September 3, 2002, 12:00 AM

A new burst of online shopping

Seven years after the start of the e-retailing phenomenon, retailers are getting smarter about using online and offline retailing techniques. The result: higher growth rates in online shopping this year when everyone had expected growth to level.

Since the end of the dot-com frenzy, growth rates in online retailing have not been receiving the attention they once did. And in fact, in the middle of last year, it almost appeared as if the online retailing revolution was running out of steam. Online sales fell from quarter to quarter for three quarters, according to the U.S. Commerce Department, the first time the industry experienced declining quarters, apart from the expected Q4 2000 to Q1 2001 drop.

But the anemic quarter-to-quarter growth last year masked ongoing year-to-year growth. Last year was surprisingly strong, the Commerce Department reported in a revision to its e-commerce retail sales numbers in May, finishing 24% higher than the year before. And now this year is shaping up to be even better.

Two major research organizations report robust growth in the first half and say they expect growth to stay strong through the end of the year. ComScore Networks Inc. says online buying grew 29% in the first half to $19.8 billion from the first half of 2001. BizRate.com Inc. says it grew 45.8% to $23.52 billion. “The faster growth is all the more remarkable on a bigger base of sales,” says Chuck Davis, CEO of BizRate.com, who projects the first half’s growth rate to carry over to the second half. “To have 45% growth in the seventh year of e-commerce is remarkable, especially when the prior year’s growth was 24%.”

Anecdotal evidence backs up the research. Be Free Inc., for instance, which manages affiliate relationships for online retailers, says most sectors it monitors have experienced growth of at least 25% over last year. “The first couple of years we weren’t surprised by the growth because the Internet was new and so you’d expect that,” says Jonathan Kapplow, corporate marketing manager for cataloger and web merchant Hanover Direct Inc. “But this year, we’re an established Internet player and so we thought that growth wouldn’t happen again. But it did.”

Hanover Direct, which markets under the Domestications, Company Store, Silhouettes, International Male, Undergear, Clearance World and Gump’s brands, is expecting web sales to grow 33% this year to about $90 million and account for 20% of revenue, up from 15.5% last year. “We’re seeing an acceleration this year,” Kapplow says.

And Hanover Direct is not alone. Drugstore.com Inc.’s sales are up 37% in the first half to $91.55 million. eBags.com’s sales are up 37.5% in the first half. Office Depot Inc.’s web sales are up 37% worldwide in the first half to $987 million. A number of companies reported other levels of growth that don’t match the 30% to 40% that some reported but that nonetheless are significant. Among them: J. Crew Group Inc., where web sales are up 22% in the first half to $56.5 million, Amazon.com Inc., where sales grew 21% in the first half to $1.65 billion, and Barnes & Noble.com, where sales in the second quarter grew 25.3%. “This is double-hump growth,” Davis says. “Very rarely do you see an industry with massive growth, a maturation, then re-acceleration.”

Many reasons

While some of these companies were leaders in growth last year as well-Office Depot’s web sales were up 74% in last year’s first half, for instance-they are joined by many smaller companies who also are experiencing rapid growth, such Oriental Trading Co., where web sales are up 50% this year, as well as by start-ups, such as Flavor Bouquet Co., which started selling online at FlavorBouquet.com last September and whose sales are growing 90-200% month to month. “Everyone’s shopping online these days,” says Pamela Jackson, president of Flavor Bouquet, which sells gourmet candy and cookies in floral-type arrangements.

Retailers and analysts point to a string of reasons that Internet shopping is growing so strongly this year. It’s partly the result of more people coming online and having positive experiences. It’s also partly due to e-retailers getting smarter about targeting their marketing through affiliate networks and e-mail campaigns and displaying their URL on every page of their catalogs. In addition, web sites are adopting the real-world processes that consumers are familiar with as a way to increase shoppers’ comfort level. At the same time, they are leveraging what’s unique about the web to boost sales. “There is a focus on better execution,” says Jim Okamura, a partner in the J.C. Williams retail consulting firm. “A lot of what was being done last year is paying off this year.”

And then there’s the convenience factor. “People like the convenience of online shopping and when something is this convenient, it grows,” Davis says. “It’s just like ATMs or pay at the pump gas stations; it’s becoming a way of life.”

More online more often

There’s no doubt that more consumers are online and spending more time online. The at-home and at-work universe of active web users, meaning they had gone online the month the survey was conducted, is 120.2 million out of 177.2 million, a 6.5% increase in active users since last year, when 112.8 million were active out of 173.6 million total, according to researchers Nielsen/NetRatings. Active users go online 12.5% more often, spend 16% more time online and view 14% more pages than a year ago (see chart, p. 27). “We’re reaching the inflection point in e-commerce,” says Steve Fortson, director of e-commerce for Oriental Trading, which sells school supplies, stationery and novelty items by web and catalog. “People are getting past the first-use stage and we’re getting to critical mass.”

Not only are there more users online, they represent a broader age range. ComScore Media Metrix predicts that the over-50 population will grow from 16% of online shoppers today to 30% in 2006. “We have people buying everything from furniture for their first apartment to more formal, big-ticket furniture,” says John Seebeck, director of Internet at home furnishings retailer Crate & Barrel. “Our age demographic in online customers is fairly broad.”

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