E-commerce versus Retail Distribution | AQA Q4, Paper 3 2018

Here is an example response to the 16-mark question in 2018 on whether the use of e-commerce rather than distributing via a retailer was a good choice for the case study entrepreneur.

In this question we are looking historically at the performance of Hopps in the first year of trading, a time when Jack was running his new business for the first time. This is important context to the decision he took to use e-commerce rather than use a retailer like Debenhams.

The choice of focusing on a direct distribution strategy using e-commerce can be argued to have been a sensible choice since Jack started with only a limited product range and low levels of inventory. A retailer like Debenhams would have required large quantities of inventory to be able to offer the products listed in Appendix A in many or all of its stores. An advantage of using a retailer like this is that sales in the first year might have been significantly higher for Hopps since Debenhams has a large store portfolio and millions of customer visits. However, Jack would not have had the financial resources to be able to finance the manufacturer of inventory to supply such high orders, and even if he had, then he would have been reliant on Debenhams to sell the products under their exclusive arrangement, even though Debenhams customers are not really in Jack’s target segment of 15-30-year-olds. Combined with the significant loss of margin that Jack would suffer by selling through a retailer, this distribution strategy looks like it would have been high risk for Jack.

Of course, using e-commerce for distribution also involved risks for Jack. Whilst setting up a website is relatively easy and quite cheap, it is not guaranteed that customers in the target segment would find the website, or that it would be effective in selling the product ranges on offer. These days there is huge competition for the attention of customers online and Jack’s decision on e-commerce meant that he would have to find and sell to each online customer rather than tap into an established customer base that retailers enjoy. Another downside of using e-commerce is that his products are the kind that are often bought and then returned by customers online, which might create a problem with handling customer returns, whereas a retailer is set up to handle these in their stores. However, Jack seems to have been able to reduce the risks of using e-commerce by making good use of social media such as celebrity endorsement on Instagram to reach his target customers, as these campaigns proved a successful way of supporting his chosen distribution method. Consequently, Jack was also able to achieve a much higher contribution per unit on his sales compared with what he would have got from a retailer (e.g. £15 contribution per unit for t-shirts sold via e-commerce compared with £6 per unit from Debenhams).

Overall, therefore, Jack’s choice of using e-commerce rather than retail distribution looks to have been a good one. For an inexperienced entrepreneur, focusing on e-commerce allowed Jack to learn more about how to reach his target customers and to discover which methods of promotion were most effective. He achieved a higher gross profit margin on each sale compared with using a retailer and, even though he struggled to manage inventory for some items, was able to avoid the risks of overtrading that distributing via a retailer might have created.