Israel may have made itself a name for technological innovation, but it's a lagger when it comes to local online commerce. While the country propels the global Internet economy forward, it trails the developed world in use and availability of Internet services, says Daniel Aminetzah, an associate principal with the McKinsey consultancy.
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A McKinsey Group study published in 2009 found that the Israeli Internet economy is one of the more advanced in the world, generating revenues of NIS 50 million that year, which was 6.4% of Israel's GDP. That study was confined to Israeli high-tech firms whose entire output is sold abroad; they are of zero moment to the Israeli consumer, wihch has not been adopting Internet shopping in droves.
In the two years since the 2009 study, there was no significant change among Israeli Internet usage. There was little increase in the purchase of electronics and food via the Internet, says Aminetzah, who who conducted the McKinsey study.
Barriers that deter Israelis from shopping online include high prices, lack of variety, the absence of binding security procedures, and complicated delivery methods.
"An OECD study estimates that electronic commerce is one of the five pillars of social well-being," said Google Israel CEO Meir Brand, quoting an OECD study in a discussion last week on the future of e-commerce, hosted by Google and the Israel Democracy Institute. "Enterprises see it as a way to slash distribution costs, and in Israel the Internet has the potential to open doors to export for small businesses."
Google Israel estimates e-commerce in Israel in the past year has totaled a mere $1 billion. If local e-commerce were to catch up with the Western world, the company says, that figure should jump to about $3.25 billion annually.
In the past year there was a trend toward concentration in Israeli commercial sites, says Sigal Caspi, CEO of the Walla Shops website. "Almost all those controlling the commercial sites today are importers of electrical appliances," she explained. "After they take over all the physical sales networks in the industry, which are the core of their business, they are creating a branch on the Internet, which is not objective. They will offer products from which they profit as importers, surplus inventory that they want to get rid of, etc."
But the major problem with Israeli e-commerce is that it is in the hands of a very small number of groups that have an interest in maintaining the old retail system – and thus have no interest in providing the consumer with digital convenience or innovation.
Retail networks in the food and book industries do have commercial websites but they don't promote them for lack of consumer interest in switching to online. Israeli fashion and furniture networks, meanwhile, have websites for promotion only. The lack of e-commerce development is evident not only in the sales of tangible merchandise, but also in the purchase of digital content such as music, films and TV shows, which leave the field open to illegal transactions.
Internal competition is another barrier to beefing up online options, stemming from the fact that without the operating cost of a store, prices will drop online.
"In e-commerce there is transparency," says a senior executive of an Israeli online company. "The consumer will know who gives better service and provide feedback on social networks – which also encourages competitive pricing. There are networks that have no interest in seeing this transparency pick up speed."
Other major barriers to online commerce include the lack of security standards, high prices for delivery, and an absence of regulatory incentives.
The future of e-commerce now depends on the younger generation of consumers, who were born with a credit card in one hand and a keyboard in the other, and who take purchasing online for granted. Many of these young people are now starting businesses and selling on the web: They are the ones heralding the growth of local e-commerce.