Outlook: Competition Will Carve Into E-Commerce Growth

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E-commerce remains the fastest-growing retail category, spurred by consumer desire for convenience, comparison and incentives as well as deeper broadband penetration. There's no reason to believe that 2006 will not improve upon last year's performance. Get a sense of the market in DM News executive editor Mickey Alam Khan's interview with Heather Dougherty, New York-based senior retail analyst at Nielsen//NetRatings.


MAK What's the outlook for e-commerce for the rest of 2006?


HD Based upon the strong holiday season of 2005, online retailers have good reason to be optimistic. There are large numbers of experienced online buyers with increased comfort levels driving sales across various product categories. These buyers tend to have broadband access and a higher household income, thus higher amounts of discretionary purchasing power.


New buyers also provide an additional opportunity, particularly as younger online users become old enough to make online purchases with their own credit and debit cards.


The growing number of women making purchases online will represent the greatest opportunity in 2006 as the primary spender in the household, and they continue to shift more dollars online.


MAK How much do you estimate was transacted via holiday e-commerce last year?


HD In the 2005 holiday season, consumers spent $30.1 billion online, excluding travel. That's a 30 percent increase over the last season's $23 billion. The 30 percent growth rate surpassed 2004's 25 percent, exhibiting greater expansion in the online retail sector.


Thanks to the popularity of gadgets such as the iPod, low-priced PCs and cell phones, the consumer electronics and computer hardware products categories were the big winners of the season. They reached combined online sales of $9.6 billion, representing 32 percent of all online holiday sales, excluding travel. Apparel followed, capturing $5.3 billion in online sales, representing 18 percent.


MAK So what's the consumer saying?


HD Consumers continue to seek convenience, and buying online can help them save time by finding product information, availability and, oftentimes, save money. It is critical for retailers to offer a site that is easy to use and allows a self-sufficient experience for the customer.


Additionally, offerings fairly unique to the Internet, such as customization, are also becoming popular with consumers as more and more products become available.


MAK What should retailers expect? Will the growth sustain?


HD Of course, double-digit growth is going to be impossible to sustain forever, and competition will grow as retailers fight for share of the consumer's wallet. However, online retailers continue to add functionality and enhancements to their Web sites, particularly among the multichannel retailers that are improving the integration across channels.


Offerings such as in-store pickup of online purchases still are available only from a few retailers, yet provide an opportunity to drive incremental revenues when customers come to the stores for their orders.


MAK You must have some more concerns?


HD Competition will continue to increase as many retailers leverage their relationships with the customer to expand into new product categories. Many retailers will seek to increase their share of the customer's wallet to drive revenues but should do so cautiously and expand only into areas that add to their core value proposition.


MAK There are renewed attempts to tax e-commerce transactions in the manner of store-based orders. Will this affect e-commerce's growth? And will these efforts to tax - backed even by the National Retail Federation - succeed?


HD States will continue to push for the taxation of Internet sales as they watch revenues grow but receive only a small percentage of tax dollars. It is fairly unlikely that the taxation of online orders will affect the continued growth of e-commerce.


This topic has been hotly debated for several years based upon concerns over consumer sticker shock at the final checkout page, but certainly now buyers enjoy the convenience and product selection available through shopping online. Adding tax will not be a major issue in the long run.


MAK What's the biggest opportunity with e-commerce this year?


HG Targeting women will be a large opportunity this year as they continue to become a more powerful force in online buying. We already see growth in female-dominated product categories such as apparel, home and garden, jewelry, and health and beauty. Similarly, targeting of ethnic groups with multilingual sites will continue to offer new sales opportunities.


MAK Walmart.com was the dark horse last year. What's with its popularity?


HG Walmart.com has been very aggressive in the past year in terms of product selection and price, which certainly will draw customers to their site. Services such as the digital photo center will help drive repeat visits to the site as well as traffic into Wal-Mart stores, which will improve customer awareness of their increased product selection and drive additional sales both online and off.


MAK Any other retailers we should expect to shine this year?


HG Specialty retailers should do well online as search marketing continues to help consumers learn about a broader variety of products and brands. Many online buyers are beginning the shopping process with a search engine, portal or comparison-shopping site simply to discover what is out there.


A strong competitive advantage for specialty retailers is to offer depth and breadth of selection coupled with specialized product knowledge. Satisfaction among the customers of specialty retailers tends to be higher because customers perceive the experience better. The ability to focus on one or two product categories lets the retailer provide a more direct shopping experience that yields more targeted results.


MAK Apparel was one of the top-selling categories over holiday season. Does this prove anything?


HG The popularity of purchasing apparel online showcases that the tactile experience is not always necessary. Consumers have many preferred apparel brands with which they are familiar and have an existing set of expectations from those specific brands - quality, fit and style - which allow them to be less risk-averse and purchase online.


For multichannel retailers with a physical presence, the risk of purchasing online is diminished further by the ability to return online purchases to stores. Any online retailer without a store will need to facilitate simple product returns for their customer base and communicate this level of ease to establish and maintain a comfort level with online apparel purchases.


MAK Which categories are now more established online than offline? How will that affect retailers?


HG Technology-driven categories tend to be more established online thanks to the early adopters who are more tenured buyers. Categories such as computer hardware and consumer electronics have matured at a faster rate than other product categories because of the ease of which information can be gathered and compared online.


Books, music and DVD/video are also strong online categories due to low price points and broader selections than can be found offline. These products also tend to be among the first purchases for many online buyers and help build online purchasing experience.


MAK Which tactics work best online? Should retailers try any new ones this year?


HG With multichannel retailers, integration among channels should be the top priority to offer a consistent experience for all interactions. Customers view the company as one brand and expect all information to be shared and accessible.


When looking across all of e-commerce, on-time delivery is one of the best tactics to drive customer retention. This may seem simple, but managing customer expectations for delivery drives satisfaction. One point is that the particular order may be the final interaction with the customer for an extended period of time, so it needs to be a good one.


MAK We didn't hear much on the merchandising front last year. Should more attention be paid this year?


HG Online merchandising should continue to improve as broadband penetration continues to grow. Retailers can greatly improve their product presentation as bandwidth concerns become a lesser issue, allowing the retailers to use higher-resolution graphics and introduce additional functionality such as panning, zooming and multiple views of the product. Providing as much detail on the product as possible - photos, descriptions - will help make the consumer far less averse to purchasing online.


MAKThe bricks-and-mortar channel is rapidly losing share to online. This doesn't necessarily mean incremental e-commerce growth, but simply channel shift, right? Is this a zero-sum game?


HG In 2005, the online channel represented 5.5 percent of all non-travel retail sales, so there still is room for growth in e-commerce as sales shift across channels. In some respects, channel shift does represent a zero-sum game as dollars simply move into other channels.


Many multichannel retailers have been successful in transitioning sales from their customers from the bricks-and-mortar stores to the online channel, which does keep the revenue with that retailer rather than a competitor. However, new products are constantly being released, which can drive up consumer spending and increase sales overall, driving growth in the entire retail market.


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