Business-to-consumer e-commerce in the United States and Canada is booming as the Internet attracts more mass-market consumers, says a new study by the Boston Consulting Group and online retail trade body Shop.org.
Online retail revenues in 1999 were up 120 percent to $33.1 billion, accounting for 1.4 percent of all retail sales, according to “The State of Online Retailing 3.0” study that surveyed and collected hard data on 412 online retailers in North America.
Despite the froth in the financial market over the past several months, online retail revenue this year is projected to grow 85 percent to $61 billion, said David Pecaut, senior vice president and global co-leader of BCG’s e-commerce practice in Toronto.
“The behavior of the online retailing market is much more like the movement of tectonic plates in the earth’s crust,” Pecaut said, “which is to say that lots of things can be going on the surface but underneath the crust it’s actually continuing to move at a pretty steady and aggressive rate.”
In addition to the $33.1 billion spent by consumers at these retail sites, businesses spent another $13 billion on computer software, travel and office supplies.
BCG attributed last year's surge of business-to-consumer e-commerce to a number of factors, including the growing number of women going online, the Internet’s rising popularity with less tech-savvy consumers and offline retailers' ramping up their online presence.
The growth of new business models, such as auctions and buying groups, and direct-to-consumer manufacturers and distributors were also responsible for burgeoning consumer e-commerce. In all, BCG estimates these new players accounted for over 35 percent of all products sold online last year.
An interesting finding of this study was the increased pay-off for online retailers who attempted to improve the end-to-end customer experience.
BCG found that the order conversion rate — the number of orders divided by the number of visitors — rose to 1.8 percent last year from 1.5 percent in 1998. Similarly, the buyer conversion rate in 1999 grew to 3.2 percent from 2.8 percent in the year before.
Improvement in these key performance metrics helped some online retailers become profitable, the study said.
Still, inefficiencies in the shopping and checkout processes are high: An estimated 65 percent of online shopping carts were abandoned before the final transaction took place, resulting in substantial lost sales.
This loss becomes even more critical in the light of rising customer acquisition costs last year, when the grab for market share among online retailers escalated and the chasm between multichannel and Internet-only retailers grew. On the whole, customer acquisition costs rose 15 percent in 1999 to $38 per customer.
BCG’s Pecaut said a big part of this increase was due to Internet-only retailers, who paid $82 to acquire a customer. Bricks-and-mortar retailers with online operations paid only $12 to acquire an Internet customer.
The difference between the two types of retailers grew this past holiday shopping season when Internet-only customers were forced to spend $108 per customer in advertising and marketing costs.
“The multichannel players, in the case of catalogers, have lower distribution costs because they’ve already built the infrastructure,” Pecaut said.
On the fulfillment issue, catalog-based retailers retain their natural advantage over Internet-only and store-based marketers. Catalogers’ fulfillment costs are 18 percent lower than Internet-only companies and 43 percent cheaper than store-based retailers.
Catalogers also have the best on-time shipping rate at 91 percent, the BCG study said. Internet-only and store-based retailers were a tad lower at 86 percent.
In yet another boost for catalogers with online operations, they were found the most responsive among Internet retailers. BCG said catalogers shipped merchandise an average of 1.5 days after taking an order. Internet-only retailers took 1.8 days and store-based retailers 1.9 days.
“The thing that comes through this work very clearly is that the traditional retail industry continues to make a comeback in the online space as a number of [bricks-and-mortar] retailers either leverage their distribution assets, their customer bases or the fact that they can acquire customers at a much lower cost,” Pecaut said.
Manufacturers Bent on Competing With Retailers
A key interesting finding of the Boston Consulting Group and Shop.org joint effort — the third year in a row — was the role of manufacturers in selling directly to consumers on the Internet.
Manufacturer-owned retail Web sites last year accounted for an estimated $3.3 billion, or about 10 percent of all online retail sales, according to the report’s findings.
Although there have been instances in which big-box retailers like Home Depot have threatened not to carry manufacturers’ products if they sell direct-to-consumers online, such arm-twisting may not work in all cases.
Not all manufacturers will follow Levi Strauss & Co.’s pullout from the online retail market, said David Pecaut, co-head of BCG’s e-commerce practice.
“The reality is that the vast majority of those [manufacturers] out there indicate they’re continuing to push ahead,” Pecaut said, “and that they realize there’s some channel conflict. But they’re either testing the waters with special products that aren’t available in the normal retail channels or they’re trying to partner with their existing retail channels. So there’s a huge amount of experimentation going on but not an overall pulling back. In fact, it’s a pretty hard push forward by direct-selling manufacturers.”