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Five months ago, online supermarket Olive Mart overhauled its business methods for the second time since its launch in May 1999.

Olive Mart initially operated a nationwide delivery service that handled 10,000 items ranging from fish procured from Tokyo’s Tsukiji Market to vegetables and daily necessities from partner supermarkets.

The operation, however, proved to be unprofitable.

Operated by Ibix Corp., a supplier of small computer systems, Olive Mart in March 2000 turned to the so-called clicks and mortar system, opening a grocery store in Tokyo’s Suginami Word to serve both as a physical outlet and a procurement station for its online customers.

Offering only 3,000 items — or less than one third of those available in the initial operation — the shop was forced to close just nine months later due to online customers’ dissatisfaction over the reduced number of items and high running costs.

With the latest overhaul, the company opted to concentrate on managing online operations, outsourcing the procurement and delivery of goods in accordance with customers’ orders received on the Net.

Whether this turns out to be the right decision remains to be seen. Olive Mart’s experience, however, is all too familiar to those attempting to catch the wave of emerging business-to-consumer (B2C) electronic commerce.

As the fast-spreading Internet virtually eliminates time and space between companies and their customers, many see e-tailing as having huge potential.

Expectations are also high that e-commerce will bring changes to Japan’s meticulous and costly distribution system.

As Junichi Saito, Olive Mart business director at Ibix, acknowledges, things are not that easy.

“We generated a lot of losses. But nobody seems to be bearing much fruit from this (kind of online) business. It’s not easy to find the right formula.”

The United States, a forerunner in Internet-related business, has weathered the rise and fall of the dot-com phenomenon.

The burst of the Net bubble last year put a number of online companies into a corner. Major online toy retailer eToys.com went under in March, online delivery service operator Kozmo.com stopped business in April, and even the famed Amazon.com recently streamlined its operations.

While the underdeveloped state of Japan’s B2C business means it has not had a similar boom-and-bust experience, many online service providers are struggling all the same.

For example, JCB Co., a major credit card issuer, closed its online shopping mall in September, although it still runs a Web site that provides price comparisons between various products. Okaimono-net, an online delivery service partly owned by major convenience store chain operators Sunkus and Associates Inc. and Circle K Japan Co., has halted operations for a month to reconstruct its system.

Despite such trials and errors, industrial analysts believe the steadily rising number of Internet users and consumers spending online means that Japan’s B2C e-commerce market has great potential.

According to a joint survey by the Ministry of Economy, Trade and Industry, the industry group Electronic Commerce Promotion Council of Japan, and consulting firm Accenture, Japan’s B2C e-commerce market was estimated at 824 billion yen in 2000, up 145 percent from the previous year, and is expected to reach 13.3 trillion yen in 2005. Around 19 percent of Japanese households, or 27 million people, were hooked to the Internet as of the end of 1999, according to an estimate by the Public Management, Home Affairs, Posts and Telecommunications Ministry.

The kinds of actual changes the Net will bring to consumption styles, however, is unknown, said Shinya Aihara, information technology analyst at Fuji Research Institute.

Things are unpredictable because, for one thing, information technology infrastructure and interfaces are changing rapidly, he said.

Both Internet-only firms and click-and-mortar companies are currently fumbling to make effective use of the Net to sell goods or build better customer relations, he said.

“We need to double the sales at our online supermarket just to bring it to a break-even point,” said Hiroyuki Abe, Web marketing manager at Seiyu Ltd.

The major supermarket chain operator opened its online store in May 2000, targeting customers in and around western Tokyo.

The online store, which currently counts 12,000 customers as members, takes orders over the Net and promises delivery within three hours at the earliest. Delivery fees are waived for customers spending over 5,000 yen.

Like Olive Mart, it has yet to make a profit.

Abe said that each of the eight Seiyu stores serving as procurement stations for online delivery services receive an average of 20 online orders per day, with typical purchases ranging between 5,500 yen and 6,000 yen per order.

But this is not enough, he said, noting that his firm will soon expand the service area and begin accepting orders via telephone and fax.

The slow spread of e-commerce is attributed to the high cost of Japan’s telecommunications and consumers’ anxiety about the security of online transactions, including online fraud and the leaking of personal information such as credit card numbers and passwords.

“The high (Net) access fee created a psychological wall for consumers,” said Fuji Research Institute’s Aihara. “As nobody wants to pay money for just selecting items at a shop, it deters them from shopping online.”

Meanwhile, he said, security concerns may have been excessively emphasized, noting that consumers need to be as careful in regular shopping as they do on the Internet.

The government has been trying to legislate measures to better protect privacy and ensure proper online transactions. Online services providers, for their part, are also taking steps to beef up security for their customers.

Yahoo Japan Corp., for instance, introduced in May an identity verification system to screen participants using its Web auctions, an additional security measure to check their e-mail addresses, and an escrow service that offers a third party agent to temporarily deposit money for a valid contract.

“We receive 280 yen monthly from each auction participant for the verification procedure, but our top priority (in introducing this system) is to remove users’ concerns (over information security),” said Hidetsugu Tonomura, a senior producer in charge of Yahoo Japan’s e-commerce service.

Apart from all the security and cost issues, there are certain businesses that are suited to operating online and many that are not, said Toru Maegawa, visiting professor at Waseda University’s Global Information and Telecommunication Institute.

Among those best suited, Maegawa counts reservation services for hotels and tours as well as ticket booking services for transportation, concerts and other events.

“I think people would see the benefit in online services that can relieve them of troublesome work . . . and they can surely enjoy the convenience (of utilizing such services),” he said. “But the actual impact that e-commerce will bring to consumers’ lifestyles may turn out to be much smaller than we had expected.”

With this in mind, many businesses are trying to utilize the Internet as a marketing tool, rather than as a marketplace.

Real estate agent Daikyo Inc., for example, is promoting sales by exchanging e-mails between customers and its salespeople. In fiscal 2000, the firm made contracts for 1,707 condominiums, or about 18 percent of properties sold, through negotiations involving e-mail communications with buyers.

“This method helps us recommend to each customer appropriate properties and helps consumers receive precise information about condos to help narrow their targets,” said Jin Sugawara, a spokesman for Daikyo. “Thus, in cases using Internet communication, we can conclude a purchasing agreement in one-fifth to one-fourth the time of ordinary cases.”

Aihara of Fuji Research Institute, however, said companies should be prudent in using online communications with their customers. The Net, by enabling anyone to release information, can be a double-edged sword.

In 1999, for instance, Toshiba Corp.’s reputation was hurt by a customer’s Web site that publicized the inadequacy of the firm’s responses to his inquiry and revealed excerpts of the correspondence between the two sides. The site received millions of hits after the media reported the incident. Aihara said Toshiba could have coped with the case much better had it not underestimated the influence of the Net.

“As evaluations (of products) circulate quickly on the Internet, it could affect corporate strategies for product mixes and brand images,” he said. “The more effectively companies use the IT tool, the more competitive they will become.”

Koikeya Co., a Tokyo-based snack maker, seems to be successful in using the Internet to build better customer relationships.

Sending its weekly e-mail magazine to about 490,000 subscribers, the firm receives 1,200 to 1,300 e-mail messages each week from consumers. The company attributes this relatively good response rate to its employees’ efforts to respond to as many customers’ messages as possible. “I think our customers feel close to our employees and our products through this online correspondence,” said Kazuyuki Toda, a spokesman for Koikeya’s Web site.

The company, for its part, benefits from its online communication with customers. It decided on the flavor of a new Pinky candy, which went on sale in November, based on an online survey from 21/2 years ago.

“Although we can’t calculate the influence of our Web activity on our business, I believe the Internet will become a more powerful marketing tool than TV ads,” said Koikeya President Takashi Koike.

“We’ve obtained valuable resources by increasing communications with consumers online. Now we’ve got to figure out what to do next by optimizing those resources.”

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