Why Do Tech-savvy Israelis Remain E-commerce Luddites

Don’t blame shoppers: Business simply hasn’t invested in online selling.

Considering the widespread use of the Internet in Israel, it is quite surprising to discover that just a half percent of gross domestic product, only NIS 5 billion, can be attributed to online transactions for goods and services. This is a considerably lower proportion than in other developed economies.

In Europe, for instance, electronic commerce accounts for roughly 1.5% of GDP, three times the rate in Israel. Purchases over the web have grown 120% a year since 2003 in China and from $1.6 billion to $43 billion annually over the past decade in Latin America. The breakthrough hasn’t yet occurred in Israel even though the volume of commerce in the country resulting from online searches reached NIS 20 billion a year, or about 2% of GDP, according to a study performed by McKinsey & Co. in 2009.

The CEOs of Israel’s leading retail companies attribute the failure of Israeli consumers to keep up with their Western counterparts to cultural reasons. Statements are voiced such as: “We offer the lowest price on the Internet, but the customer always ends up calling to close the deal,” or “It’s a small country and the Israeli always prefers coming to the store to see and handle the merchandise.” Other frequently heard explanations include:”The customer is afraid to pay with a credit card over the web,” or “There still isn’t a consumer culture of buying online” and so on.

What they say is apparently correct but a more probing study raises a number of important questions.

The Israeli consumer has, after all, proven to be digitally flexible and sophisticated in almost every area. We’re sixth in the world in tsmartphone penetration, despite their late introduction here and steep prices.

Obviously, the ultimate example is buying of coupons online, an industry that mushroomed within a year to around NIS 500 million and brought online shopping to almost every home in Israel. It proved decisively that there’s no cultural issue in Israel, rather a simple cost-benefit calculation. The benefit offered by most sales websites today is simply too small, so the Israeli consumer shuns them.

The question arises as to why it is that the state of the websites is so poor. The vast majority of marketing chains don’t sell via the Internet at all and those that do merely go through the motions, with poor user experience, bloated prices, small selection, and unclear delivery times.

The answer is simple: The Israeli market is small and is controlled by a limited number of small players. These players have a clear interest to continue their domination in the street and avoid changes that could shake things up. From their point of view Internet sales can bring nothing but a headache.

Price risk

Transparency and competition would cause prices to fall, force them to raise the level of service and create friction between the head office and branch managers − and all this for a volume of sales that can’t be expected to be that big from their perspective. In other words, narrow and short-term business considerations prevent most from giving customers a modern and readily-available shopping experience while ignoring the long-term benefits for themselves and their brands.

But business, like life itself, can’t be maintained for long in a vacuum, and over the past several years a number of strategic changes have been brewing that could signal a breakthrough:

• Price competition in the online food market, led by Rami Levy, is making shopping in this field attractive and easy for everyone.

• Massive penetration by the coupon industry has led to nearly every household in Israel using credit cards to pay for purchases on the web, breaking down of a critical psychological barrier.

• The penetration of smartphones on a global scale brings about the ability to compare prices over the Internet while shopping in stores, pushing many retailers into maintaining a presence on the web.

• The social revolution and economic situation causes more and more consumers to compare prices on the web before buying.

• The accumulation of success stories like those of Domino’s Pizza and DealExtreme make it easier to opt for the Internet ‏(the herd mentality‏).

• Lower customs duties on imported packages has led to exponential growth in overseas purchases from websites such as DealExtreme and ASOS offering free delivery to Israel and attractive prices.

• The first convention in Israel for electronic commerce − Go E-Commerce at Airport City on July 18 − is a clear sign of the field’s growth in Israel over the past year.

• Market entry, although belated by leading retailers like Castro, Delta Apparel, Rami Levy Hashikma Marketing, etc.

All these point towards a possible breakthrough in the field within the next year or two.

For this to happen, retailers must shake off the “going through the motions” mentality and provide customers with a real shopping experience of international caliber. This means: A friendly and easy interface, a complete connection in shopping experience between the web and the physical store, competitive prices − for delivery also, and identical service and selection of goods in the online store to those on the street.

There are already a number of local high-tech companies that know how to provide solutions, and delivery companies are also constantly improving the level of their services. Make us an offer we can’t refuse and we’ll buy en masse.

The writer is a founder of the Israeli E-Commerce Executive Forum.

Bloomberg