May 30, 2008, 12:00 AM

Internet Retailer Survey: Forging ahead

By watching expenses and generating more sales from repeat customers, web retailers are bullish about their business.

A stalled economy, high gas prices and shoppers with less disposable income are taking a toll on traditional store retailers and catalogers. But consumers are still buying online and that’s good news to web retailers, which aren’t looking to cut back on business development and don’t foresee a big drop in sales and profits this year, according to Internet Retailer’s latest monthly survey.

The survey, this one on profitability and business development, finds that only 17.4% of online retailers plan on scaling back their businesses this year. Instead most merchants are busy planning and launching new initiatives, including 72.6% that are devoting more resources to improving web site features and functions, 59% expanding online marketing, 57.3% adding products or lines of merchandise, 52.1% who expect to grow e-commerce into a bigger portion of their total business and 31.6% introducing more services.

“Smart retailers know the best way to maximize profitability is by generating more business from existing customers,” says Paula Rosenblum, managing director of retail research and advisory firm RSR Research LLC. “Acquiring new customers is expensive so merchants that are putting resources into new business development and building a better online shopping experience are the ones that will get the most repeat business.”

The weak economy, which some economists say is in a recession, has forced some online merchants and retailers or catalogers with large e-commerce channels such as RedEnvelope Inc., Lillian Vernon Corp., Sharper Image Corp. and Linens ‘n Things Inc. into bankruptcy. But in general the Internet Retailer survey finds most online retailers are running a profitable enterprise and expect to once again deliver solid top-and bottom line-results this year.

The survey finds that 36.1% of merchants anticipate sales will grow by at least 30% over last year, including 18.4% between 30.1% and 50% and 17.7% by more than 50%. Only 28.9% of merchants think online sales will grow by 10% or less. Among specific merchant segments, web-only retailers are the group forecasting the most growth, with 25% expecting to grow annual online sales by 50% or more in 2008, compared with 14.3% of consumer brand manufacturers, 10% of catalogers and 7.4% of chain retailers.

Many web retailing companies are running established organizations and have a solid track record in building a sustainable and profitable e-commerce model. The survey finds that 84.3% of Internet retailing companies are profitable, including 14.4% that have been operating in the black for at least three years, followed by 15.5% for more than four years, 7.2% for more than five years and 17.2% for more than six years. In 2008, 56.4% of online retailers also expect their net income to grow by at least 10%, including 11.7% by over 25% and 17% by more than 50%. Of the online retailing companies that do expect to lose money this year, 84.4% say their loss will total $1 million or less.

“A lot of savvy retailers saw this slowdown coming and prudently reduced expenses where it made sense and looked at other sensible ways to generate more revenue,” Rosenblum says. “Many web retailers are profitable and bullish this year because they are doing business in the industry’s fastest growing channel. They are looking ahead and still see a very good opportunity for expansion.”

Tight leash

The survey was e-mailed in early May to subscribers of IRNewsLink, the magazine’s e-newsletter and all responses were collected and analyzed by Vovici Corp., which has partnered with Internet Retailer in a series of surveys of the e-retailing industry. Respondents to the survey, which included 72 web-only merchants, 27 chain retailers, 14 consumer brand manufacturers and 11 catalog companies, are mostly privately held (72.6%) and fund ongoing operations through current owners and management (71.9%).

To maintain profitability, web retailers are keeping a close eye on expenses. In the past year, 52.1% of merchants list marketing and advertising as the area where they’ve seen the biggest jump in operating costs, followed by fulfillment and distribution at 36.8%, general and administrative and technology expenses each at 26.5% and procurement at 13.4%. Digital marketing costs are higher as web retailers pump more money into higher bids for paid search terms or hire more workers and third-party agencies to optimize their natural search rankings. Retailers also are getting hit with hefty increases in fulfillment and supply chain operations as fuel prices continue to climb.

But so far retailers are keeping key expenses in line with accepted industry standards. In general web retailing analysts say spending between 5% and 10% of total online sales on marketing is a good benchmark. 44.6% of retailers in the Internet Retailer survey spend 5% or less of online sales on marketing-related expenditures and 32.2% spend 5.1% to 10%. Only 23.2% spend more than 10% of revenue on marketing.

Acceptable limits

Spending on fulfillment, distribution and technology also are within accepted limits. An established web merchant with an efficient shipping operation can expect to spend 5% to 12% of total web revenue on fulfillment and distribution and about 5% on technology. 84.1% of merchants in the Internet Retailer survey spend 10% or less on fulfillment and distribution and 59.1% less than 5% on e-commerce technology.

With budgets already in line, 45.9% plan to cut expenses. Of those, 30.9% expect to cut general and administrative expenses this year to maintain profits followed by 21.8% that will reduce marketing and advertising, 21.8% that will spend less on fulfillment, 14.6% that will cut back in other areas and 10.9% that will decrease technology-related expenditures.

It’s easier for smaller online merchants to keep a close eye on expenses as they boot strap their operations to build a business or save money by building and retooling internally developed e-commerce technology. But as they grow, web retailers also need to maintain profitability and control expenses by avoiding inefficiency and maintaining more effective business practices and procedures, says Kasey Lobaugh, principal, multi-channel retail practice lead at Deloitte Consulting LLP.

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