September 3, 2002, 12:00 AM

Online retailers make the transition from surviving to thriving

More than half of online retailers made a profit on their web operations last year, says the new State of Online Retailing 5.0 report from Shop.org and Boston Consulting Group.

For Internet retailers who survived the shakeout of 2000, 2001 brought good news: More than half of online retailers surveyed made profits last year, according to the new Shop.org/Boston Consulting Group study The State of Online Retailing 5.0, part of an annual series.

An increase in consumer spending online-up 21% from the year before to $51.3 billion-drove some of the gains. (The $51.3 billion figures comes from Forrester Research Inc. and comScore Networks Inc. and includes travel and event-ticket spending.) The rest is chalked up to continuing improvements in online operations and judicious cost-cutting. Marketing costs per order fell from $20 in 2000 to $12 in 2001. Conversions as a percentage of visits rose to 3.1% for the year from 2.2% in 2000. And customer acquisition costs fell from an average $29 per customer in 2000 to $14 in 2001, a function of an increase in the number of repeat buyers. Repeat customers accounted for more than half of sales and 53% of online revenue in 2001, up from only 40% in 2000.

To Shop.org chairman Elaine Rubin, the numbers underscore online retailing’s growing maturity. “The online portion of a retailer’s business has proven it can be successful, not only in its own right, but in supporting other channels,” she says. “We no longer have to prove we should be here, but how we can become more effective and efficient.”

Of the more than 100 retailers surveyed, average operating margins rose from a net loss of 15% in 2000 to a loss of 6% in 2001. In the aggregate, retailers on average are expected to break even or better this year, on revenues projected to grow by 41%, doubling 2001’s 21% revenue increase over the previous year. As a group, catalog-based retailers showed the greatest success last year, reporting profits of 6% on average. Though store- and web-based retailers posted negative margins of 5% and 13%, respectively, their losses narrowed from the year before.

The percentage of all retail dollars spent online continues to rise, with online spending in five retail product categories as well as in event tickets and travel now accounting for 5% or more of all consumer spending in the category. Computer hardware and software topped the list, with 17.9% of retail spending in the category spent online in 2001, up from 16.9% the year before. The study projects that online spending will represent as much as 23.4% of retail spending for the category this year. Books, the second largest-selling category online, actually dropped to 11.1% last year from 12.7% in 2000, but the web is expected to account for 13.5% of sales in the category this year.

Overall, multi-channel retailers’ share of online revenues rose to 67% in 2001 from 54% in 2000 and is expected to increase further this year. “For multi-channel retailers, it is now more important than ever to ensure that the online businesses are integrated with the store and catalog businesses,” says Peter Stanger, Boston Consulting Group vice president and Boston Consulting’s leader of the Shop.org study. “It’s by analyzing customer information across channels that multi-channel retailers can realize a significant increase in share of wallet.”

Rubin says that the customer-centric attitude required for successful retailing in the online environment-and off-represents a change for some multi-channel retailers who’ve been more company-centered. “For many years, retailers ran their business based on their merchandise, their supply chain and back end operations without truly engaging the customer in all of their decisions,” she says.

The shift in focus is already leading to the creation of a new executive title-chief customer officer -at some brand manufacturers. Rubin predicts retail will soon follow. “The big brands’ lifeblood is knowing what the customer wants,” she says. “I see that starting to happen in retail, and the online part of the business is driving it. Never before could the retailer understand, communicate and relate to the customer without the tools of the direct channel.”

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