The economic impact of e-commerce

Thanks to the development of electronic commerce, the most basic of economic transactions— the buying and selling of goods—continues to undergo changes that will have a profound impact on the way companies manage their supply chains. Simply put, e-commerce has altered the practice, timing, and technology of business-to-business (B2B) and business-to-consumer (B2C) commerce. It has affected pricing, product availability, transportation patterns, and consumer behavior in developed economies worldwide.

B2B e-commerce leads the way
Business-to-business electronic commerce accounts for the vast majority of total e-commerce sales and plays a leading role in global supply chain networks (see Figure 1). In 2003, approximately 21 percent of manufacturing sales and 14.6 percent of wholesale sales in the United States were e-commerce related; by 2008 those percentages had increased to almost 40 percent for manufacturing and 16.3 percent for wholesale trade. One reason why B2B e-commerce is more sophisticated and larger in size than directto- consumer e-commerce is that B2B transactions developed out of the electronic data interchange (EDI) networks of the 1970s and 1980s.

Article Figures

[Figure 1] Supply chain web with e-commerce retail trade Enlarge this image

[Figure 2] E-commerce retail sales Enlarge this image

The steady growth in business-to-business e-commerce has changed the cost and profit picture for companies worldwide. At the microeconomic level, growth of B2B e-commerce results in a substantial reduction in transaction costs, improved supply chain management, and reduced costs for domestic and global sourcing. At the macroeconomic level, strong growth of B2B e-commerce places downward pressure on inflation and increases productivity, profit margins, and competitiveness.

Double-digit growth for B2C
E-commerce retail has become the fastest growing trade sector and has outpaced every other trade and manufacturing sector since 1999, when the U.S. Census Bureau started collecting and publishing data on e-commerce. That year, e-commerce retail sales represented less than 1 percent of total U.S. retail sales. In 2003 that number climbed to a little less than 2 percent; by 2008 it had grown to 3.6 percent, and by the fourth quarter of 2010 B2C e-commerce reached 4.4 percent of total U.S. retail sales. In dollar terms, e-commerce retail revenue currently stands at approximately US $165 billion, considerably less than the US $3.9 trillion that represents the total U.S. retail market.

During the "Great Recession," which lasted from December 2007 through June 2009, manufacturing, wholesale, and bricks-and-mortar retail sales took a heavy beating. By the fourth quarter of 2010 they still had not fully recovered, even though U.S. gross domestic product (GDP) and personal spending (adjusted for inflation) had surpassed their previous peaks seen in late 2007.

Retail e-commerce, by contrast, weathered the recession relatively well, albeit with considerably slower growth than had been seen prior to the financial crisis. In the first quarter of 2002, retail ecommerce experienced quarterly, year-over-year growth of about 42 percent. On the eve of the recession, that rate dropped to a still-respectable 18 percent. Quarterly sales continued to grow until the latter part of 2008, and in the fourth quarter of 2009 sales surpassed the previous peak (see Figure 2).

It's important to note here that a large portion of B2C sales come through mail-order houses, many of which have an online presence as well as traditional storefront outlets. Contrary to popular opinion, mail-order houses still have a very strong online presence, and until just recently their sales outperformed online-only retailers.

Economic, behavioral changes
The changes that B2C e-commerce has sparked arguably have had a more significant impact on the economy and on buyers' behavior than has B2B ecommerce. In the past, when consumers wanted to make purchases they had to set aside time to shop during certain hours of the day, or they had to read through catalogs sent to them by mail-order houses. Today, many consumers can simply use their computers— and now smart phones or other portable electronic devices—to shop online. Buyers and sellers that engage in e-commerce retail trade are no longer restricted by store hours, geographic marketing areas, or catalog mailing lists. With a few simple clicks they can gain access to a variety of goods 24 hours a day, seven days a week.

The characteristics of retail e-commerce merchandise also have changed significantly over the past decade. Back in 2000, computer hardware was the most common type of merchandise sold over the Internet. Today, the variety of merchandise is extremely diverse, and shoppers can buy almost anything online.

Online shoppers have benefited in other ways. The growth of e-commerce retail sales has reduced consumers' search cost, placed downward pressure on many consumer prices, and reduced price dispersion for many consumer goods. But this has led to a substantial decrease in the number of small companies operating in certain industries, as they tend to be less involved with e-commerce. Larger businesses, most notably retail book outlets, new automobile dealerships, and travel agents, are better able to compete in this new market environment.

The extremely rapid growth of e-commerce retail sales has provided a major boost to residential parceldelivery services. That's because online merchandise purchases involve some form of residential delivery by a third-party vendor such as FedEx, UPS, or the U.S. Postal Service. In addition, there appear to be considerable synergies related to B2C parcel and heavier freight volumes—parcel industry insiders have observed that businesses with strong e-commercerelated B2C parcel shipment volumes often have stronger B2B shipment volumes than those that do not engage in B2C e-commerce.

E-commerce influences demand patterns
As technology, e-commerce, and globalization become more intertwined, buyers and sellers are increasing their connectivity and the speed with which they conduct sales transactions. As we saw during the recent turmoil in the financial markets and some supply chain networks, speeding up sales transactions can be a very positive attribute when small market corrections are taking place. However, during a major economic correction like the one we witnessed during the Great Recession, a quicker response to sales transactions can have cascading impacts on supply chains, resulting in large contractions or expansions in orders, production, shipments, and inventory.

That's because years ago, it might have taken two years for events in one country to affect another's economy. Now, thanks to technology and instant communication, the impact can be almost immediate.

Thus, there are some potentially negative consequences to the rapid growth of e-commerce. In this volatile business environment, supply chain managers should consider developing strategies for dealing with the rapid swings that can result from increasing use of e-commerce in a globalized market.