Issue No.15 THE INTERNET - WHAT IT MEANS FOR AUSTRALIAN PACKAGING KEY POINTS: The infrastructure for Global Electronic commerce on the Internet is now being set. President Clinton launched his Global Information Infrastructure statement in July 1997 closely followed by the Europeans with their Global Information Networks statement. In Australia, the Goldsworthy report (The Global Information Economy: the Way Ahead) and the IPAC report (Commonwealth of Information) have made recommendations about Australian businesses using the Internet for electronic commerce. National and international bodies, public and private, are addressing integrity issues such as international contract law, privacy, copyright, security of data and electronic financial transaction systems. Companies are moving rapidly to change "information brochure" Web sites into multimedia and interactive electronic commerce sites. Already, thousands of companies are trading on the Internet and gaining a competitive advantage. These advantages include: marketing leadership; speed to market with new products; enhanced customer service, support and feed-back; new brands and leveraging of old brands; access to global markets; markets open 24 hours and 365 days per annum; individual product customisation; market reversal - where customers target vendors; integrated supply chain networks; faster inventory turnarounds; lower operational costs; single entry data processing; and speedier electronic payments. The packaging industry in Australia cannot ignore or escape the consequences of global electronic commerce. It is not a passing "fad". Companies in the packaging industry who fail to keep up to date with developments will find themselves at a competitive disadvantage with their competitors, both nationally and globally. Specifically, the spread of electronic commerce will affect packaging companies in the following ways: product cycles will be shortened packaging machinery will require greater flexibility the role of packaging as a point of sale marketing device may alter there will be greater contracting out by companies and fewer "support" staff employed. Product selection and distribution will be affected by Internet trading which, in turn, could affect the type of packaging used. Consumer protection may become more difficult to ensure. The Internet serves two major functions: firstly, it is a means to communicate information and messages; and, secondly, it facilitates the buying and selling of goods and services, otherwise known as electronic commerce. Electronic commerce provides both a payment system and a means to select and order products. On the Internet, a buyer and seller may not know each other and may often be in different countries with different currencies. Both want their respective interests protected in a commercial transaction. The efficiency with which transactions take place is critical to the success of trading on the Internet. A Global Framework for Electronic Commerce On 1 July 1997, President Clinton released a report entitled "A Framework for Global Electronic Commerce", setting out his Administration's vision of the emerging electronic market-place and outlining the principles that will guide Washington's actions and policies in the new electronic age of commerce. The Report states that the "Global Information Infrastructure (GII) ... is already transforming our world. Over the next decade, it will affect almost every aspect of daily life - education, health care, work and leisure activities. Disparate populations, once separated by distance and time, will experience these changes as part of a global community." A week later, the Bonn European Ministerial Conference, released a statement: "Global Information Networks - Realising the Potential" which stated that - "Global Information Networks are transforming the world...making possible profound economic and social transformations which are diffusing through all realms of human activity... essential to nations' competitiveness, employment and living standards". In August 1997, the Australian Government received the Goldsworthy report - "The Global Information Economy: the Way Ahead" and the IPAC report - "Commonwealth of Information". Both Reports contain recommendations to assist governments and businesses to facilitate greater use of electronic commerce on the Internet. Legislation has already been foreshadowed to set the necessary framework for the security and integrity of transactions. Some of the major findings of the Goldsworthy Report are as follows: • The information industries will play a key role in enabling businesses in all industries across the economy to raise their productivity and compete internationally. • The National Information Industries Strategy must include a range of initiatives aimed at enabling and empowering users to maximise the returns on their information and communication technology investments, to recognise and seize emerging business opportunities and to prosper in the information economy that is rapidly evolving. • There must be greater awareness that information and communication technologies are inevitably transforming the economy and that the productivity and competitiveness of Australian businesses in all industries throughout the economy will depend upon best practice application of best of breed systems and solutions. • New models of commercial interaction are developing as businesses and consumers participate in the electronic marketplace and reap the resultant benefits. Entrepreneurs are able to start new businesses more easily, with smaller up-front investment requirements, by accessing the Internet's world-wide network of customers. • Doing business on-line provides new opportunities in the nature of business and new business opportunities. It also provides new one-to-one, as well as the more traditional one-to-many, customer relationships and greater opportunities for customer-supplier interaction. New skills are required to take full advantage of these new opportunities. In March 1997 McKinsey's produced a report entitled "australia.com: Australia's Future Online" for the Australian Coalition of Service Industries, which recommended that businesses get "online" to participate in "a major shift in the global economy". The Online economy was defined as: electronic access to product and service information; online ordering of goods and services; and remote electronic financial transactions. It also involves instantaneous and lower cost communication via electronic mail within organisations and within the supply chain, including with customers. The Global Online economy will force 'international competitiveness' into every level of our society. Global competition means markets are open 24 hours a day, every day of the year. Competition is coming not only from normal competitors world-wide, but also from new and unexpected directions. For example: old style banks carry heavy "real estate" cost burdens compared to new entrants with electronic home banking and kiosks conveniently located; supermarkets are threatened by electronic warehouses offering home shopping and delivery; traditional book stores are threatened by Online businesses offering millions of titles which are searchable online and supported by readers reviews, gift wrapping and courier delivery anywhere in the world. Potential Value of Electronic Commerce Commerce on the Internet will accelerate global trade by lowering transaction costs, creating new types of commercial transactions, and bringing buyers and sellers together in completely new ways. Forrester Research, USA forecast that ".....the Internet will massively re-shape basic communications and commerce. The total value of goods and services traded between business-to-business over the Internet will reach $8 billion in 1997 and $327 billion in the year 2002... far outstripping the Internet consumer market." They forecast retail sales will rise from $518 million in 1996 to almost $2 billion by the year 2000. They believe 75% of these sales will be of hard goods such as apparel, gifts, food, entertainment products and computer equipment. Coopers & Lybrand surveyed Australian retailers recently (IS in the grocery supply chain) and found 15% already offer home shopping on the Internet. They forecast this will rise to 75% in 18 months because Australia has the highest penetration per capita of the Internet. Dataquest Australia estimated recently that current Australian revenues from the Internet stood at 2% of sales but would grow at a compound rate of 100% annually to reach 20% of sales in 5 years. Tradegate ECA has stated that at least $25 billion worth of goods and services is now traded in business-to-business electronic commerce in Australia, mainly in retail, manufacturing and government taxation collection. It estimates that by the year 2005 almost 50% of all business-to-business transactions will be done electronically. From Web Brochures To Web Commerce Until recently, companies have been simply setting up Web sites as bulletin and information boards, with static brochure information about the company and its products. Now, with the explosion of new Web Businesses and of "Business-to-business" commercial transactions over the Internet new multimedia and interactive commercial transaction Web sites are developing. On the Internet, buyers and sellers may not - need not - know each other except electronically. Supply chain networks and "communities of interest" are developing which will advantage early entrants as preferred suppliers and "lock out" late-comers. Integrity Issues And Consumer Protection Two major impediments to the growth of Internet trading are now being addressed - encryption (for privacy) and the security of financial transactions. The OECD released Guidelines on encryption earlier this year. These guidelines set only broad principles, allowing for the free flow of encrypted material across national borders. The OECD committee, which was chaired by Australia, has called for international co-ordination of cryptography policy to ensure that conflicting policy and technology does not present a barrier to international trade. There have been a number of other initiatives designed to enhance security of financial transactions over the Internet. Microsoft, IBM, Visa International and Mastercard have been leading the way in establishing Secure Electronic Transactions Standards. Now, an Australian company ERG and Banksys S.A. have announced a joint venture to establish a multi-purpose, "smart card electronic payment's system". e-COMM, a consortium of French financial institutions, is one of the latest groups to announce they are developing a standard of high security for payments over the Internet. At present, many products are sold through major retail chains which have their own reputations to protect. Mail order is more difficult to police, and a direct electronic link between an unknown producer who could be anywhere in the world and the Australian consumer carries considerable risk. While financial systems are gearing up to prevent fraud, they may not be able to guard against those "entrepreneurs" who set up sites just to make a fast buck and then disappear with consumers money. In a global marketplace, what protection will there be for consumers regarding product quality, value and safety? The best protection would appear to be to rely on a physical distributor with an established reputation, even if this costs a little more than buying direct. Competitive Advantages from the Internet American companies are leading the way, gaining first entry advantage and capturing business from around the World. Recent start-up businesses have reached multi-million dollar turnover in just a few years, old businesses are leveraging old brands and creating new brands. Even small and medium businesses are entering global markets as the Internet shrinks the barriers of time and distance and lowers the costs of market entry. Companies have identified cost advantages in putting catalogues on the Internet, letting customers "drill" down and select products and access customer support information. The same applies for integrated supply chains as automatic replenishment becomes the order of the day. Cost savings can be identified in staff numbers, time in processing orders and in providing after sales customer support. Market advantages include low entry costs to global markets operating 24 hours a day, 365 days a year - without the labour costs which would usually accrue from staying open all year. Companies can achieve scale economies whilst offering one to one marketing and even single customisation of products. Other market advantages include direct customer feed-back via E-mail enabling companies to identify quickly which are the popular products or what changes to make to products or product lines. In turn, direct feedback from customers allows for better segmentation and targeting of markets and of advertising. Some of the biggest advantages arise from the formation of integrated supply chain networks and faster stock turnarounds leading to lower operational costs. Some producers are cutting out "middlemen" and dealing directly with retailers and customers, although new forms of agents are appearing as "aggregators" of demand. The Internet operates across the disparate computer platforms within companies (allowing better internal communications, especially in merged entities), across supply chains (allowing integration for less inventory and faster stock turnarounds) and across customers (allowing global access and better customer service). Electronic commerce through the Internet also seems to be leading to acceptance of speedier electronic payments, creating investment opportunities and cost savings on receivables. The cost advantages of electronic commerce on the Internet are creating pricing competition advantages, especially for early entrants. In addition to the foregoing, the Internet opens up opportunities for small and medium enterprises, including: • Lower barriers to entry to national and global markets. (It is not necessary to open overseas offices); • Easier identification of potential partners in foreign markets; • Lower cost advertising - 24 hours a day, 365 days a year - globally as well as locally; • Speedier payments; • Customers seeking them out. Implications for the Australian Packaging Industry The packaging industry in Australia cannot escape the consequences of global electronic commerce. It will affect every company involved in the packaging chain. The "International competitiveness" of recent years may have been tough but "global competition" from global electronic commerce will bring a quantum leap in competitiveness. Integrated rather than linear supply chains will mean that information will flow quickly back from customer purchases through the entire chain to raw materials suppliers allowing for cost efficiencies throughout the chain and for better strategic planning. Apart from digital products such as music, video, films and journals, which can be downloaded from the Internet, electronic commerce still has to be supported by the physical distribution of goods. Physical distribution requires packaging. The global packaging industry can expect an increase in product demand as the brand-owners will be selling goods globally, nationally and to their customers in the same State, city and suburb. The nature of the packaging required may, however, change. A key element in electronic sales and distribution will be electronic tagging or identification of goods. Packaging must play its role here to ensure, for example, that bar-coding is well sited on packaging and not damaged, hidden or unreadable by plastic overlays. There will also be a global move towards standardised and integrated transport and storage systems. Packaging for shipment of electronic commerce sales may result in more "plain labelling", since it may not have to carry normal advertising and point of sale information. Information technologies today allow customisation of products down to individual consumers. For example, in the United States, customers can order over the Internet "made to measure" jeans from Levi's. This individual customisation will also lead to increased demand for single serve packaging. Specific Changes Changes brought about by the Internet and the growth of on-line trading will result in the following changes for the packaging industry: Product Cycles - The product cycle will be shortened. This will lead to greater rapidity with which new products are created and more rapid product obsolescence. Being first on to the market will assume even greater importance but the financial gains from being first on the market may be short-lived. Packaging Machinery - As a result of shorter product cycles there will be a greater demand for packaging machines with increased flexibility. Packaging machinery will need to accommodate multiple processes at the same time and have the ability to produce many items in smaller lots. Point Of Sale Marketing Device - With more and more goods being sold on the Internet, the role of packaging as a point of sale marketing device may change. On the one hand, packaging may need to be more "robust", if being sold on a one off basis to customers thousands of kilometres away. On the other hand, there will be far more versions of the same product and packaging will have a role to play in differentiating those products. Moreover, it needs to be borne in mind that even when purchases are made on the Internet, packaging will still have a role as a marketing device when the product reaches the home of the purchaser and is "on display" in kitchen cupboards, etc. Smaller Scale Enterprises - On-line trading will reduce costs. There will be greater contracting out of activities by all companies in the packaging chain with support staff replaced by lower cost automation, information and accounting systems. In Australia, for example, it has been estimated that the cost of processing accounts by traditional means varies from $20 - $100 per account, whereas on the Internet costs are likely to be no more than $5 and, in many cases, considerably less. Companies who do not utilise these systems will become uncompetitive. Advertising - The Internet offers companies the opportunity to reduce reliance on product and sales catalogues as well as print advertising and replace it with the lower cost opportunity of putting this information Online. These Online catalogues and advertisements can be more readily changed, at lower cost and are immediately accessible to either a much wider and global audience or, if required, to a more targeted audience. Customers can "drill down" more readily through electronic catalogues to find products of specific interest to them. Surveys in the United States show a strong uptake of Internet advertising and a move away from more traditional and expensive mediums. Bringing new products to consumers' attention might, in some respects, become more challenging. By definition, consumers can switch off interactive advertisements (just as they can fast-forward through the ads when watching videoed TV programs). Logistics and Distribution - Advanced logistics and distribution systems nationally and internationally will be needed to support electronic commerce on the Internet. Parcel delivery services are expanding rapidly to fulfil consumer expectations of rapid delivery of Internet purchases. One to one marketing and sales which are enabled by the Internet will mean smaller parcels are being shipped longer distances. There will be cross-docking warehouses and globally standardised packaging to cope with the accelerated growth in national and international trade. Leading distribution companies, such as FedEx, DHL and UPS, are setting up trans-shipment warehouses in strategic locations around the world. Labelling will come under pressure to adopt uniform international standards. These companies are also offering extended services including software for self-help shipment and have opened their own databases for customers to track the shipment. They are also providing export and import clearances worldwide. Some like FedEx, which now describes itself as a "Network company", have gone further and now offer to set up and manage distribution support for electronic commerce through supply chains. They even provide support for customer self-development of Web pages and online catalogues. Product Selection and Distribution The ability to order products and services over the Internet could lead to the following developments: Electronic Distribution - Games and business software, feature films, sports videos and music could be distributed electronically without any packaging or physical product at all. This is: • very likely to happen with feature films, recordings of sporting matches and other products which most users will not keep very long; • quite likely to happen with software - The barrier is that people usually want a hard copy of the manual and the software producers have so far had only limited success in persuading people that a "helpline" integral to the program will do as well; • unlikely to happen with collectables like classical music, jazz or classic pop albums and, perhaps, big sporting occasions where people like to have something tangible on display on their shelves. Enhanced Mail Order - The Internet could be used to compare prices and specifications before buying consumer durables. Some consumers might want to see an example of the product on display, but others would be happy to order direct. This could be open to the same problem as traditional mail order, namely that the illustration in the catalogue may not tally with the actual product. Technology would, however, at least offer the possibility of viewing the product in three dimensions and from all angles. Whether the products are delivered direct from the factory or from a retail outlet, only transport packaging is needed, so there will probably be no change to the type of packaging, only to the speed and flexibility demanded of the supply chain. The Electronic Shopping List - Many people don't get much of a "kick" out of routine household purchases like toilet rolls, sugar, jam, butter and so on. An electronic list on which you tick the items that need replenishing could be sent to a distribution company, which would also provide information on recipe products you might want to consider buying. Since purchase of these routine items would be more or less automatic, price is likely to be the major factor that persuades the consumer to change brands. Packaging for products bought in this way would be strictly functional, since marketing would be done on the Internet site rather than on the pack. Even if the sites are run by the packaged goods manufacturers rather than retailers, visual appeal is likely to become less important and price (and product performance) more important as a way of winning market share. If "shelf-appeal" becomes less significant, one could expect greater use of minimalist packaging. If the "electronic shopping list" comes about, it would still be an open question as to whether the company taking the order would be the product manufacturer, the home-shopping arm of a traditional retailer, or a home-shopping specialist. Physical delivery could be contracted to a specialist who could consolidate orders from a number of manufacturers or retailers. Regulations making it mandatory for certain information to be published on the Internet would be technically feasible for any product, even groceries. As and when use of the Internet becomes universal, that would mean that the packaging taken home need only contain instructions for use, safety warnings and a use-by date. Information needed at the time of purchase (quantity declaration, ingredients list, etc.) could be published on the Internet. Not everyone will have direct access to the Internet, but terminals could be provided in-store. That would save space on the label and mean that pack size would hardly ever be determined by the need to include a lot of information on it - an environmental plus. Overall, the main environmental advantages would be fewer vehicle movements; there would also be a bit less packaging and perhaps less attractive packaging (depending on whether research shows that people still want attractive packs in their homes). In a limited number of cases, products might be delivered singly (like mail order today) rather than consolidated by a distributor who will bring groceries, magazines, CDs and a new lawnmower on the same vehicle. In that case, packaging might become heavier as it will have to serve as transport packaging as well; and there may not be savings in vehicle movements. However, it is unlikely that single-product distribution to the home will often be economic, particularly since electronic communications will make consolidation so much easier to organise. Virtual Shopping - Busy people in the upper income brackets would probably be the main users of electronic shopping. Others, particularly older consumers, may well want the assurance of seeing the products they are buying. This could be done by enabling them to scan the shelves electronically and click on the items they want to buy. The scanning might be "artificial" - high quality graphics - or there might be a video camera tracking along the shelves of an actual store. If this format takes off, packaging would still need the same presentational properties as it does now, though as in the point above, there may be scope for the ingredients, etc., to be shown electronically alongside the pack rather than printed on it. The Status Quo - Some people like shopping because of the human contact; others don't particularly like it, but like computers even less. Traditional retailing and distribution still has a future, though some products could become unavailable in some stores if the bulk of the market moves to new systems. The probability is that some or all of these formats will exist simultaneously. That would mean a greater variety of packaging with shorter production runs; meanwhile increased computerisation will accelerate the move away from stockholding and towards just-in-time delivery. Environmental Aspects and Industry Responsibility - If a product is ordered from abroad via the Internet, the private consumer is the importer. The foreign packer/filler will inevitably get a free ride vis-à-vis any industry responsibility for managing the used packaging. If industry is going to have to support local authority waste management costs, another way would have to be found - there would seem to be little alternative to "pay-as-you-throw" by the consumer. SUMMARY The packaging industry should look to Internet electronic commerce as both a better way of doing business and a new way of doing business. Senior executives are urged to use and explore the Internet and find out for themselves what is going on. Electronic commerce on the Internet is not simply a passing new technology fad. It is a new way of doing business and can mean growth if adopted quickly - or decline if ignored. Executives will also be surprised at the news and information freely available on the Internet, which they might otherwise have paid to get from a consultant. An Internet visit to some of the leading American corporate sites can be instructive - LL Bean, Amazon.com, Campbell Soups, FedEx, DHL, 1-800 Flowers, CDNow, CUC International, Streamline, Virtual Vineyards, Peapod, Auto-by-tel, Jango, Onsale.com, Greet Street, Robert Waxman Cameras and Fragrance Counter. Read other Issues Papers: No.01 - "Combustion with Energy Recovery" No.02 - "Life Cycle Analysis" No.03 - "Managing Packaging Waste in Europe - Lessons for Australia" No.04 - "Waste Management " No.05 - "Litter" No.06 - "Mandatory Deposits" No.07 - "Excessive Packaging" No.08 - "Recycling" No.09 - "Australian Packaging - How Competitive?" No.10 - "The Packaging Council of Australia" No.11 - "Mandatory Minimum Recycled Content" No.12 - "Eco-Labelling" No.13 - "Packaging - Ten Trends for The Next Ten Years" No.14 - "Packaging - It's Essential Role" No.16 - "Single, Active, Post-Materialistic, and Grey?" No.17 - "Digitisation in Printing - Implications for Packaging" No.18 - "Australian Packaging: Issues and Trends"