Study: E-Tailing No Longer in the Red

Online sales climbed 48 percent to $76 billion last year, according to estimates from a Forrester Research Inc. study for the National Retail Federation's e-commerce division.

Even more encouraging, 70 percent of the 130-odd retailers surveyed reported positive operating margins for their online arms, compared with 56 percent in 2001. Overall, the retailers claimed online sales reached break-even last year, from a loss of 6 percent in 2001.

“The online channel is mirroring the mass population, and I think there's just a growing acceptance and a growing usage of consumers online,” said Elaine Rubin, chairwoman of and a consultant to Inc., Westbury, NY.

The State of Retailing Online 6.0 study comes as the retail industry is reeling from poor sales attributed to fears of terrorism, the Iraq war, high unemployment, atypical weather and a weak stock market. Consequently, any jump in a retail sector is welcome for retail executives under pressure to perform.

Of course, it has to be noted that online retail still accounted for only 3.6 percent of all multichannel business-to-consumer sales. This year, the Internet is projected to account for 4.5 percent of all retail sales.

Helping this ferocious pace of growth is the increasing trust of the American shopper. While the catalog industry took roughly a century to account for 4.7 percent of total retail sales, it will take e-commerce less than one-tenth of that time to reach that goal.

According to Forrester, Cambridge, MA, online retail sales are projected to grow 26 percent this year to $96 billion. Seven product categories are to grow at 40 percent.

It is just a matter of time before the Internet becomes the province of some categories. Thirty-two percent of all computer hardware and software last year was sold online, 17 percent of tickets for events and 12 percent of all books. Nine categories will exceed 5 percent Internet penetration this year, versus seven categories in 2002.

But online retailers still face many challenges. Marketing and fulfillment budgets have been slashed. Hence, online divisions had to work harder with less allocation last year.

“2002 was really the year of cost-cutting and focus on profitability,” Rubin said.

Portal deals making way for performance-based affiliate marketing and search engine optimization linked with keyword buys helped cut marketing costs per order last year to $8, from $12 in 2001. The comparable cost per store-based order is $5 and catalog $7, so online retail still has catching up to do. In fact, Internet-only retailers had the highest marketing costs at $10 per order.

One trend is the investment in technology to improve multichannel customer experience. Similarly, messaging is increasingly consistent across the store, catalog, phone, television and online channels.

The study found that 63 percent of the surveyed retailers upgraded inventory management systems for supply chain optimization, and 78 percent accept in-store returns of Internet purchases.

Nearly all of the retailers track customer behavior with their brand. These multichannel retailers have found that 46 percent of their online customers buy offline. Conversely, 17 percent of their offline customers buy online.

Acquitting itself even further, the Internet channel is said to influence 15 percent of the surveyed retailers' offline sales.

Rubin expects retailers this year to boost tactics related to merchandising, cross-selling, upselling and personalization.

“They need to focus on retention and loyalty,” she said. “Not that acquisition is not important, but for years it was all about acquisition and there was little about retention and loyalty.”

Retailers equally need to be vigilant about a few alarming discoveries in the study. Conversion rate aggregated was 3.2 percent last year, barely inching up from 3.1 percent in 2001. More worryingly, the shopping cart abandonment rate rose from 47 percent in 2001 to 49 percent in 2002.

One reason for this could be that the cart is being used as a placeholder or for comparison-shopping purposes and research. Some consumers may want to tally shipping and tax costs, which often are disclosed at the closing transactional pages. And some simply may not have enough orders to qualify for free shipping, hence the jettisoning.

Perhaps retailers need to return to basics.

“We've been focused so much on reducing marketing costs for operational efficiencies that I think there's not been as much focus on the Web site, site usability and the experience for the customer,” Rubin said.

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