May 30, 2008, 12:00 AM

The Top 500 Guide

(Page 2 of 3)

Powering growth

In tough economic times, it’s the speed, efficiency and critical mass of their e-commerce sites that are generating all-or a significant portion-of the growth at many big chain retailers. Many big box retailers, which formerly saw the web as a minor sales channel or as one part of a bigger multi-channel strategy, now see e-commerce in a strategic light. These days the web isn’t just driving total sales. The Internet and e-commerce are driving growth at a rate and critical mass stores can’t match.

Even at Office Depot, with its 1,222 stores, the web is powering growth. In 2007, sales at OfficeDepot.com rose by 14% to $4.9 billion from $4.3 billion in 2006. That increase accounted for all the growth in Office Depot’s sales last year. Total revenue rose by 3.5% to $15.5 billion from $15 billion in 2006 while comparable store sales dropped by 5%. Office Depot was an early believer in the Internet as a sales channel and took an innovative approach to maintaining its e-commerce site. Today its commitment to the web is paying off.

In 2007 OfficeDepot.com generated as much revenue as 565 of the office supply retailer’s bricks-and-mortar locations and accounted for 32% of total sales. “When a web site generates the same revenue as more than 500 of its stores, that’s an eye-popping statistic that shows the economics of the industry are changing,” says Jim Okamura, senior partner at retail consulting firm J.C. Williams Group Ltd. “A big chain like Office Depot is crossing the threshold where the web will keep on outperforming stores. The Internet is a lower cost and higher margin channel that’s generating their biggest return on investment.”

Chain reaction

Other major chain retailers also counted on their Internet operations to generate growth in 2007 when store and catalog sales dropped off.

Total sales at Circuit City Stores Inc. (No. 16) dropped by 5.5% in 2007 to $11.7 billion from $12.4 billion in 2006. Comparable store sales also dropped by 8% last year, but CircuitCity.com grew by 40% to $1.4 billion from $1 billion in 2006.

The web also provided the only uptick in sales at Gap Inc. (No. 24). While total 2007 revenue remained flat at $15.8 billion and comparable store sales fell 4%, Gap’s web sites-BananaRepublic.com, Gap.com, OldNavy.com and PiperLime.com-grew combined e-commerce revenue by 23.7% to $903 million from $730 million in 2006. “The CEOs at these major retail chains aren’t going to forget the huge financial contribution their Internet channel made last year to the overall performance of the business,” Okamura says. “They know their growth came from more people shopping online and not driving to the mall.”

As a group, chain retailers fared well in 2007, but they were the slowest growing category among all Top 500 merchant groups. Last year catalog companies, which accounted for 15.5% of all Top 500 sales, grew the fastest with combined sales of $15.7 billion, an increase of 30.8% from $12 billion in 2006. Top 500 web-only merchants grew their combined sales year-over-year by 22.2% to $31.4 billion from $25.7 billion in 2006, while consumer brand manufacturers ranked as Top 500 retailers increased their collective 2007 sales by 21.7% to $14 billion from $11.5 billion in the prior year. Top 500 chain retailers recorded $40.6 billion in combined sales in 2007, up 18.4% from $34.3 billion in 2006.

The biggest Top 500 direct marketers and multi-channel companies with a catalog arm continue to shift sales to the web and away from direct mail and call centers. The web now accounts for almost one-third-30%-of all sales for CDW, the Top 500’s biggest catalog company. But the web represented an even bigger percentage of total sales at other well-known catalog companies, including L.L Bean Inc. (No. 23), Redcats USA (No. 29), and Oriental Trading Co. Inc. (No. 49).

Cataloging growth

At L.L. Bean, the web now accounts for an estimated 59% of total sales, while at Redcats USA, which posted web sales of $801 million last year, the Internet accounted for 62% of total revenue of $1.3 billion. At Oriental Trading, 2007 web sales grew to $299 million and represented 52% of total sales of $570 million. The fastest growing catalogers in the Top 500 in 2007 were Green Mountain Coffee Roasters (No. 172), which grew its web sales by 249.8%. Another traditional catalog company-Fingerhut Direct Marketing Inc. (No. 96)-used a new Internet strategy and a redesigned web site to grow web sales by 75.6% to $144 million last year from $82 million in 2006.

Many traditional catalogers used the speed and efficiency of their e-commerce channel to offset sharply higher direct mail and publishing costs in 2007. As catalogers struggle with rising costs, the shift to a more efficient e-commerce model will accelerate, say retail and direct marketing analysts. “At many companies, the paper catalog is becoming an advertising vehicle the same as a Sunday newspaper circular,” says Robert Antall, CEO of retail consulting firm Lake West Group. “More consumer direct companies we talk with are cutting back on printing catalogs because the web is a more efficient order entry vehicle and also can be used as a significant marketing vehicle to drive traffic and sales.”

In recent years web-only retailers have accounted for some of the fastest growth among Top 500 companies and 2007 was no exception. The five fastest growing web-only retailers included Diapers.com (No. 231), which grew its annual web sales by 227.3% to $36 million in 2007 from $11 million in 2006. Diapers.com was followed by Cymax Stores Inc. (No. 247), up 159.6% to $32.5 million; LA Police Gear Inc. (No. 336), up 137.5% to $19 million; Blue Bay Inc. (No. 372), up 131.5% to $15.7 million; and Designer Plumbing Outlet (No. 452), up 126.2% to $9.5 million.

Many web-only retailers kept their online sales machines cranking in an otherwise tough year because they are niche merchants with less overhead and bureaucracy than traditional catalogers and chains. Using the speed of the Internet in tandem with powerful but affordable e-commerce technology, web-only merchants also can add lines of merchandising and implement online marketing programs faster than conventional retailers.

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