July 25, 2011, 9:16 AM

Stick with a niche

The merchants in Internet Retailer’s Second 500 Guide know how to grow specialty businesses.

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The U.S. online retail market is big, getting bigger and increasingly dominated by the largest web merchants. But even in an industry where Amazon.com Inc. alone accounted for 20.7%—$34.2 billion—of all U.S. e-commerce sales of $165.4 billion in 2010 and the top 100 retailers, including Amazon, ranked in the Top 500 Guide accounted for 78.2%, or $129.4 billion, there’s still of plenty room for highly specialized niche retailers to grow and prosper.

And while Amazon and other big e-commerce players grow from the top down, there’s a strong group of up-and-coming smaller niche web merchants gaining sales and custom­ers from the ground up. And these smaller entrepreneurial upstarts make up a big part of the 500 online retailers profiled in Internet Retailer’s Second 500 Guide, a newly released companion to the Internet Retailer Top 500 Guide. Like the Top 500 Guide, the Second 500 ranks North American retailers by their online sales, and the com­panies in the Second 500 generated 2010 web sales of up to $13 million. More importantly, they’re growing, with their combined web sales increasing 16.5% to $2.47 billion from $2.12 billion in 2009.

In fact, almost all of the compa­nies in the Second 500 are growing. Of the 286 web-only merchants, 90 consumer brand manufacturers, 81 chain retailers and 43 catalog companies ranked in the guide, 93.4%—467—posted an increase in sales in 2010, including 22.3% that met or exceeded the 2010 growth rate of 14.8% for all U.S. e-commerce sales and 20.1% that met or exceeded the collective annual growth rate of 16.5% of the Second 500.

And it wasn’t necessarily the biggest retailers in the Second 500 growing the fastest.

Retailers ranked 501 to 600 increased their combined sales year over year about 16.2% to $1.04 billion from $893.8 million. But it was retailers numbered 601 to 700 that grew the fastest, increas­ing their collective web sales 20.9% to $670.6 million in 2010 from $554.5 million in 2009. In com­parison retailers ranked 701 to 800 grew year over year almost 13% to $407.2 million from $361.0 million and merchants numbered 801 to 900 increased 13.7% to $241.6 million from $212.5 million. The final seg­ment—Second 500 retailers ranked 901 to 1000—had collective web sales of $111.9 million in 2010, an increase of 14.6% from $97.8 million in 2009.

The fastest-growing Second 500  retailer is Blank Label (No. 995), a start-up apparel web merchant that grew sales nearly 100 times to $325,000 in 2010 from $4,500 in 2009.

Second 500 retailers on the sales fast track have several characteristics in common, despite the diversity in what they sell, says Jim Okamura, managing director of Chicago retail consulting firm Okamura Consulting. “If a niche web retailer survived 2008 and 2009 and put up aggressive growth in 2010, they went into the recession with a good business model and came out of it with a clear understanding of what it takes to keep their best customers coming back, even in the most difficult of economic times,” says Okamura. “They hung on and emerged ready to grow again.”

The 2011 Internet Retailer Second 500 Guide ranks, profiles and analyzes the next 500 retailers by online sales after the 500 ranked in the Internet Retailer Top 500 Guide, including several that are growing rapidly. For more information how to order click here. To see the full list of Second 500 merchants click here.

 

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