The Internet is Broken

Web of Intrigue – 1: The Internet Is Broken
2Target Open Day Sep 19, 2014 | The Village Hotel, Leeds, UK

Web of Intrigue – 1: Internet Growth Is Not Materialising

UK Online 2006 - 2013
% Population Purchasing on Internet

36m Brits Use the Internet Daily…
0
20
40
60
80
2006 2007 2008 2009 2010 2011 2012 2013
Daily At least weekly Less than weekly Not used in the last 3 months
35.7million
7.4million
4.2m
1.6m
UK Online 2006 - 2013
% UK Population

…What Are They All Doing?
0
20
40
60
80
100
16-24
25-34
35-44
45-54
55-64
65+
UK Online 2006 - 2013
%
Age
Group

Surely Everyone is Buying Stuff?
0
20
40
60
80
100
2008 2009 2010 2011 2012 2013
16-24
25-34
35-44
45-54
55-64
65+
UK Online 2006 - 2013
%
Age
Group

Surely Everyone’s Buying Computers?
0
10
20
30
40
50
60
70
80
16-24
25-34
35-44
45-54
55-64
65+
All
UK Online 2006 - 2013
Significant mail-order persists
% Age
Group

% Category Total Captured 2012

Drivers of Internet Growth
Driver
1. Non-store sales (66%)
– Mail order, TV shopping,
Insurance
2. Branded commodities
– Branded electricals (not
bespoke systems)
3. Grocery
4. Digital goods
– Music, video, software, ebooks
Reason
• Channel displacement
– aaaaaaaaaaaaaaaaaaaaaaaaaa
aaaaaaaaaaaaaaaaaaaaaa
• Price comparison
• aaaaaaaaaaaaaaaaaaaaaaaaaaaaaa
aaaaaaaaaaaaaaaaaa
• Competitive response
• Electronically transferrable
• aaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

Death of the High-Street?
Chain branch trends
Net shedding mainly in
services such
• Banks
• Building societies
• Post offices
• Travel agencies etc.
• Also easy-capture retailing
such as music, video,
software etc.

• Growth reporting flawed: fails to differentiate
– Canabalisation v non-store
– Home delivery v click-and-collect
• Diversion from shops far lower than predicted
– Shopping hinges on ‘see, touch, feel, experience’
• On current trajectory UK 2020 internet sales
– 14-15% total retail sales

Clear Evidence of Hype, Hysteria, Puff, Denial

Web of Intrigue – 1: Internet Growth Is Slowing Early & Abruptly

% Category Total Captured 2012
• Failing to penetrate markets 15 times the size
• Significant bricks-and-mortar fulfilment remains

Dramatic Unexpected Asymmetry
66% 8%No logistical barriers
Electronically transferrable goods
Online suits buyers
Logistical barriers
Complex sales
Experiential sales

Home Delivery Trails Sales Growth
Electronically transferrable
displacement
‘Click-and-collect’
Online grocery shopping
‘irregular’

• Growth overwhelmingly from electronically transferrable goods
• The bulk of trade is from services not retailing
• Reports include misclassified sales – especially travel
• Home delivery growth shows its just a selling channel

Internet Growth is Crashing
Sales Growth Online vs All-Retail (%)

Web of Intrigue – 1: The Dot.Com Bubble Has Not Yet Burst

Is Being Online Easy Money?
• Legions of entrants make price competition fierce
– Many inexperienced even naïve
• Business seem profitable but are transient
– Few plan adequate margin for sustainable profits
• Increased logistics costs
– Prohibitive as item value decreases
– Incremental picking and logistics (supermarkets)
• Very few successful pureplays
– Those that are, are increasing margins (eBuyer, Scan)

Anyone Can Be a Millionaire?
Firm Size
Average Value of
Sales via Internet
Online Revenue as % of
Total Turnover
Micro
(<10 employees)
£1,000 0.6%
Small
(11 to 49 employees)
£175,000 4.6%
Medium
(50 to 249 employees)
£2,500,000 13.1%
Large enterprises
(250+ employees)
£69,000,000 18.7%
2010 Average Annual Online Sales
Source: Cebr analytics; Office for National Statistics

• Founded ’95
• $10.5Bn invested by 2012
• IPO ’97
• P/E ratio of 400
• Jeff Bezos worth $29.7Bn
• No dividend since IPO ‘97
• Quarterly results July 2014
– 23% rise in sales to $19.3Bn
– Net loss of $126M
• Since ‘97 cumulative
– Sales $315 billion
– Profits $2 billion or 0.6%
(Wal-Mart is 3.4%)

A strategy of ‘buying’ market share then raising prices is
NOT working
Stock Decline 2014

The Internet Is Funded By Advertising

Traditional Advertising is Failing
• 95% Don’t trust advertising
• 8% Trust what companies say about themselves
• 58% Believe "companies are only interested in
selling products and services to me, not
necessarily the product or service that is right
for me“
• 17% Believe companies take what they say seriously
Source: “Your Brand: At Risk or Ready for Growth”, Alterian plc by Lancaster University 2010

Killing The Golden Goose?
• ‘Interruption’ being used to shore up ROI
– Pop-ups
– Lead generation (data gathering)
• Yet when the internet delivers so much choice, how
can it be a good thing to annoy customers?

Social Endorsement
Social Media presents an opportunity
BUT ‘old-school’ marketing is prevailing

Is the Internet Morally Bankrupt?
• Those with the biggest servers will win
– Wealth will be concentrated with the few
• Relentless falling prices means
– Increased unemployment
– Impoverished consumers

A Crisis Is Emerging
• Inequalities drive public opinion
• Governments will respond
– Taxes will follow (are?)
– Tax avoidance will be addressed
• Price advantages will cease
• The internet could go into
reverse

• Google paid just
£935,000 on £239m for
2011 and £8m between
2004 and 2010
• Amazon made £3.3bn
sales in 2011, but paid
no corporation tax in
the UK
• Starbucks paid just
£8.6m in its 14 years of
trading in the UK

Summary

The Chickens Are Coming
• Realities confound forecasts
• Investments will never be recouped
• Huge vested interests are at play
• Moralities are being confronted
• A correction is inevitable

The Internet is Broken

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