contracts conducting spot purchasing.

The exchanges are characteristic for their good liquidity, depending on the type of goods traded, ease, speed and volume of transactions realized at the specific exchange. The exchange participants benefit from less expensive and time-consuming identification of potential partners to do business with. With an increasing number of participants in an exchange, the transaction costs are decreasing and contrariwise the chances of making a sale increasing.

The buyers take an advantage of gathering market information such as collection of market prices, checking out different suppliers and monitoring the current events and happenings all in one place. The sellers, then benefit from extended access to potential buyers.

The reality of exchanges, however, faces several challenges, especially for the suppliers.

At an exchange, they are facing powerful price competition making it difficult to convince more and more of them to move into these singular digital markets. Additionally, they may be having difficult times in convincing the potential buyers to participate in an exchange shifting away from their trusted long-term trading partners. These circumstances have resulted in a significant decrease of number of exchanges.

Exchanges generate revenue by charging a commission or fee based on the size of the transactions realized among trading parties.

Industry consortia

Industry consortia are best described as vertical industry-owned marketplaces that with their products and services supply the needs of a smaller number of companies in specific industries such as automobile, chemical, or logging industries. Industry consortia operating in vertical marketplaces are, therefore, the opposite of horizontal marketplaces that supply a wide range of companies with their particular type of goods and services.

When compared with exchanges, industry consortia have tendency to be more successful. One reason is that they are sponsored by powerful industry players, another one is that instead of trying to transform business behavior they seek to strengthen traditional purchasing manners.

The way the industry consortia generate their income is by commission or fee charging based on the transaction size performed among trading parties.

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14 Private industrial networks

Private industrial networks, sometimes referred to as private trading exchanges are company-owned entities, typically the successors of companies’ own enterprise resource planning (ERP) systems out of which they have evolved with the goal of including a limited set of key business partners in the firm’s own decision-making process. The aim of these networks is to coordinate the communication flow among firms that are engaged together in a business – the customers and their trusted long-term suppliers of direct inputs.

The revenue model works on a principle that the cost absorbed by network owner are then recovered through production and distribution efficiencies of participating parties.

2.3.5 E-tailing business models

In the thesis, we will focus mainly on online retail, as one of the most high-profile sectors of e-commerce. To understand this area better, we will have a closer look exactly at the 4 models identified by Laudon & Traver (2017), utilized by the firms operating in the online retail sector:

Virtual merchants

As for virtual merchants we can consider the e-commerce companies operating single-channel generating almost all their revenues from online sales.

These e-tailers benefit from having no costs of maintaining physical stores due using online sales channels to generate their revenues. On the other hand, there are several challenges the virtual merchants need to cope with. At the very beginning, these firms have to establish their online presence in a new channel and build their brand from the scratch in order to maintain their position in the market and obtain their share. All that time, there is a relentless pressure applied from many virtual competitors that the new merchants have to face. Low, respectively no costs of running the physical stores are evened out by high costs of building and maintaining e-commerce presence, building an infrastructure and acquiring customers in order to build a brand able to compete in the market.

The strategy of virtual merchants is usually focused on providing goods at low costs, bringing value for the customer in form of convenience and effective and efficient fulfillment processes ensuring as fast as possible delivery of the order to final customer. Due to low margins achieved in this area, operating efficiently and attracting many customers are the key strategic aspects in order to cover the costs and get some profit, eventually.

Omni-channel merchants

Omni-channel merchants, also known as bricks-and-clicks are retail networks incorporating several physical stores as well as online “stores”. The primary retail channel of bricks-and-clicks are the physical stores with online retailing serving as a secondary channel.

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15 In terms of building the online presence, the omni-channel merchants are not entirely starting from the scratch, yet from an advantageous position of having established a brand, a local/regional/national customer base, warehouses, trained staff and developed economies of scale to a particular extent. Therefore, less expenses need to be incurred in order to build a customer base and a brand, both of which already exist.

Disadvantageous are on the other hand still-present costs of physical building and staff responsible for the main channel sales. For bricks-and-clicks the situation might become challenging in process of leveraging their assets to the online environment and building an online purchasing environment. As a result, they must cope with coordinating prices across the sales channels. A fundamental aspect worth putting more effort into is the consideration of the investment into purchasing and inventory control systems to control the costs of business in order to stay profitable in the long run. Ensuring efficiency in this area may become a key difference of generating positive revenues mainly due to thin margins that are typical for the industry.

Catalog merchants

Catalog merchants are companies that have established national offline catalog operation as their largest channel, however, are recently developing online capabilities as well.

The reason of this shift is caused by falling sales growth rates that have suffered in recent years.

The solution is being found in diversification of sales channels such as building stores, getting acquired by store-based companies or as mentioned building a strong online presence.

Should the latter be found as the solution, catalog merchants would benefit from already developed centralized fulfillment centers and call centers, experience in customer service and excellent fulfillment in partnership with delivery services. Moreover, a very efficient order entry and fulfillment systems are key cost-saving aspects in this case.

Shifting to the online environment helps the firm to get rid of high costs for printing and mailing millions of catalogs each year. The following challenge is to build a credible online presence and hire new staff.

Manufacturer-direct

Manufacturer-direct firms, also named direct-to-customer, are single-channel or multi-channel manufacturers that are selling their goods directly to consumers without any other retailer acting as a middleman.

They were predicted to play large role in e-commerce, however, that did not happen in the end and manufacturer-direct firms are not common in the market in high volumes. Some exceptions we may find in fields of computer hardware (Apple, Dell, HP, etc.) or apparel manufacturers (Nike, Adidas, etc.). The majority of manufacturers producing consumer products do not usually sell online directly. This, however, may have started to change as new start-ups, sometimes referred to as digital native verticals, started to show up focusing on direct material sourcing, distribution channel control and direct connection to customers.

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16 Manufacturer-direct businesses must sometimes face challenges resulting from the channel conflict. This situation occurs when the retailers compete on price and currency of inventories against the manufacturer, directly. The manufacturers are in a good position, because they do not face costs of maintaining inventory, sales staff and physical stores.

Additional challenges are identified for the firms lacking prior experience with direct marketing, facing issues of developing a sufficient and efficient online order and fulfillment system, acquisition of customers and coordination of supply chains with demand of the market.

The manufacturer-direct firms, moreover, benefit from the advantage of having established the brand on local/regional or national level, existence of a customer base and lower cost structure than other merchants – they do no pay profits to anyone because they are the manufacturers. Given that, the manufacturers-direct businesses shall have higher profit margins.

2.4 Online retail

2.4.1 Common topics, ideas and trends

We have identified several business models present and used in the online retail environment. Even though, they differ to some extent in their nature, they have several trends and topics in common, common for most of the retail businesses operating online.

Firms operating in this business environment are relatively in a favorable position in terms of potential future growth, as the online retail is the fastest growing channel in retail commerce in terms of sales, consumer base, and penetration across many categories of goods (Laudon & Traver, 2017). For newly establishment businesses, it is common to take several years to turn from the red to black numbers. Achieving profit does not happen immediately, it is a process to be accomplished in the long run.

To succeed, these fundamental ideas shall be followed (Laudon & Traver, 2017):

• a highly efficient inventory system

• a highly efficient fulfillment system

• charging high enough prices to cover the costs of goods and services On the other hand, following shall be avoided (Laudon & Traver, 2017):

• lowering prices below total costs of goods and operations

• failing to develop efficient business processes

• failing to attract a large enough audience

• spending far too much on customer acquisition and marketing

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17 Entering a market unprepared with not sufficient and efficient business plan might result in several drawbacks and errors that are not always cheap. Some of the new businesses might fail to develop efficient business processes in order to carry out their business, failing to attract a large enough audience, then compensate for their errors by making other mistakes of spending too much on marketing and customer acquisition. To convince customers to buy from given retailer, the firms may try to incorporate the strategy of lowering prices for their goods. This might not be a good idea should the prices be lower than total costs of goods and operations.

This way the profit will not be achieved.

On the other hand, the businesses that develop a good business plan, developing a highly efficient inventory and fulfillment systems can offer goods at lower costs compared to their competitors and still be able to generate profits. However, charging high enough prices should be always kept in mind to cover all the costs of goods as well as operations and marketing costs in order to attract new customers.

In previous paragraphs we mentioned some of the common mistakes that should be avoided as well as aspects to be followed to become profitable. One of the aspects were also the prices that the firms charge their customers for their goods and services. Here, it is important to state that in the last years, the consumer behavior has evolved eventually – the consumers’

main factors affecting their decision making evolved. In the past, the customers would look for cheap prices online, but as the time went by, nowadays, the main decisive factors are convenience and time savings, according to Laudon & Kenneth (2017). In return for the convenience, the consumers are nowadays willing to accept higher prices to avoid experiencing inconvenience of physical shopping at malls or stores. This opens more space for online merchants for movement of the prices, having more freedom.

2.5 Analysis of the viability of an online retail business

In this chapter we will examine and describe the way the analysis of viability of an online retail business is carried out in terms of two approaches: strategic and financial. As Laudon & Traver (2017) explain, under economic viability we may understand the ability of a firm to survive as a profitable business during a given period.

In our analysis, we will focus mainly on a medium-term viability of retail businesses and their business models. This analysis is applicable exactly on the four models described for online retail businesses, however, might be used for the other as well.

To explain the way how such an analysis is conducted we will use the framework explained by Laudon & Traver (2017) and Radovilsky (2015), consisting of various non- monetary as well as monetary (financial) measurements. In the first part – strategic analysis, we will explain how to utilize the strategic measures to help us understand the competitive situation of the firm. In the second one – financial analysis, the monetary ratios will be introduced in order to understand how a firm is in fact performing.

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18 2.5.1 Strategic analysis

When analyzing the economic viability given the strategic approach, we shall focus on the competitive environment the online retail business operates in as well as on the firm itself.

For the analysis of competitive environment, we will follow the Porter’s Five Forces (5F) methodology (Porter, 1985) adapted and tailored for the purpose of online retail industry, explaining the key aspects to be addressed when conducting the strategic analysis of a firm operating in given area in addition to traditional 5F framework.

Threat of entry

The threat of entry is represented in form of new entrants to an industry that aim to gain a particular market share at the expense of current entities. The degree of such threat is dependent on various barriers present in the market and corresponding reaction of existing competitors. Six major sources of barriers of entry are economies of scale, product differentiation, capital requirements, cost disadvantages independent of size, access to distribution channels and government policy.

In case of retail e-commerce, high capital costs or intellectual property barriers such as copyrights or patents can be identified as major threats restraining the new businesses enter the market.

Bargaining power of suppliers

The suppliers use their bargaining powers to dictate the prices in the industry. They exert their high power in two ways – by raising prices or reducing the quality of goods and services. Should their bargaining power be high, suppliers are able to squeeze profitability out of an industry will would not be able to recover increased costs in its own prices.

Bargaining power of customers

Bargaining power of customers is demonstrated in the ability to force suppliers’ prices down, play the competitors off against each other, or demand higher quality of goods and services. To evaluate the bargaining power of customers the main question addressed is if the customers have the possibility to choose from many competing suppliers, thus, challenge their high prices and margins.

Threat of substitute products

To assess the existence of substitution, we want to find out if the products and services can be obtained from alternative channels or competing products in different industries.

Additionally, we shall investigate if substitute products and services are likely to emerge in the near future and what kind of consequences they would have on our analyzed business.

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19 Competitive rivalry

To understand the fundamentals of competitive rivalry, we have to understand the competition within the industry – based on product differentiation, price, scope or focus of offerings. Further, we analyze and evaluate how the nature of competition is changing and if the business will benefit from these changes or vice-versa.

Apart from Porter’s five forces present in competitive environment of online retail businesses, Laudon & Traver (2017) identify one more strategic factor, which is:

Industry value chain

The main question here is if the chain of production and distribution in the industry is changing in different ways and if these changes are beneficial or rather harmful the firm.

After assessment of a firm’s competitive environment, we will have a look at the firm itself. The strategic success factors that pertain to the firm and its related businesses include (Laudon & Traver, 2017):

Firm value chain

The firm value chain analysis consists of addressing internal business processes, methods and operations. Focus is put at adoption of business processes and methods of operation in a way that allows the firm to achieve the highest efficiency in its industry (de Wit, 2017). We also keep in mind possible changes in technology and their impact on the firm’s business processes.

Core competencies

Under core competencies we may understand the unique set of skills and competencies that the business possesses and that cannot be easily duplicated by other firms. We analyze if these competencies are present in the firm and possible impacts of changes in technology, and in case some changes occur if the firm’s competencies would become invalidated or strengthened by them.

Synergies

The internal potential of the firm can be evaluated by the number of competencies and assets either owned outright by the company or through strategic partnerships and alliances it has formed or is able to form resulting in an increased competitive advantage (de Wit, 2017).

Technology

In the constantly developing world the technology is often a game-changing asset and its use especially in e-commerce has a powerful impact on business performance, effectivity and efficiency. Key aspect to be analyzed include the development of proprietary technologies allowing the business to scale with growing demand for their products and services and the

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20 development of operational technologies such as customer relationship management, supply chain management, fulfillment or inventory control.

Social and legal challenges

An integral part to be analyzed is the social and legal challenges. To prevent negative impacts, the firms have to develop a complex set of policies requiring a holistic approach to address consumer trust issues such as consumer protection, etc. (OECD, 2019). Potential issues that could be challenging the business model need to be faced and resolved. Foreseeable statutory developments need to be analyzed and addressed, putting emphasis on the degree of impact of the business by eventual changes in development that needs to be constantly monitored.

2.5.2 Financial analysis

We have explained the strategic analysis to help us understand the competitive situation of the firm. If we want to understand how the firm is in fact performing, for that purpose we use the financial analysis. This analysis consists of two parts - the balance sheet and the statement of operations. From the first one we can find out how many assets does the company have to support its current and future operations. And the other one, the statement of operations, recognizes current sales and costs, reporting how much profit or loss is the firm achieving, eventually.

Below, we will introduce and explain key financial measures used for analyzing the performance of the business, according to Alexander (2018). We will, moreover, according to the theory of Laudon & Kenneth (2017), explain their application in the e-commerce industry.

Revenues

Revenues, also known as sales, represent income generated from business operations performed by the firm, in our case the e-commerce sale (Radovilsky, 2015). To recognize if the business is performing well or not we analyze if the revenues are growing and at what rate.

Moreover, we might examine the behavior of revenue throughout the time to detect the influence of other factors on its growth or decline, for example by introduction of a new sales channel.

Cost of sales

Cost of sales, or cost of goods sold (COGS) signify the direct costs of goods and services produced by the company which are then sold by this company. Cost of sales is composed by the cost of material and labor used for production of the firm’s products. Indirect costs, however, are not part of this measure.

When analyzing the performance and profitability, we compare the cost of sales to revenues. Naturally, the lower cost of sales is compared to firm’s revenue, the higher the company generates its gross profit. Therefore, a possible strategy to increase the profit is trying to minimize the costs.

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21 Gross margin

Gross margin symbolizes the difference between above-mentioned 2 measures – the firm’s net sales (revenue) minus the cost of sales, resulting in the revenue a company retains after deducting its direct costs from revenue of goods and services sold. With higher gross margin, the company is able to retain more capital that can be used for further development of the firm. However, the gross margins vary widely across industries, from amounts as little as 10% in case of retailers, to figures as high as 80% in case of technology companies, for example software.

For better illustration, the gross margin could be also expressed as a percentage proportion of the total gross margin divided by net sales (revenue). By comparing its values in time, we can assess if it is increasing, decreasing on keeping the same value over the time, therefore, analyze if the company is gaining or losing its market power in relation to its key suppliers.

Operating expenses

Commonly abbreviated as OPEX, operating expenses are costs that are incurred during the firm’s operations. These costs usually include costs of administration, rent, overhead, payroll, marketing, R&D, inventory, etc., required for the run of the business. Operating expenses, moreover, include amortization of intangibles, impairment of investments or stock-based compensation to executives and employees.

Operating expenses are very important for e-commerce companies. Thanks to the introduction of e-commerce, the operative efficiency, thus, lowering costs of operations is possible now more than before (Qin et al. 2014). This allows the businesses either to generate more profits due to higher margins or to decrease their prices while keeping the margins constant, eventually.

Operating margin

Operating margin indicates how is the company able to turn their sales into profit (before taxes) after deducting operating expenses. We calculate operating margin by dividing the firm’s operating income by its net sales (revenue). Eventually, after the analysis of operating margin, we will find out if the company’s current operations are able to cover its operating expenses and the degree of efficiency and effectiveness.

Net margin

After all expenses are deducted, the net margin tells us what proportion of sales revenue the company was able to retain. Net margin is determined by dividing net income by sales revenue. Net margin summarizes a company's success in making a profit on each dollar of sales revenue. By analyzing the net margin, we can investigate the relative efficiency of the firm regarding other businesses within an industry, especially regarding the competitors.

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22

3 Practical part

In the practical part of the thesis, we will firstly focus on the analysis of data regarding performance of the global retail and e-commerce retails sectors throughout the time including future forecast and describing the trend in global development. Additional focus will be put on specific areas within given sectors. The reason we are choosing the e-commerce retail is because it is the most high-profile e-commerce sector (Laudon & Traver, 2017). Over the past years, the online retail experienced several ups and downs in the form of explosive growth as well as spectacular failures. The influence of COVID-19 will be taken into account as an important disruptive factor throughout the thesis. The causes and consequences of such a disruption will be analyzed as well as the newly emerging trends are going to be introduced.

Another point of view will describe the development of consumer behavior of the e-commerce users caused by the outbreak of COVID-19.

A strong focus will be put on real global statistical data and professional studies carried out all over the world by renowned firms and agencies. Following the analysis and description, the outcomes are going to be summarized in a form of guidelines and recommendations that should be followed in order to succeed in the post-COVID world.

3.1 COVID-19 global pandemics

Coronavirus disease 2019, abbreviated to well-known COVID-19 is an infectious disease caused by a newly discovered coronavirus SARS-CoV-2. As firstly identified in Wuhan, Hubei Province in the People's Republic of China in December 2019, the virus has been spreading uncontrollably ever since resulting in a global pandemic declared by The World Health Organization (WHO) on 11 March 2020 (World Health Organization, 2020). WHO (2020) has declared the status of a pandemic following an exponential growth of new cases in the early beginning. At the time of declaration, according to WHO (2020), there have been more than 118,000 cases spread in 114 countries with 4,291 people having lost their lives because of COVID-19.

The main way of transmission of COVID-19 results of a close contact of an infected person with another person. WHO (2020) says that the SARS-CoV-2 virus is primarily spread through tiny droplets of saliva or discharge from the nose as an infected person breathes, speaks, sneezes or coughs. These little droplets then usually infect other persons as they enter their bodies via nose, mouth, eventually eyes. Transmission via air or via contaminated surfaces is also possible, however, less common.

For infected people, it might take up to 14 days that they remain contagious. Within that period the spread of the virus may still be possible even in case of not developing any symptoms. Therefore, several measures have been introduced in order to prevent and slow down the transmission of the virus such as social distancing, wearing protective masks, improved hygiene and regular disinfection of surfaces, testing or self-isolation.

Hlavní práce76800_blap02.pdf, 661.4 kB Stáhnout

Prague University of Economics and Business

Bachelor’s thesis

2021 Patrik Blažovský

Prague University of Economics and Business Faculty of Business Administration

Title of the Bachelor’s thesis:

Impacts of COVID-19 on the shift in e-commerce paradigm

Author: Patrik Blažovský

Supervisor: Ing. Karel Pernica

Title of the Bachelor’s thesis:

Contents

List of figures

1 Introduction

2 Theoretical part

2.1 Introduction to e-commerce

2.2 Types of e-commerce

2.3 E-commerce business models

2.4 Online retail

2.5 Analysis of the viability of an online retail business

3 Practical part

3.1 COVID-19 global pandemics