Despite dominating total sales, big chains have some catching up to do in online sales
By Mark Brohan
In retailing, the Internet is a great equalizer and no group knows that better than the biggest chains. With their deep pockets, established brands and thousands of stores, the big chains dominate conventional retail sales.
But after 10 years it’s clear that major chain retailers aren’t dominating e-commerce sales. When the Internet emerged as a bona fide sales channel, many of the big chains stepped aside as more nimble merchants, including Amazon.com, rushed in and took full advantage of e-commerce and the opportunity for anytime, anywhere retailing.
Today the big retail chains are losing online market share and ceding even more sales to virtual merchants, consumer brand manufacturers and smaller niche players. As a group, the 25 largest chain retailers accounted for $25.6 billion—19%—of all e-commerce sales of $136.2 billion in 2006, down from 22%, or $23.7 billion, of $109.4 billion in 2005, according to an analysis by Internet Retailer. In 2006 the business-to consumer e-commerce market grew by 26%, but the biggest 25 chain retailers increased their combined sales by 8%.
Some old hands
Other merchant groups also experienced less growth, but they still grew faster than the big chains. For example, the 25 biggest virtual merchants grew year over year by 23.4% with combined sales of $20 billion in 2006 versus $16.2 billion in 2005, while the top 25 consumer brand manufacturers increased their combined web sales by 20.2% to $10.1 billion in 2006 from $8.4 billion in 2005. The big chains also lost ground to the 25 largest catalogers. In 2006 the largest catalog/call center companies posted combined web sales of $11.2 billion, an increase of just 9.8% from $10.2 billion in 2005.
Big chain retailers certainly aren’t newcomers to e-commerce. Six chains, including J.C. Penney Co. Inc., Macy’s Group Inc. and Gap Inc. Direct, have been selling online for more than a decade and 16 others between five and 10 years. But with the exception of J.C. Penney, an early believer in e-commerce, and Limited Brands Inc., where the web accounts for about 10% of all revenue, and a few others, most big chains aren’t growing their Internet sales nearly as fast as the competition.
With annual sales of $10.7 billion, Amazon.com grew by 26% in 2006 and accounted for 8% of total e-commerce sales. In comparison, the combined online sales of the five largest retail chains—Wal-Mart Stores Inc., The Home Depot Co. Inc., Costco Wholesale Corp., Target Corp. and Sears Holdings Corp.—amounted to $5.9 billion, or 4.3%, of all e-commerce sales last year. Of the five biggest chains, only one—Costco—exceeded Amazon’s growth rate. 2006 was a breakout year for Costco, which grew its annual web sales by 65% to $880 million. In comparison Walmart.com increased sales by 20% to $1.26 billion, The Home Depot by 15% to $404 million, and Sears Holdings and Target by 10%, with web sales of $2.4 billion and $986.2 million, respectively. Sales for Walmart.com, Home Depot, Sears Holdings and Target are Internet Retailer estimates.
Laggards
“Most of the big chains are trailing the online retail market in sales by a wide margin,” says Paula Rosenblum, a partner with Retail Systems Research LLC, a Miami retail technology research and consulting firm. “Their systems and resources are focused on stores and they aren’t using the full potential the web offers as a sales channel.”
The 25 largest chains continue to dominate total retail sales. Last year the top 25 chains, not counting 9 major grocery and food service companies that don’t have a major e-commerce presence, accounted for 38%—$1 trillion—of all sales of $2.63 trillion. The figure for total retail sales includes most standard retail categories from the U.S. Department of Commerce with the exception of parts and accessories sold by automotive dealers and food service, gasoline stations and fuel sales. The figure for annual e-commerce sales includes sales from the U.S. Department of Commerce and sales at eBay Inc. that could be considered retail sales.
On the whole the Internet Retailer analysis finds that most big mass merchandise and department store chains continue to view the Internet as a minor sales channel. For instance, of the top 25 retail chains, seven companies posted annual web sales that represent less than 1% of their total sales, while three chains, including Rite Aid Corp., TJX Companies Inc. and B.J.’s Wholesale Club Inc., have no e-commerce business or only a limited or fledgling operation. With 2006 Internet Retailer-estimated web sales of $10.8 million, the Internet accounted for just 0.14% of total sales at Dillard’s Inc., followed by Kohl’s Corp at 0.21% ($32.1 million), CVS Corp. at 0.31% ($135.5 million), Walgreen Co. at 0.36% ($169.5 million) and Lowe’s Cos. Inc. at 0.37% ($173.6 million). The web sales for Kohl’s, CVS, Walgreens and Lowe’s are Internet Retailer estimates.
“Most of the big chains have been lagging behind in web sales for years and they have to decide if they want to change their points of view and business models to catch up,” says Kasey Lobaugh, retail direct to consumer and multi-channel retailing practice leader for Deloitte Consulting, a unit of Deloitte & Touche LLP. “Selling online is all about effective one-on-one merchandising and successfully picking, packing and shipping individual orders, but many of the big chains still aren’t set up to manage this kind of e-commerce business.”
Other priorities
Many web retailers and industry analysts look at a merchant’s annual increase in e-commerce sales and the ratio of web sales to total sales as the biggest indicators of growth. But it’s also clear that big chain retailers with their focus on stores and multiple sales channels also see the Internet in different terms. For instance, Wal-Mart has completely redesigned Walmart.com over the past year and added advanced features and functions such as product reviews, faster search and an order online/pick up in store service.
But the main value proposition of Walmart.com to Wal-Mart isn’t just to generate sales. Instead Wal-Mart uses Walmart.com to support the company’s global network of nearly 7,000 stores and give shoppers different ways to locate and purchase merchandise. “The goal of Walmart.com is to be the premier multi-channel retailer,” says a Walmart.com spokesman. “We’ve launched several web initiatives that reflect our commitment to this goal and they are designed to deepen our relationship with customers and make it easier for them to access Wal-Mart regardless of which channel they choose.”
Large-scale systems
The big chains have large-scale systems and supply chains they use to move merchandise to hundreds and even thousands of stores. But it’s a different business model to build and maintain a virtual store and to pick, pack and ship individual web orders. Most analysts credit J.C. Penney with being adept at converting a large catalog operation over time into a substantial e-commerce business which in 2006 generated sales of $1.3 billion and is growing at an annual rate of 25%.
Other big chains are also beginning to invest in their e-commerce channel as well. Both Macy’s Group Inc. and Nordstrom Inc. expect to generate at least $1 billion in annual sales within a few years. To support such growth Macy’s is spending more than $200 million to build a pair of new fulfillment centers in Arizona and Tennessee. Nordstrom is building its own dedicated distribution center in Iowa.
Despite their small ratio of web sales to total sales, the big chains still have plenty of remaining opportunity to grow their e-commerce business. The National Retail Federation estimates that U.S. retail sales will grow by about 5% in 2007 to around $3.15 trillion. In comparison many retailing and e-commerce technology research firms expect the U.S. business-to-consumer e-commerce market to grow by around 23% to about $167.5 billion. And they expect the online retailing market will remain the fastest growing portion of the market.
If they want to make a serious effort at selling more online and not just use their web sites as marketing and merchandising tools, the big chains need to refocus their approach to e-commerce, beginning with a change in thinking in the executive suite, analysts say.
“The top executives know that their web sales might be growing exponentially, but when it’s only 1% of total sales they are going to keep their focus on stores,” says Mary Brett Whitfield, senior vice president and analyst with TNS Retail Forward Inc., a Columbus, Ohio, retail research firm. “They need to realize that there are still big opportunities and reasons to invest more in their online channels.”
mark@verticalwebmedia.com
