August 29, 2007, 12:00 AM

Follow the leader

Retail chains dominate offline, but analysis of their Top 500 Guide numbers shows they have a lot of catching up to do online.

In retailing, the Internet is a great equalizer and no group knows that better than the biggest chains. With their deep pockets, established brands and thousands of stores, the big chains dominate conventional retail sales.

But after 10 years it’s clear that major chain retailers aren’t dominating e-commerce sales. When the Internet emerged as a bona fide sales channel, many of the big chains stepped aside as more nimble merchants, including Amazon.com, rushed in and took full advantage of e-commerce and the opportunity for anytime, anywhere retailing.

Today the big retail chains are losing online market share and ceding even more sales to virtual merchants, consumer brand manufacturers and smaller niche players. As a group, the 25 largest chain retailers accounted for $25.6 billion-19%-of all e-commerce sales of $136.2 billion in 2006, down from 22%, or $23.7 billion, of $109.4 billion in 2005, according to an analysis by Internet Retailer. In 2006 the business-to consumer e-commerce market grew by 26%, but the biggest 25 chain retailers increased their combined sales by 8%.

Some old hands

Other merchant groups also experienced less growth, but they still grew faster than the big chains. For example, the 25 biggest virtual merchants grew year over year by 23.4% with combined sales of $20 billion in 2006 versus $16.2 billion in 2005, while the top 25 consumer brand manufacturers increased their combined web sales by 20.2% to $10.1 billion in 2006 from $8.4 billion in 2005. The big chains also lost ground to the 25 largest catalogers. In 2006 the largest catalog/call center companies posted combined web sales of $11.2 billion, an increase of just 9.8% from $10.2 billion in 2005.

Big chain retailers certainly aren’t newcomers to e-commerce. Six chains, including J.C. Penney Co. Inc., Macy’s Group Inc. and Gap Inc. Direct, have been selling online for more than a decade and 16 others between five and 10 years. But with the exception of J.C. Penney, an early believer in e-commerce, and Limited Brands Inc., where the web accounts for about 10% of all revenue, and a few others, most big chains aren’t growing their Internet sales nearly as fast as the competition.

With annual sales of $10.7 billion, Amazon.com grew by 26% in 2006 and accounted for 8% of total e-commerce sales. In comparison, the combined online sales of the five largest retail chains-Wal-Mart Stores Inc., The Home Depot Co. Inc., Costco Wholesale Corp., Target Corp. and Sears Holdings Corp.-amounted to $5.9 billion, or 4.3%, of all e-commerce sales last year. Of the five biggest chains, only one-Costco-exceeded Amazon’s growth rate. 2006 was a breakout year for Costco, which grew its annual web sales by 65% to $880 million. In comparison Walmart.com increased sales by 20% to $1.26 billion, The Home Depot by 15% to $404 million, and Sears Holdings and Target by 10%, with web sales of $2.4 billion and $986.2 million, respectively. Sales for Walmart.com, Home Depot, Sears Holdings and Target are Internet Retailer estimates.

Laggards

“Most of the big chains are trailing the online retail market in sales by a wide margin,” says Paula Rosenblum, a partner with Retail Systems Research LLC, a Miami retail technology research and consulting firm. “Their systems and resources are focused on stores and they aren’t using the full potential the web offers as a sales channel.”

The 25 largest chains continue to dominate total retail sales. Last year the top 25 chains, not counting 9 major grocery and food service companies that don’t have a major e-commerce presence, accounted for 38%-$1 trillion-of all sales of $2.63 trillion. The figure for total retail sales includes most standard retail categories from the U.S. Department of Commerce with the exception of parts and accessories sold by automotive dealers and food service, gasoline stations and fuel sales. The figure for annual e-commerce sales includes sales from the U.S. Department of Commerce and sales at eBay Inc. that could be considered retail sales.

On the whole the Internet Retailer analysis finds that most big mass merchandise and department store chains continue to view the Internet as a minor sales channel. For instance, of the top 25 retail chains, seven companies posted annual web sales that represent less than 1% of their total sales, while three chains, including Rite Aid Corp., TJX Companies Inc. and B.J.’s Wholesale Club Inc., have no e-commerce business or only a limited or fledgling operation. With 2006 Internet Retailer-estimated web sales of $10.8 million, the Internet accounted for just 0.14% of total sales at Dillard’s Inc., followed by Kohl’s Corp at 0.21% ($32.1 million), CVS Corp. at 0.31% ($135.5 million), Walgreen Co. at 0.36% ($169.5 million) and Lowe’s Cos. Inc. at 0.37% ($173.6 million). The web sales for Kohl’s, CVS, Walgreens and Lowe’s are Internet Retailer estimates.

“Most of the big chains have been lagging behind in web sales for years and they have to decide if they want to change their points of view and business models to catch up,” says Kasey Lobaugh, retail direct to consumer and multi-channel retailing practice leader for Deloitte Consulting, a unit of Deloitte & Touche LLP. “Selling online is all about effective one-on-one merchandising and successfully picking, packing and shipping individual orders, but many of the big chains still aren’t set up to manage this kind of e-commerce business.”

Other priorities

Many web retailers and industry analysts look at a merchant’s annual increase in e-commerce sales and the ratio of web sales to total sales as the biggest indicators of growth. But it’s also clear that big chain retailers with their focus on stores and multiple sales channels also see the Internet in different terms. For instance, Wal-Mart has completely redesigned Walmart.com over the past year and added advanced features and functions such as product reviews, faster search and an order online/pick up in store service.

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