Slow take-off in Internet trade

Though the number of people using the internet in SA is still experiencing exponential growth, consumer-orientated Internet businesses have not seen the same growth accorded to similar businesses in the US and Europe.

A recent report by US internet research company ActivMedia noted that consumer-orientated Web sites throughout the US are continuing to show improved profitability and that almost 70% of respondents expected to be profitable this year, indicating that e-commerce has become a viable selling channel for all sorts of companies.

Listening to M-Web head Antonie Roux expounding on his business, one can quite easily believe that the glory days for SA's homegrown Internet businesses are just around the corner. However, the reality seems to be somewhat different, as demonstrated by the investment community's poor sentiment towards most of SA's few listed consumer-orientated Internet businesses.

What we actually see is that most of these businesses are struggling to meet profit forecasts and indeed remain profitable at all.

SA Internet based financial services businesses U-Trade and Tradek have been unable to match over eager forecasts and it appears that subscribers to MoneyWeb - the Internet financial media company headed by Alec Hogg - are displaying a similar reticence to buy goods and services over the Internet, given that the company earns most of its revenue from advertising and sponsorships. Even worse, Metropolis, the Internet portal which aims to generate income by persuading "vertical communities" - people with the same interests - to transact online, just seems to lurch from one crisis to another.

Against this background, M-Web's Roux and Eddie van Rensburg (who heads M-Web's Business Solutions division) would have us believe that business-to-consumer (B2C) e-commerce is about to explode in SA. They say that the number of people surfing the Net is increasing dramatically and that all they're waiting for are big brand names - businesses that have already built up consumer trust and loyalty - to take their businesses on to the Net.

After all, this is more or less how it happened in the US where , at first, consumers showed a distinct reticence to transact online. However, volumes began to grow exponentially about two years ago when large US retailers began embracing the internet. This resulted in exponential growth in the B2C e-commerce market over Christmas 1998 - which caught many retailers off guard. MoneyWeb executive director Tim Wood is a lot more conservative: South Africans are transacting on the Web, but I have always said that there will be a five-year build out period. Until we get another million people online, we're not going to see the volumes being experienced in other markets here in SA- it will take another four years."

This raises an important question : how many people actually surf the Internet in SA? Unfortunately, the industry in SA cannot agree on A number. SA research agency BMI-Techknowledge says that there are just under 2m discrete e-mail addresses in SA - but to arrive at the number of Web Surfers, one has to account for the individuals who have more than one e-mail address (just think of how many people you know who fall into this category) and those who only use the internet for e-mail purposes. Predictably those companies which rely on a large internet user group in SA for their business model to work (such as M-Web) peg the current user base at more than 1,5m. However Jenny McKinnell, founder of Cape Town based Internet research company Webchek believes that the number is far lower - probably around 900 000 people. But even that's a respectable number of people, representing the higher income brackets. So why aren't they buying goods and services online? McKinnell says that the key reason is the cost of accessing the Internet, particularly the Telkom charges related to dialling into an individual's internet service provider (ISP).

"(The hype) persuades individuals to get connected , but they then have heart failure when they see their first phone bill, says McKinnell. "Most people just dial in to get their e-mail; our research shows that 60% of Web users visit nine or less sites a month and more than half cruise the Net for less that three hours a month. What are you going to buy in that time?"

Roux disagrees. M-Web numbers show that their subscribers cruise the Net for around 41 minutes/day - not dissimilar to subscribers to AmericaOnline (AOL) in the US. Furthermore, the average subscriber's phone bill is around R120/month, because they carefully choose the time to dial into M-Web to take advantage of off-peak phone rates. That may well be so, but Webchek's research still shows that 74% of Websurfers in SA have never bought anything online and few have purchased goods more than five times. Once again, Roux counters. He says that M-Web is currently processing about 120 online transactions/week valued at around R800 000/month. But stockbroker analysts treat this number with disdain, pointing out that 120 transactions/week form nearly 250 000 subscribers is poor and that the purchases appear to be big ticket items (more than R1000) on the numbers given.

Analysts say that the reason that Web users in SA are reluctant to transact online is more likely to be found in the profound lack of perceived benefits, a point confirmed by McKinnell. It's now got cheaper for South Africans to buy goods online. For example, buying a CD from Kalahari.net this past Christmas would have cost a lot more - after factoring in the delivery costs - than visiting your local Musica store. Furthermore, it's not certain that the price of goods will come down anytime soon. Both McKinnell and Wood say that retailers in SA need to rethink their businesses and invest a large whack of cash in the necessary infrastructure (particular computer systems , warehousing and logistics) to improve the efficiency of their supply chains and thus cut the cost of goods. But it's not just infrastructure, Wood says. SA's Banks need "to come to the party as well" to bring down the cost of transactions. Retailers simply cannot discount the price of their goods, given the margin-eating costs they face - a credit card fee of anything between 3%-5%, a further gateway fee to the banker and an additional payment to the transaction broker (such as EC Ne). "It's cheaper to run the credit card number through a Speedpoint machine than to introduce straight through processing" says Wood.

[Featured in Finance Week, June 2000]

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