August 5, 2009, 12:00 AM

Analysis: Top 500 manufacturers lose their fear of selling online

Shifting market conditions have consumer brand manufacturers looking at e-commerce in a whole new light. Once laggards, many Top 500 manufacturers now are racing ahead online.

As a group, consumer brand manufacturers have lagged behind Top 500 web-only merchants, catalogers and retail chains in the race for e-commerce sales.

But with more at stake, Top 500 manufacturers, which grew their combined web sales 15.7% to $14.0 billion in 2008 from $12.1 billion in 2007, are leading the pack. When Amazon.com, which accounts for 52.2% of sales among all Top 500 web-only retailers, is factored out, manufacturers stood out as the fastest-growing merchant category in the current Top 500 Guide. Without Amazon, No. 1 in the Internet Retailer Top 500 Guide, Top 500 web-only merchants only grew their combined web sales year over year by 12.1% to $17.6 billion compared with 12% to $45.1 billion for chain retailers and 5.2% to $18.3 billion for catalogers.

Historically, many manufacturers have been slow to build a web store and sell directly to the public online. They feared alienating their retailer and distributor networks. But the retailing market is consolidating. In some segments one or two large chains, such as Wal-Mart Stores Inc. in mass merchandise and Best Buy Co. Inc. in consumer electronics, are able to dictate more terms, including pricing and inventory levels, to manufacturers, say industry analysts. The fact that more retailers such as J.C. Penney Co. continue to develop additional private-label brands also is seen as a bigger competitive threat by some consumer brand manufacturers. “There is significant pressure on consumer brand manufacturers and many of their markets are undergoing radical change,” says Kasey Lobaugh, retail analyst and principal with Deloitte Consulting LLP. “One area where they see a chance to grow, protect their brand and deal directly with consumers is online.”

Among the current Top 500 Guide’s 50 fastest-growing web retailers, seven companies were consumer brand manufacturers: American Apparel Inc. (No. 236), Jones Apparel Group Inc. (No. 271), Vera Bradley (No. 240), Under Armour Inc. (No. 259), The Estee Lauder Cos. Inc. (No. 129), Levi Strauss & Co. (No. 349) and Apple Inc. (No. 5). With web sales that grew 55.1% to $39.4 million in 2008, American Apparel was the fastest-growing Top 500 brand manufacturer, followed by Jones and Vera Bradley, which grew their e-commerce revenue year over year by 52.3% to $32 million and 46% to $26.6 million, respectively. With 2008 web sales of $4.8 billion, Dell Inc. (No. 3) was the biggest manufacturer ranked in the current Top 500 Guide, followed by Apple Inc. with 2008 web sales of $3.6 billion and SonyStyle.com (No. 12), the e-commerce arm of Sony Corp., with 2008 e-commerce revenue of $1.8 billion.

The bad economy and the cutback in consumer spending did result in lower web sales in 2008 for some brand manufacturers. The three companies that showed the biggest decrease in e-commerce sales among all Top 500 retailers were manufacturers. With consumers no longer buying as much upscale bedding or certain electronics, web sales for Tempur-Pedic International Inc. (No. 206) in 2008 decreased year over year 40.3% to $47.6 million, while e-commerce revenue for Palm Inc. (No. 282) and Select Comfort Corp. (No. 247) declined last year by 40% to $30 million and 31% to $37.1 million, respectively. Both Tempur-Pedic and Select Comfort are bedding manufacturers.

But of the 55 manufacturers ranked in the current Top 500 Guide, 40 posted a gain in annual web sales in 2008, compared with just four with flat sales and 11 with web sales that declined.

Consumer brand manufacturers have certain advantages over other types of online retailers, says Lobaugh. In addition to controlling the inventory and most product information, many manufacturers can also sell online with a well-known brand consumers recognize. “More brand manufacturers are going to make a serious investment in their web site because they see e-commerce as a way to protect revenue and get closer to the consumer,” he says.

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