The Top 500 Guide

Store and catalog sales stalled in 2007, but e-commerce roared along as the retail industry’s growth engine

If there is a silver lining to the clouds hanging over the retail industry, it’s the Internet. In 2007, high gas prices, a credit crunch and weaker consumer confidence added up to a tough year financially for many retailers. A sharp drop in revenue and higher operating costs forced several well-known brands, including Lillian Vernon Corp. (No. 105) and The Sharper Image Corp. (No. 176), into bankruptcy. Other prominent retailers such as Linens ‘n Things Inc. (No. 154), which missed a key interest payment and is looking at more cost-cutting, and RedEnvelope Inc. (No. 132), which filed for bankruptcy in April, also have fallen on hard times.

In 2007, many retailers struggled with weak store and catalog sales. By contrast, e-commerce was the retailing industry’s growth engine. In 2007, the business-to-consumer e-commerce market, which includes the Internet Retailer Top 500, grew nearly six times faster than total retail sales. Last year online retail sales reached $165.9 billion, an increase of 21.8% from $136.2 billion a year earlier. Meanwhile, total retail sales grew by 3.9% to $2.41 trillion from $2.32 trillion in 2006, according to the National Retail Federation.

In 2007, the Top 500 grew their combined sales to $101.7 billion, an increase of 21.6% from web sales of $83.6 billion in 2006. The rest of the market, including an estimated $38 billion in eBay Inc.-originated sales that could be considered retail sales, accounted for $64.2 billion in sales, up 22% from $52.6 billion a year earlier. 2007 sales at the Top 100 grew to $87.7 billion—22.5%—from $71.6 billion in 2006.

In 2007 the Top 500 accounted for 61.3% of all sales, up from 60.2% a year earlier. As in previous years, it was the largest web-only retailers and big national chains, catalogers and consumer brand manufacturers with an Internet channel that accounted for the biggest share of the market.

Among the Top 500, the biggest 100 accounted for 86% of sales, or $87.7 billion. The Top 100 did not increase their market share from 86% last year, when their combined sales were $71.6 billion. Smaller niche merchants also grew web sales but not as fast as the Top 100. Last year combined revenue of the Top 500’s 100 smallest merchants—companies with annual web sales ranging from $6.4 million to $13.4 million—rose by 19% to $995.5 million from $836.3 million in 2006.

Clearly, while the performance of stores and catalogs faltered for many retailing companies, it was the Internet that accounted for the most significant growth. At Staples Inc. (No. 2), the largest retail chain in the Top 500, the web represented 29% of total sales in 2007 but made up 58% of annual growth. The financial impact of e-commerce was even more pronounced at Williams-Sonoma Inc. (No. 21). The web represented almost one-third of all revenue at Williams-Sonoma and accounted for 81% of revenue growth across all channels last year, including stores, the Internet and catalog.

Last year the Top 500 web sites received 1.88 billion average monthly visits, compared with 1.68 billion average visits per month in 2006. “We’re seeing a tipping point in retailing where shoppers are going to conduct less business in stores or by catalog and shift even more of their buying to online,” says Nikki Baird, managing partner of retail research company Retail Systems Research. “Customers are getting a better shopping experience online where the merchandise selection is infinitely better than in stores and it’s faster and easier to make a purchase.”

As a direct result of the sophisticated features Top 500 web retailers are adding such as videos, customer reviews and advanced rich media, shoppers are visiting more web sites and making bigger purchases. In 2007, the total number of transactions on all Top 500 web sites rose by 8.8% to 456 million from 419 million in 2006.

Bigger ticket

Last year across all categories web shoppers spent an average of $223 each time they made an online purchase at a Top 500 e-retailer, compared with an average ticket of $199 in the prior year. Factoring out unusually high average orders such as furniture and consumer electronics, the average ticket is $169, up from $132 in 2006. Web shoppers also visited an average of 10 retail sites each month last year. “The fact that consumers are visiting more web sites and increasing the size of their purchase when they buy is another reason chain retailers can’t see their e-commerce channel as just another big store, and other Top 500 merchants have to make their customer experience even better,” Baird says. “Retail growth isn’t coming from traditional channels. It’s being generated online.”

Amazon.com (No. 1) remains the web’s most dominant retailer. With 2007 sales of $14.8 billion, Amazon accounted for 9% of total U.S. business-to-consumer e-commerce sales last year and 15% of all sales for the Top 500. In comparison, it would take the combined sales of 406 of the smallest Top 500 merchants to equal Amazon’s annual revenue. Amazon is enjoying record growth because the company continues to invest in new technology and merchandising that improved operating efficiency and lowered costs.

In 2007, Amazon spent 6% of total sales—$818 million—on new content and technology. The online retailer also spent $1.3 billion, or 9% of all revenue, on fulfillment. The ongoing investment in a better infrastructure and diversified merchandising paid off handsomely for Amazon in 2007 as net income grew by 151% to $476 million from $190 million in 2006.

In 2007, 21 retailers, including Amazon, generated annual e-commerce revenue of $1 billion or more. Following Amazon, the biggest billion-dollar online retailers include Staples at $5.6 billion; Office Depot Inc. (No. 3) at $4.9 billion; Dell Inc. at $4.2 billion (No. 4); HP Home & Home Office Store (No. 5) at $3.4 billion; OfficeMax Inc. (No. 6) at $3.2 billion; Apple Inc. (No. 7) at $2.7 billion; Sears Holdings Corp. (No. 8) at $2.6 billion; CDW Corp. (No. 9) at $2.4 billion; Newegg.com (No. 10) at $1.9 billion; and QVC Inc. (No. 11) at $1.9 billion. Web sales for Dell, HP, OfficeMax, Apple, Sears and QVC are Internet Retailer estimates.

Powering growth

In tough economic times, it’s the speed, efficiency and critical mass of their e-commerce sites that are generating all—or a significant portion—of the growth at many big chain retailers. Many big box retailers, which formerly saw the web as a minor sales channel or as one part of a bigger multi-channel strategy, now see e-commerce in a strategic light. These days the web isn’t just driving total sales. The Internet and e-commerce are driving growth at a rate and critical mass stores can’t match.

Even at Office Depot, with its 1,222 stores, the web is powering growth. In 2007, sales at OfficeDepot.com rose by 14% to $4.9 billion from $4.3 billion in 2006. That increase accounted for all the growth in Office Depot’s sales last year. Total revenue rose by 3.5% to $15.5 billion from $15 billion in 2006 while comparable store sales dropped by 5%. Office Depot was an early believer in the Internet as a sales channel and took an innovative approach to maintaining its e-commerce site. Today its commitment to the web is paying off.

In 2007 OfficeDepot.com generated as much revenue as 565 of the office supply retailer’s bricks-and-mortar locations and accounted for 32% of total sales. “When a web site generates the same revenue as more than 500 of its stores, that’s an eye-popping statistic that shows the economics of the industry are changing,” says Jim Okamura, senior partner at retail consulting firm J.C. Williams Group Ltd. “A big chain like Office Depot is crossing the threshold where the web will keep on outperforming stores. The Internet is a lower cost and higher margin channel that’s generating their biggest return on investment.”

Chain reaction

Other major chain retailers also counted on their Internet operations to generate growth in 2007 when store and catalog sales dropped off.

Total sales at Circuit City Stores Inc. (No. 16) dropped by 5.5% in 2007 to $11.7 billion from $12.4 billion in 2006. Comparable store sales also dropped by 8% last year, but CircuitCity.com grew by 40% to $1.4 billion from $1 billion in 2006.

The web also provided the only uptick in sales at Gap Inc. (No. 24). While total 2007 revenue remained flat at $15.8 billion and comparable store sales fell 4%, Gap’s web sites—BananaRepublic.com, Gap.com, OldNavy.com and PiperLime.com—grew combined e-commerce revenue by 23.7% to $903 million from $730 million in 2006. “The CEOs at these major retail chains aren’t going to forget the huge financial contribution their Internet channel made last year to the overall performance of the business,” Okamura says. “They know their growth came from more people shopping online and not driving to the mall.”

As a group, chain retailers fared well in 2007, but they were the slowest growing category among all Top 500 merchant groups. Last year catalog companies, which accounted for 15.5% of all Top 500 sales, grew the fastest with combined sales of $15.7 billion, an increase of 30.8% from $12 billion in 2006. Top 500 web-only merchants grew their combined sales year-over-year by 22.2% to $31.4 billion from $25.7 billion in 2006, while consumer brand manufacturers ranked as Top 500 retailers increased their collective 2007 sales by 21.7% to $14 billion from $11.5 billion in the prior year. Top 500 chain retailers recorded $40.6 billion in combined sales in 2007, up 18.4% from $34.3 billion in 2006.

The biggest Top 500 direct marketers and multi-channel companies with a catalog arm continue to shift sales to the web and away from direct mail and call centers. The web now accounts for almost one-third—30%—of all sales for CDW, the Top 500’s biggest catalog company. But the web represented an even bigger percentage of total sales at other well-known catalog companies, including L.L Bean Inc. (No. 23), Redcats USA (No. 29), and Oriental Trading Co. Inc. (No. 49).

Cataloging growth

At L.L. Bean, the web now accounts for an estimated 59% of total sales, while at Redcats USA, which posted web sales of $801 million last year, the Internet accounted for 62% of total revenue of $1.3 billion. At Oriental Trading, 2007 web sales grew to $299 million and represented 52% of total sales of $570 million. The fastest growing catalogers in the Top 500 in 2007 were Green Mountain Coffee Roasters (No. 172), which grew its web sales by 249.8%. Another traditional catalog company—Fingerhut Direct Marketing Inc. (No. 96)—used a new Internet strategy and a redesigned web site to grow web sales by 75.6% to $144 million last year from $82 million in 2006.

Many traditional catalogers used the speed and efficiency of their e-commerce channel to offset sharply higher direct mail and publishing costs in 2007. As catalogers struggle with rising costs, the shift to a more efficient e-commerce model will accelerate, say retail and direct marketing analysts. “At many companies, the paper catalog is becoming an advertising vehicle the same as a Sunday newspaper circular,” says Robert Antall, CEO of retail consulting firm Lake West Group. “More consumer direct companies we talk with are cutting back on printing catalogs because the web is a more efficient order entry vehicle and also can be used as a significant marketing vehicle to drive traffic and sales.”

In recent years web-only retailers have accounted for some of the fastest growth among Top 500 companies and 2007 was no exception. The five fastest growing web-only retailers included Diapers.com (No. 231), which grew its annual web sales by 227.3% to $36 million in 2007 from $11 million in 2006. Diapers.com was followed by Cymax Stores Inc. (No. 247), up 159.6% to $32.5 million; LA Police Gear Inc. (No. 336), up 137.5% to $19 million; Blue Bay Inc. (No. 372), up 131.5% to $15.7 million; and Designer Plumbing Outlet (No. 452), up 126.2% to $9.5 million.

Many web-only retailers kept their online sales machines cranking in an otherwise tough year because they are niche merchants with less overhead and bureaucracy than traditional catalogers and chains. Using the speed of the Internet in tandem with powerful but affordable e-commerce technology, web-only merchants also can add lines of merchandising and implement online marketing programs faster than conventional retailers.

Many Top 500 consumer brand manufacturers, once considered e-commerce laggards, also now see the web and e-commerce in a broader and more important light, particularly as they look to build even bigger international brands and generate more sales directly from the public online. For example, Nike Inc. (No. 47) used its e-commerce channel to generate $326.5 million in online sales in 2007, up 45.6% from $224.3 million in 2006.

Though online sales accounted for only 2% of Nike’s total revenue last year of $16.3 billion, the company is committed to turning its web channel into a more significant sales and strategic tool going forward, CEO Mark Parker told analysts on the company’s first quarter earnings call.

“E-commerce today is a small percentage of our business relative to what we think it could or should be,” Parker said. “We sort of woke up a year ago and said we want to move this from, to speak candidly, a bit of a hobby to a real commitment to pursuing the full potential of one of the fastest growing channels on the planet.”

Ralph Lauren Media LLC, the e-commerce arm of Polo Ralph Lauren Corp. (No. 87), is also among the manufacturers making a bigger commitment to the Internet. In 2007, Ralph Lauren, which increased its annual web sales by 25% to $150 million from $120 million, spent $43.7 million to acquire all remaining shares of Ralph Lauren Media from ValueVision Media Inc.

The company also opened a state-of-the-art e-commerce call center and customer service facility in Greensboro, N.C., this spring to handle its growing e-commerce business.

“We made a very early commitment to the online business back in 2000, and we spent years really learning and investing in how that would operate,” Ralph Lauren’s president and chief operating officer Roger Farah told Wall Street analysts on the company’s second quarter earnings call. “I think our desire to see that as a huge future platform speaks as to why we bought the 50% back that we didn’t own.”

Diversity counts

Many individual Top 500 retailers kept pace or exceeded the industry’s growth rate in 2007, but equally impressive is the diversity of sales. Last year all 14 Top 500 merchant categories posted larger combined sales, including four—apparel/accessories, books/music/video, jewelry and mass merchant—which exceeded the industry average. The biggest growth occurred among online jewelry merchants who combined for sales of $1.05 billion, up 36% from one year ago. They were followed by online books/music/video retailers, which grew by 32% to $4.1 billion in 2007, and mass merchants and department stores, up by 31% to $29.3 billion. Apparel and accessories retailers grew their combined web sales by 24% to $12.4 billion in 2007.

As 2007 ended and the U.S. economy slipped into what many economists now see as a recession, some analysts expect the overall retail market to slow even more this year. But the exception to stagnant store and catalog sales will continue to be the Internet. “The growth in the retail industry will continue to come primarily from the web and not other channels,” says Antall. “People are shopping less in stores or picking up the phone and calling in a catalog order. Shoppers will keep on migrating to the web because it’s now easier, convenient and mainstream.”

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 61.3% 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 2007 the Top 500 retail web sites received 1.88 billion average monthly visits. There are 188 million Internet users in the U.S., who visited an average of 10 retail sites each month in 2007.

Performance averages

The Top 500 retail sites recorded an estimated 456 million separate sales in 2007 with an average ticket across merchandise categories of $223. Sales conversions based on monthly visits vary widely, ranging from 0.3% to 10.75% for chain retailers, 0.65% to 31% for catalog/call center operators, 0.12% to 19% for web-only merchants and 0.25% to 10% for consumer brand manufacturers.

Web sales of the Top 100

The sales of the top 100 retail web sites in 2007 accounted for 86% of the Top 500 sales of $101.7 billion.

Methodology

Researchers contacted hundreds of retailers over six months. The starting point of data gathering was the rankings of retailers’ web traffic from comScore Inc. and Nielsen Online. That list was supplemented with retailers that Internet Retailer has covered.

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 review and 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 Online 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.