INTERNET: Wake up to Web brands - European firms are fast falling behind their US rivals when it comes to brand building on the Internet, writes David Sumner Smith

North American companies are investing heavily to establish

powerful ’cyberbrands’ on the Internet, according to online business

specialists.

European companies have to act quickly or they will be priced out of the

global market. ’UK businesses have got to wake up. There is no time to

waste,’ says Peter Matthews, managing director of Nucleus Design.

His concerns are borne out by ’The Internet Retailing Report’ from

Morgan Stanley. By 2000, the company suggests a ’conservative’ usership

of 150 million people contributing retail sales worth dollars 35bn

(pounds 21m), with business-to-business sales worth dollars 70bn to

dollars 90bn (pounds 42.4bn to pounds 54.5bn). Although European usage

has grown by 222% in two years and Asia by 550%, the two regions still

only account for 22% and 6% respectively. North America accounts for

two-thirds of users.

The greater maturity of the American market has combined with a greater

willingness to make longer term investments to give US companies an

invaluable head start. ’The UK is only two years behind,’ says Matthews,

’but that’s a long way in a market developing so very rapidly.’

’The US has built up unrivalled levels of technical virtuosity in the

cybereconomy,’ agrees Michael Page, director of interactive services at

Acxiom. Security has played a major part, with help from the US State

Department, which has used the argument of state security to prevent

128-bit encryption keys - the highest level of security technology -

being exported. The Supreme Court recently reversed that decision,

allowing companies here to process online orders more rapidly and give

European consumers a greater perception of security.

’America provides an excellent test market,’ says Myer Berlow, senior

vice-president of interactive marketing at America On Line, the largest

online service in the world. ’Europeans can learn from our mistakes and

replicate our successes. But you will have to do so quickly. We have

moved on from the second stage of viewing the Net as an advertising

medium. It has reached the third stage of being a transactional

medium.’

’Shopping-related activities are becoming increasingly popular online,’

says the Morgan Stanley report. ’A recent CommerceNet survey indicated

that approximately 73% of Web-using respondents spent part of their

online time searching for information about specific products or

services. Of this group, 53% went on to make an actual purchase (either

online or offline) and 15% actually made a purchase online.’

Garage sales

The most potent demonstration of the Internet’s business potential is

the book selling site Amazon. Launched in July 1995 from the garage of

Jeff Bezos, it achieved sales of dollars 27.9m (pounds 4.8m) in the

second quarter of this year.

It offers more than 2.5 million titles, many at substantial discounts,

thanks to its highly automated structure and low overheads. Only the

top-selling 700 titles are held in stock (where they have a turnover 20

times higher than those stocked by America’s leading conventional book

retailer).

Although it exists only within the cybereconomy, Amazon’s level of brand

awareness and loyalty ’should create a barrier to entry for

competitors’, according to Morgan Stanley. In less than 30 months,

Amazon has achieved a market valuation of dollars 400m (pounds 242.4m)

and recently tied up an exclusive advertising deal with the Yahoo search

engine worth dollars 50m (pounds 30.3m) over three years.

Similar commitment is shown by US companies such as 1-800-Flowers,

Preview Travel and sharedealers Charles Schwab. Having set up the

spin-off brand Eschwab, the company is achieving an online trading

turnover of more than dollars 100bn (pounds 60.6bn).

Self-selected audience groups for individual Web sites allow precisely

targeted campaigns using many different online advertising techniques.

But advertisers wishing to reach larger groups are already witnessing an

escalation in costs to levels only US companies appear ready to

meet.

’The Internet has become a great leveller, but it also offers big

opportunities to large companies,’ says Matthews. ’Major brand owners

can cost-effectively reach global audiences, or segment their product

offers and customise them to appeal to specific audiences.

Micro-marketing on a global scale is here and now. It is possible to

present the same product or service in different ways without

duplicating the infrastructure cost.’

Charles Schwab’s rebranding strategy is just one approach to the

Internet branding dilemma faced by many prospective participants.

’Convenience and choice are critical elements in giving Internet users

reasons to buy, but cost is the most important,’ says Matthews.

’Companies are faced with the choice of using their existing brand and

cannibalising some conventional sales with cheaper online offers, or

setting up a new brand and piggybacking on existing fulfilment

procedures.’

’Prices may be lower but the amount of savings you make by selling

online gives the margins that other brands can only dream about,’ says

Myer Berlow.

Early success will belong to areas of business, he says, where existing

distribution channels add little value to the core proposition.

’The market for goods and services that have the best potential for Web

retailing are: insurance/financial services; computer software/hardware;

travel; books; magazines; music/video; flowers/gifts and autos,’ says

Morgan Stanley. ’Specific retail categories that we believe may take

longer to develop (or may never develop) include groceries/food;

apparel; sporting goods; tools/home repair; and toys.’

Net opportunists

’Unencumbered cherry-pickers without the baggage of a retail network

simply cannot be stopped in some sectors,’ says James Mackenzie,

associate director of Interfocus. ’Some consumers need the safety net of

a high-street brand identity, but Amazon and others have demonstrated

how brand values can be built exclusively in cyberspace.

’The critical thing is that having searched the product category they

require, the customer should recognise the brand that they will select

from the list of possible sites. Smart brand builders will make the core

proposition central to their name; a name like ’musicCDtomorrow’ can be

understood immediately.’

Financial services are a good example of the potential of

cybertrading.

The same insurance product could be positioned as a conservative

middle-aged choice to one sector and, to another, as an in-touch

lifestyle product for 20-somethings.

IDC, the market research company, is forecasting that electronic

insurance sales will rise from nothing in 1996 to between dollars 18bn

and dollars 19bn (pounds 10.9bn and pounds 11.5bn) by the year 2000. In

another study, management consultancy Booz Allen & Hamilton also

predicts radical savings of between 58% and 71% for companies operating

online insurance services over the lifetime of a consumer. This

indicates better value for online consumers and bigger profits for

online companies.

However, many European financial institutions appear to have been caught

napping by their cyber rivals.

A recent banking report by Ernst & Young estimates that transactions

costs 64p in a typical branch bank, compared with 32p by telephone, 27p

through an ATM and just 0.5p via the Net. Yet British banks appear

unprepared to exploit the cost savings or the potential for

segmentation.

Called to account

If banks don’t reap the rewards, others will. Jim McCormick, of First

Manhattan Consulting, says: ’Banks ought to win this business. They have

the customers, the distribution and the products. But the competition is

picking off customers.’

When the company measured profitability of retail banking customers,

profit margins averaged dollars 750 (pounds 454) for the top 20%, while

the next 10% averaged less than dollars 50 (pounds 30). These customers

are precisely the ones that the non-bank competitors are

cherry-picking.

Security First Network Bank, the first exclusively virtual bank, branded

itself from the start to address security concerns. Citibank, which has

offered online banking since 1985, now has 350,000 Direct Access users

worldwide. Chase Manhattan is up there too, emphasising free use and

convenience. None of these banks charge.

UK retail banks are still rubbing their eyes. NatWest’s Web site is

little more than an advertisement for its retail network. Barclays

offers a Barclays-brand PC banking service, but there is a pounds 30

set-up fee and a pounds 15 annual charge. The Royal Bank of Scotland

charges pounds 1.50 monthly.

Such charges are viewed with exasperation by potential early adopters,

who are good targets for trusted organisations unencumbered by the

overheads of a retail banking network. The market is ripe for firms such

as Sainsbury’s (Sainsbury’s Bank) and Tesco (Tesco Personal Finance) to

move in, along with major US institutions such as Citibank.

Equally significant are the plans that BSkyB, HSBC, Midland, BT and

Matsushita have for digital TV, launching next spring. Their service,

British Interactive Broadcasting, will offer a number of Internet

services, one of which will be home banking. The details of the service

and cost structure have yet to be finalised, but it has great

potential.

’Strong brand-name recognition should be a critical success variable,’

says Morgan Stanley. ’We expect this branding element to result in a

couple of companies in each sector dominating mind share and profits,

while the rest struggle, with varying degrees of success.’

It is difficult to guess whether the cyberbranding battle will be won by

new brands created on the Web or traditional brands moving in. Morgan

Stanley says: ’The winners will be a combination of both sets, with

success being determined by the best brand names accompanied by great

infrastructure, economies of scale and quality of experience.

’Those that don’t create a significant Web presence within two years may

have a tough go of it when they get there.’

This feature and links to the companies mentioned can be found at

www.marketing.haynet.com

Make the Net work for you

Morgan Stanley’s criteria for successful retailing on the Internet:

- Pursuing a viable market opportunity.

- Having a low-cost structure with economies of scale.

- Superior database/fulfilment/distribution capabilities.

- Knowing how to leverage technology while maintaining creativity.

- Creating a sense of community/membership among customers.

- Understanding how to increase profits as well as revenue.

- Providing a broad selection, competitive prices and great service,

plus ease of use and speedy delivery.

Cyberbrands to watch

Computer software        CNET Shareware           shareware.com

Computer hardware        Dell Computer            dell.com

Business electronics     Cisco                    cisco.com

Brokering                E*Trade                  etrade.com

Books                    Amazon                   amazon.com

Travel                   Travelocity              travelocity

Cars                     Auto-By-Tel              autobytel.com

Magazines                Electronic Newsstand     enews.com

Shipping                 Federal Express          fedex.com

Clothing                 LL Bean                  llbean.com

This article was first published on Marketing