Retailers are trying to hold back the Internet tide

Which is the largest bookshop in the world? Foyles on London's Charing Cross Road? The Barnes & Noble branch which opened in Minneapolis a couple of years ago? Dillons in Gower Street, London, perhaps? Wrong, wrong and wrong again. The answer lies not on the high street but in cyberspace. Amazon Books, the Internet bookseller founded by two American brothers, claims to be the "planet's largest bookstore," with more than a million titles on offer.

Yet it has no stores, just a huge warehouse outside Seattle. A true "virtual" retailer, it has far lower costs which allows it to keep prices lower than high street rivals and still cream off far higher margins.

Amazon is not alone. CD Now, which was founded by two brothers in a Californian basement, also has no shops but offers 250,000 CDs through its "virtual" store on the Internet. This is around the same number of combined CDs and videos as at the Virgin Megastore in Oxford Street.

Virtual Vineyards has no off-licences, but ships lesser known Californian wines around the world from orders taken via its Internet web site.

The growth of these companies is significant. Without the baggage of a store portfolio with its expensive rent, heating, lighting and security bills, virtual retailers have an in-built cost advantage over their high- street counterparts.

A recent study by Hoskyns, the computer services group, shows that while a traditional retailer might have operating margins of 6 per cent, a virtual retailer's margins would be 18 per cent (see graph).

Herein lies a problem for traditional store groups. They would dearly love to grab a slice of these higher-margin sales by selling direct. But if they do, they risk cannibalising their existing branches. If they do nothing, start-ups will grab market share. Not much, maybe, but in many cases just a small loss of volume is enough to turn a profitable store into a loss-maker.

This conundrum is one reason why electronic shopping has been relatively slow to take off. Retailers have a vested interest in it not happening.

Most of the big store groups have an Internet presence but many of their strategies are largely defensive, trying to protect what they already have.

A study published this week by IMRG (Interactive Media in Retail Group) says this fear, or "leadership resistance" is one of the main barriers to the widespread acceptance of on-line commerce.

"The resistance is short sighted," it says. "The result is that new entrants to the market are setting up, under-cutting the big operators and establishing themselves."

The report says that direct selling channels, such as mail order or electronic media, represent a serious challenge to traditional high street retailers.

With the Internet growing rapidly and other electronic channels such as interactive television developing, stick-in-the-mud retailers are standing in the path of an unstoppable tide.

Retail sales on the Internet were valued at just $500m last year but are predicted to rise to over $6bn by the end of the decade. Hoskyns foresees electronic revenues of pounds 21bn - that is 30 per cent of the UK market - within nine years. Better technology, such as cable modems and satellite Internet connections, is coming.

Security issues, including concern over credit card transactions on the Internet, are being addressed. Demographics are shifting in the direction of electronic media. The Nintendo generation, which is more comfortable with computers, is growing up and entering the job market. They will be much more comfortable about shopping on-line than today's forty-something technophobes.

The implications for retailers are frightening. Some pundits have said that in 40 years there may be no shops at all. Nicholas Negroponte, author of the best-seller Being Digital, has said that the video-rental store will not exist in a few years time, sunk by video-on-demand technology that will enable viewers to download programmes when they want, via the telephone line.

All that investment in expensive store portfolios suddenly looks rather vulnerable. In traditional retailing the mantra still holds true that there are three things that matter: location, location and location. People shop at their nearest store or one that is convenient. But in the digital age, geography becomes irrelevant. Using "intelligent agents" - software robots which can be sent to search the Internet - people will be able to shop around for the cheapest price at the click of a mouse.

Some retailers are more vulnerable than others. People will still prefer to go the shops to try on clothes, sit on furniture and see and hear expensive TV and audio equipment. But what about commodity items such as books and records? In CDs, for example, it is the artist that is the brand, not the retailer. What value is the retailer adding?

Supermarkets also look vulnerable. They represent a time-consuming distress- purchase that many individuals would prefer to avoid. Home shopping could prove attractive to those prepared to pay extra for home delivery.

But most supermarket groups are in a state of denial. They have convinced themselves that consumers like visiting the grocery store and that food shopping is somehow a "sensual" experience.

The truth is probably more painful. The supermarkets, more than any other group of retailers, have invested millions of pounds in store portfolios. The current system is also structured in such a way that the customer does most of the work. They drive to the store, pick their own goods, sometimes scan it themselves, pack it, load it into the car and drive home again. Supermarkets have their consumers pretty well trained.

But new alternatives are coming. Streamline, the US home shopping system, wants to franchise its service in Britain. For a monthly charge the company will handle a family's groceries, dry cleaning, video rental and mail, and deliver it all into a lockable box in the family's garage.

Unlike many other home shopping trials, Streamline has no stores. It buys direct from manufacturers and bypasses the retailers altogether.

The world's largest retailers may feel they are too powerful to be injured by a fledgling new shopping channel that is currently slow, cumbersome and used by only a small proportion of people. But icons do crumble. As the IMRG study points out, the mighty Hollywood film studios of the 1940s and 1950s failed to see the threat posed by television and many went bankrupt within a few years.

In the 1980s IBM under-estimated the impact of the personal computer and was wrong-footed. In retailing many department stores failed to withstand the onslaught of the speciality stores and probably more importantly, the "category killers" such as Toys 'R' Us.

The department stores became the dinosaurs of the 1980s by failing to notice the changes around them. According to Faith Popcorn, the US future trends guru, the supermarkets could be next. Other sectors could follow. Worrying times on the high street.

'Web Sites', published by Interactive Media in Retail Group.