The downside of Internet commerce

August 02, 2010|By Joseph L. Kroart III

With the emergence of the Internet marketplace, the early years of the 21st century will likely be recognized as the beginning of a radical transformation of the mode of many retail transactions. Not since the advent of mass-produced mail-order catalogs has there been such an altering influence on the fundamental nature of how people shop.

Internet retail sales represent less than 10 percent of total annual retail sales figures, but this number is somewhat misleading. This decade, annual online retail sales have skyrocketed from $27 billion in 2000 to $134 billion in 2009. While increases in Internet sales have slowed during the Great Recession, the average annual rate of online sales growth before 2008 exceeded 20 percent. Continued growth should be expected in the future: Rates of Internet use and online shopping are higher among younger age groups. One recent study projects online sales to nearly double by 2014. And many retail chains that have historically been brick-and-mortar operations have turned their focus toward developing their online presence, hoping not only to cross-market their traditional and online businesses, but also to remain relevant in a business atmosphere increasingly geared towards e-commerce.

Consumers are flocking to the online marketplace for the benefits they perceive, mainly pricing and convenience. With a few points and clicks, a potential retail customer can browse several online stores and find the lowest prices for products that interest them. Accessibility is also a draw, as consumers can search globally for items that they might not otherwise have been able to find. Moreover, they can research products for the sake of comparison and read the reviews of past customers of the same items to better educate themselves about their prospective purchases.

However, the growth of Internet retail also carries some latent consequences that are not as attractive. Like the rise of big box stores before it, the Internet represents the latest grave threat to the livelihood of many small businesses. But while big box stores wrestled market share away from small business primarily through large economies of scale, Internet retailers enjoy a much more powerful advantage: freedom from the overhead costs of operating a brick-and-mortar store, allowing them to reduce profit margins beneath the minimum threshold required for a traditional business to be sustainable.

But before dismissing this as a problem unique to small business owners, consider that the increasing competitive pressures on conventional retail businesses will likely result in job losses. The mall industry, counted on both as a source of employment and as a generator of tax revenue, is under siege locally and nationally from a weak economy and large anchor stores closing locations. The siphoning away of retail sales by Internet brokers may prove to be a death knell for some malls, many of which already suffer from higher than normal vacancy rates. Store closures would be a bitter pill to swallow: nearly one-fifth of Maryland's workers are employed in jobs directly related to retail. Those who lose their jobs because of Internet sales competition will likely need to be absorbed by other sectors of the state's economy.

The impacts of these trends will trickle down to consumers as well. There are advantages to shopping in actual stores that cannot be replicated in the online shopping experience, such as the abilities to see, handle, and try out the product before purchasing it. Many consumers are simply not comfortable with the notion of purchasing items such as clothing or shoes that they have not been able to try on. Even more troubling is the proliferation of such big-ticket items as major appliances being sold online, a trend that, if it were to continue, might result in a dearth of physical showrooms with professional salespeople who counsel and educate prospective customers. And for those who like to shop with friends as a social activity? Such behavior might soon be largely a relic of the past.

And then there is the issue of lost tax revenue. Maryland currently loses an estimated $7 million each year in retail sales tax revenue from transactions involving sellers that do not have a physical presence in the state, a figure that promises to grow. Legislators in Annapolis and across the country have been thwarted in their attempts to effectively close this loophole by issues both logistical and constitutional. That a version of the so-called "Amazon tax" that several other states have tried to implement has twice been introduced in the General Assembly but failed to gain passage suggests that there is no clear consensus over how to tackle this problem. But further growth in Internet retail sales and a failure to find a suitable means for collecting taxes on those transactions may require lawmakers to look for other ways (tax hikes, perhaps?) to make up for this lost revenue.

The Internet marketplace is here to stay, and everyone welcomes the lower prices and greater convenience that it brings. But while embracing these benefits, we should recognize the lurking costs and consequences that accompany its arrival.

Joseph L. Kroart III is vice president of Ocean Gallery Fine Art Centers Inc. in Ocean City. His e-mail is

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