Internet Purchases by Rural Residents

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1 Spring 2002 Volume 13, Issue 2 Internet Purchases by Rural Residents by Justin Colavito and Norman Walzer 1 The Internet and other telecommunication advances have dramatically changed the way we conduct business and communicate. A National Telecommunications and Information Administration (NTIA) study reported the share of individuals using the Internet rose by a third, from 32.7 percent in December of 1998 to 44.4 percent in August of 2000 (U.S. Department of Commerce 2000, xv). The NTIA reports a 58 percent gain in the number of households with access across America during the same time period (xv). Of major interest, however, is whether this growth in Internet usage is occurring mainly in metropolitan areas or whether rural areas are also establishing greater access to the Internet and communication tools. The NTIA survey reported that access is growing, with 38.9 percent of rural households having Internet access in 2000 compared to only 22.2 percent with access in The NTIA also found, The gap between households in rural areas and households nationwide that access the Internet has narrowed from 4.0 percentage points in 1998 to 2.6 percentage points in 2000 (U.S. Department of Commerce 2000, xv). As Internet usage continues to grow as a way to communicate and conduct business, it is imperative to know how Internet communication has or will affect rural communities and businesses. Potentially, the Internet provides a new avenue for exchange that expands the effects on rural businesses caused by the introduction of mail order catalogs and the ability provided by this option to make purchases in remote areas. Already, many rural businesses face changing demographics directly affecting their shrinking customer base because of population declines and increased competition from discount centers or regional shopping centers. The most recent approach to shopping, the Internet, will almost certainly impact land-based merchants in rural areas even more as Internet facilities evolve and expand. The question is to what extent? This report examines buying patterns of rural residents on the Internet and offers merchants insights into the competition that they may face in the future. The paper touches on the following topics: The shopping habits of rural residents in Illinois are compared with those reported in national studies. This information should provide a broad background regarding basic Internet shopping patterns in rural Illinois. The characteristics of online shoppers in rural Illinois are described based on the 2000 Illinois Rural Life Panel (IRLP) survey conducted by the Illinois Institute for Rural Affairs. Merchants in rural areas can use these patterns to better understand the changing competition. The potential economic implications of online shopping for rural Illinois communities and their local businesses are discussed along with options that rural businesses might take to meet the growing competition. 1 The authors are a M.A. student in Economics who works for the Illinois Institute for Rural Affairs, and director, Illinois Institute for Rural Affairs, Western Illinois University. The authors thank Burton Witthuhn, Nancy Baird, and Carol Harper for their assistance in preparing this report and Paul Thistlethwaite for managing the IRLP survey. 1

2 Comparison of Illinois and U.S. Data The IRLP and NTIA surveys were both conducted in 2000, permitting reasonable time comparisons of Internet use. 2 Internet usage, based on these surveys, is compared in three categories: (1) Internet access at home, (2) Internet use, and (3) online shopping patterns. Internet Access at Home. The NTIA survey reports that 41.5 percent of households across the nation have access to the Internet and that, The percentage of homes with household Internet access registered an impressive 58 percent gain [August 2000] from the 26.2 percent penetration rate in December 1998 (U.S. Department of Commerce 2000, 2). After a 75 percent increase from December 1998, rural households, nationwide, reported a 38.9 percent Internet access rate (xv). Access to the Internet is important for several reasons. High-speed Internet access in rural areas can promote economic development by providing opportunities for residents to shop with companies located throughout the world for merchandise delivery to their door. In some cases, however, this increased external competition may reduce the markets for local retail stores. An understanding of Internet uses and online purchasing patterns is needed to better understand these competitive impacts. Internet Uses. is the most common activity conducted online (79.9 percent of Internet users) according to the NTIA survey (Figure 1). Online searches for information ranked second, with 58.8 percent of Internet users, and checking the news ranked third with 43.2 percent (U.S. Department of Commerce 2000, 48). Figure 1. Online Activities of Internet Users Shop and Pay Bills Checking the News Online Searches Percent Source: U.S. Department of Commerce Although only 30 percent of online users shopped or paid bills online, this usage demonstrated the largest activity increase (U.S. Department of Commerce 2000). Online shopping and bill payment will almost certainly increase as businesses encourage customers to take advantage of this option and as Internet sites become more secure with respect to information sharing. At question, however, is whether the online shopping trend increases reported throughout the nation also hold true for rural Illinois? Information for making this comparison was provided through IRLP data. The characteristics of rural Illinois residents who participated in the survey are important for analyzing the information presented later regarding usage, shopping patterns, and other issues (Table 1). Table 1. Characteristics of IRLP Panelists Variable Frequency Valid Percent Gender Female Male Age Under to and older Gross Household Income Less than $15, $15,000 to $24, $25,000 to $34, $35,000 to $49, $50,000 to $74, $75,000 to $99, $100,000 or more Education Level Less than a high school degree High school degree/ged Some college, no degree Associate s degree Bachelor s degree Some graduate work Graduate degree Approximate Size of Closest Community , ,500-2, ,500-4, ,000-9, ,000 or more Internet Access at Home Yes No Internet Access at Work Yes No Online Purchase No Yes The 2000 IRLP Survey has 1,510 responses from 5,074 Illinois residents (31 percent response rate); the NTIA study uses the Census Bureau s supplement of approximately 48,000 households. 2

3 Overall, 27.6 percent of the respondents lived in or near a city of 10,000 or larger. Respondents clearly use the Internet both at work and in their homes, with approximately 72 percent of residents reporting access at home and 65.5 percent reporting access in the workplace. The work response, obviously, is partly determined by occupation and whether the Internet is needed or suitable to perform their jobs. Rural residents in Illinois rank above the national percentage for rural household Internet access (72.1 percent) when compared with the NTIA s results (38.9 percent). Even after narrowing the comparison to residents living in or near a community with a population of less than 2,500 and residents who live in the country, the comparisons still show rural Illinois with greater access than rural areas nationwide 67 and 64 percent, respectively. Among users in Illinois, also ranked highest with approximately 82 percent of respondents reporting this use. Similar to the NTIA s findings, approximately 30 percent of Illinois respondents use the Internet for online shopping. Differences in the way the questions were stated complicate comparisons of other Internet uses, however. Nevertheless, the similarities in and shopping use among the two surveys suggest that Illinois is consistent with the rest of the nation. increasing 30 percent during the previous three years (Figure 2); however, 54 percent of Illinois respondents reported no online purchases during the three previous years. These comparisons are partly affected by growth in Internet facilities and access. Overall, the results show relatively strong increases in Internet use. As the Internet access expands and people begin to use it more frequently in their everyday life, what online purchasing trends can be expected? An explanation of current characteristics of the online consumer population are reviewed to help understand Internet consumers in order to take appropriate steps to sustain local businesses. Figure 2. Percent Change in Internet Purchases Over the Last Three Years Remain the Same 15% Increased 30% Decreased 1% Did Not Purchase 54% The NTIA survey also reported that, as a nation, online shopping increased 58 percent from December of 1998 to August IRLP respondents reported online purchases Online Shopping Characteristics Who purchases online? To better understand changing markets, businesses must know the characteristics of online purchasers and their purchasing behaviors (Table 2). A Crosstab Chi-Square analysis was used to test for a significant relationship between online purchasers and several surveyed characteristics of these consumers. Characteristics found to be significantly associated with online purchases (5 percent confidence level) were employment status and attitude about how their financial situation has changed over the past year. The approximate size of the community or closest community, type of area, age category, and Internet access at home were significant at the 1 percent level. Internet access at home, approximate size of community, and attitude towards changing financial situation suggests a positive relationship with online purchases; however, employment status, type of area, and age category suggests a negative relationship with online shopping. Income was not significantly related to whether a person made an online purchase, according to the IRLP data. Initially, this finding was unexpected; however, Comor (2000) states that, Income and purchasing power are general factors shaping the capacities of individuals to expand consumption activities and/or shift their spending away from brick-and-mortar to virtual shops (109). 3

4 Table 2. Percentage of Panelists Responding to Making a Purchase Online Online Purchase Pct. Answered Pct. Answered Characteristics Yes No Significance Approximate Size of Closest Community (n=1,481).000** 1-2, ,500-9, ,000 or more Type of Area (n=1,479).009** In the country, not on a farm On a farm In a rural subdivision In a town/city Other Employment Status (n=1,509).011* Unemployed Retired Student Homemaker Employed part-time Employed full-time Age Category (n=1,463).000** Under 40 years old to 64 years old years and older Financial Condition Today Compared to a Year Ago (n=1,474).012* Much worse Worse Remained the same Better Much better Internet Access at Home (n=697).003** Yes No * Significant at.05 level ** Significant at.01 level In addition, education level was barely significant (10 percent). As the digital divide continues to decrease among urban and rural areas, could the importance of education and income characteristics be blurring as well? Michael Weiss (2001) comments on a study of Internet users conducted by ZDNet: Their [Internet users] average education 38 percent hold a college degree is falling. Likewise, their socioeconomic status is sinking thanks to the fastest-growing segment of Web newbies: Americans over 55 years old with working-class incomes and middlebrow tastes. The newest generation of connected Americans looks increasingly like the folks who cruise your local Wal-Mart. (54) Thus, public initiatives to bring increased Internet access to Americans, regardless of income, education, and age, may have reduced the importance of these characteristics in explaining purchasing patterns. This increase in access may be partially responsible for slowly eroding prior income, education, or age divisions in online shopping and may explain why income and education are not significantly related. In the future, predicting potential online customers using variables such as income, education, and age may be more difficult. Nonetheless, the current findings within rural Illinois suggest that proximity to larger communities, better financial situation, and online access to the Internet increase the likelihood of consumers purchasing online. The data clearly show that older residents make fewer online purchases. Thirty-nine percent of IRLP respondents younger than 40-years-old made an online purchase compared to only 14.4 percent of the 65 and older group. This older group may be less receptive to change, having more established tastes and preferences or may not know how to access the Internet as much as younger groups. For example, persons over 65 may be more comfortable with personally viewing an item before purchasing it. Other explanations are also possible. For instance, a significant relationship between age and perceived financial situation was also found (1 percent). When IRLP respondents reported how their financial situations changed during the previous year, younger respondents were more positive. Specifically, 47.6 percent of the Under 40 age category compared with only 16.8 percent of the 65 and older category responded that they were Better or Much Better off; therefore, the 65 and older respondents may have been less likely to purchase online than others because of their perceived financial situations. In some ways, employment status provides an unexpected relationship. Homemakers and part-time employees more often made an online purchase than full-time employees. The amount of leisure time may be a factor in conducting an online purchase (Comor 2000). Scouring websites for information to make an informed decision before finally purchasing an item takes time, which is more readily available to someone with a flexible schedule. Also, those individuals working full-time may find it more convenient to shop before or after work at sites close to their employment. 4

5 Understanding Online Consumers Knowing the reasons for choosing online shopping over traditional land-based purchasing can help in understanding how these decisions are made. Convenience, increased product information, better selections, and better prices are all possible explanations for making online purchases (Windham and Orton 2000). Brynjolfsson and Smith report, that prices on the Internet are significantly lower (9 to 16 percent less) than prices for identical goods in conventional outlets... [and], depending on the measure used for price dispersion, the variance in prices is lower on the Internet than in conventional markets (Wiseman 2000, 45). Conversely, Bailey in a study involving purchases of books, compact discs, and software found higher prices online than in traditional stores; however, Bailey s study was conducted in whereas Brynjolfsson and Smith s study was conducted in using different research methodologies (Brynjolfsson and Kahin 2000). The main difference between Bailey s methodology and Brynjolfsson and Smith s was that Bailey was unable to confirm that the offline prices attained actually coincided with the actual prices of the offline respective retailer, whereas Brynjolfsson and Smith randomly selected offline retailers from across the country and verified the prices of the conventional retailers (Wiseman 2000). Potentially, Bailey s results differ from Brynjolfsson and Smith s not only due to different methodologies, but also due to the time that they were conducted. Through time, as the online market matures and becomes more efficient, prices may converge and remove some of the differences between the Brynjolfsson and Smith findings and those of Bailey. While the time disparity between the two studies was relatively short, this may indicate that the online market is quickly maturing. Regardless, if consumers find increased product selection, better information, and convenience on the Internet, then small differences in nominal price may become less important. How exactly do online purchases affect other channels of purchasing goods? Does an online consumer represent one less traditional consumer who bought from a bookstore or are mail-order catalog sales affected more? The answer is not yet clear and will become even more difficult to determine as more and more catalog sellers go online. Merryll Lynch & Co. claims that Internet sales will be more of a detriment to catalog sales for several reasons (Welanetz 1999). First, catalog consumers are already acclimated to purchasing without actually being physically present to make the purchase. Second, catalog consumers may be more willing to provide personal information such as a credit card or address to someone they cannot see than traditional customers. In these cases, the transition from a mail-order catalog to an online catalog could be relatively easy. What are the implications for land-based stores? In the IRLP survey, specialty items, books, and computer software products were the most frequently purchased items (Figure 3). Conversely, food items, drugs, and tools are purchased least online. Purchasing items such as food may be easier than locating a software title in a remote rural area. Future research on the availability of these services in rural areas may aid in explaining specific shopping patterns. With food items, drugs, and tools being the least purchased items online, and generally more available in remote areas, access to goods may be a force driving residents in rural areas to purchase online. So why do consumers purchase certain items more frequently than others online? One explanation for consumers purchases could be that consumers realize that little or no variation in service exists between a compact disc regardless of where it is purchased. Also, Brynjolfsson and Smith reported that certain products were less expensive online, which provides another incentive (Wiseman 2000). In rural areas, more specialized products may be less readily available especially in small towns; this causes consumers to turn to the Internet to save transport costs and possibly avoid interstate taxes. Figure 3. Internet Purchases in the Last Six Months Specialty Items 19 Books 18 Computer Software 14 CD 13 Computer Equipment 12 Airline Tickets 11 Entertainment 10 Clothes 9 Tools 4 Drugs 4 Food Items Percent 5

6 Table 3. Percentage of Respondents Answering Yes to Internet Purchases by Age, Gender, and Education Age Category Gender Education Level Percent Percent Percent Online Category of Good/Service Under and Older Female Airline Tickets * Books ** ** Compact Discs * Clothing ** ** Computing Equipment Computer Software Drugs Entertainment ** * Food Speciality Items ** Tools * Significant at.05 level ** Significant at.01 level Analysis by Crosstab Chi-Square for IRLP Survey, Spring Male High School Degree or GED Some College, No Degree Associate s Degree Bachelor s Degree Some Graduate Work Graduate Degree Subdividing the IRLP data further into types of purchases by age, gender, and education bolsters the argument that consumers purchase items with which they require little direct contact. For example, younger age groups more often purchase books, compact discs, clothes, entertainment, and specialty items online than do older respondents (Table 3). Males, more often than females, purchase airline tickets and entertainment online. Gender, however, is not significant between other categories of purchases. Finally, the more education respondents have, the more likely they seem ready to purchase books online; whereas shopping for clothes online occurs more often with respondents holding a bachelor s degree or having completed some graduate work. Other types of purchases, such as clothes, may require more physical contact before making a purchase decision. Traditional businesses may be able to attract consumers back to the downtown knowing this information. Income differences do not seem to be very important in the decisions by consumers to shop on land or online. Other researchers have identified reasons why people do not shop online, including but not limited to, security, privacy, lack of access, and lack of the personal contact. According to the Pulse of the Customer, a survey of people who shopped online, 44 percent cited the inability to see, touch, and smell as a reason for not purchasing online (Windham and Orton 2000). Security and privacy were also cited as reasons, with 34 percent and 32 percent responding, respectively. These considerations, among others, can be important as rural businesses try to attract more consumers back to their stores. For example, land-based stores may want to stress the personal aspects of their business and make customers feel important and valued rather than simply an unknown buyer. Rural stores can use the Internet to sell to other customers comfortable with this type of purchase but they may have to overcome competition from larger stores that have lower prices. They may be able to participate in a buying cooperative that allows them to access a much larger range of merchandise that can be provided by mail. For example, the Northern Colorado Internet Cooperative ( states its goal is to encourage businesses to utilize the Internet s benefits by primarily providing cheaper access. Rural stores may want to consider implementing a similar strategy to aid in providing Internet services for less and at the same time developing their market base past the confines of their town. 6

7 Conclusions and Suggestions Several conclusions result from the data. First, potential online purchasers must have easy access to the Internet. This access is likely to increase in the future. Second, currently, online purchasers are younger; however, as these consumers grow older, age may become less important as a factor in purchasing online. Residents in larger towns are more likely to shop online, but this may relate to better access to the Internet. In addition, online consumers tend to purchase items with little need for differentiation as compared with items that require personal inspection or contact. Differences in education and income seem to be less important factors for separating online consumers from traditional customers but this may reflect an even greater access to the Internet by the average American. The growth of e-commerce may cause businesses in rural areas to feel threatened by competition from global online businesses. This perceived competition is in addition to discount stores, catalog sales, and other approaches. Continued population declines in some rural areas certainly have increased the pressures on rural merchants to maintain a customer base. If the Internet continues to expand into rural areas as expected, is there great cause for concern? According to Windham and Orton (2000), We don t believe that the Internet as a whole will put retail stores, as a category, out of business, just as direct-mail catalogs didn t put retail stores out of business (155). Businesses should not view anyone with access to the Internet as a potential e-consumer or as a loss to a traditional method of purchasing (Reilly 1997). Even so, rural businesses must proactively find ways to diversify their businesses to minimize competition from e-commerce or to possibly use the Web to expand their market share. One suggestion is that rural area retailers work together to implement a regional e-commerce website. This could reduce the strain on merchants in starting their own Web presence and, at the same time, increase their market potential. Traditional stores may also find it necessary to evaluate what attracts people to make purchases at land-based stores in order to offer what online stores cannot. For example, land-based stores still offer personal contact, assistance in making selections, and special services. Windham and Orton (2000) concur: Retail storefronts continue to serve a distinct purpose in the lives of consumers. This is particularly true for high involvement items that require demonstration and service products that consumers feel require a tactile experience such as clothing, furniture, fragrances, and food. (155) Obviously, determining the net effect of online purchasing on rural area businesses is complex and difficult because e-commerce is in its early stages. Many factors play a role and are changing as technology advances. Rural area businesses, developers, and policymakers during the next several years must monitor the effects of online competition on their respective markets. Rural communities, educational institutions, and businesses may have to work together to assess the impact of e- commerce and develop a plan to help local businesses find a market niche. Local areas may be able to compete with specialty or niche goods, but business leaders may need help in accessing these new markets. Many more Americans are likely to purchase online in the future as the consumer base and technology expands. Wireless e-commerce is one of the next revolutions for Internet shoppers, adding accessibility to an already convenient online method of shopping. In rural areas especially, businesses must market their advantages. Planning, marketing, and implementation of new techniques to retain or lure customers back must be undertaken, not only to meet increased competition, but to maintain a vibrant economy and high quality of life. 7

8 References Brynjolfsson, Erik, and Brian Kahin, eds Understanding the digital economy: Data, tools, and research. Cambridge: MIT Press. Comor, Edward Household consumption on the Internet: Income, time, and institutional contradictions. Journal of Economic Issues (March): Kish, Andy Internet sales. Economy.com s Dismal Scientist. Available online: < Downloaded: August Northern Colorado Internet Cooperative website. Available online: < Reilly, Barbara Electronic commerce for sale. Forbes (September 22). U.S. Department of Commerce, National Telecommunications and Information Administration Falling through the net, toward digital inclusion. Washington, DC: U.S. Department of Commerce. Weiss, Michael Online America. American Demographics (March): Welanetz, Robert The threat of virtual retail. Mortgage Banking (September): Windham, Laurie, and Ken Orton The soul of the new consumer: The attitudes, behaviors, and preferences of E-customers. New York: Allworth. Wiseman, Alan E The Internet economy: Access, taxes, and market structure. Washington, DC: Brookings Press. The Rural Research Report is a series published by the Illinois Institute for Rural Affairs to provide brief updates on research projects conducted by the Institute. Rural Research Reports are peer-reviewed and distributed to public officials, libraries, and professional associations involved with specific policy issues. Printed on recycled paper Illinois Institute for Rural Affairs Stipes Hall 518 Western Illinois University 1 University Circle Macomb, IL NONPROFIT U.S. Postage PAID Macomb, IL PERMIT No. 489