June 1, 2007, 12:00 AM

The Top 500 Guide

2006 marked another record year of sales, but the fastest-growing merchants are smaller niche retailers who specialize and know what makes their customers tick

For more than a decade the Internet has been the fastest growing retail sales channel. It routinely generates annual growth of 25%, while total retail sales have been growing at 5% to 6% each year.

Last year was no exception, with online sales reaching $136.2 billion, up 25.9% from a year earlier. But what was different last year was that growth came from smaller retailers. While the Top 500 was the engine that powered online sales growth for several years, in 2006 sales at the Top 500 grew 21.3% compared to 25.9% for the entire market. Top 500 sales totaled $83.6 billion, up from $68.9 billion a year earlier. The rest of the market, including an estimated $34 billion in eBay Inc.-originated sales that could be considered retail sales, accounted for $52.6 billion in sales, up 29.9% from $40.5 billion a year earlier.

Within the Top 500, the split between slower growing large sites and faster growing smaller sites was -apparent. In 2006, combined revenue of the Top 500’s 100 smallest merchants-with annual sales of about $5.5 million to $10.8 million-rose by 23% to $836.3 million from $682.6 million in 2005. Sales at the Top 100 grew 19% to $71.6 billion in 2006 from $60.2 billion in 2005.

In 2006, the Top 500 accounted for 61% of all online retail sales, down from 62.9% a year earlier. Among the Top 500, the Top 100 account for 86% of all sales, down slightly from 87% a year earlier.

But smaller and more nimble merchants continue to grow faster than their established competitors. For instance, the Top 25 retailers grew their combined sales in 2006 to $52.9 billion from $44.8 billion, an increase of 18%. But the total sales for all start-up retailers in the Top 500 Guide-companies only in business since 2004-grew by 55% to $494 million last year from $319 million in 2005.

Growth shifting to smaller retail sites proves once more that the Internet with its lower cost of entry can still level the playing field between small start-ups and giant chains. “It’s still possible for entrepreneurs and start-ups to take a risk and gain a reward by -launching a web retailing site, but the fast-growing merchants these days are specialists and not generalists,” says Jim Okamura, senior partner at retail consulting firm J.C. Williams Group Ltd. “They are search-savvy and know who their specialized customers are and what they want.”

In 2006 small web -merchants-those outside of the Top 500-grew their combined revenue to $18.5 billion, based on subtracting total sales for the Top 500 from the total online sales, not including eBay-originated sales, of $102.1 billion as reported by comScore Networks Inc., which tracks millions of online users’ activities. That number is an increase of 45.7% from a combined $12.7 billion in 2005.

Among the 100 smallest retailers in the Top 500, 19 posted annual growth rates of better than 50%, including seven with 2006 growth rates of more than 100%. By contrast, only seven of the Top 100 had growth rates (excluding acquisitions) of 50% or more.

Working it

A prime example of the success experienced by specialty marketers is Working Persons Enterprises, which operates WorkingPerson.com. It was the fastest growing retailer among the smallest 100 with 2006 web sales of $8.2 million, up 241.7% from $2.4 million in 2005.

WorkingPerson.com (No. 449) caters to shoppers who need to supply their own work apparel such as boots and coveralls. The site also caters to small business owners that purchase personalized uniforms for their employees. The company was founded to take advantage of an under-served niche after -market research indicated that other retailers weren’t offering the mix of price, merchandise and personalization online shoppers wanted, says WorkingPerson.com chief operating officer Stephen Antisdel.

“We thought that consumers who need to buy their own work clothes are a specific retail segment with a lot of potential,” Antisdel says. “It’s too expensive to start as a general merchant on the web today so we knew we had to specialize and find a segment with good growth opportunity.”

In the early days of e-commerce most web merchants built sales by concentrating on customer acquisition and increasing brand awareness. But now, with active U.S. web shoppers expected to peak at about 161 million by 2010, web retailers are shifting resources to applications, third-party services and merchandising strategies that drive more repeat business.

Clearly online buyers are spending more time surfing, searching and shopping the Internet and spending more each time they make a purchase. In 2006, the total number of transactions initiated on all Top 500 web sites rose by 20.7% to 632.5 million from 523.9 million, while the average ticket grew 19.2% to $199 from $167. Factoring out unusually high average orders, such as furniture and computers/-electronics purchases, the average ticket is $132, compared with $118 in 2005. As in previous years, chain retailers accounted for the biggest portion of total online sales in 2006. Last year chain retailers amassed 41.1% of all sales vs. 40.3% in 2005. In 2006 chain retailers in the Top 500 Guide generated combined sales of $34.3 billion, an increase of 23.4% from combined sales of $27.8 billion in 2005.

Following chain retailers were virtual merchants with 30.8% of sales among Top 500 companies, while catalogers and consumer brand manufacturers ended 2006 with market shares of 14.4% and 13.7%, respectively.

In 2006, Top 500 web-only merchants combined for sales of $25.7 billion, up 23.6% from $20.8 billion, compared with catalogers with total combined sales of $12 billion vs. $9.9 billion in 2005, an increase of 21.2%. Consumer brand manufacturers combined for $11.5 billion in 2006 sales, an increase of 9.1%.

The billion dollar club

Chain retailers also represented the segment with the most companies in the billion dollar sales club: Staples Inc., Office Depot Inc., OfficeMax Inc., Sears Holdings Corp., Best Buy Co., J.C. Penney Co. Inc., Wal-Mart Stores Inc. and Circuit City Stores Inc.

Amazon.com Inc. remains the 900-pound gorilla of web -retailing, accounting for 8% of all U.S. online retail sales in 2006 and 13% of all Top 500 sales. Amazon (No. 1) grew its web sales by 26.1% in 2006 to $10.7 billion from $8.5 billion in the prior year.

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