'They Look in the Shops, They Buy on the Internet'

"Sales of electrical appliances and electronic products have not grown in the past two years," says Oded Keren, general manager of Netvision Commerce, which operates the NetAction online store, "but the Internet's market share has increased substantially. Sales are growing from one month to the next, while imports of electrical appliances in general have declined. We are growing at the expense of retailers.'

Despite the recession in Israel, or perhaps because of it, e-commerce in Israel is flourishing, and with only a relatively small investment in advertising in comparison to the Internet bubble years. Most online trade in Israel is transacted on sites owned by companies that do not have real stores, unlike the American market, in which the leading e-commerce sites are owned by long-time retailers, with the exception of Amazon.com.

The total volume of online trade in Israel in 2003 will be about NIS 1.4 billion, compared to about NIS 1 billion in 2002, according to a study conducted by the TASC research company. The market is controlled by four main players who attract 62 percent of sales, mostly electrical appliances and computer products: Olsale (18 percent), P1000 (17 percent), NetAction (17 percent) and Walla Shop (10 percent). The rest of online trade is divided among niche sites that focus on various areas: books, tourism, food, tickets for entertainment events, flowers, etc.

The growth in online trade, particularly in the electrical appliances and computer products departments, is quite prominent against the backdrop of a 25-percent decline in electrical appliance sales in 2002, to NIS 4.5 billion, down from NIS 6 billion in 2001, according to data provided by the BDI research company. In 2002, Internet sites accounted for just 10 percent of electrical appliance sales. Along with the growth in their sales, the four leading e-commerce sites are now reporting their successful transition to profitability.

"Our total sales are greater than those of Shekem Electric, the largest electrical appliance retailer in Israel," says Keren.

Two-tier competition

In response, Shekem Electric CEO Yoel Gabbi, says the chain, which operates 36 stores, did not suffer any decline in sales in 2002 in comparison to 2001, with annual sales totaling NIS 500 million. "The Internet sites' business model is particularly problematic," says Gabbi, "because their gross profits are only 5 percent and some of them are losing." Gabbi believes the e-commerce sites are harming mainly the neighborhood electrical appliance stores.

Ophir Leibstein, vice president of Gold-Trade Online, which operates the P1000 site, says the site's competition is on two levels. "The first level is against the other Internet sites - we are in direct competition with them because we all use the same marketing system. The second level is that of the retail stores. We are nibbling away mainly at the sales of the big chain stores, which allocate a lot of money to maintain their labels. These chains now serve as our display window. There, people look; here, they buy," says Leibstein, noting that 70 percent of P1000's sales come from electrical appliances and computer products.

Yair Shemesh, the CEO of Olsale, says that 60 percent of sales are from electrical appliances and electronics including computers. Vice president Uri Nadler of Walla Shop says that 65 percent of the site's sales are in those two fields.

Retailers are in no hurry to admit that the e-commerce sites are hurting their sales. Shlomi Ohayun, CEO of Sakal Electric, says that it is hard to tell whether sales have been hurt due to online trade.

"There has been a decline in sales, and it is impossible to ignore the fact that e-commerce is gaining momentum, but it is hard to say just how much it is really hurting our sales."

Ohayun notes that the e-commerce sites have flourished due to their online auctions, in which the auction game is part of the purchasing process and the price is the prize. "I cannot compete with auctions," he says. "The prices on the Internet are good because the sites have lower overheads, but most people are now buying via auctions. It has become a type of refined gambling. When our main competitor is the Internet, we will have to check whether we have a right to exist, because our overheads are much higher."

The potential for Internet sales is far from being exhausted. A TIM study, conducted by the TNS/ Teleseker group in February 2003 found that 65 percent of Internet surfers show a willingness to purchase products online - although only two-thirds of them actually make online purchases. The TASC study report included a forecast that online trade in Israel will continue to grow substantially in 2003-2006, based on the assessment that surfing hours will increase by 25-30 percent.