Outlet Markets in Portugal
There can be found hundreds of outlet markets in Portugal alone just by searching online, these are organized all across the country, in multiple exhibition centers and venues, some examples can be found in this website: http://montra.me/lowcost/tag/feira-stocks/. These outlet markets consist of physical marketplaces that bring together many brands, renting them stands in the market space where they attempt to sell their excessive stock of products at discounted prices. The products sold in these markets can be existing stocks, past collections, defective products, sell-out due to insolvency, old product collections, products produced to sell-out excessive materials inventory, product samples originally made to present to clients, collections that didn’t leave the company due to payment problems from clients, etc. (Olhamar, 2018)
The business model of outlet markets consists in organizing short term fairs, usually taking place during 3 days, charging participant brands and companies a fee for renting a temporary marketspace to them, and then charging an entrance fee to consumers who have to pay to access this market space (Stockmarket Lisboa, 2018). Being the fair organizers, they basically manage the venue space, and then have the responsibility to communicate the event and attract the local population to this limited period flash sales event. Traditionally, in order to achieve this, outlet market’s try to focus its offering and promotions on large global brands whose name has the capability of being recognized by consumers, grabbing its attention and attracting people to the physical space where then they might also have small vendors that can benefit from this traffic.
Outlet markets have always kept successful in attracting consumers with the promotions offered, and also attracting brands to participate. This happens for several reason, on one hand, people visit the market to find products at a discount price, on the other hand, this is only possible because manufacturers and retailers want and need to take one last opportunity to sell-out their inventories and try to make some money out of it, even if close to production cost in order not to lose the money invested in those items. This happens because manufacturers and retailers are susceptible to many inventory management challenges such as demand fluctuations, distressed stocks, and other issues related to managing products and keeping count of the inventory (Patil & Divekar, 2014). These markets might also be important to brands, because brands might not have stocking capacity or because holding inventory is expensive, the same holds true if we talk about minimal defect products, companies are not be able to keep them, sell them and want to take any chance to cover as many costs as possible, also, these products might soon lose its commercial value, which needs to be registered in accounting books (Olhamar, 2018).
There are some insights that show that this offline markets are not able to sustain their business model anymore, which is slowly becoming obsolete. One of the main factors for this to happen, is that larger brands are starting to promote their own outlets, this leads to a negative impact in the organized stock markets, who start having trouble recruiting these larger brands to participate, this leads to less traffic to their sites, which in the end results in less interest from consumers to pay such high price to access the promotions (Nomad Bubble, 2017).
Also, as this larger outlet markets seem to be decreasing relevance in the outlet landscape, the market is evolving towards fragmentation, becoming more favorable to smaller outlet markets, who gain popularity as an alternative channel for smaller brands who cannot afford and do not have space to sell their stocks, and also answer to the increasing need for diversity and quality that the portuguese consumer demands nowadays (Nomad Bubble, 2017). Plus, these are cheaper for consumers to access.
As an example, we can see that there are new markets appearing with a focus exclusively on portuguese brands, brands which are an opportunity as well in the outlet market:
This new business answers to the inexistence of a platform to connect consumers with high quality portuguese manufacturers and brands who have exceedent products to sell-out and do not have capability of having their own outlet, having to resort to physical stock markets. Also, it answers to some of the limitations that characterize the physical outlet markets this companies resort to, such as:
brands have to pay high prices to have a stand inside these markets;
consumers need to pay to enter the market and be able to access low prices;
physical outlet markets, having a specific location, can only attract consumers close enough to be willing to go there;
most markets have a very short and limited duration;
the number of participating companies is limited to the number of available stands;
the assortment offered by each brand is limited to the area of the stand.
This business will have benefits for both end consumers and suppliers. It will not have restrictions to the number of manufacturers or brands participating and instead of having to pay high fees in advance to be within the limited number of companies accessing the fair and renting the stand just for a few days, they will have a solution that enables them to monetize their inventory all year round as they need, paying as they sell. Also, the use of an online dropshipping model will offer the manufacturers an alternative channel for destocking, which presents several benefits as they might not possess yet a secondary sales channel through an online store (Yu, Cheong and Sun, 2017). Consumers won’t need to pay to enter the marketspace, won’t need to move to the physical space, will be able to buy from these companies all year round, will have a higher number of manufacturers to choose from and will still benefit from the low prices provided by the traditional stock markets.
As we will analyse in further detail in the next chapters, this new business follows a different approach to any other online outlet retailer existing in Portugal. First of all, it will focus solely on portuguese manufacturers and brands the chance to destock, it will have a quality and “made in portugal” orientation with priority to emerging brands instead of focusing in global leader brands. Secondly, it proposes a different business model orientation, one of closer cooperation with these smaller suppliers. It will be an online outlet stock market retailer with a consumer direct fulfillment (dropship) model in which this e-commerce platform will be responsible for the marketing, sales and order processing functions of all of its clients, in exchange for a direct dispatch of the products ordered from the source directly to the consumer, being the supplier responsible for managing the operations incurred in order fulfillment and delivery.
In short, this e-commerce platform will set its own prices, attract customers to purchase to ensure profitability and be inventory free, directly transmitting purchasing orders to suppliers, being charged a shipping and handling fee from them (Rabinovich, 2005).
2. LITERATURE REVIEW
The starting point to this project was the compilation and understanding of the fundamental business concepts encompassing the scope of the project to be developed, such as the concepts of “E-Commerce”, “Dropshipping Logistics Model” and “Business Plan and Business Model”. At this point, the main objective of this literature review is to understand these concepts in order to define and support the strategy of implementation of this online business.
E-commerce and E-business
E-commerce can be defined as “the use of the Internet, the Web, and apps to transact business” (Laudon and Trevor, 2014: 10). The way this business is conducted, is by using the internet, to purchase, sell, transport, or trade data, goods, or services (Turban, 2015; Chaffey, 2009).
This concept is often confused with the concept of e-business (Laudon and Trevor, 2014; Turban et al., 2015). The difference between the concepts of e-commerce and e-business lies in the fact that e-commerce can be described as a subset of e-business (Turban, 2015). While many authors generally refer to e-commerce as describing only the buying and selling transactions conducted between business partners through the web (Laudon and Trevor, 2014; Turban et al., 2015; Chaffey, 2009; Combe 2006), e-business refers to a broader definition of e-commerce, which includes not only the buying and selling of goods and services, but also takes into consideration internal transactions within an organisation. These include transactions relating to procurement, logistics, supply chain management, payments, stock control and order tracking (Combe, 2006).
E-commerce influence in a firm’s processes, relationships and competitiveness
As e-business transactions involve any information systems under the control of the firm in the scope of its activity (Laudon and Trevor, 2014) and enable for electronic execution of all kinds of business online such as servicing customers, collaborating with business partners and conduct any business process within the firm (Turban, 2015), it becomes clear that the use of e-commerce technologies has an impact on a firm’s business processes and its relationship with external stakeholders. Laudon and Trevor (2014: vii) mention that “E-commerce has a direct impact on a firm’s relationship with suppliers, customers, competitors, and partners, as well as how firms market products, advertise, and use brands.”, this means that digital technologies and e-commerce affect the levels of competitiveness and the structure of industries itself, which is composed by five forces: rivalry among existing competitors, the threat of substitute products, barriers to entry into the industry, the bargaining power of suppliers, and the bargaining power of buyers (Porter, 1985).
It is very important to perform an industry structural analysis when considering a business model and its profitability potential on long-term (Porter, 1985; Laudon and Trevor, 2014), the pictures below show us the perspective of these authors on the 5 Forces Model and how E-commerce has the potential to change the relative strength of these competitive forces:
Figure 1 – How e-commerce influences industry structure (Laudon and Trevor, 2014 – p88 Ch2)
Benefits of e-commerce
The use of e-commerce technologies, might represent great benefits for businesses, in comparison with traditional means of commerce, as highlighted by Turban (2015), some of these benefits, for businesses, are:
Global reach: Quickly locating customers and/or suppliers at reasonable cost worldwide;
Cost reduction: Lower cost of information processing, storage, and distribution;
Facilitate problem solving: Solve complex problems that have remained unsolved;
Supply chain improvements: Reduce delays, inventories, and cost;
Business always open: Open 24/7/365; no overtime or other costs;
Customization/personalization: Make order for customer preference;
Ability to innovate, use new business models;
Lower communication costs: The Internet is cheaper than VAN private lines;
Efficient procurement: Saves time and reduces costs by enabling e-procurement;
Improved customer service and relationship: Direct interaction with customers;
Help small and medium companies to compete: E-commerce may help small companies to compete against large ones by using special business models;
Lower inventories: Using customization, inventories can be minimized;
Lower cost of distributing digitizable product: Delivery online can be 90% cheaper;
Provide competitive advantage: Innovative business models.
These authors also consider that the use of the unique features of e-commerce has particular benefits to consumers, such as:
Inventory: Large selection to choose from (vendor, products, styles);
Ubiquity: Can shop any time from any place;
Self configuration: Can self-customize products;
Find bargains: Use comparison engine;
Real time delivery: Download digital products;
No sales tax: Sometimes; changing;
Enable telecommuting: Can work or study at home or any place;
Social interaction: In social networks;
Find unique items: Using online auctions, collectible items can be found;
Comfortable shopping: Shop at your leisure without pushy sales clerks bothering you;
As this business plan refers to a company operating exclusively online, it’s also important to analyse the strategic challenges that these types of companies might face, according to Laudon and Trevor (2014), some of them are:
Must build a business and brand name from scratch quickly, to tackle established competitors;
Operate solely online removes the high costs associated with opening physical stores, but the costs for building and maintaining a brand, acquiring customers and building a website that enables for order fulfillment capabilities might be high;
As gross margins might be low, they need to preserve profit by achieving highly efficient operations;
Customer acquisition costs are high, but they have to attract sufficient customers to cover their costs of operations;
Need to ensure customers receive what they ordered as fast as possible, most businesses adopt low-cost and convenience strategies, coupled with extremely effective and efficient fulfillment processes.
According to the nature of the relationships and the transactions conducted among participants, in other words, who is selling to whom, there are several types of e-commerce that can be identified (Laudon and Trevor, 2014; Turban, 2015; Combe, 2009). Below are listed some of the main types of e-commerce identified by these authors:
Business-to-business (B2B) e-commerce: online businesses selling to other businesses; Business-to-consumer (B2C) e-commerce: online businesses selling to individuals;
Business-to-Business-to-Consumer (B2B2C): online businesses selling to another business and own individual customers;
Consumer-to-Business (C2B): consumers selling to individuals and organizations;
Consumer-to-consumer (C2C) e-commerce: consumers selling to other consumers.
E-commerce Business Models
A business model describes the manner in which business is done to generate revenue and create
Value (Turban, 2015). Through the use of a business model, an organisation can identify where and how in its value chain, it can create added value and profit, and analyse its environment more effectively, thereby exploiting the potential of its markets, better understanding its customers and raising entry barriers for possible competitors. (Combe, 2009).
Chaffey (2009), considers that a business model is a summary of how a company will generate a profit, identifying its product value proposition, target customers in different markets, position in the competitive online marketplace or value chain and its projections for revenue and costs.
There are several different business models, that make use of specific revenue models, which according to Chaffey (2009) are the methods and techniques of generating income for an organization. Focusing on B2C, Laudon and Trevor (2014) identifies 7 different business models and how they generate profit, as listed below:
E-tailer: online version of retail stores, where consumers can shop at any time of the day and from anywhere they have an internet connection. E-tailers make money through the sale of goods online;
Community provider: it is a website that creates an online environment where people with similar interests can meet to communicate, share interests, photos, videos, and buy or sell goods. Community providers make money by charging advertising, subscription or affiliate referral fees;
Content provider: provider of entertainment and information content that distributes and transacts content such as news, music, photos, video, and artwork. Content providers make money by charging advertising, subscription or affiliate referral fees;
Portal: offers users an integrated package of tools, content and services in one unique place. These might include search engines, e-mail service, social networks, news, chats, music, video streaming, calendars, etc. Portals make money by charging advertising, subscription or transaction fees;
Transaction broker: site that processes transactions for consumers that are normally handled in person, by phone, or by mail, to help them get things done faster and more efficiently, for example, online travel agents or stockbrokers. Transaction brokers make money by charging transaction fees;
Market creator: business that uses internet to create a digital market environment to bring buyers and sellers together. In these markets, they can meet, display products, search for products, and establish a price for products. Market creators make money by charging transaction fees;
Service provider: company that offers services online. Service providers make money through the sale of services.
For the development of this Business plan, which refers to an online retailer, we are going to focus the E-tailer business model, which according to Laudon and Trevor (2014) has four main types:
Virtual Merchants: operate exclusively online, in one single channel, generating almost all their sales revenue via online sales.
Multi-channel Merchants: Also called bricks-and-clicks, are online retailers that operate primarily via their physical stores, but have also an online store.
Catalog Merchants: Catalog merchants are companies that have an offline catalogue operation, but who have also developed online operations.
Manufacturer-direct: Manufacturer-direct businesses are manufacturers that sell directly online to consumers without the intervention of retailers.
The online business this business plan refers to consists of an online retailer making money exclusively through the sale of goods online, an e-tailer virtual merchant business.
Because of all the fundamental business issues in e-commerce analysed above that show us how it can influence the business at several levels, such as marketing and sales, information systems, finance and logistics, and “given the continued growth and diffusion of e-commerce” (Laudon and Trevor, 2014: vii), it’s important to take into consideration how can we leverage on e-commerce technologies in the development of this business plan, to reduce supply chain costs, increase efficiency and tighten the relationship with customers and suppliers. (Laudon and Trevor, 2014). For this purpose, we are taking a closer look to one specific logistics model called dropshipping, a consumer direct fulfillment model in which the procurement sources are usually responsible for managing and paying expenses incurred in transportation operations and, in return, they charge the e-commerce retailer a shipping and Handling fee. This way, according to Rabinovich (2005) the e-commerce platform can solely focus on marketing, customer acquisition, and order processing functions, which helps achieving this efficiency goal.