Study: Online Sales Up 21% in 2001

The U.S. online retail market will grow 41 percent to $72.1 billion in 2002 after sales rose 21 percent to $51.3 billion in 2001, according to Boston Consulting Group's fifth annual study for

Online sales of computer hardware and software, books, music and video, toys and consumer electronics each accounted for more than 5 percent of all retail sales in those categories in 2001.

Computer hardware and software recorded 18 percent penetration last year, with 23 percent projected for this year. For books last year, it was 11.1 percent; music and video, 7 percent; travel, 6.3 percent; toys, 6.1 percent; and consumer electronics, 5.3 percent.

“Several of the leading categories online have a very low fulfillment cost relative to the size of the purchase,” said Peter Stanger, the Toronto-based BCG vice president who spearheaded “The State of Retailing Online 5.0.”

Consumer adoption of the retail channel helped maintain this steady clip despite a sluggish economy last year.

“It's clearly becoming a mass market at this point,” said Elaine Rubin, partner at New York consultancy Retail Options and chairman of, a trade body of 200 online retailers that is owned by the National Retail Federation, Washington, DC.

BCG's study for New York-based polled 100 retailers across classes like mass merchandisers, specialty retail, department stores and buying clubs. Forrester Research Inc., a Cambridge, MA, technology consultancy, provided the market-sizing information.

The study found that the U.S. online retail market improved in profitability from minus 15 percent gross margins to minus 6 percent overall. And 56 percent of retailers reported profitable online operations last year, up from 43 percent in 2000.

Discounting online continues, whether in shipping or on the products, but there is no visible shift. Fixed price remains the most preferred pricing mechanism, though retailers increasingly are using venues like auction site eBay for sales of new products.

Still, online retail, which accounted for only 2.4 percent of sales across all U.S. retail channels and is projected to touch 3.2 percent this year, is not out of the woods.

According to the study, Web-based retailers — those whose primary channel is the Internet — remain the least profitable. Store-based retailers have 8 percent higher margins and catalog-based retailers 19 percent more than their Web-based counterparts as an aggregate.

“We think 2002 is going to be a year where the industry overall is at a break-even,” Rubin said. “The common belief is that all Web-based companies are unprofitable, but 56 percent of participating Web-based companies showed a profitable operation.”

Progress is being made. Flowers, cards and gift sales online are nearing the 5 percent level.

Higher sales accompanied by better marketing efficiencies lowered marketing costs per order to $12 in 2001, the report said. In 2000, it was $20. Customer acquisition costs were down last year to $14 from $29 in 2000.

Surveyed retailers said they found affiliates, search engine optimization, house e-mails and online promotions worked best as acquisition tools.

“Going back a couple of years, it was banners and portals,” Rubin said.

Stanger and Rubin agreed that customer relationship management would be the next big challenge for retailers. Tracking customer behavior and transactions across all channels will be paramount if retention efforts are to succeed.

According to the study, repeat buyers account for 53 percent of all 2001 sales on the Internet, an improvement from 40 percent in 2000.

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