June 1, 2012, 12:00 AM

Tunnel Vision

Web-only retailers' single-channel focus drives growth.

Lead Photo

Jackthreads.com was a true start-up-from-nothing retailer in 2008 that had no outside funding and made merchandising decisions based on what felt right rather than hard facts. But starting in late 2010 and throughout 2011 the members-only young men's apparel site began analyzing its data and then deploying new web site tools that drove sales growth.

That focus helped make Jackthreads.com (No. 440) the growth leader among web-only retailers in Internet Retailer's 2012 Top 500 Guide, increasing its 2011 web sales by about 355% to $20.2 million from $4.4 million in 2010.

Despite limited resources Jackthreads.com has grown because the company has been able to focus on the web as its sole sales channel, says Jason Ross, founder and CEO of the members-only apparel site.

"On the merchandising side, a lot of our decisions were made on gut feelings," Ross says. "Then in late 2011 we got focused on data to be sure we knew who our customers were, and made sure our merchandising team was finding products appealing to them."

Web site improvements in 2011 included moving navigation to the top of the page along with notices of all active sales. Once a sale is chosen, members can sort by price, size, color and other categories. "We saw an increase in conversion rates when we did that," Ross says.

Jackthreads.com's growth stems from its ability to serve a niche market. It's also an example of the advantage shared by all web-only retailers in the Top 500 Guide, namely that focusing on one channel gives them a major edge online over the e-commerce sites of retail chains, catalogers and consumer brand manufacturers, says Bernardine Wu, CEO of e-commerce consulting firm FitForCommerce. Like Jackthreads, the fastest-growing web-only retailers in the Top 500 Guide also target very specific markets.

That single-channel edge helped online-only retailers grow faster than any other merchant category in the Top 500 Guide. Led by Amazon.com Inc. (No. 1) web only retailers grew their combined web sales 31.8% to $73.39 billion from $55.68 billion in 2010.

Retailers that sell products solely on the Internet benefit from their focus on reaching their consumer targets because they don't have to manage the competition for company resources that is a fact of life at multichannel retailers and consumer brand manufacturers, Wu says. "Web-only retailers as a group, and Amazon in particular, are leading online sales growth because they are in a unique position to invest and optimize marketing and operations to fuel growth," she says. "They don't have to consider other channels in their overall strategy—that set of decisions and issues that complicates matters and makes e-commerce investment decisions for multichannel web retailers both more challenging and more costly."

Even without Amazon's 2011 sales, which grew by about 41% to $48.08 billion from $34.20 billion in 2010, web-only retailers beat the overall U.S. e-commerce growth rate of 16% for 2011, as determined by the U.S. Department of Commerce. Minus Amazon, online-only merchants in the Top 500 grew their combined sales by 17.8% to $25.31 billion from $21.48 billion in 2010. That rate exceeded the 14.4% growth of the Top 500 without Amazon, from $115.93 billion to $132.65 billion. Including Amazon, all Top 500 retailers grew their combined sales by 20.4%, from $150.13 billion in 2010 to $180.73 billion.

64 of the 198 web-only retailers, or 32%, matched or exceeded the Top 500 growth rate and 77—39%—of them grew at a rate equal to or better than the increase in total U.S. e-commerce sales. That compares with 190, or 38%, of all Top 500 retailers that equaled or surpassed the 14.4% growth rate—without Amazon.

Amazon registered sales growth in 2011 slightly higher than its 39.5% growth rate as in 2010. But income fell 47.4% to $631 million from $1.2 billion as the world's largest online retailer continued to invest heavily in technology and content, primarily for its family of Kindle electronic book readers and Kindle Fire tablets.

Spending on technology and content increased 70.6% to $2.90 billion from $1.70 billion.

Amazon's heavy spending on technology—the $2.90 billion it spent in 2011 exceeds the online revenue of all but 11 e-retailers—means all Amazon's online rivals need to be focused on growing in their niches where they can differentiate themselves from Amazon.

Yet many smaller retailers are doing quite well by taking advantage of niche markets and connecting with their customers. And web-only retailers are especially good at being found by their potential customers.

Jackthreads uses social media to reach its target demographic of young style-aware men. That includes taking advantage of its ties to Thrillist.com, a men's digital lifestyle publisher that purchased Jackthreads in 2010. Social media is playing an increasing role in Jackthreads' ability to bond with its customers, Ross says. "We added some social tools in 2011 and made it easy to share items through Facebook and Twitter when a shopper is making a purchase."

Internet-only retailers matched the Top 500 as a whole in using two of the big three social media tools—Facebook, Twitter and YouTube. Of the 198 web-only retailers, 186 (94%) have a presence on Facebook, 180 (91%) on Twitter and 140 (71%) have posted videos on YouTube.

Web-only retailers are in synch with Top 500 retailers as a whole regarding use of Facebook and Twitter, but they lag in YouTube videos. The Top 500 retailers' social media use breaks down as follows: 471 (94%) have a presence on Facebook; 455 (91%) on Twitter and 386 (77%) on YouTube.

While social media interaction has spread rapidly to older users, it is younger consumers who interact on the channels that drive sales growth at niche retailers such as Nasty Gal Inc. (No. 372). The retailer of trendy apparel for young women built its following on social media and its customers feel they are part of the merchandising effort, says Sophia Amoruso, founder and CEO. NastyGal.com grew sales by 180% in 2011, to $28 million from $10 million in 2010.

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