The Top 500 Guide

2006 marked another record year of sales, but the fastest-growing merchants are smaller niche retailers who specialize and know what makes their customers tick

For more than a decade the Internet has been the fastest growing retail sales channel. It routinely generates annual growth of 25%, while total retail sales have been growing at 5% to 6% each year.

Last year was no exception, with online sales reaching $136.2 billion, up 25.9% from a year earlier. But what was different last year was that growth came from smaller retailers. While the Top 500 was the engine that powered online sales growth for several years, in 2006 sales at the Top 500 grew 21.3% compared to 25.9% for the entire market. Top 500 sales totaled $83.6 billion, up from $68.9 billion a year earlier. The rest of the market, including an estimated $34 billion in eBay Inc.-originated sales that could be considered retail sales, accounted for $52.6 billion in sales, up 29.9% from $40.5 billion a year earlier.

Within the Top 500, the split between slower growing large sites and faster growing smaller sites was -apparent. In 2006, combined revenue of the Top 500’s 100 smallest merchants—with annual sales of about $5.5 million to $10.8 million—rose by 23% to $836.3 million from $682.6 million in 2005. Sales at the Top 100 grew 19% to $71.6 billion in 2006 from $60.2 billion in 2005.

In 2006, the Top 500 accounted for 61% of all online retail sales, down from 62.9% a year earlier. Among the Top 500, the Top 100 account for 86% of all sales, down slightly from 87% a year earlier.

But smaller and more nimble merchants continue to grow faster than their established competitors. For instance, the Top 25 retailers grew their combined sales in 2006 to $52.9 billion from $44.8 billion, an increase of 18%. But the total sales for all start-up retailers in the Top 500 Guide—companies only in business since 2004—grew by 55% to $494 million last year from $319 million in 2005.

Growth shifting to smaller retail sites proves once more that the Internet with its lower cost of entry can still level the playing field between small start-ups and giant chains. “It’s still possible for entrepreneurs and start-ups to take a risk and gain a reward by -launching a web retailing site, but the fast-growing merchants these days are specialists and not generalists,” says Jim Okamura, senior partner at retail consulting firm J.C. Williams Group Ltd. “They are search-savvy and know who their specialized customers are and what they want.”

In 2006 small web -merchants—those outside of the Top 500—grew their combined revenue to $18.5 billion, based on subtracting total sales for the Top 500 from the total online sales, not including eBay-originated sales, of $102.1 billion as reported by comScore Networks Inc., which tracks millions of online users’ activities. That number is an increase of 45.7% from a combined $12.7 billion in 2005.

Among the 100 smallest retailers in the Top 500, 19 posted annual growth rates of better than 50%, including seven with 2006 growth rates of more than 100%. By contrast, only seven of the Top 100 had growth rates (excluding acquisitions) of 50% or more.

Working it

A prime example of the success experienced by specialty marketers is Working Persons Enterprises, which operates WorkingPerson.com. It was the fastest growing retailer among the smallest 100 with 2006 web sales of $8.2 million, up 241.7% from $2.4 million in 2005.

WorkingPerson.com (No. 449) caters to shoppers who need to supply their own work apparel such as boots and coveralls. The site also caters to small business owners that purchase personalized uniforms for their employees. The company was founded to take advantage of an under-served niche after -market research indicated that other retailers weren’t offering the mix of price, merchandise and personalization online shoppers wanted, says WorkingPerson.com chief operating officer Stephen Antisdel.

“We thought that consumers who need to buy their own work clothes are a specific retail segment with a lot of potential,” Antisdel says. “It’s too expensive to start as a general merchant on the web today so we knew we had to specialize and find a segment with good growth opportunity.”

In the early days of e-commerce most web merchants built sales by concentrating on customer acquisition and increasing brand awareness. But now, with active U.S. web shoppers expected to peak at about 161 million by 2010, web retailers are shifting resources to applications, third-party services and merchandising strategies that drive more repeat business.

Clearly online buyers are spending more time surfing, searching and shopping the Internet and spending more each time they make a purchase. In 2006, the total number of transactions initiated on all Top 500 web sites rose by 20.7% to 632.5 million from 523.9 million, while the average ticket grew 19.2% to $199 from $167. Factoring out unusually high average orders, such as furniture and computers/-electronics purchases, the average ticket is $132, compared with $118 in 2005. As in previous years, chain retailers accounted for the biggest portion of total online sales in 2006. Last year chain retailers amassed 41.1% of all sales vs. 40.3% in 2005. In 2006 chain retailers in the Top 500 Guide generated combined sales of $34.3 billion, an increase of 23.4% from combined sales of $27.8 billion in 2005.

Following chain retailers were virtual merchants with 30.8% of sales among Top 500 companies, while catalogers and consumer brand manufacturers ended 2006 with market shares of 14.4% and 13.7%, respectively.

In 2006, Top 500 web-only merchants combined for sales of $25.7 billion, up 23.6% from $20.8 billion, compared with catalogers with total combined sales of $12 billion vs. $9.9 billion in 2005, an increase of 21.2%. Consumer brand manufacturers combined for $11.5 billion in 2006 sales, an increase of 9.1%.

The billion dollar club

Chain retailers also represented the segment with the most companies in the billion dollar sales club: Staples Inc., Office Depot Inc., OfficeMax Inc., Sears Holdings Corp., Best Buy Co., J.C. Penney Co. Inc., Wal-Mart Stores Inc. and Circuit City Stores Inc.

Amazon.com Inc. remains the 900-pound gorilla of web -retailing, accounting for 8% of all U.S. online retail sales in 2006 and 13% of all Top 500 sales. Amazon (No. 1) grew its web sales by 26.1% in 2006 to $10.7 billion from $8.5 billion in the prior year.

Following Amazon, the -billion dollar online retailers include Staples (No. 2) $4.9 billion; Office Depot (No. 3) $4.3 billion, Dell Inc. (No. 4) $3.9 billion; HP Home & Home Office Store (No. 5) $3 billion; OfficeMax (No. 6) $2.8 billion; Sears (No. 7) $2.4 billion; CDW (No. 8) $2 billion; SonyStyle.com (No. 9) $1.7 billion; Newegg.com (No. 10) $1.5 billion; Best Buy (No. 11) $1.4 billion; J.C. Penney (No. 12) $1.3 billion; Walmart.com (No. 13) $1.259 billion; QVC Inc. (No. 14) $1.256 billion; Apple Inc. (No. 15), $1.1 billion; Victoria’s Secret Direct (Limited Brands Inc.) (No. 16), $1.1 billion; and Circuit City (No. 17), $1 billion. Web sales for Dell, HP, OfficeMax, Sears, Sony, Best Buy, Walmart.com, Apple and Victoria’s Secret are Internet Retailer estimates. Other chains also posted solid e-commerce gains in 2006. Williams-Sonoma Inc. (No. 20) had 2006 web sales of $927 million vs. $766.3 million in 2005, an increase of 21%, while Gap Inc. Direct (No. 27) grew e-commerce revenue by 22.7% last year to $730 million from $595 million in the prior year.

Among the Top 100, seven retailers—Costco Wholesale Corp. (No. 21), Zappos.com Inc. (No. 31), Blockbuster Inc. (No. 51), American Eagle Outfitters Inc. (No. 56), Harry and David Holdings Inc. (No. 75), VistaPrint Ltd. (No. 79), Restoration Hardware Inc. (No. 96)—had annual organic growth rates of better than 50%. Three merchants—Redcats USA (No. 28), The Talbots Inc. (No. 62) and Charming Shoppes (No. 100)—also grew year-over-year by more than 50%, but did so through acquisitions. Redcats acquired The Sportsman’s Guide Inc., while Talbots purchased the J. Jill Group and Charming Shoppes acquired Crosstown Traders.

Of the top 100 merchants, the fastest-growing based on organic growth were Blockbuster and VistaPrint. Blockbuster, which still trails online movie subscriber leader Netflix (No. 18) by a wide margin, posted 2006 web sales of $248.3 million, an increase of 73.9% from $142.8 million in 2005. VistaPrint grew its annual web sales by 67% to $152.1 million in 2006 from $90.9 million in 2005.

Fast track

Among merchants ranked from 101 to 400, 46 retailers—15%—had annual sales growth of more than 50%, including eight that grew by more than 100%.

In 2006, Diapers.com (No. 396) finished with sales of $11 million—340% higher than web sales of $2.5 million in 2005—and expects revenue to exceed $30 million in 2007. Four years ago, co--founders Marc Lore and Vinit Bharara scanned dozens of consumer products categories and ranked more than 250,000 keywords and phrases looking for an under-served niche. They chose diapers as their prime merchandise category after their research showed that young families and couples about to start families were shopping online for specific diaper brands and other baby care products at discount prices.

“Shoppers were making more than 200,000 keyword searches on diapers each month and we couldn’t believe there weren’t more retailers going after the business opportunity,” Lore says.

Since founding the business as 1800Diapers Inc., Diapers.com has shipped more than 50 million diapers to about 120,000 parents, Lore says.

Diapers.com is growing because it’s taking the time to understand its niche and how shoppers are using search engines to find the specific products they are looking for. “We combed through search engine rankings looking for the right niche,” Lore says.

Search and find

Today many smaller retailers are growing because they are doing a better job of implementing both paid and natural search. Online shoppers also are using Google, Yahoo and other search engines to find and place orders on a growing number of web sites. And evidence suggests that smaller retailers have a better command of search marketing than their bigger colleagues, which may account in part for their faster growth, experts say.

Based on data supplied for each Top 500 retailer from Hitwise, now part of Experian, 40% of merchants ranked 400 to 500 depend on search engines to generate 50% or more of total site traffic. In contrast, only one Top 100 retailer, Northern Tool + Equipment Catalog Co. (No. 76) generates as much as 38% of site traffic from search engines, while most depend on search engines for 11% to 30% of monthly visits. “If virtual merchants are getting 50% of their traffic from Google and other engines and still growing at a combined rate of more than 20% per year, that tells me that the smaller niche players are doing a good job with pay-per-click and optimization to hold their own against the big players,” says Okamura. “If they weren’t properly using paid and natural search, many of the niche players would be out of business.”

Growing categories

In 2006, 13 of 14 merchant categories posted an increase in year-over-year sales. The fastest--growing Top 500 merchant category was hardware & home improvements followed closely by apparel & accessories. In 2006 total web sales for online hardware and home improvements retailers climbed 42% to $1.2 billion from $851.2 million in 2005. The Home Depot Inc. (No. 37) and Lowe’s (No. 69) lead the category with Internet Retailer estimated 2006 web sales of $404.1 million and $173.6 million, respectively. But the fastest-growing merchant was relative newcomer LumberLiquidators.com (No. 263), which grew 400% year-over-year to an Internet Retailer estimated $25 million in 2006.

The merchants in the largest category in the Top 500 Guide—apparel & accessories—continue to show that shoppers have no qualms with buying clothes and other items, including shoes and bags, online. Combined 2006 web sales rose by 41% to almost $10 billion from $7 billion in 2005.

In previous years, it wasn’t uncommon for almost all merchant categories to post annual revenue gains of more than 30% and in 2006 two segments—housewares & home furnishings and toys & hobbies—continued that trend. Top 500 housewares/home furnishings retailers grew their combined sales by 35% to $3.25 billion in 2006 from $2.41 billion in 2005, while online toys/hobbies posted a year-over-year increase of 32% to $979.1 million from $741 million. Combined sales in the specialty/non-apparel market also grew by 32% to $3.07 billion in 2006 from $2.33 billion in 2005.

But for many Top 500 merchant categories in 2006, overall growth was more in line with or below the industry average. Books/CDs/DVDs grew by 25% in 2006 to $3.1 billion led by Netflix with revenue of $996.7 million, while computers/electronics grew by only 12% to $19.8 billion.

For the first time Circuit City generated more than $1 billion in sales through CircuitCity.com. But a number of electronics merchants, including CompSource Inc. (No. 392), Comp-U-Plus (No. 147), eCost.com Inc. (No. 111), eXtreme PC Gear.com (No. 489), Gateway Inc. (No. 54) and Headsets.com Inc. (No. 452), posted lower sales than the year before and -accelerated a shift from selling only gear to -adding services such as PC repairs and computer networking. Among all Top 500 retailers, eCost posted the largest decrease as 2006 web sales dropped by 41.5% to $101.3 million from $173.1 million in 2005.

Going up

Other Top 500 category sales in 2006 include: health/beauty, up 27% to $2.27 billion from $1.75 billion; jewelry, up 26% to $772.4 million from $615.1 million; mass merchants, up 22% to $22.4 billion from $18.3 billion; office supplies, up 19% to $12.3 billion from $10.3 billion; food/drug up 13% to $2.13 billion from $1.87 billion and flowers/gifts, up 1% to $1.21 billion from $1.2 billion.

Though there is moderation in some online categories, there also is still ample room for growth for individual web retailers, particularly smaller niche-oriented web merchants. Over time in other industries, a handful of large players such as General Motors Corp. and Ford Motor Co. in the automotive market and McDonald’s Corp., Burger King and Wendy’s International Inc. in the fast food business, have moved to consolidate their share of the market and forced smaller local and regional competitors to merge or go out of business altogether.

The group with the potential to dominate web retailing—chain stores—often still views the Internet as a minor sales channel or as a venue best used to support their bricks-and-mortar operations

But chain retailers also make up only 20% of the 50 fastest-growing merchants in the Top 500 Guide. In contrast, virtual merchants make up 70% of the list followed by catalogers at 4% and consumer brand manufacturers with 6%, respectively.

Some web retailers find their niche only after extensive market research and even by trial and error. But other smaller Top 500 retailers are growing and running established e-commerce businesses by taking their experience of running stores and applying that knowledge online.

Onlineshoes.com (No. 129) is typical of the smaller web-only merchants using the Internet to find a niche and build a lasting brand. Onlineshoes.com has been selling on the web for more than a decade and in 2006 grew its web sales by 64% to an Internet Retailer estimated $80.2 million. The company, owned and operated by Dan Gerler, a second generation shoe retailer, has been profitable since 2000.

The site also expects web traffic to exceed 28 million visits in 2007, an increase of almost 65% over 2005 traffic of 17 million visits. Onlineshoes.com is able to compete against other rivals such as Zappos, Shoes.com (No. 155) and Gap, which recently launched shoe site PiperLime.com, because the company knows its space and its customers.

Through the Gerler family roots as a Seattle shoe retailer with five stores, Onlineshoes has extensive manufacturer contacts that enable the web site to offer 33,000 styles and 200 premium brands. Onlineshoes.com also backs up its customer service with a 110% price guarantee and offers shoppers unique merchandising programs such as Shoephoria, a shoe-of-the-month program that sends members a new style of shoe each month along with discounts and extended payment plans.

“The Internet gives us the reach we could never have as a conventional retailer and the ability to compete against anyone,” Gerler says.

The extensive data in the Top 500 Guide shows that that is as true now as it was 10 years when the Internet arose as a merchandising vehicle.

mark@verticalwebmedia.com

The Top 500:
Key operating statistics

Industry concentration

The concentration of the e-retailing industry mirrors that of all retailing. The Top 500 e-retailers account for 61% of all online sales, but the top 100 dominate. The top 100 control 53% of retail web sales. By comparison the top 100 store-based retailers control more than 60% of all retail sales in the U.S., not including automobile and restaurant sales.

Web site traffic

In 2006 the Top 500 retail web sites received 1.68 billion average monthly visits. There are 147 million Internet users in the U.S., who visited an average of 5.3 retail sites in 2006.

Performance averages

The Top 500 retail sites recorded an estimated 632.5 million separate sales in 2006 at an average ticket of $132. Sales conversions based on monthly visits vary widely, ranging from 0.05% to 22.5% for chain retailers, 0.33% to 12% for catalog/call center operators, 0.03% to 22.5% for web-only merchants and 0.33% to 12% for consumer brand manufacturers.

Percentage of web sales

The sales of the top 100 retail web sites in 2006 accounted for 53% of the total corporate sales of the retail chains, catalog companies and manufacturers that operate those sites.

Methodology
Researchers contacted hundreds of retailers over five months. The starting point of data gathering was previous Top 500 rankings, and rankings of retailers’ web traffic from comScore Networks Inc. and Nielsen/Net Ratings Inc. That list was supplemented with retailers that Internet Retailer has covered and by retailers who contacted Internet Retailer for inclusion.

Web sales. Whenever possible, web sales listed in the guide came from the company. If the company did not provide sales figures, Internet Retailer estimated sales based on traffic and an assumed conversion rate and average ticket for that retailer’s category—as well as on analyst interviews—to formulate estimates. Retailers were given multiple opportunities to respond to estimates.

Visits and unique visitors. Official numbers were supplied by many retailers. When a retailer did not reveal figures, researchers used comScore, Nielsen/NetRatings or Internet Retailer estimates. Retailers were given the opportunity to respond to estimates.

Conversion rates. In most cases, researchers used category data and analyst interviews to formulate estimates if a retailer did not reveal a number. Retailers were given the opportunity to respond to estimates.

Average ticket. If a retailer would not reveal an average ticket, researchers estimated the figure based on averages within a category and input from market analysts. Retailers were given the opportunity to respond to estimates.

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