January 31, 2006, 12:00 AM

E-Retailing: The 25% Growth Phenomenon

While the definitive numbers for 2005 are not yet tabulated, analysts believe that thanks to another blistering holiday shopping season online, e-retailing last year again achieved its historic growth rate.

When our publishing team started this magazine seven years ago, we were encouraged by the growth of the e-retailing market, which was growing at the time at 30% per year-five times the growth of retailing overall. We felt certain the growth of online sales would continue exceeding the growth of store sales, but we assumed that growth rates for Internet retailing would slow as its base grew larger.

We were right on the first part but dead wrong on the second. In fact, Internet retailing has consistently achieved growth rates of 25% to 30%. While the definitive numbers for 2005 are not yet tabulated, analysts believe that thanks to another blistering holiday shopping season online, e-retailing last year again achieved its historic growth rate. ComScore Networks calculates a 24% growth rate for e-retailing in 2005 and Nielsen/NetRatings estimates 30%. Once again e-retailing grew at least five times faster than store retailing.

What does it mean? Experience with related technologies offers some clues. Our publishing group has been covering online customer service net-works for 24 years, beginning with our first publication, Bank Network News, which was launched in early 1982 to cover the ATM networks which at the time were just beginning to connect the automated teller systems of one bank with those of other banks so that depositors had broader access to ATMs.

The more I follow online retailing, the more I see similarities with the development of now ubiquitous ATMs. When we started BNN, the ATM market was early into its second decade-just about where online retailing is today. The country had about 12,000 ATMs online then, but only about a third of depositors used them. The rest were still devoted to weekly trips to the bank to stock up on cash, and plenty of supermarkets still cashed checks for regular customers with no purchase required. How quaint that seems today.

Most consumers back then avoided using ATMs for fear it would jeopardize the security of their deposits. Others did not trust the machines to accurately dispense cash and for the bank to properly record the transaction. Even though the ATM transaction was free (talk about quaint!), most consumers had grown comfortable with cashing checks for cash and did not rush to adopt the newer and more convenient technology.

But as more ATMs appeared in more convenient locations and were connected into national and global networks and as more consumers began relating their successful ATM experiences, the barriers to broad usage of the technology began breaking down. Add to that the cultural changes wrought by the development of the two-income household-and the disappearance of the housewife who picks up cash during banker’s hours-and you got an ATM explosion. Today, there are 400,000 ATMs in the U.S. and we are so dependent on them that we have grown accustomed to paying $1.50 for the privilege to use them. And many depositors go for months-even years-without stepping inside a bank.

What’s the ATM lesson? I think it means that over time customer fears about a new technology disappear as that technology demonstrates reliability, that the demand for convenience is the most powerful motivator for the American consumer, that consumer lifestyle changes-and not the traditions or desires of traditional service providers-ultimately dictate the direction of consumer markets and that technologies that involve fundamental cultural changes often experience their greatest growth in their second, third or fourth decade, not their first. E-retailing may be headed in the direction of the ATM-and its 25% growth rates may not be over.

Jack Love, Publisher

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