Through innovation and investment, the Top 300 lead the way in the maturing online channel
By Jack Love
The Top 300 retail web sites accounted for 57% of the $70 billion worth of merchandise that was sold online in the U.S. last year, according to a major new research study published this month by Internet Retailer. The study, the first of its kind, is published in a 152-page glossy directory entitled the Top 300 Guide, which ranks the 300 largest retail web sites by their 2003 Internet sales volume and contains many details of their operation, including annual growth, web site traffic, average sales ticket, conversion rate, number of SKUs on the site, vendors, management, corporate ownership and contact data.
The study, the first of its kind, is published in a 152-page glossy directory entitled the Top 300 Guide, which ranks the 300 largest retail web sites by their 2003 Internet sales volume and contains many details of their operation, including annual growth, web site traffic, average sales ticket, conversion rate, number of SKUs on the site, vendors, management, corporate ownership and contact data.
The Top 300 Guide, the result of six months of detailed journalistic research by Internet Retailer, contains a profile on each of the web sites that make up the Top 300 ranking and the data on each illustrate how remarkably fast the e-retailing industry has matured, becoming a significant, increasingly profitable and highly efficient merchandising channel in the U.S. retailing industry. The Guide’s data relating to the performance of the online channel are as impressive as the total web sales figure it reveals. The Top 300 web merchants last year recorded an estimated 11.4 billion visits to their sites. Of those, an estimated 435 million led to an online sale, a conversion rate of 3.8%, well above the 2% rate that only a couple of years ago was considered standard. The Top 300 web merchants also reported an impressive average sales ticket for 2003—$92. Both measurements reflect operating gains web retailers have achieved thanks to recent investments they have made in such web-based technologies as advanced site search, web analytics, search engine marketing, personalization software and content management systems.
A microcosm
In short, the Top 300 study shows that web retailing is fast becoming a microcosm of the overall retailing industry. The types of products sold by the Top 300 web merchants are as varied as those sold in stores, and the proportion of web sales represented by different product categories is far closer to matching the offline retailing environment than it was in the late 1990s, when e-retailing was mostly limited to the marketing of books, CDs and computer gear.
As is the case with offline retailing, general mass merchants now comprise the largest category on the web, accounting for 29% of sales generated by the Top 300 sites. Sales in this group are dominated by Amazon.com Inc., which is the overall leader in the Top 300—accounting for a stunning $5.3 billion in sales, or 7.5% of all sales on the web. As a clear measure of Amazon’s dominance, the second-largest retail site on the Internet generates $2.8 billion in annual sales, slightly more than half of Amazon’s volume. That site belongs to Dell Inc., whose web site allows visitors to design the PC they purchase online to meet their particular needs.
Dell has the top site in the second-largest retail category on the web—consumer electronics. Reflecting the ease with which commodity electronic goods can be sold over the Internet, computer and other electronic sites account for 27% of total sales generated by the Top 300 retail sites. And despite the fact that just four office supply companies made it into the Top 300 retail web sites, they account for a stunning 13% of total web sales of the group and comprise the third largest merchandise category on the Internet, according to the Top 300 Guide. Indeed, as a measure of how well-suited office supplies are on the web, the two largest office supply chains—Office Depot Inc. and Staples Inc.—have the third and fifth largest retail web sites respectively. By comparison, these two merchants rank 25th and 26th among offline retail chains, except that their respective positions in total corporate sales are reversed.
The other product category standout among the Top 300 is specialty apparel, the one market that many retailers once believed would not convert well from the offline to the online channel, simply because web shoppers could neither feel the garment nor try it on before purchasing it online. Yet, 70 of the Top 300 retail web sites are operated by specialty apparel merchants and manufacturers, and together they account for $3.3 billion of sales, or 9% of the total sales for the leading retail sites, a figure that excludes apparel sold online by mass merchants or sporting goods sites. The web sites of Gap Inc. (ranked #16) and Sears-owned Lands End (ranked #17) are the leading specialty apparel sites, each controlling 13% of the apparel web site category.
Perhaps in the most telling indication of the web’s growing breadth of merchandise, sites that specialize in books, CDs and videos account for only 2% of sales of the Top 300 web sites in the U.S., although that percentage would climb to 7% if Amazon’s $4 billion in book, CD and video sales were counted in this category instead of the mass merchandiser group.
Greater diversity
In one respect—the nature of the companies that own the web stores which compete in the online channel—the Internet retailing industry is even more diverse than the ownership make-up of the overall U.S. retailing market. While retail chains and stores, for example, account for the great bulk of retail merchandise sold in the U.S., the web sites owned by retail chains account for only 41% of online sales generated by the Top 300 retail sites, a clear indication that retail stores have a long way to go before they duplicate online the type of dominance their brands enjoy offline. The Top 300 Guide also reveals that catalogers, long considered natural players in the e-retailing field, have not been able to use their mastery of direct retailing and their early adoption of online merchandising to significantly expand their overall share of the retail market. The cataloger sites ranked in the Guide account for just under 15% of the Top 300’s total sales, only slightly above the catalog industry’s overall share of offline retail sales.
But the study reveals a surprising collective online market share for the two other types of players in the e-retailing space—virtual (web-only) merchants and consumer brand manufacturers. For a group that was given up for dead soon after the dot-com bust that took down such high-profile pure plays as Webvan Group Inc. and Kozmo.com, the virtual merchants which survived the shakeout are well represented in the Top 300 ranking, accounting for fully 24% of total Internet sales measured in the Top 300 research study. Consumer brand manufacturers, led by big PC makers Dell and Hewlett-Packard Co. (the fourth largest e-merchant) and by consumer electronics giant Sony (ranked sixth), operate retail web sites that account for 20% of the online sales of the Top 300. But not all manufacturer sites in the survey are those of electronics producers. The retail web sites of shoe makers, such as Reebock (ranked #84) and Nike (#96); greeting card makers, such as Hallmark (#67) and American Greetings (#117); and even chocolatiers, such as Hershey (#202) Godiva (#243), all made it into the Top 300.
With one obvious exception, the Top 300 retail sites proportionately represent the product make-up found in the broader retail market. That exception is food, the category Webvan tried but failed to revolutionize. Since then, food retailing has become the backwater of online merchandising. Although 14 food companies have sites in the Top 300, together they account for just 2% of total web sales for the group. Only three of those are owned by supermarket chains, including Albertsons (#149), Safeway (#154) and the Peapod.com subsidiary of Royal Ahold (#51). By contrast, 26 supermarket and convenience store chains rank among the top 100 store-based retail chains, and together account for 10% of all retail sales in the U.S.
Where’s Wal-Mart?
Looking below the leading web site in each category provides a telling analysis of how traditional merchants fare on the web relative to their traditional offline competitors and how much emphasis different multi-channel merchants give to the online channel. The world’s leading retailer—Wal-Mart Stores Inc.—is a prime example. The Arkansas-based giant revolutionized retailing in the 1970s and 1980s largely by relying on state-of-the-art retail systems that greatly reduced costs—savings it passed on to consumers, whose patronage allowed Wal-Mart to leapfrog Sears, Roebuck and Co., Kmart Corp. and J.C. Penney Co. Inc. in store sales to become the most imposing store-based retailer in history with $256 billion in sales in 2003, nearly four times the volume of second-ranked Home Depot Inc. Yet, Wal-Mart has been unwilling or unable to establish the same retail sales dominance on the web.
While Wal-Mart.com ranks 11th among the Top 300 with $723 million in online sales, Sears is the country’s seventh-largest e-retailer with $1.2 billion of web sales and Target is the tenth-largest with $907 million of web sales. Wal-Mart’s relatively weak performance on the web is perhaps best seen by analyzing how its web sales compare to its overall retail sales. It gets a paltry 0.28% of its total sales on the web, the lowest percentage of any of the nation’s top five general merchants. By comparison, Sears generates 2.9% of its sales from the web, Target gets 2.1%, Penney pulls in 1.86% and Kmart gets 1.8%.
Measured in this manner, the most effective web merchant among the big multi-channel retail chains is Office Depot, which generates a commanding 23% of total sales from its web operation. Its major competitor in the office supplies category—Staples—generates 18% of its total sales from the Internet. These office supply chains lead all store-based merchants in terms of percentage of sales from the web, further illustrating the natural fit between the web and products for the office. Interestingly, Office Max, which competes in the same market as Office Depot and Staples, does not benefit as much from that category’s affinity for the Internet: only 10% of its sales come from the web.
While the office supply chains lead other national store-based retailers in terms of their percentage of web sales, a growing number and variety of big store-based chains now get more than 5% of sales from their web operations. The leading bookstore chain, Barnes & Noble, gets 7% of its total sales online; housewares chain Williams-Sonoma Inc. generates 12% of its sales from the web; Guitar Center Inc. gets 11% of its sales from its MusiciansFriend.com web site; and J. Crew Group Inc. and Sharper Image Corp. each get nearly 15% of their sales online, reflecting the direct-selling expertise that comes from their roots in the catalog business.
Neiman Marcus leads
But the store-based retailer that turns in the most surprising performance online is the carriage-trade leader—Neiman Marcus Group Inc. Reflecting its efforts in continually upgrading its site and its strategy of using the web to extend its well known brand in markets where it has no department stores, Neiman Marcus last year generated 7.5% of its sales from the Internet. No other national department store chain comes close to that performance. Indeed, the second-best traditional department store in terms of web sales percentages is Saks, which now gets 2.6% of its sales on line and is belatedly attempting to emulate the online performance of its arch rival in the high-end department store market.
The other major market where the big chain stores have done well on the web is consumer electronics, but here as elsewhere, there are major differences in the web performances of competing chains. Best Buy Co. Inc., whose web site is the ninth largest in e-retailing, gets 3.8% of its sales online. Circuit City Stores Inc., (ranked 18th online) does even better, with 4.5% of its revenue coming from the web. Contrast this performance with the original consumer electronics specialty chain—Radio Shack—which generates only 1.4% of its sales online.
Catalogers, of course, jumped on the web sooner and more aggressively than did store-based merchants, many of which lacked a direct-to-consumer merchandising capability. As a result, the traditional catalogers included in the Top 300 Guide get a much higher percentage of their total sales from the Internet. As a group, the 23 catalog firms whose web sites are ranked among the country’s 100 largest retail sites generate 18% of their total sales from the Internet. If the retail stores operated by these catalogers are removed from the equation, the web would account for about 25% of their direct-to-consumer business.
But that average blurs the distinctions between their respective performances. Of these 23 catalogers measured on percentage of web to total sales, the leaders are Bear Creek Corp. (Harry & David specialty foods) and Drs. Foster & Smith Inc. (pet supplies), each of which generate 45% of their sales online. Other notables are J.C. Whitney (auto parts), Sportsman’s Guide Inc. (outdoor gear), Crutchfield Corp. (electronics) and Lillian Vernon (gifts), all of which get slightly more than a third of their sales over the web. By comparison, Spiegel Inc. (apparel) and Cabela’s Inc. (outdoor gear) get only 14% and 9% of their respective total sales from the Internet, figures that are somewhat misleading because both also operate stores. Still, Cabelas gets only 18% of its direct-to-consumer sales from the web, and Spiegel, which is rapidly closing stores as part of its Chapter 11 reorganization, likely gets less than 20% of its direct-to-consumer business from the web.
The re-birth of the pure-plays
While retail chains and catalog firms are expanding their web sales percentages as part of a multi-channel merchandising strategy, the so-called pure-plays that began the Internet retailing revolution have largely remained one-trick ponies. Most still get all of their sales from the only channel they have ever known, and yet for them that appears to be a bankable strategy. Nearly a third (95) of the retail web sites ranked and profiled in the Top 300 Guide are those of pure-plays, and as a group, their combined sales grew last year by 36%, faster than any other type of web merchant in the survey and seven percentage points faster than last year’s overall growth rate for Internet retailing.
They are often overlooked because of the high-profile dot-com bankruptcies of a few years ago and because few have yet to become big-time merchants. The leader of the group—Amazon—is the largest and most highly regarded e-retailer in America, but one must scroll down to the #24 spot in the Top 300 ranking before encountering another pure-play—BUY.com.
Nonetheless, the pure-plays have successfully established leadership positions on the web in certain product categories, such as videos, jewelry, drugs and cameras. The largest movie rental operator on the net is pure-play Netflix Inc., which ranks #30 in the Top 300. Meanwhile, Blockbuster Inc., the 40th largest retail chain in the U.S. with a dominant position in offline movie rentals, is not even ranked among the Top 300 web merchants. Virtual diamond merchant Blue Nile Inc., which grew 79% last year and is going public this year, is the largest jewelry merchant on the web with the 54th largest site. By comparison, Zale Corp., the nation’s largest jewelry chain, is only the 199th largest e-retailer, although Tiffany & Co., the second largest store-based jeweler, managed a 75th place ranking in the Top 300 Guide. Similarly Drugstore.com Inc., the leading web-based drugstore, sells 56% more merchandise online than Walgreen Co., the nation’s largest pharmacy and 11th largest retail chain. And when it comes to selling cameras online, the category leader is pure play RitzInteractive.com, the only camera web store ranked in the Guide.
jack@verticalwebmedia.com
