Online price deflation threatens e-tailers

Traditional businesses are better at playing the e-tail game than pure dot-coms
Written by Wendy McAuliffe, Contributor

A day before the Trading Standards Institute released its damning report on Internet shopping, UK online consumer price index Goldfish ePI said "Clicks and mortar" retailers are pushing cash strapped e-tailers further into bankruptcy.

The Goldfish ePI, released Wednesday, found that fierce online price deflation is making life difficult for pure dot-com businesses, with their more traditional counterparts proving to be 12.7 percent cheaper across the spread of consumer goods.

The index shows the average price paid by consumers for goods on the Internet fell by 2.4 percent during the July to September period. The most significant change is in the price of holidays online, which fell 9.7 percent.

"With UK consumer spending on the Web in 1999 totalling £1.7bn and some estimates valuing the total spend for 2005 at £23bn, online prices are an increasingly important economic indicator," said Peter Barrett, managing director of Goldfish. The report's findings suggest that traditional businesses with online arms are placing increasing pressure on dot-coms to compete with their tactical pricing policies.

Huge disparities between prices of consumer products on the Web from one e-tailer to another were also found. Consumers can pay up to 42.5 percent more for fresh vegetables at the most expensive retailer than at those offering average prices; a similarly high 37.5 percent disparity was found on selected alcohol.

"Pure e-tailers are struggling to sell, as the average consumer isn't converting his online visit into a purchase," said Hugh Brown, partner at business consultants PricewaterhouseCoopers. He argues that on the Web there is a smaller profit margin as the prices are naturally more competitive -- an increased volume is necessary to compensate. "E-tailers are finding themselves in the worst of all worlds, where they have a small profit margin and a small volume of sales."

The ePI is produced on a monthly basis and tracks a basket of 1,300 products at over 150 e-tailers.

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