The relatively new question of how brick-and-mortar stores interact with online and catalog retailers has been a point of confusion for many businesses. A new working paper* by the Harvard Business School suggests that the relationship between these types of retail operations is situational in the short term — beneficial for some, harmful for others.
In the long run, however, the presence of a physical store in the market will generally help online and catalog-based retailers, the paper suggests.
For catalog operations, the opening of a new store will cost the catolog an average of 12% in the short term.
However, over the longer term, a retail store is complementary to both catalog and online channels and allows them to grow sales, new customer household acquisition, and repeat customer household purchasing frequency at a greater than expected rate which more than makes up for the short term sales cannibalization.
While the results of the study show “catalog and online sales exhibit similar patterns of complementary effects,” online operations do not experience the same type of cannibilization by new retail branches that catalog businesses fall victim to in the short term.
Similarly, the effects of brick-and-morter branches are greater on online retailers, who show a 34% increase in sales from the presence of retail branches, compared to the relatively minor 0.4% that catalogs experience.
“This asymmetry is due to an important difference between catalog and online sales channels which offers insight into the origins of demand for online and catalog retailing”
The paper sounded one note of caution: “In the early days of the Internet as studied here, online sales were not cannibalized by the opening of a retail store; however, as online penetration grows and as shopping via the online becomes more predominant, the opening of retail stores may begin to cannibalize online sales.”
*Adding Bricks to Clicks: The Effects of Store Openings on Sales Through Direct Channels (Jill Avery, Simmons School of Management; Thomas J. Steenburgh and John Deighton, Harvard Business School; Mary Caravella, University of Connecticut).
Deloitte has just released a large new survey of consumer attitudes towards the US healthcare system. The survey examined five different major aspects of the healthcare system: traditional health services; alternative and non-conventional healthcare; self-directed care; information-seeking; and financing.
One common theme of the survey is the desire for consumers to have more information about and control over their health care. As a result, healthcare is truly becoming a consumer market.
The desire for change - and specifically for some sort of state-mandated system - was one striking feature of the survey results. And many consumers are willing to see taxes increase to provide coverage for the uninisured.
66% are supportive or might be supportive of state mandates requiring individuals to have health insurance.
Other key findings include:
- 79 percent of consumers believe health care will be an important issue in
the 2008 election; 46 percent described it as one of the top three issues that will affect their vote
- 34 percent say they would use a retail clinic; 16 percent already have
- 60 percent want physicians to provide online access to medical records and test results, and online appointment scheduling; 1 in 4 say they would pay more for the service
- 1 in 3 consumers say they want more holistic/alternative therapies in their treatment program
- 3 of 4 consumers want expanded use of in-home monitoring devices and online tools that would reduce need for visits and allow individuals to be more active in their care
Most consumers are satisfied with their doctors and hospitals
but want better service and improved value.
- 84 percent prefer generics to name-brand drugs
- 29 percent support a tax increase to help cover the uninsured; another 37 percent say they would consider a tax hike
- Only 52 percent of consumers say they understand their insurance coverage
- 1 in 4 consumers maintain a personal health record
The survey was based on a weighted sample of 3,000 respondents who filled out on-line questionnaires.
Popular new topics among visitors to Research Recap during the latest week included energy, video and outsourcing.
Data implying that high oil prices may be encouraging conservation, thereby reducing US demand for petroeum products ,were highlighted by FT Alphaville.
Forrester Research analyzed the disappointingly slow uptake of video on demand and a study for NBC found that DVR ad zappers still absorb some advertising messages.
KPMG looked at how a skills shortage is slowing the growth in outsourcing of high knowledge tasks.
Back to an ever-popular topic, Ernst&Young’s Real Estate Trends for 2008 was well read. And vistiors continued to make use of our Primers on Credit Default Swaps, Structured Investment Vehicles and Subprime Mortgages.
Taxing carbon has long been considered by many economists to be one of the most effective tools for reducing greenhouse gas emissions. Now, a new study of its potential impact in the Canadian setting supports many of the hopes of the most optimistic advocates of a carbon tax.
The study was conducted for the David Suzuki Foundation, an advocate of sustainable ecology. It found that a carbon tax could have benefits for the economy by raising tax revenues while having minimal negative impact on economic growth. The study models several scenarios based on carbon taxes of $75 to $200 per tonne.
The study’s main findings:
- A phased-in carbon price would eventually generate considerable government revenue. The study shows that setting the price to bring Canada’s greenhouse gas emissions down to a trajectory in line with recommendations made by international climate change scientists would generate government revenue of at least $50 billion per year by 2020.
If the entire revenue generated by a carbon price were used to offset
income taxes, Canadians would experience a 50 per cent average reduction in the income tax they pay.
- The implementation of a well-designed revenue use policy, such as tax shifting or revenue recycling, would reduce the economic impact of a carbon price on those sectors and regions of Canada’s economy that rely heavily on carbon intensive activities.
- With the introduction of a carbon price, even a fairly high one, Canada’s
economy would continue to grow rapidly. A well-designed revenue use policy can reduce the economic impact of a carbon price by as much as half, to less than one per cent of lost GDP growth by 2020.”
The main conclusions drawn by the Foundation:
- The research reinforces what several recent studies have shown, that the single most effective solution to rising greenhouse gas emissions is using the market to put a price on carbon.
- The federal government has the option of introducing a carbon price
that either takes the form of an emission tax, a cap-and -rade system, or a
combination of both. The overriding imperative is that government take
action.
- A substantial portion of the government revenue from a carbon price should be invested in a large-scale increase in renewable energy, home energy efficiency improvements, and public transportation. This will help further reduce the advantage that the fossil fuel sector, which does not have to fully cover the cost of its carbon emissions, has over clean technologies.
Cleantech is one of the country’s most rapidly evolving markets, but faces a number of challenges in securing financing for growth. This is one of the conclusions of a recent forum organized by Ernst & Young . Results of the forum have now been published in E&Y’s quarterly Cleantech Matters.
Noting that, “as this industry matures, it is apparent that the scale of most cleantech projects is far larger and more capital intensive than that of other early-stage high-growth industries, such as software or medical devices.”
costs… generally exceed the scope of traditional venture capital financing
These two factors — scale and required capital — have brought about significant financing challenges for the industry.
Some of the key findings of the forum:
- There is a financing gap for entrepreneurs between raising venture capital and accessing public markets.
- Though capital is available, project financiers are risk-adverse and generally only fund proven technologies.
- Cleantech companies incur large costs building and scaling production facilities and revamping existing distribution infrastructure.
- New financing needs are breaking the paradigm as larger funds are required for later stages. These needs are usually beyond the scope of traditional VC deals.
The report recommends several key strategies for cleantech firms getting over their financing hurdles, including:
- Focusing on securing customers
- Assuring investors about warranty issues
- Using all public funds available
- Recognizing that cleantech is a “replacement technology.” Most products have to push out products with established market shares.
“The year 2008,” according to a new report by Deloitte, “will be a period of guarded status quo for the health sciences industry, as providers, health plans, and life sciences companies wait for a new President and Congress to set the nation’s health care agenda for the next four years.”
Rising costs will affect companies across the board, and remain perhaps the single most important feature of the industry. “U.S. health care costs are growing at 8 percent per year, an unsustainable rate that will be forcing every employer to make a crossroads decision in the next 12 to 36 months.”
“Increasingly, there will be intramural tensions as dollars grow tighter, technologies change how things are done, and investors look for disruptive innovations that improve quality and efficiency. Physician-hospital tensions will increase. Employer-health plan tensions will increase.”
Consumerism is on the rise, Deloitte says, largely as a byproduct of more and more individuals paying for all of their own coverage. “As individuals begin to shoulder a larger share of the health care cost burden, they are becoming increasingly engaged in their health care decisions and purchases.”
Technology will provide new opportunities for cost-cutting, Deloitte says.
Advances in information technology and increased information exchanges are enabling improvements across the entire value chain.
Other topics covered by the Deloitte report include:
- Wellness and prevention
- Industry convergence
- Talent management
Economists have previously noted firms’ propensity to “smooth out” their earnings numbers with marketing campaigns and other promotional tools that help their year-end numbers, perhaps at the cost of their long-term performance. A new paper*published by Harvard Business School explores this possibility with a case study in the soup industry.
The study finds that “the timing of marketing actions (price, feature and display promotions) observed at the retail level are closely related to the fiscal calendar of product manufacturers.
In contrast to prior literature that suggests firms reduce discretionary expenditures in order to boost reported earnings, we show that soup manufacturers roughly double the frequency of all marketing promotions at the fiscal year-end.
The statistic at the heart of their findings: Soup firms use price reductions to boost sales by an average of 20% at the fiscal year-end. However, the resulting loss in the next quarter from such activity totals to an average of 23.5%. Thus, there is a net loss of roughly 3.5%.
Furthermore, the study suggests that “firms systematically alter their pricing and promotion strategies both within and across brands when incentive to manage earnings upwards are stronger.”
The authors continue, “More interestingly, across brands we find that firms shift display promotions away from smaller revenue brands and towards larger ones following periods of poor financial performance. This is consistent with the actions being directed by parties higher in the organization than the brand managers, as no individual brand manager would voluntarily give up aisle displays in support for his or her brand.”
The authors say the study should “be of interest to practitioners negotiating with suppliers as well as those responsible for setting price and promotion strategy in response to competitor actions; we show that a firm’s internal desire to meet or beat earnings benchmarks can help determine when it will take marketing actions. The final results relating to the level of those responsible for the actions may also be of interest to those designing incentive-based compensation as well as regulators monitoring reporting of fiscal period-ending promotion.”
*An Investigation of Earnings Management through Marketing Actions (Craig J. Chapman and Thomas J. Steenburgh, Harvard Business School)
The rising oil-driven wealth of many Islamic countries is fueling strong growth in bonds that comply with Shari’ia rules. A timely report just released by Moody’s provides a comprehensive overview of the Islamic finance industry.
Islamic finance makes up a small part of the world finance industry, estimated by Moody’s to be worth around $700 billion globally. However, it has grown by around 15% in each of the past three years, partly as a result of the increased wealth in Islamic countries driven by high oil prices. This rapid growth shows no signs of slowing, Moody’s says in its 2007 Review and 2008 Outlook: Islamic Finance.
Within a large segment of Muslim societies and communities, the compliance of financial services with Shari’ah rules and principles is a primary concern for the users of these services. As such, efforts to enhance the access of Muslim communities and societies to financial services will hinge upon, among other factors, the compatibility of these services with Muslims’ religious principles.
While catering to such specific needs of society, Shari’ah-compliant financial services could also appeal to other segments of the population so long as the quality of these services is at least comparable to other alternatives, Moody’s says. Islamic finance covers all financial activity that enables Muslims to invest while conforming with Islamic law, or Shari’ah.
In practice, Islamic finance involves using traditional investment techniques and structures that comply with Shari’ah to create arrangements that work in ways that are comparable to modern conventional finance.
Sukuk (or Islamic bonds) are the fastest-growing segment of the Islamic finance market, which has seen phenomenal growth in the past six years. Global volume up to 2007 reached $97.3 billion, with the majority coming from Malaysia and the Gulf. Even though certain regions such as Europe and Africa did not produce any new issues during 2007, the expectations are high for 2008, including multi-jurisdiction issuances.
However, the Sukuk issuance market in H2 2007 demonstrated that despite its faith-based nature, it is not immune from the global financial system. A number of issuers have delayed the issuance of their planned Sukuk, including Ithmar bank and Amlak Finance; both are planning to issue their sukuk when the market stabilises.
Overall Sukuk issuance volume increased by 71% to $32.65 billion compared to 2006 The number of Sukuk transactions rose to 119 from 109 in 2006, while the average deal size increased to $269.8 million from $175 million.
Some 88 Sukuk deals were issued by corporates, compared to 31 deals issued by sovereigns This was influenced by buoyant government budgets, mainly in the Gulf Co-operation Council (GCC), over this period as fiscal and current account surpluses widened. Moreover, since the 2006 equity market crisis, corporates have shifted their funding focus more into debt markets. This trend continued into 2007, albeit the equity markets recovered significantly during the year.
The report covers the outlook for each major issuing country, and includes a handy Glossary of Islamic Finance Terms. Other Topics covered:
• Islamic Securitisation
• Islamic Funds and Private Equity
• Infrastructure and Project Finance
• Islamic Banking
• Islamic Real Estate Investment Trusts
The use of food-based crops for the production of biofuels is a controversial topic. Regardless, corn-based ethanol will be a large part of the alternative fuel picture for many years. In that context, the 2008 Annual Industry Outlook 2008 Annual Industry Outlook from the Renewable Fuels Association is a useful resource.
The RFA is the self-proclaimed “Voice of the Ethanol Industry,” so it understandably emphasizes the benefits of ethanol as an alternative fuel. Still, the report contains valuable information on the industry, including a complete listing of existing biorefineries and planned capacity expansion, almost all of it corn-based. It also features a listing of ethanol blending requirements around the world.
During 2007, ethanol production capacity increased by almost 2 billion gallons to an annualized rate of more than 7.8 billion gallons, according to the RFA. The industry grew from 110 biorefineries operating in 19 states across to 139 in 21 states.
In 2008 an estimated 4 billion gallons of ethanol production capacity will come online from 68 biorefineries under construction or expanding, the RFA report says.
Once all of the new construction currently underway is complete, the U.S. ethanol industry will be able to supply more than 13 billion gallons of ethanol, representing nearly 10% of the nation’s gasoline demand.
Actual production of ethanol soared 32% 6.5 billion gallons in 2007.
The RFA sees the conversion of feedstocks like corn stover, corn fiber and corn cobs will be the “bridge technology” that leads the industry to the conversion of other cellulosic feedstocks and energy crops such as wheat straw, switchgrass, miscanthus, and fast-growing trees, to name a few.
While the technology to produce cellulosic ethanol exists, commercialization remains a question of economics. The capital investment necessary to build cellulosic ethanol facilities is significantly more than that of grain-based facilities.
“Those costs will, of course, come down once the first few facilities are built, the efficiency of the process improves, and the technology continues to advance,” the report says.
The report also challenges claims that food-based feedstocks drive up food prices and are bad for the environment.
With serious questions concerning consumer spending during the economic downturn looming over both industries, the Music & Entertainment and Retail industries will both have to meet coming challenges with innovative solutions, according to an outlook report on American industries from Deloitte.
Driven in part by technological changes, the Music & Entertainment industry will see perhaps the a more fundamental set of changes in 2008. Content proliferation is likely to see many important technological developments. For instance, Deloitte asks, “Will people want to watch episodic TV on their telephones?”
As content delivery becomes more varied and internet-based, piracy will be a major issue, both for movies and music. Digital providers like iTunes, however, may see the rise of significant, legal competition, all the while being forced into de facto competition with pirated content.
The Retail industry is facing a particularly stark economic outlook. “In response, retailers should focus on maintaining cash flow, keeping inventories lean and payrolls low, and rationalizing other costs, particularly selling, general, and administrative expenses.”
Coupon-based marketing strategies may once again be an effective strategy in an environment of lowering levels of discretionary spending.
Shopping cart systems that incorporate electronic games for children, handheld shopping scanners, and interactive kiosks all made headlines in 2007 and are expected to generate continued industry attention in the coming year.
Deloitte says the industry faces growing pressure to heighten standards in three key areas:
- Product transparency
- Privacy and security
- Green business practices
The report also looks at the outlook for the Gaming, Print Media and Advertising industries.
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