In its second-largest acquisition, Amazon buys the company for $970 million.
As a result of shifting marketing conditions, more retailers now consider a robust e-commerce infrastructure a competitive edge.
Call it making up for lost time.
When the Internet first took hold as a bona fide sales channel in the 1990s, many retailers looked at building and maintaining an e-commerce platform as a necessary evil. Rather than invest in e-commerce systems that could improve their ability to process orders, many retailers instead poured money into flashy site designs and brand marketing.
Today, however, web retailers are rethinking their e-commerce technology priorities. After a decade of growth-years in which the business-to-consumer e-commerce market routinely posted annual gains of 25%-industry analysts are predicting slower growth for the years ahead. And the number of online shoppers will peak at about 156 million within five years, according to research firm eMarketer Inc.
As a result of shifting marketing conditions, more retailers now see a robust e-commerce infrastructure as a competitive edge. After years of making do with outdated internal and first-generation systems, more retailers also are increasing their spending on key applications and services that will help them generate more repeat business, higher sales conversions and longer term customer relationships.
“Internet retailers are coming out of hibernation and spending more on e-commerce technology,” says Rob Garf, vice president of retail strategies at AMR Research. “The market is shifting to slower sales growth and customer retention. Web retailers investing wisely in systems and applications today to keep pace with customer expectations are the ones that will gain market share tomorrow.”
A decade ago a typical web merchant spent about 3% of total revenue on e-commerce technology. But now many web retailers, including public companies such as Amazon.com Inc., Overstock.com Inc., VistaPrint Ltd., ShutterFly Inc., Drugstore.com Inc., Bluefly Inc. and others, are spending about 4% to 11% of sales on e-commerce technology and in many instances significantly more.
Amazon.com, for instance, spent 6.2% of total sales-$662 million-on new content and technology in 2006 compared with 5.3%, or $451 million, in 2005, an increase of 46%. Other retailers such as VistaPrint, an online retailer and provider of digital printing services, Shutterfly, an online photo services retailer, and Overstock.com are investing an even greater proportion of their revenue on new e-commerce systems and services.
In 2006 Overstock.com spent $65.2 million on technology initiatives, 8% of total revenue, vs. just 3%, $27.9 million, in 2005. VistaPrint spent $15.6 million, or 10.3% of its total 2006 fiscal year revenue, on systems and services, up 44% from $10.8 million in fiscal 2005. Shutterfly spent 15.5%, $19.1 million, of sales on technology in 2006, up 45% from $13.1 million in 2005.
For the 10 publicly traded retailing companies that use the Internet to generate all or a majority of sales and that clearly break out their technology spending, the average spending on technology systems and services rose by 54.8% and accounted for an average of 7.7% of total revenue (see table, page 10).
From 2001 through 2003, overall spending on e-commerce systems remained flat as retailers struggled with a bad economy and regrouped after the dot-com investment bubble burst. More merchants now see their investment in new technology as a competitive edge and a way to keep pace with changing online buying behavior.
A new Internet Retailer survey on e-commerce technology spending intentions reveals 78% of the nearly 200 merchants surveyed are spending more on applications and third-party services this year. 31% of respondents also plan to increase their spending on e-commerce technology by 21% to 50%, and 15% by more than 50% (see page 14).
“In a Web 2.0 world a basic system isn’t good enough and retailers are spending more to keep up with the times,” says Mike Brinker, e-commerce and web channel solutions practice leader at Deloitte Consulting.
Today most basic e-commerce platforms include a shopping cart, limited site search, simple account management, order tracking tools and payment processing functionality. More sophisticated platforms may also incorporate personalization tools, product reviews, gift registries or wish lists, customer reviews and ratings, product comparisons, guided search navigation, and alternative payments.
Going forward, though, retailers will be purchasing new commerce systems or upgrading their existing platforms with richer Internet applications, AJAX and Flash technology, for example, that expedite multi-channel purchasing, product research and personalization. With richer Internet applications, retailers will be able to offer new features such as mouse-over navigation, streaming content and interactive product reviews.
“E-commerce systems are entering the age of YouTube and Web 2.0,” Brinker says. “Channel convergence has accelerated in the past three years and retailers will be adding applications that substantially improve navigation, let shoppers compare and contrast products in greater detail, and search for inventory online or across multiple channels.”
In previous years, web retailers invested in systems and services that helped them acquire customers. Faced with the prospect of slower overall growth and fewer first-time web shoppers, however, retailers are shifting resources and investing in applications that drive more repeat business.
In 2006 e-commerce sales totaled an estimated $142.7 billion based on retail web sales of $108.7 billion, according to the Census Bureau of the U.S. Department of Commerce, and $34 billion in eBay Inc. sales that could be considered retail sales. That’s an increase of 26.4% from 2005 when business-to-consumer e-commerce sales reached an estimated $112.9 billion based on retail web sales of $86.3 billion and eBay retail sales that hit $26.6 billion.
But most industry analysts and research firms expect growth of about 20% in 2007, meaning the U.S. web retailing market will generate estimated sales of about $171.2 billion. In the coming years, analysts also expect more moderate growth rates of between 15% and 18%. “Over the next four years retail e-commerce sales will be driven more by current online buyers increasing their spending than by new online buyers shopping for the first time,” says Jeffrey Grau, senior analyst at eMarketer.
In 2007 the average web shopper will spend about $1,123 shopping online, a figure that eMarketer estimates will grow by 14% to $1,279 by 2008 and 62.9% to $1,829 in 2011. “There are going to be more retailers chasing the same repeat buyers and competing for fewer new online shoppers,” Grau says. “Retailers that will garner the most market share are the ones that are the savviest technology buyers that see their investment in e-commerce systems as a competitive advantage.”