The second generation of retail selling began with the advent of electronic retail (e-retail) Universal, 24-hour-a-day access to a centralized order processing and distribution system is the hallmark of e-retail. A well-designed Web site provides the customer greater ease and speed in access, shopping, and buying than physical stores do. In addition, Web technology allows companies to personalize the shopping experience by guiding the consumer to parts of the site that are in line with the customer's interest profile.The process of online buying allows the business to create a consistent, personalized, and efficient shopping experience.

In addition, the automated and centralized business processes of e-retail allow for a wide variety of highly discounted products. (Wilder 2005), one of the leaders in e-retail, continually receives high marks for customer service. Their Web site is designed to speed the consumer through the process of selecting and ordering books, music, videos, toys, electronics, and home improvement tools, whilst giving reassuring, personal service at highly discounted prices. Products are typically drop-shipped using delivery services such as UPS and FedEx.

The combination of efficiency, discounted prices, and personal service is why is frequently mentioned as a model of customer service for businesses on the Web. Traditional retail companies have tried with varying degrees of success to compete with the e-retailers. Even though its Web site has yet to make a significant contribution to its total revenue, retail giant Wal-Mart has publicly stated its intention to stake a leadership position in e-commerce.At Office Depot, Bill Seltzer, executive vice president and chief information officer, spends nearly one-third of his time planning and initiating an electronic-business strategy. Sales through Office Depot's enhanced Web sites totalled $219 million for the first three quarters of 1999 and rose more than 492 percent from the previous year, according to an article by C.

Wilder published in InformationWeek. Yet Web sales account for just three percent of the company's total annual revenue. Even less-aggressive retailers admit that the potential for synergy between physical stores and e-retail exists. For example, Rangnar Nilsson, chief information officer for Karstadt (Europe's largest department store chain), was quoted in Harvard Business Review as saying that he believes "e-commerce can be a true extension of shopping in the physical world, but not all stores are currently in a position to take advantage of it.

" (Evans 2005)In many ways the retail industry is trailing other sectors of the economy in e-commerce. For example, in a December 1999 survey of 375 businesses and information technology managers, businesses in the retail sector estimated that 7 percent of their company's total revenue came from their Web site, 10 percent of Web site visitors buy online, and only 31 percent route e-business customer inquiries to a customer-relationship database. This compares unfavourably to the IT and financial services (FS) sectors, where 18 percent (IT) and nine percent (FS) of revenues are Web-based, where 10 percent (IT) and 23 percent (FS) of Web visitors buy products online, and where 58 percent (IT) and 42 percent (FS) of businesses deploy customer-relationship databases. Yet, in spite of these numbers, more than 61 percent of all retail organizations either currently have or have planned a Web-only business division. Clearly, there are high expectations among retail businesses with regard to e-commerce.

The third generation of retail will be characterized by hybrid organizations that combine the best of e-retail with the best of traditional bricks-and-mortar retailing.According to the Harvard Business Review article, prognosticators such as John Quelch, dean of the London Business School, believe that hybrid retail, may work "for supermarkets, wholesale clubs, and retailers that offer a great assortment of mostly low-end merchandise." Others see a broader role for hybrid retail, in which retailers of products that buyers must see in person before they buy view their physical stores as the key channel for acquiring and building relationships with customers and where Web sites are set up as fulfilment channels, organized to handle repeat orders at a low cost. Traditional catalogue retail is actually an offline version of e-retail. Most catalogue retailers have established or are in the process of establishing an e-retail component of their business.

This makes their business model identical to or very similar to that of e-retail. For this reason, catalogue retail is a unique retail category. (Gallaugher2006)Literature reviewIn order to evaluate the three types of retail systems, we must look at a model of a retail system. The model shows the measures of system success that come from the customer's purchasing experience and from the retailer's fulfilment process. The model begins with the assumption that market share and profitability ultimately determine the success of a retailer. Market share is determined by a retailer's ability to attract new customers and retain existing customers; thus, the need to examine the customer's purchasing experience.

Profitability is affected by profit margin and sales volume; thus, the need to examine the components of the retailers operations. (Wilder 2005) Customer total satisfaction with the purchasing experience is defined as customer satisfaction with the purchasing experience during all three phases of the purchasing process (i.e., pre-purchasing, purchasing, and post-purchasing).

Customer total satisfaction with the purchasing experience affects retailer ability to attract new customers and retain existing customers. A retailer can gather valuable information regarding customer satisfaction during the purchasing process, including components of customer satisfaction throughout the phases of the purchasing process. For example, the number of customers who purchased one or more products compared to the number of potential customers (i.e.

, those who browse a retailer Web site or its physical aisles) is one indication of retailer effectiveness in achieving customer satisfaction with the pre-purchasing experience.The number of repeat customers compared to the total number of customers as well as information regarding the frequency of repeat purchases is additional indications of the retailer effectiveness in achieving customer satisfaction with the purchasing experience. The percentage of retained customers among those customers who have returned purchased items is an indication of the retailer effectiveness in achieving customer satisfaction with the post-purchasing experience. (Gallaugher2006) The information a retailer gathers regarding customer satisfaction with the purchasing process can be used to plan marketing policies for each of the three phases of the process.

Implementing specific marketing policies may increase customer total satisfaction with the purchasing experience but may reduce profit margin because of the cost associated with implementing such policies.For example, stores that have frequent large promotions to attract customers may end up selling larger amounts of products for a smaller profit margin. Similarly, retailers that increase the number of sales associates and customer service representatives or maintain a no-hassle return policy may attract more customers but end up reducing the profit margin. (Wilder 2005) The effectiveness of the information system that coordinates and integrates its supply chain affects a retailer's ability to ship products efficiently from suppliers to customers via the retailer's distribution system.The efficiency of a supply chain is determined both by the level of inventories kept at distribution centres and stores as well as by the retailer's cycle time.

A retailer's cycle time is defined as the time that elapses between ordering products from suppliers and delivering them to retailer's customers. The level of efficiency of a retailer's supply chain affects its profit margin. The level of coordination of a retailer's supply chain with its various marketing policies and with real-time point-of-sales information affects a retailer's ability to offer customers the products they want, when and where they want them.This ability affects a retailer's effectiveness and, ultimately, its profit margin. Criteria used to evaluate the different retail systems are defined in the next section.

These criteria, used in conjunction with the aforementioned model of a retail system, make it possible to identify the most effective retail system. Physical retail, e-retail, and hybrid sales systems are evaluated below according to a variety of criteria. The criteria are compiled into two groups. (Hagel, and Armstrong, 2006)Comparison from the customer view In the criteria are grouped according to their phase in the purchasing process. The first criterion considered in the customer's pre-purchasing experience is the spectrum of products offered.

Physical retail offers a much narrower spectrum than e-retail because cost is prohibitive. E-retailers are able to build warehouses in remote areas where land is cheap because they need not draw customers to their physical location. Physical retailers, to the contrary, must pick sites that are easily accessible and zoned for consumer traffic. Such sites are limited and, as a result, cost more and are often linked with higher taxes. Since the presentation of products makes for customer appeal, physical retailers actually use more space per item than e-retailers.

Displays must be eye-catching and allow room for customers to move about the store.The same number of products will necessitate more space for a physical retailer than for an e-retailer and, as a consequence, result in greater inventory cost per item. Thus, the physical retailer has fewer items available than the e-retailer because space is either unavailable or not affordable. Since the hybrid retailer has an e-retail component, it can offer the same wide spectrum of products as the e-retailer and thus shares that advantage.

(Rayport, and Jaworski 2002)The second criterion considered in is information related to product availability. E-retail has the potential to provide comprehensive information to the customer online. Physical retail, on the other hand, has only limited information available to the customer. This information is accessible via brochures, ads, etc.

Hybrid retail, with its e-retail component, shares the competitive advantage with e-retail regarding information on product availability. If, however, the hybrid retailer makes online information regarding product availability in the physical store available to customers as well, the hybrid may increase the effectiveness of its physical store component. A kiosk in a physical store that provides online information regarding product availability will likely improve the physical store's advantage.The advantage will be limited, however, because customers must come to the store to get the information and will likely have to wait in line to access it. Since information systems that are easily navigated and provide information on product availability along with appealing graphics would typically necessitate costly upgrading from existing systems, some physical retailers would find them too expensive. Retail stores typically offer incomplete lines of particular products.

A shoe store, for example, might sell a certain shoe in narrow and medium widths only. Retail stores also often sell only selected brands of merchandise. Since retail stores must sell what they carry, they are unlikely to provide information about the full range of competitive products. Because e-retail is not constrained by space limitations or regional tastes, e-retail can sell and provide information about the whole spectrum of products.Furthermore, there is no salesperson to push particular items.

Instead, e-retail customers read available information from independent sources that may be provided online, such as Consumer Reports, and then make an independent evaluation according to personal need. Thus, the completeness of information criterion listed in ranks e-retail and hybrid as high and physical retail as low. On the criterion of completeness of information regarding availability of sales merchandise, retail stores rank low. Sale flyers advertise a range of discounts (e.

g., 20 percent to 25 percent off) on a range of products (e.g., many name-brand suits) Product availability vanes with the store, as sales merchandise is often that which remains from a current product line at the end of a season.

Thus, a customer knowing the general parameters of a sale goes to his local department store to find that only three brands of suits are on sale and all available are sized extra large.E-retail lists specific items along with specific sale pricing and thus ranks high for completeness of information on sales merchandise. Hybrid retail ranks high as well due to its e-retail component. If hybrid retail provides information online about sale items in their physical stores and allows the potential customer to both accesses this information and reserve a particular item at a nearby store for immediate pick-up, the hybrid retail offers a customer advantage.

Customers at physical retail stores are constrained by store hours. Customers at e-retail and hybrid retail, however, can make purchases any time. Further, with portable computers, they can purchase from any location. Even customers who are out of town can purchase from a favourite Web site. Customers at physical retail stores must be near the store of choice. E-retail is less advantageous when one considers ease of product retrieval.

Consumers at physical stores and at those hybrids where customers are allowed to pick up e-ordered merchandise at a physical store are able to obtain products in the timeliest manner. There is no delay for shipping and handling. When time is critical, consumers are most likely to frequent the type of store that allows for immediate pick-up. This gives customers at physical retail and the specified hybrids a time advantage. Physical retail and hybrids complement this advantage with an expense advantage.Consumers who pick up items save on shipping and handling costs.

The lower the total purchase price, the higher the contribution of shipping/handling cost to overall price and the less appealing the product. This criterion is related to both the pre-purchasing and purchasing experience. (Landry 2006) The ability to communicate with a live person regarding product characteristics is the first of the criteria related to the customer's experience during the purchasing process. Whilst salespeople in a retail store do not typically offer complete product information, they do offer some advantages.

A good salesperson can often offer useful insights gleaned from experience. For example, whilst sales personnel in a camping goods store may not be able to offer information on a brand of product not carried in the store, they might be able to tell you whether such a product in general is worth its weight when backpacking in Canada.Salespeople who know their merchandise are also often helpful in matching products to customer needs. In e-retail, for example, it may be difficult to determine exact colour or fit of clothing.

A salesperson, however, can look at a pair of pants that a customer is wearing and suggest specific sweaters that might be coordinated with them, thereby saving time and confusion. Many customers value the personal warmth as well as the expertise of a salesperson. For many people, the smile accompanying a sales associate's comment that "tapered legs are flattering on you" makes her invaluable.Retail stores and hybrids rank high for ability to communicate with a live person regarding product characteristics. E-retail stores that offer e-mail or phone communication with a live person rank in the middle.

Whilst such communication may not be as effective as communication with a salesperson that can see both the customer and the merchandise, it is better than no communication at all. Another criterion related to the customer experience during the purchasing process is the ability to shop with a remote friend. E-retailers and hybrids offer consumers one opportunity that physical retail stores cannot. E-retail and hybrids allow consumers who are separated by large physical distances to shop together.

By browsing together online at the same e-retail Web site whilst chatting simultaneously on the phone, Mom in St. Louis and Grandma in Phoenix can pick out a gift for Suzy in Los Angeles. The return policy pertains to the post-purchasing experience. Returning items to a physical store is an easy task. The customer goes to the store with the merchandise and is helped by a salesperson or manager.

Returning items to hybrid retail is equally easy if the hybrid allows the e-customer to return items to a physical store. Returning to an e-retail store, however, is more complex. The customer may or may not have to contact the company via e-mail first. Then the customer must deal with re-packaging the merchandise before taking it to the post office or engaging a delivery service. Customers may have to pay for shipping and insurance and may later have to seek reimbursement.

(Turban 2000)Comparison from retailer view The criteria outlined in dealing with retailer advantage with respect to effectiveness of marketing policies, information system, and supply chain. The first criterion related to marketing policy is the ability to hold regional sales. Retail stores and hybrids garner the advantage in sales flexibility both are able to hold regional sales as needed to promote purchase of slow-moving inventory Product sales vary according to locale. The season for winter merchandise, for example, might be shorter in the Midwest than in the North, so sales on winter apparel might begin earlier in Missouri than in Minnesota. E-retailers, however, cannot hold small-scale regional sales.

When competing with regional sales, e-retailers must offer nation-wide reductions. This means that e-retailers must lower product costs unnecessarily in certain regions if they are to compete with retail stores. If they choose not to compete with regional sales in a timely manner, they must absorb inventory costs until a national sale is productive.Thus, e-retailers lack the sales flexibility that retail stores and hybrids enjoy. (Wilder 2005) E-retailers lose in more ways than one when retail stores and hybrids offer regional sales.

Customers who are lured inside a physical store for a sale may be tempted to buy multiple items. Customers may buy items that are attractively displayed or they may be reminded of items they need once walking through the aisles. Impulse shopping is anticipated from physical retail customers. Many people wander through malls as a form of entertainment.

They socialize with friends and pass time whilst browsing.Whilst e-customers may also do some impulse shopping as they browse online through pictured items, they are probably less apt to do so because pictured objects are somehow less engaging than physical ones. Hybrid retailers who allow customers to pick up and return items at a physical store may have the ultimate advantage of tempting impulse buyers. Customers who may not be tempted to make additional purchases online will have a second opportunity to buy on impulse once they are in a physical store to pick up an electronically ordered item. There they will be lured by the physical displays of merchandise.

E-retailers and hybrid retailers must price items for national distribution.They must often disregard regional market differences if they are to compete nationally. Although an item might bring in a higher price in one section of the country than another because of customer demand, the e-retailer and hybrid retailer must consider all markets when establishing a single price. If the e-retail price is too high for some geographic areas, the retailer may sacrifice customers. If the e-retail price is too low for some geographic regions, the retailer may sacrifice profit margin. Hybrid stores are in a unique position.

To attract e-customers, they must choose a competitive price for electronically ordered merchandise. If the same merchandise is sold in the hybrid's physical store, however, the price must reflect local market value.The hybrid retailer will lose profit margin at the physical store if it sells the item at the e-retail price. It may lose customers at the physical store, however, if the e-retail price is considerably lower than the price at the physical store. Hybrid stores have a complex pricing issue because they are in the unenviable position of competing with themselves as well as with physical and e-retail competitors. Companies are able to collect information regarding customer buying patterns effectively when customers shop online.

As online transactions are recorded, information regarding customers and the products they choose becomes available. Customers in physical stores may refuse to provide personal information such as address and phone number. For this reason, e-retail and hybrid stores have the advantage over physical retailers of being able to collect more complete information regarding customer buying patterns.E-retail and hybrids can use collected information to tailor their marketing efforts to better match the needs and tastes of customers. Buying patterns and interests of e-customers can be incorporated into the expert systems of e-retailers so that Web sites can be personalized to suggest products a customer may desire.

In other words, once the expert system analyses data regarding the past buying patterns of a particular customer and compares it with the buying patterns of other customers with similar interests, it can suggest other products that may suit the customer's interests. has such a system. The company analyzes the characteristics of books a customer buys and then suggests other books that may be of interest. This marketing capability can increase sales for e-retailers and hybrids.