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Marrying e-commerce and instant gratification

The euphoria over e-commerce conceals a significant weakness that caps opportunity, but companies are beginning to develop options to satisfy the need for instant gratification.

    Much has been made of the numerous benefits of e-commerce over traditional retail. No other medium allows a consumer to shop as easily, or select from so broad an assortment of products. These features have enticed millions of consumers to purchase products online, and repeat customer rates and favorable word-of-mouth testimonials indicate high satisfaction from those who shop online.

    What the euphoria over e-commerce conceals, however, is a significant weakness that actually caps opportunity. While e-commerce companies have largely succeeded in facilitating the consumer purchase, they do a poor job of providing instant gratification. Considering that a large percentage of consumer purchases are impulse buys, e-commerce companies are targeting only a small portion of their potential market.

    When it comes to distribution, most e-commerce companies are really no more than electronic mail-order catalogues, sending their products by post to consumers in three or more business days. Consumers have to deal with shipping, which means costs that can eliminate price advantages and delivery times that are no better than a day's wait.

    While this is satisfactory for patient consumers or those who plan ahead, it deters those who cannot or do not want to wait to receive their purchases. Given general consumer trends towards instant gratification, we expect e-commerce companies to begin to take steps towards closing the "delivery gap." We believe that a significant new market opportunity exists for companies that marry the benefits of online shopping (convenience, information, product selection) with instant gratification.

    Traditional brick-and-mortar stores could benefit greatly from this trend. An online consumer could browse an e-commerce site, select a printer best-suited for her needs, identify local stores that carry the product and at what cost, place her order, and pick the printer up on her way home. Alternatively, the consumer could select the product online and have it delivered to her home or office. In either scenario, the consumer can get the product fast--without having to pay high shipping costs for next-day delivery.

    A number of companies are already moving in this direction. Amazon.com continues to open new distribution centers around the country and elsewhere in the world to shorten delivery times. The Web giant also recently invested in HomeGrocer.com, an online grocery store. While the Seattle company won't elaborate, we believe Amazon.com will ultimately use HomeGrocer.com's distribution capabilities for more than just groceries. 1-800-Flowers, meanwhile, is opening up physical stores around the country.

    Clearly, combining the benefits of online shopping with instant gratification greatly broadens the size of the market opportunity and improves the consumer experience. For e-retailers, the incremental revenue comes with risks, however. Providing same-day delivery requires incurring brick-and-mortar costs, which reduces the scalability of the business and shifts the model in the direction of traditional retailers, whose valuations are far less attractive. Despite this risk, we believe that the size of the opportunity and demand from consumers will drive e-commerce companies to develop options that provide instant gratification.