Bricks and clicks build solid foundation

By Stanley J. Lukowski

Last year's surge and slump of the "dot-coms" provided solid evidence regarding the future of the services industry in the age of e-commerce.

As 2000 began, the new economy enthusiasts were predicting a revolutionary upheaval, saying consumers would soon abandon malls and flock to Internet-only goods and service providers, the so-called "dot-coms" or "e-tailers." The ambitious e-commerce startups offered everything from free checking to discounted airline tickets.

The theory sounded plausible. After all, people love a bargain, and an online operation typically has lower overhead costs than traditional "bricks and mortar" businesses, helping them to sell their goods and services at lower prices.

By last spring, however, the bubble had burst for many e-commerce companies. As losses mounted, some e-commerce companies folded. Others began doing the unthinkable: opening physical offices to support their online operations. Clicks turned to bricks for support.

Meanwhile, the bricks and mortar companies - insurers, banks and retailers, among them - continued to hone their Internet strategy. Online banking is quickly becoming as important to a bank as ATM service. Major department stores are allowing customers to buy products online, even offering Internet-only discounts to customers.

That's the future of the services industry. It's not a matter of clicks replacing bricks, or bricks withstanding the challenges presented by clicks. The lesson that unfolded last year was bricks work best when supported by clicks, and clicks work best when supported by bricks.

We were reminded of something else last year. People like to deal with people. That isn't true for everyone and it may not be true forever, but it is the rule of thumb for now and the foreseeable future. Customers also want the best price, which is something we've always known. However, we have been reassured by last year's dot-com failures that price alone won't always draw away customers who want one-on-one interaction with a salesperson when buying a car, mutual fund or insurance policy.

It's important to note that the Internet isn't the first innovation that has reshaped some aspect of the service industry. There was the automated teller machine of course. Some predicted it would soon replace tellers and eliminate the need for branches. While some customers now complete all of their transactions through an ATM, many still prefer to deal directly with a teller at least some of the time. The ATM didn't replace a traditional delivery channel. Rather, like telephone banking or Internet banking, it providing customers with another opportunity to interact with their bank. Now, instead of withdrawing $200 from a teller to last the week, many people access their money from an ATM only as they need it. The lesson is that the availability of a service or information often creates a demand for it.

The mail order catalogue has long been a success story. Successful retailers such as L.L. Bean have used it to reach customers who don't live near one of their stores. Catalogues also extend the opportunity to buy products beyond normal shopping hours. And they provide customers with information. That is, customers can look at a catalogue at any time and find out how much L.L. Bean charges for a green, two-person kayak with two storage compartments.

That's exactly what the Internet has done. Consumers can now buy almost anything at any time. They also have access to more information than they could ever use, creating a savvier customer. And, like the catalogue, the Internet isn't a replacement for a department store. It's a service enhancement. Note that L.L. Bean has a successful, well-run Web site.

Some customers won't order products from a catalogue. Likewise, many people won't shop online. Different people use different avenues to complete their purchases. The Internet's ease of use will shape some people's willingness to try it. The more user-friendly the Internet becomes, the more likely people will use it to conduct business.

The Internet must also overcome the perception that buying something online is a security risk. While tales of security breaches are few and far between, many consumers still wonder what happens to their credit card number in cyber space. Interestingly, many of these same people will watch as a waiter takes away their credit card and never give a second thought to what could happen to that card before they see it again. As time goes on, we expect Internet security to become less and less of an issue for consumers.

As banks once pondered the impact of ATMs, all traditional service industry companies are wondering to what extent the Internet will affect their business. Selling goods and services is one way. Another is providing services in a new way. Accountants are providing customers with tax tips online. Banks are providing account balances. Insurers are providing detailed information on the differences between term and whole life policies. Retailers are providing maps to their stores. The list goes on and on for opportunities beyond simply selling a good or service.

As we move into 2001, we have to keep an eye on two issues. First, there are economic uncertainties. Steadily rising oil prices are, in effect, a new tax. The economy is expected to slow down a bit, with the Gross Domestic Product dropping 1 percent to slightly more than 3 percent growth. A recession - even if it's the "soft landing" sought by the Federal Reserve - could hurt all businesses, tempting them to reduce spending on new ventures. However, those that invest the money during a downturn may find themselves ahead when the economy picks up.

The labor market is the second issue. Nationally, the unemployment rate is expected to remain around 4 percent, creating an obstacle for any business looking to expand. The Internet and, in general, technology provides our industry with an opportunity to improve productivity and leverage the efforts of our labor force, so that overall service levels can even improve, despite the tight labor market.

If we seize the opportunities presented by the Internet, service industries will flourish as customers gradually embrace the new technologies. The business model may be different in the years to come, but the end result will continue to be satisfied customers and profitable companies.

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Stanley J. Lukowski is chairman and chief executive officer of Eastern Bank.