The Top 400 Guide

Online retailing continues to be a significant merchandising channel, with e-retailing operations growing in sales, average ticket, conversion rates and more

Ten years ago, long before the Internet investment bubble even began to build much less burst and Amazon.com was just beginning to sell online, few, if any, retailers could predict whether business-to-consumer e-commerce would catch on with customers or if the Internet would ever rival stores and catalogs as a serious sales channel.

But today, with more than a third of all households making at least one online purchase each year—a figure Forrester Research Inc. predicts will increase to almost 40% by 2009—Internet retailing has clearly come of age and remains the U.S. retailing industry’s fastest-growing sales channel.

U.S. Internet retail sales totaled $87.5 billion in 2004, up 25% from

$70 billion in 2003 and up 62% from $54 billion in 2002, according to Internet Retailer estimates.

Based on statistics compiled for the Internet Retailer Top 400 Guide, the top 400 retailers in 2004 generated combined web sales of more than $51 billion and accounted for 58.3% of all U.S. Internet sales. In comparison, the top 300 web retailers in 2003 generated sales of $40 billion, 57% of all U.S. Internet sales.

Growing the average ticket

The Top 400 Guide identifies and ranks the 400 largest retail web sites by their 2004 sales and measures other key statistics for each e-commerce site, including monthly visits, monthly unique visits, sales conversion rate and average ticket.

A key metric that demonstrates web retailing’s growing power and merchants’ growing ability to analyze, predict and react to changes in online shopping behavior is the increasing size of average orders. The Top 400 Guide reveals that the average ticket across all merchandising categories tracked in the Guide—Mass Merchants/Department Stores, Computers/Electronics, Office Supplies, Health/Beauty, Books/CDs/DVDs/Music, Housewares/Home Furnishings, Apparel/Accessories, Food/Drug, Flowers/Gifts, Sporting Goods, Specialty/Non-Apparel, Jewelry, Hardware/Home Improvement and Toys/Hobbies—was up about 16% from $92 in 2003 to $107 in 2004.

To present a true picture of average orders, that statistic eliminates sites with unusually high average orders; some furniture sites, for instance, have average orders of $1,000 and computer/electronics sites have average orders of $400+. With those high-value sites factored in, the average order shoots up to $127.

That in itself is a measure of the confidence that consumers have in online shopping. It is also a reflection of retailers’ increasing ability to close the sale. Today sophisticated search engine marketing programs, site search tools and web analytics, along with aggressive pricing and targeted promotions, are helping retailers move their online sales numbers up. In fact, conversion rates generally average in the 2.5% range, but rates that reach 8% are not uncommon and some sites report conversion rates of 18% and higher.

The multi-channel era

In 1995, when Amazon.com, CD Universe, 1800Flowers.com and other pioneers began to demonstrate that the web was an emerging merchandising channel, some traditional chain retailers and catalogers feared that Internet-only merchants could dominate their market niches and force them to cannibalize store and catalog sales to catch up. But in 2005, an era of multi-channel retailing, the Top 400 Guide shows that each segment of the market, which includes retail chains, catalog/call center companies, virtual (web-only) merchants and consumer brand manufacturers, is well represented and experiencing solid growth.

Of the categories tracked in The Top 400 Guide, the com-puters and electronics category and the mass merchants/department store category were tied for the largest share of Top 400 sales, each accounting for 28%. Computers and electronics retailers last year generated $14.3 billion in web sales up from $10.9 billion in the Top 300 published in 2004. They accounted for 27% of the Top 300 sales.

Web sales in the mass merchants/department stores category totaled $14.2 billion compared with category sales of $11.8 billion in last year’s Top 300. Mass merchants/department stores accounted for 29.5% of Top 300 sales.

Other web retailing categories demonstrating solid sales growth are books, CDs, DVDs and music, which increased sales 70% from $999 million in 2003 to $1.7 billion in 2004 and office supplies, which rose 23% from category sales of $5.2 billion in 2003 to $6.4 billion in 2004.

Though there is still room for start-ups and expansion in the web retailing market—No. 388 Ace Hardware grew its web sales more than 400% from just $848,910 in 2003 to $4.4 million in 2004—the largest 100 chain retailers continue to dominate the U.S. web retailing market. In 2004, the top 100 online merchants generated total web sales of $45 billion, or 53% of all online sales. In comparison, the top 100 retailers ranked in 2003 had combined web sales of $36.8 billion, or 52% of the U.S. Internet retailing market.

The $1 billion club

The Guide’s top 100 includes 40 chains, 28 catalog/call center companies, 24 web-only merchants and eight consumer goods manufacturers. Amazon continues as the Internet’s largest retailer with 2004 sales of $6.9 billion, up 31% from $5.2 billion in 2003. Amazon has more than 44 million active customers and offers more than 10 million SKUs.

But Amazon, which on its own accounts for about 8% of all U.S. Internet sales, is joined in the $1 billion club by eight others, including No. 2 Dell Inc. (2004 web sales of $3.2 billion); No. 3 Office Depot Inc. (2004 web sales of $3.1 billion); No. 4 Staples Inc. (2004 web sales of $3 billion) No. 5 HPDirect Inc., a unit of Hewlett-Packard Co. (2004 estimated web sales of $2.7 billion); No. 6 Sears, Roebuck and Co. (2004 estimated web sales of $1.7 billion); No. 7 SonyStyle.com, a unit of Sony Corp. (2004 estimated web sales of $1.6 billion); No. 8 CDW Corp. (2004 web sales of $1.5 billion); and No. 9 Newegg.com (2004 web sales of $1 billion).

The guide’s top 10 merchants reflect the fact that office supplies, consumer electronics and personal computer equipment retailing and direct marketing companies were among the first—and most aggressive—groups of merchants to begin selling online and introduced merchandising tactics that are now standard operating procedure for most web retailers. Dell, for instance, dominates the selling of personal computers online because of its innovative and pioneering strategy of giving customers the option of designing and personalizing their own PCs. But a diverse number of web retailing categories are well represented in The Guide’s top 100, which include 20 apparel/accessories retailers, 17 computer/electronic sites, 16 mass merchants, nine specialty/non-apparel sites, eight food/drug merchants and 30 other merchants in various categories.

Many of the nation’s largest and best-known chain retailing, direct marketing and web retailing companies are represented in the top 100. But while the big are getting bigger in the U.S. Internet retailing market, the web still makes up only a small percentage of many large chain retailers’ total sales. For instance, Wal-Mart Stores Inc., which employs more than 1.5 million associates worldwide in more than 3,600 Wal-Mart and Sam’s Club stores in the United States and more than 1,570 in other countries, is the world’s largest retailer with 2004 sales of $285 billion. But while its estimated 2004 web sales of $782.2 million are impressive and rank Walmart.com, which also includes the online sales of Sam’s Club, as No. 12 in the Top 400 Guide, the web represents less than 1% of all sales. Similarly, web sales account for about 5% of total sales at Sears, 4% at J.C. Penney Co., 3% at Best Buy Corp., 2% at Target Corp. and 1% at Kmart Corp., which in March completed a merger with Sears to form Sears Holdings Corp.

Learning from offline

As a category, many chain retailers came later to the web and business-to-consumer e-commerce than their direct marketing and Internet-only competitors. While there were exceptions such as Macy’s, a unit of Federated Department Stores Inc., that began selling online in 1998, many chains didn’t understand the Internet as a new merchandising tool and feared the web would hurt existing sales channels. As a result, many chains early on launched limited e-commerce sites with only a few product categories or formed separate Internet divisions and stand-alone units. But times change and now chain retailers are using their considerable merchandising, supply chain, technology and marketing resources to make the web a key component of their respective multi-channel retailing strategies.

For instance, Neiman Marcus Group Inc. used 2004 to expedite e-commerce through initiatives such as more effective cross-channel promotions. Though Neiman Marcus operated one fewer web store after selling its Chef’s Catalog brand to Pikes Peak Direct Marketing Inc. in November, the chain still achieved 2004 web sales of $240 million, up 49% from $161 million in 2003. Other chain retailers turning in impressive sales performances last year include Williams-Sonoma Inc., which racked up web sales of $477 million in 2004, a 43% increase over $333 million in 2003, and J.C. Penney, with web sales that grew 32% from $617 million in 2003 to $812 million. Of all the chains ranked in the Top 400 Guide, only bookseller and multi-channel retailer Barnes & Noble experienced declining sales, with 2004 web sales down 1% from $424.8 million in 2003 to $419.8 million.

Across all retailers ranked in the Top 400 Guide, using the web to drive multi-channel sales or using stores and catalogs to emphasize the speed and convenience of shopping online remained a top priority. For instance, many traditional catalog and direct marketing companies are now posting interactive editions of their catalogs and updating their web sites with catalog quick order boxes or enhanced search tools that enable catalog shoppers to quickly and easily find products. Catalogers also are using the web to test new products, text and images before printing their next editions. Innovations such as these are helping many catalogers achieve higher web sales and make the Internet their biggest merchandising channel. Both No. 70 Crutchfield, which had 2004 web sales of $108 million, up 33% from sales of $81 million in 2003, and No. 80 Drs. Foster & Smith, a catalog company with web sales of $90.1 million in 2004, up 29% from $69.9 million in 2003, are quickly approaching the day when 50% of all revenues will be generated by e-commerce. And those companies aren’t alone.

Because of their direct marketing business models, catalogers are well poised to sell successfully online, and several catalog and call center companies posted significant year-to-year sales gains in the Top 400 Guide. Among those with the biggest gains were No. 116 PetMed Express Inc. (2004 web sales of $47 million, up 94% from 2003); No. 139 Fingerhut Direct Marketing Inc. (2004 web sales of $39 million, up 62% from 2003); No. 172 Barrie Pace, a unit of Hartmarx Corp. (estimated 2004 web sales of $29 million, up 44% from 2003); No. 8 CDW Corp. (2004 web sales of $1.5 billion, up 44% from 2003); No. 71 Lillian Vernon Corp. (estimated 2004 web sales of $108 million, up 35% from 2003); and No. 52 Oriental Trading Co. Inc. (estimated 2004 web sales of $160 million, up 33% from 2003).

Solid e-commerce strategies

Catalogers jumped to the web early on, but in many merchandising niches, virtual web-only merchants were there before them. In the late 1990s, high profile start-ups such as Pets.com, Garden.com, Kozmo.com and WebVan poured in millions of dollars, developed complex business models, recruited top management talent and prepared for the day when an initial public stock offering would create a handsome return on investment. But many pure-plays were forced to fold, victims of the dot-com bomb, a slowing economy or the failure to build a merchandising strategy that generated visitors and sales.

Today, most virtual web-only merchants have built solid e-commerce strategies to remain competitive, and the ranks of pure play Internet retailers are well represented in the Top 400 Guide. Amazon.com still dominates the category. The next largest virtual merchant is No. 9 Newegg, followed by No. 18 Netflix Inc. with 2004 web sales of $506 million, No. 19 Overstock.com Inc. with 2004 web sales of $494.6 million, and No. 28 Drugstore.com Inc. with 2004 web sales of $360.1 million.

One trend driving sales growth among the pure plays is the devotion to their niche and building an extremely diverse and loyal customer base. Among the virtual web-only merchants with the biggest annual sales gain are No. 45 Zappos, up 163% to $184 million from $70 million in 2003; No. 260 Thralow Inc., up 114% in 2004 to almost $13 million; No. 176 Backcountry.com, up 84% to $27.4 million from $14.9 million in 2003; and No. 111 Home Décor Products Inc., a home furnishings and décor retailer with 2004 web sales of $49.9 million, an increase of 83% from $27.2 million in 2003.

Pure-plays are successfully establishing leadership in certain product categories, including videos, jewelry, and health and fitness. For instance, No. 178 Ice.com, an online jewelry retailer, saw its sales jump 73% from $15.7 million in 2003 to $27.2 million in 2004. In the health and fitness niche, No. 160 BodyBuilding.com expects its 2005 sales to approach $45 million, up from 2004 sales of $32 million and $16 million in 2003, based on a loyal customer base and strong content that includes a library of more than 10,000 pages. Based on the need to become multi-channel, pure plays such as No. 123 Bluefly.com (2004 web sales of $43.8 million) and No. 382 DVD Planet (estimated 2004 sales of $4.6 million) are expanding into bricks-and-mortar locations.

But most virtual merchants prefer to concentrate on their Internet expertise. Web retailers across all categories, including pure plays, are using better marketing and merchandising tactics such as sending out e-newsletters loaded with specific content and promotional offers such as web-only specials and downloadable coupons redeemable both online and in stores. Web retailers, especially consumer goods manufacturers, also are looking to capitalize even more on their brand awareness to drive site traffic and convert sales.

Manufacturing online success

Online shoppers frequently visit manufacturers’ web sites to research product information and view content on the latest styles, features and colors. As statistics compiled about consumer brand manufacturers in The Top 400 Guide clearly indicate, more manufacturers are commerce-enabling their web sites and selling direct to the public. In 2004, customers spent almost $10 billion purchasing direct online from the manufacturer. That compares to category sales of $8.1 billion a year earlier, an increase of 23%.

Many of the nation’s biggest and most well-known consumer brand manufacturers, including No. 2 Dell, No. 7 Sony Electronics, No. 17 Apple Computer Inc., No. 110 Polo Ralph Lauren Corp., No. 193 Liz Claiborne Inc., No. 205 Patagonia Inc., No. 215 Fossil Inc., No. 218 RealNetworks Inc, No. 220 Tupperware Corp., No. 228 A/X Armani Exchange, No. 237 The Nautilus Group Inc., No. 240 Hershey Foods Corp., No. 241 Sara Lee Branded Apparel and others are ranked and profiled in The Top 400 Guide. In practically every instance, the e-commerce functionality, product displays and site search tools are as up-to-date and sophisticated as any competing chain retailer’s or direct marketer’s site.

The result of paying more attention to web retailing is helping consumer brand manufacturers complete more sales. For instance, The Pfaltzgraff Co., No. 285 in the Top 400 Guide, had web sales of $10.5 million in 2004, up 25% from $8.4 million in 2003. One reason for the growth in sales is the addition of a line of personalized dinnerware and a new web site, pfz.com, dedicated to promoting—and selling—the new product line.

Manufacturers are extremely brand-conscious and, in addition to selling direct to the public, also encourage multi-channel retailing by including links to their distributors and store locater buttons on their web sites. For instance shoe manufacturer Steve Madden Ltd., No. 374 with 2004 e-commerce sales of $5.2 million, features a series of pages on SteveMadden.com that enables customers to find a store in their state. Two search boxes also help customers search by store or by ZIP code.

Consumer brand manufacturers represented about 19% of all U.S. business-to-consumer e-commerce sales in 2004, compared to around 20% in 2003, according to The Top 400 Guide. It’s also clear that consumer brand manufacturers, like their chain retailer, catalog/call center and virtual (web-only) counterparts, are on an upward sales path. With U.S. Internet retailing sales historically growing at an average 20% to 25% annually, the industry is on track to achieve total sales of at least $106 billion in 2005.

Mark Brohan is lead researcher on The Top 400 Guide to Online Retailers and principal of Milwaukee, Wis.-based The Brohan Group, providing editorial and consulting services to the publishing industry.