March 24, 2006, 12:00 AM

Another year of record sales

(Page 2 of 2)

At the age of 10, the online retailing industry continues its robust growth

By Kurt PetersThe story in the online retailing industry for the past year is the same old story-but what a story.Sales so far this year are up 25% over a year ago, reaching $30.3 billion in the first five months from $24.3 billion a year ago, according to numbers from comScore Networks Inc. If that growth holds, online sales will reach $81 billion this year, nearly double the number only three years ago, when sales totaled $43 billion.OptimismRetailers are optimistic that they will be able to achieve that growth. An Internet Retailer web-based survey on the future of web retailing reveals that 35.5% of 268 merchants who responded believe that their e-commerce revenues this year will grow by at least 35%. 8% forecast an increase of 25% or higher. Another 30% expect revenue growth of 15% to 25% and 16.8% anticipate annual web sales to rise 10-15%. Only 9.5% of retailers surveyed expect annual revenues this year to grow by less than 10%, a sign of the bullish prospects that retailers hold.In addition to the exceptional growth, the industry’s profitability that began developing two years ago has picked up steam. Operating margins for retailers’ web channels increased from 21% to 28% last year, according to State of the Industry 8.0, an annual research report from Shop.org and Forrester Research Inc. The sales and profitability stats show that online shopping is becoming mainstream and that is reflected as well in the categories where retailers expect the fastest growth. Retailers participating in the Shop.org study say they expect fastest growth in cosmetics and fragrances, up 33%, over-the-counter medications and personal care, up 32%, jewelry and luxury goods, up 31%, and flowers, cards, and gifts, up 30%-all mainstream products.Online retailing’s status is also reflected in the categories where online sales account for 10% or more of total category sales: computer hardware and software (48%), travel (26%), books (20%), consumer electronics (13%), cosmetics and fragrances (12%), toys and video games (12%), and flowers, cards, and gifts (10%). Focus on innovation“With profitability behind them, retailers can now focus on innovation and growth through things like increased integration of their online and offline businesses and internationalization of their sites,” says Carrie Johnson, lead author of the report and principal analyst at Forrester Research.Among the most significant market developments in the past year has been a sudden focus on international sales. According to a survey conducted by Internet Retailer, most e-retailers in the U.S. believe their penetration of foreign markets is only in the early growth stages. 36% of 186 American e-retailers who completed the survey report that 10% or more of their annual online sales come from customers outside the U.S. And in five years, nearly 52% of respondents believe their foreign orders will hit or exceed 10% of all their web sales.71% of the 186 respondents to the survey report that they regularly fulfill online orders from customers outside the U.S., and two-thirds of those have used the web to serve foreign markets for three years or more. The 29% of respondents who do not process foreign orders from their retail web sites report that their principal reason is the difficulty and cost of shipping merchandise outside the U.S.The movement abroad by American e-retailers has been led by the very smallest of online merchants-those with less than $1 million in total online sales. Nearly a third of these small online merchants get 15% of their web sales from foreign markets. By comparison, only 18% of online merchants with web sales of $50 million or more have the same level coming from outside the U.S. However, the biggest expect more from foreign web sales in the future than do the smallest. 46% of web sites with annual sales of $50 million or more predict that 15% or more of their annual sales will come from outside the U.S. in five years. That compares to 18% who are at that level today. By contrast, 31% of retail sites in the $1 million to $3 million annual sales range believe they will hit or exceed the 15%-plus level in five years.One thing that has not changed in the past year is that e-retailers continue to promote their sites using the three major forms of online marketing: search engine marketing, e-mail marketing and affiliate marketing. In another in the series of Internet Retailer surveys, more than half of all respondents said that search engine marketing performs somewhat or much better than other forms of marketing for their e-commerce sites. And only a quarter of respondents report that search engine marketing performs worse.But while retailers like it a lot, the survey also made clear that search is only now becoming a well established marketing form. Fully 13% of those responding to the survey still do not use search engine marketing and another 18% have begun using it only in the last year. Only 21% of those surveyed report using search engine marketing for four years or more. Paid vs. naturalIn the paid-vs.-natural language debate, 57% of respondents use both paid keywords and natural language search optimization, and the remainder are split evenly in the paid and natural search camps. Those who use only natural language search marketing report a higher level of online sales attributable to search than those who use only paid search. But for those who use both-the majority of respondents-search engine marketing produces more web sales than either method used on its own.In e-mail marketing, an Internet Retailer survey shows that 68.3% of online retailers are expanding their e-mail marketing activity much more or somewhat more this year over last. Only 13.2% said they are using e-mail less and 18.6% that they are using e-mail about the same amount. More than a third-38%-said they are sending more e-mails because their web business is growing and e-mail helps them stay in touch with those customers and promote their sites.And in affiliate marketing, 19% of e-retailers in the AFFStat 2005 survey from Shawn Collins Consulting report that 31% or more of their online sales come through affiliates. (see page 9).It’s clear that the online retailing market, while already 10 years old, is not nearing maturity. If anything, the industry is in a prolonged adolescence, with more growth ahead. And like teen-agers, the industry still has a lot to learn. lkurt@verticalwebmedia.comNo signs of let-upThe Census Bureau of the U.S. Department of Commerce issues a quarterly report on online retail sales, with numbers based on a survey of 11,000 retail companies. Many in the industry consider the numbers to be among the most authoritative by virtue of the size of the survey. It includes traditional retail merchants and catalogers, and excludes travel, auctions and event tickets. When comparing online sales to total sales, keep in mind that total sales include many sales not likely to move online, such as service stations, bars and sit-down restaurants and fuel sales. Note that the numbers the Commerce Department reports differ slightly from the numbers that other researchers, such as comScore Networks, report due to differing methodologies.
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