Bigger is better: McKinsey report

Companies with substantial off-line presence may be better off as they net second tier Internet users with lower income but represent larger volumes.

SYDNEY (Asia Pulse) - As competition for the e-commerce market heats up, customers focus on value and branding is likely to benefit those companies with a large off-line presence to the detriment of purely on-line companies.

McKinsey principal Matt Bekier said today that consolidation and a return to value and realism in the on-line world meant that bigger off-line players would have the upper hand over their on-line competitors in the race for markets and customers. "Given the all these forces we think that incumbents will be very well positioned to succeed in the on-line world," he told an Australian Securities and Investments Commission e-commerce conference.

An important factor was the swing to a second wave of Internet users in "middle America", compared to the high income, well educated users who dominated the first wave of net surfers. "By 2003, most of the growth in Internet usage is not going to be in the high income bracket, but lower income earners," said Mr Bekier. These users were more likely to be swayed by branding and a company which had both an on-line and off-line presence to service customers.

Mr Bekier added players which had an off-line and on-line presence - such as US on-line broking giant Charles Schwab - were also much better positioned for profits and financial gain. Around three per cent of "bricks and mortar" companies achieved negative returns, post mergers and acquisitions, compared to around 25 per cent of on-line deals. Incumbents were also in an advantageous position with the decline in valuations for Internet companies from the giddy heights of around a year ago, he said.

"Of the initial public offers since 1995, around three-quarters of those companies are trading under their issue price," said Mr Bekier. "What is happening in the Internet now is that people are understanding a lot better, as to how and where to make money. "We are understanding now how much future growth is going to go ahead," he said.