June 12, 2002, 12:00 AM

Blue skies ahead for online retailing, says new Shop.org study

In 2001, 56% of retailers were profitable online, up from 43% in 2000, says The State of Retailing Online 5.0. Operating margins rose from a net loss of 15% in 2000 to a loss of 6% in 2001. The industry will break even this year.

The online sales channel is becoming more profitable for retailers, reports The State of Retailing Online 5.0, the latest in a series of snapshots of the industry from trade group Shop.org and the Boston Consulting Group.

In 2001, a majority-56%-of retailers reported profitable online operations, up from 43% in 2000. Operating margins rose from a net loss of 15% in 2000 to a loss of 6% in 2001, the report says. Researchers said they expect the industry as a whole to break even this year.

As they have done with the rest of the web experience, catalog-based retailers continued to have the most success, with positive margins of 6%. Store-based and web-based retailers posted aggregate losses, though both groups showed year-over-year improvement and are trending toward break even, the report says.

Continued strong growth in online buying which will create further efficiencies is one reason that Boston Consulting Group/Shop.org researchers expect the industry to break even this year. Based on market size figures from Forrester Research Inc., The State of Online Retailing report predicts a 41% increase in consumer spending online to $72.1 billion this year.

The State of Retailing Online 5.0 says 2001 sales totaled $51.3 billion. That figure includes $14.1 billion in travel spending and $1.5 billion in event ticket sales. With those numbers subtracted, the Forrester numbers come in only $0.2 billion in variance with the Commerce Department sales numbers released earlier this year: $35.9 billion from the Commerce Department vs. $35.7 billion from Forrester.

Other drivers of improved profitability in 2001 were operational performance improvements in a variety of areas such as increased marketing efficiency, an increase in the number of repeat online buyers and tighter expense control, the report says. Marketing efficiency has increased significantly, with marketing costs per order falling from $20 in 2000 to $12 in 2001 and customer acquisition costs down from $29 in 2000 to $14 in 2001. Repeat buyers now account for 53% of revenue, up from 40% in 2000. Furthermore, conversion rates increased to 3.1% last year from 2.2% the year before.

The report also says online penetration by product category grew last year. Out of 15 categories that researchers studied, sales in seven, including computer hardware and software, books, music and video, toys, and consumer electronics, represented more than 5% of all retail sales for those respective categories with some category penetration as high as 17%.

“Many retailers have achieved scale and made focused investments in infrastructure,” said Michael Silverstein, senior vice president and global leader of Boston Consulting Group’s consumer practice. “2002 is likely to be the beginning of a profitable era in online retailing. Not only will retailers continue to improve marketing effectiveness, but they will also have opportunities to realize efficiencies in the supply chain and product fulfillment. We will also see strong top-line growth, especially from store-based and catalog-based retailers as they take customer relationship management and targeted marketing to the next level of effectiveness.”

The State of Retailing Online 5.0 is based on data from more than 100 retailers who participated in a detailed survey.

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