The Top 500 Guide

Online retailing weathered the storm in 2008 and finished as the retail market’s only growth driver

Last year showed online retailers an unpleasant and previously unacknowledged truth: E-commerce is subject to the same economic forces as the rest of the economy. For the first time in their dozen years of history, e-commerce sales grew at only a single-digit rate. But 2008 also confirmed what many e-retailers knew: Consumers are hooked on shopping online. As a result, online retailing has withstood the economic storm better than other areas of the industry and is one area of retailing that experienced growth last year.

Sales of the Top 500 online retailers grew 11.7% to $115.85 billion in 2008 from $103.69 billion in 2007 while Internet Retailer estimates the total retail sales market grew 1.4%. Those broad numbers, however, mask some interesting developments that indicate the fundamental strength of online retailing. For one thing, while chain retailers’ web sales were growing, their comparable-store sales were shrinking. In fact at 41 of the 50 biggest chains, e-commerce revenue grew as comparable-store sales declined. And at six, web sales declined, but not nearly as much as same-store sales.

In fact, overall web sales were responsible for 20% of the growth in total retail sales last year while accounting for about 6.5% of sales. Internet Retailer calculates that web sales across the board added up to $178.18 billion in 2008, up $7.7 billion, or 4.6%, from $170.41 billion in 2007. Sales across all general merchandise, excluding restaurants, gasoline stations and fuel sales, as measured by the U.S. Department of Commerce, equaled $2.744 trillion, up $39 billion, or 1.4%, from $2.705 trillion a year earlier.

Total online sales are made up of $115.8 billion in sales by the Internet Retailer Top 500, an Internet Retailer-estimated $21.6 billion in U.S. gross merchandise volume at eBay, and $40.7 billion in sales by online retailers not in the Top 500, an Internet Retailer estimate based on the U.S. Department of Commerce report of online sales. For the previous year, sales consisted of $103.7 billion in sales by the Top 500, $23.4 billion in U.S. gross merchandise volume at eBay and $43.3 billion in non-Top 500 sales. Clearly, 2008’s sinking economy took its toll on the smallest retailers—the non-Top 500 retailers and eBay sellers.

Top 100 dominate

In 2008, while the deepest recession in decades and a cutback in consumer spending forced some well-known store chains, including Circuit City Stores Inc. (No. 17) and KB Toys Inc., into bankruptcy, the combined sales of the Top 100 e-merchants grew by 14.3% to $98.60 billion from $86.30 billion in 2007. The biggest 100 accounted for 85.1% of sales in 2008 compared with 83.2% in the prior year. Smaller niche Top 500 merchants also slightly outpaced the overall e-commerce market. Last year the combined revenue of the Top 500’s 100 smallest merchants—companies with annual e-commerce revenue of $9 million to $15.2 million—increased by 13.2% to $1.20 billion from $1.06 billion in the prior year.

Amazon.com Inc. (No. 1) continues to dominate the market because of its sheer size. Last year sales at Amazon grew more than five times faster than the rest of the business-to-consumer e-commerce market—up 29.5% to $19.17 billion from $14.80 billion in the prior year.

Amazon remains the largest web retailer because the company continues to expand overseas and diversify into new merchandising categories. Amazon opened 12 new web stores in 2008—28 in the past two years. Amazon also continues to invest heavily in technology and new products such as Kindle, its electronic book reader. Last year Amazon invested just over $1 billion, or 5% of revenue, on technology and content. Amazon also continues to build a bigger international base. Overseas sales now represent 46.6% of total sales and grew by 33.3% to $8.93 billion in 2008 from $6.7 billion in 2007. Consumers also responded to Amazon’s low prices and to Amazon Prime, which for $79 a year provides free two-day express shipping and one-day delivery upgrades for $3.99. In 2008, Amazon added more web stores, including an election store and a microsite for out-of-circulation and hard-to-find CDs.

In 2008, other Top 100 retailers grew because they made key acquisitions or continued to invest in technology, product development or updated web site features such as customer reviews and videos. Aided by its $4.4 billion acquisition of Corporate Express LLC in July, for instance, Staples Inc. (No. 2) controlled about 44% of the online office supplies category in 2008, up from 41% in 2007. The acquisition of Corporate Express, which added an estimated $1.65 billion in online revenue last year, also helped Staples increase its total web sales by 37.5% to $7.7 billion in 2008 from $5.6 billion in 2007.

Fundamental changes

In previous years, when the U.S. online retailing market grew at an annual rate of 25% or higher, web retailers had an easier time attracting customers and building up their e-commerce channel. But the harsh economic conditions of 2008 changed the fundamental nature of online retailing. Size still matters, but going forward only the web merchants that offer consumers the best online shopping experience, competitive pricing and superior merchandise will survive and grow.

“In 2008 the wheat came off the chaff in online retailing,” says Nikki Baird, managing partner at research firm RSR Research. “The online retailers that just count on being the lowest price provider aren’t going to be around for the long term. The ones that survive and grow will be ones that run a very efficient operation and give consumers the best customer service and shopping experience.”

While Circuit City succumbed to bankruptcy in 2008, Best Buy Co. (No. 10) grew web sales by 13.1% to an estimated $2.01 billion and laid the foundation for greater long-term e-commerce growth. Expanding in digital content, Best Buy in September acquired online music service Napster for $121 million. Best Buy also created a dedicated web site for Spanish-speaking shoppers last year and launched a $2.1 billion joint venture in Europe with The Carphone Warehouse Group PLC aimed at the consumer electronics and mobile commerce market.

Another big web retailer that continues to diversify is Newegg (No. 9). Sales for many online electronics retailers flat-lined in 2008, but Newegg grew its sales year over year by 10.5% to $2.1 billion by launching NeweggMall.com, a mass merchandise web site with more than 15,000 products in categories including beauty, travel, and home and garden, and creating a new Canadian e-commerce site.

The outsource option

Without diversification or the resources to run a bigger operation some Top 500 retailers, such as Discovery Communications LLC (No. 191), are finding that maintaining the status quo is not enough to stay competitive. Just two years ago Discovery Commerce, the retail arm of Discovery Communications, closed 100 stores to concentrate on web retailing, using its own in-house technology platform, marketing program and fulfillment operation. But after years of stagnant web sales, Discovery outsourced the entire operation of DiscoveryStore.com to Delivery Agent Inc., a third-party provider of online retailing, digital advertising and content services to entertainment companies.

Delivery Agent now operates all aspects of DiscoveryStore.com. “To compete in the e-commerce business today, you have to ramp up and be a big online retailer with the infrastructure to back it up or settle for being a niche provider,” says Discovery Commerce and Digital Media chief operating officer Kelly Day. “We were in the middle and not growing. Signing a deal with Delivery Agent was a good alternative.”

In 2008, the retailers that grew the fastest in a tough economic environment were the merchants that continued to diversify their product lines or develop niches that appeal to a certain online audience. While some apparel retailers that cater to older women such as Talbots (No. 106) and Coldwater Creek Inc. (No. 70) finished 2008 with declining e-commerce sales, other merchants, especially chains that target a younger and more web-savvy audience, enjoyed solid growth. Just two years after launching its web store, Aéropostale Inc. (No. 156) increased web sales by 85% to $79 million in 2008, while Yoox.com (No. 79), an international e-retailer, grew sales by 57.9% to $192.1 million. Other youth-oriented chains with notable increases were American Apparel Inc. (No. 236), up 55.1% to $39.4 million; Hot Topic Inc. (No. 211), up 33.4% to $45.7 million; and American Eagle Outfitters Inc. (No. 54), up 26.1% to $307 million.

“Last year was the most difficult year in memory in retailing, but the online merchants that had the right price points and delivered the best web shopping experience to a targeted audience could still put up healthy numbers,” Baird says. “Teenagers and women in their 20s grew up on the web and for many young people it’s their favorite way to shop.”

As in previous years, web-only merchants posted the biggest increases in Internet sales across all merchant categories in 2008, thanks to Amazon.com, which accounted for 52% of category sales. Apart from that, sales growth was surprisingly strong across categories, with the exception of catalogers. Combined sales for all Top 500 web-only merchants grew year over year by 20.7% to $36.84 billion from $30.52 billion. Without Amazon, sales for all other Top 500 Internet-only retailers grew 12.4% to $17.67 billion from $15.72 billion in 2007.

Top 500 retail chains grew their combined web sales last year by 12% to $45.11 billion from $40.37 billion. Top 500 consumer brand manufacturers grew their web sales by 15.3% to $14 billion from $12.14 billion in 2007. Only Top 500 catalog companies posted a drop in sales last year, declining by 3.6% to $19.90 billion from $20.65 billion in 2007.

Growing sales

With sales that increased 172.7% to $12 million in 2008 from $4.4 million in 2007, GourmetGiftBaskets.com was the fastest-growing Top 500 web-only retailer. In a tough economy where many consumers cut back on discretionary items, GourmetGiftBaskets.com (No. 446) overhauled its web site with new options to customize a gift basket and easier ways to shop. GourmetGiftBaskets, which is run by a second-generation family floral business, added customer reviews, and completely revamped its site search program and page navigation. Shoppers at GourmetGiftBaskets.com can now easily browse by category, price, occasion and specialty items.

With better navigation, shoppers can also complete a custom order in as few as five steps. “Well over half of our customers are repeat shoppers and we implemented a number of initiatives that made it easier for them to complete a custom order online,” says GourmetGiftBaskets.com president Ryan Abood. “The gifts baskets business can be pretty cookie cutter. We grew because we listened to customers, gave them the site improvements they asked for and still kept each order highly personalized.”

Among catalog companies, Green Mountain Coffee Roasters Inc. (No. 120) was once more the fastest-growing company in the category with web sales that grew 86.1% to $111.3 million from $59.8 million. To drive its online business, Green Mountain expanded the value of its Café Express, its web shopper loyalty program, by offering two free bags of coffee, $2 off on cups, $1 off on a bag of coffee and a 10% discount on non-coffee items. As result, Green Mountain doubled the number of Café Express members to about 135,000 in the past 12 months. In its e-mail and conventional direct mailing program to Café Express members, Green Mountain emphasized the value, speed and convenience of shopping online over standing in line at the grocery store or a coffee shop.

In its online inventory, Green Mountain also can offer web shoppers more than 200 types of gourmet coffee, compared with only about a dozen to 20 brands in a typical grocery store. “Café Express members are our most loyal customers and we drove web sales higher in a tough economy by offering them more value along with the easiness of buying coffee and brewers online,” says Ken Crites, director of consumer direct for Green Mountain’s specialty coffee business unit. “We emphasized they could get bargains but still easily shop our e-commerce sites for more than 200 gourmet products without having to drive to the store or put up with grumpy servers. We tell customers: why go to the store when you can find the same value or better online and have an easier time shopping.”

Overseas diversity

American Apparel Inc. (No. 236), the fastest-growing Top 500 consumer brand manufacturer, also counted on diversity to increase its web sales year over year by 55.1% to $39.4 million from $25.4 million. American Apparel, which also operates 260 stores in 19 countries, has spent two years building web stores for shoppers in Australia, Canada, Europe, Japan and South Korea. As a result, international e-commerce sales increased 82.9% to $13.9 million in 2008 from $7.6 million in 2007 while U.S. online sales grew year over year 43.3% to $25.5 million from $17.8 million.

“We can use the speed and efficiency of the web to build a business quickly in a foreign market and that’s helping to diversify our e-commerce sales,” says American Apparel web director Raz Schionning. “Last year was a tough one in apparel retailing and manufacturing, but being able to sell online in multiple countries was a big advantage for us.”

In 2008 as the economy worsened and comparable-store sales dropped, many big chain retailers relied on their e-commerce units to drive business. While comparable-store sales decreased by 1.5% for Charlotte Russe Holding Inc. (No. 464), the fastest-growing Top 500 chain retailer which began selling online only two years ago, web sales grew by 633.3% for fiscal 2008 to $11 million from $1.5 million in 2007.

The web clearly drove sales for most big chains in 2008. E-commerce generated the only growth in sales at several other prominent chains, including Gap Inc. (No. 25), Macy’s Inc. (No. 23), Nordstrom Inc. (No. 32), and Kohl’s Corp. (No. 50).

— In 2008 Gap posted e-commerce revenue of $1.03 billion, up 14% from $903 million in 2007. In comparison, total revenue and comparable-store sales dropped by 7.8% and 12%, respectively.

— At Macy’s, e-commerce sales grew by 28% to an estimated $1.04 billion in 2008 while total sales were down 5.6% and comp-store sales were down 4.6%.

— In 2008, web sales for Kohl’s rose by 58.9% to $356 million from $224 million in 2007. Comparable-store sales at Kohl’s decreased by 6.9% while total revenue dropped by 0.5%.

— The web made an even bigger difference at Nordstrom (No. 32). In 2008, e-commerce sales increased by 8.4% to $686.2 million from $633 million in 2007 vs. a decline in overall sales of 6.2% and same-store sales that dropped 9%.

Overall e-commerce was the one channel that made a difference for many chain retailers—for 31 of the top 50 chains the web grew while total sales declined. But the online retailing industry was hardly recession proof. In 2008, 74 Top 500 retailers had flat or declining sales, compared with 25 in 2007 and just 13 in 2006. Last year only five of 14 merchandising categories in the Top 500—apparel/accessories, computers/electronics, health/beauty, mass merchant and specialty/non-apparel—exceeded or grew at the same rate as the overall e-commerce market. With sales that increased 20% to $35.52 billion, the mass merchandise segment was the fastest-growing merchandise category while the jewelry and flowers/gift segments each grew by 1% to $1.06 billion and $1.46 billion, respectively.

Market shift

As 2008 ended, it was clear that business-to-consumer e-commerce remains the growth engine for the retailing industry. But the tough economy also changed fundamental ways successful retailers will need to run their web business going forward, says Scot Wingo, an eBay analyst, author, and president and CEO of ChannelAdvisor Corp., which helps retailers sell through online marketplaces such as eBay and Amazon.com.

“When the market was growing at 25% per year, most merchants looked first and foremost at growing the top line,” Wingo says. “But the recession has put a lot of web retailers just in survival mode. The successful merchants that will make it through tough times and grow are the ones that execute on every part of their business plan and do whatever must be done to maximize their performance.”

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 65% of all online sales, but the top 100 dominate. The top 100 control 55.3% of retail web sales. By comparison the top 100 store-based retailers control about 60% of all retail sales in the U.S., not including automobile and restaurant sales.

Web site traffic
In 2008 the Top 500 retail web sites received 2.17 billion average monthly visits. There are 192 million Internet users in the U.S., who visited an average of 11.3 retail sites per month.

Performance averages
The Top 500 retail sites recorded an estimated 585.1 million separate sales in 2008 with an average ticket across all merchandising categories of $198. Sales conversions based on monthly visits vary widely, ranging from 0.3% to 10% for chain retailers, 0.55% to 27% for catalog/call center operators, 0.27% to 14.5% for web-only merchants and 0.5% to 6% for consumer brand manufacturers.

Percentage of web sales
The sales of the top 100 retail web sites in 2008 accounted for 85.1% of the Top 500 sales, compared with 83.2% in 2007. The top 100 merchants includes: 40 chains, 26 web-only retailers, 28 catalog companies and six consumer brand manufacturers. There were a total of 27 top 100 retailers with annual web sales of $1 billion or higher, up from 21 in 2007

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

Web sales. Whenever possible, web sales listed in the guide came from the company. If the company did not provide sales figures, researchers 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 the opportunity 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 Online or internal estimates. Retailers were given the opportunity to respond to estimates.

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

Average ticket. If a retailer would not reveal 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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