A new burst of online shopping

But the anemic quarter-to-quarter growth last year masked ongoing year-to-year growth. Last year was surprisingly strong, the Commerce Department reported in a revision to its e-commerce retail sales numbers in May, finishing 24% higher than the year before. And now this year is shaping up to be even better.

Two major research organizations report robust growth in the first half and say they expect growth to stay strong through the end of the year. ComScore Networks Inc. says online buying grew 29% in the first half to $19.8 billion from the first half of 2001. BizRate.com Inc. says it grew 45.8% to $23.52 billion. “The faster growth is all the more remarkable on a bigger base of sales,” says Chuck Davis, CEO of BizRate.com, who projects the first half’s growth rate to carry over to the second half. “To have 45% growth in the seventh year of e-commerce is remarkable, especially when the prior year’s growth was 24%.”

Anecdotal evidence backs up the research. Be Free Inc., for instance, which manages affiliate relationships for online retailers, says most sectors it monitors have experienced growth of at least 25% over last year. “The first couple of years we weren’t surprised by the growth because the Internet was new and so you’d expect that,” says Jonathan Kapplow, corporate marketing manager for cataloger and web merchant Hanover Direct Inc. “But this year, we’re an established Internet player and so we thought that growth wouldn’t happen again. But it did.”

Hanover Direct, which markets under the Domestications, Company Store, Silhouettes, International Male, Undergear, Clearance World and Gump’s brands, is expecting web sales to grow 33% this year to about $90 million and account for 20% of revenue, up from 15.5% last year. “We’re seeing an acceleration this year,” Kapplow says.

And Hanover Direct is not alone. Drugstore.com Inc.’s sales are up 37% in the first half to $91.55 million. eBags.com’s sales are up 37.5% in the first half. Office Depot Inc.’s web sales are up 37% worldwide in the first half to $987 million. A number of companies reported other levels of growth that don’t match the 30% to 40% that some reported but that nonetheless are significant. Among them: J. Crew Group Inc., where web sales are up 22% in the first half to $56.5 million, Amazon.com Inc., where sales grew 21% in the first half to $1.65 billion, and Barnes & Noble.com, where sales in the second quarter grew 25.3%. “This is double-hump growth,” Davis says. “Very rarely do you see an industry with massive growth, a maturation, then re-acceleration.”

Many reasons

While some of these companies were leaders in growth last year as well—Office Depot’s web sales were up 74% in last year’s first half, for instance—they are joined by many smaller companies who also are experiencing rapid growth, such Oriental Trading Co., where web sales are up 50% this year, as well as by start-ups, such as Flavor Bouquet Co., which started selling online at FlavorBouquet.com last September and whose sales are growing 90-200% month to month. “Everyone’s shopping online these days,” says Pamela Jackson, president of Flavor Bouquet, which sells gourmet candy and cookies in floral-type arrangements.

Retailers and analysts point to a string of reasons that Internet shopping is growing so strongly this year. It’s partly the result of more people coming online and having positive experiences. It’s also partly due to e-retailers getting smarter about targeting their marketing through affiliate networks and e-mail campaigns and displaying their URL on every page of their catalogs. In addition, web sites are adopting the real-world processes that consumers are familiar with as a way to increase shoppers’ comfort level. At the same time, they are leveraging what’s unique about the web to boost sales. “There is a focus on better execution,” says Jim Okamura, a partner in the J.C. Williams retail consulting firm. “A lot of what was being done last year is paying off this year.”

And then there’s the convenience factor. “People like the convenience of online shopping and when something is this convenient, it grows,” Davis says. “It’s just like ATMs or pay at the pump gas stations; it’s becoming a way of life.”

More online more often

There’s no doubt that more consumers are online and spending more time online. The at-home and at-work universe of active web users, meaning they had gone online the month the survey was conducted, is 120.2 million out of 177.2 million, a 6.5% increase in active users since last year, when 112.8 million were active out of 173.6 million total, according to researchers Nielsen/NetRatings. Active users go online 12.5% more often, spend 16% more time online and view 14% more pages than a year ago (see chart, p. 27). “We’re reaching the inflection point in e-commerce,” says Steve Fortson, director of e-commerce for Oriental Trading, which sells school supplies, stationery and novelty items by web and catalog. “People are getting past the first-use stage and we’re getting to critical mass.”

Not only are there more users online, they represent a broader age range. ComScore Media Metrix predicts that the over-50 population will grow from 16% of online shoppers today to 30% in 2006. “We have people buying everything from furniture for their first apartment to more formal, big-ticket furniture,” says John Seebeck, director of Internet at home furnishings retailer Crate & Barrel. “Our age demographic in online customers is fairly broad.”

In addition, the forest fire of the dot-com bust has cleared away a lot of retail competitors, leaving consumers with clearer choices. That, in turn, makes them more confident that they’ve made the right choice in their purchases and thus more willing to buy. “The plethora of offerings led to hesitation by buyers; there was no way to know if you had gotten a good deal,” says Samuel P. Gerace, founder and chief technology officer of Be Free, now owned by marketing company Value Click Inc. He likens buyers’ attitudes about online purchases a year and a half ago to car buyers in a survey who expressed dissatisfaction with their purchases, not because they didn’t like the car but because they feared they hadn’t gotten the best deal possible. “There’s a lot less confusion because comparison shoppers no longer believe they have 20 options for every purchase,” Gerace says.

The retailers who are left have learned more about marketing on the web and thus have become more sophisticated about targeting that marketing. One of the hottest online marketing methods is affiliate marketing, in which a retailer posts a link at a site that the retailer believes will attract the kinds of customers the retailer wants, then pays a commission to the hosting site when a customer clicks through on the ad and buys. From a throw-it-out-there-and-see-what-works approach early on, retailers have moved to evaluating affiliate relationships to make sure they get a return on managing those relationships. As a result, affiliates are driving sales at a number of sites, including Hanover Direct’s, which has as many as 20,000 affiliate relationships. “We’re doubling our affiliate sales over last year,” Kapplow says.

New twists

Top 500 Guide

There also are new twists to affiliate marketing that are putting buying opportunities in front of more customers more frequently. For instance, Yes Networks Inc. is linking Amazon.com and CDNow.com to radio station sites. Using technology that identifies music playing at 1,000 radio stations throughout the U.S., Yes Networks can download the information to a station’s web site so listeners can learn what’s playing at the moment, then immediately buy the CD. (See related story, p. 12.)

E-retailers are also developing a deeper understanding of e-mail’s role in marketing. The mantra today is focus. “The blast campaigns are down,” Gerace says. And major catalogers are printing their URLs on every page of their catalogs. For Hanover Direct, that means billions of impressions as consumers browse the 240 million catalogs it mails each year. Clearly, the focus has been not on brand advertising but on marketing that will give an immediate boost to online sales “When we market, we’re looking for the call to action,” Kapplow says.

Retailers have also become smarter about presenting merchandise, so that once their marketing has brought customers to a site, they know better how to convert visitors to buyers. For one thing, consultative selling techniques have increased, driven primarily by computer sellers Dell Computer Co. and Gateway Inc. As a result, consumers are not afraid to buy computers online because sellers have devised ways of letting them know that they’ve bought the right system. “The Internet is learning to assume some of the consultative roles that individuals play in stores,” says Jerry Johnston, CEO of Critical Mass, a division of marketing company The Omnicom Group Inc., which designs web sites for such high profile customers as Mercedes Benz USA, Nike Inc., Dell and automotive parts retailer The Pep Boys, Manny, Moe & Jack. “People want assurance that that they’ve made the right decision. One of the areas we focus on is assuring customers that what they’ve just configured is right for them.”

Creating trust

Web sites also are learning to apply merchandising and cross-sell/up-sell techniques from the store world to the web. For instance, Lands’ End Inc. recently implemented a cross-sell at checkout, offering products that complement what the customer is about to buy. 30% of customers who get the cross-sell pop-up window click through to the suggested merchandise. “Online retailers are getting better at targeting their customers so they’re getting those cross-sells and up-sells,” Okamura says.

And retailers are understanding the importance of communicating that they are a real business that has more than just a nice web site. While that’s easy for chain stores or catalogers to achieve simply by the power of the brand, it’s not so easy for small retailers or pure plays, as many failed dot-coms learned too late. Thus they are tuning in to customers’ concerns about credibility and reliability. “With a new company online, there’s a certain amount of distrust,” says Jackson of FlavorBouquet.com, which records as many as 12,000 visitors and ships up to 500 orders a month, “and that carries over to online shopping.”

All of this better understanding of how to use the web is the result of experienced offline retailers now being able to focus on retailing on the web, rather than on maximizing their web investments, some observers say. “Ultimately the frenzy did sophisticated retailers a disservice because it forced them to pay too much attention to the frenzy and not to what they knew from the offline world—that merchandising is important,” Be Free’s Gerace says.

On top of bringing offline techniques to the web, retailers are leveraging the unique properties of the web, and that, too, is increasing sales. Many retailers have implemented such web practices as search or order by catalog number, account registration and one-step checkout. And many are developing a better understanding of how the web is different from other channels. “As the Internet has matured, we are seeing fewer retailers who throw up their entire catalog and expect consumers to page through 1,500 pages,” Gerace says.

The hottest categories of online sellers continue to be the products that either consumers know well or don’t need to experience before they buy. Thus Be Free says the top sellers are health and beauty, up 53% in the first half, computers and consumer electronics, up 44%, and home and garden, up 38%. ComScore Networks reports that the top sellers are office supplies, up 51% over a year ago, and computer hardware, up 45%. Gifts and flowers continues as a hot category as well, with sales increasing 100% or more during gift-giving periods, such as Valentines Day and Mothers Day.

With such growth comes the opportunity for retailers to grab a share of the online market while shopping loyalties are still unformed. That means doing more of the same of what has brought online retailing to this point—marketing and merchandising—and then providing a good experience. “If retailers don’t do it now, they’ll miss the boat,” says Kal Raman, president and CEO of Drugstore.com. “The cost of acquiring customers now and providing a great experience is much lower than it will be a few years from now when you’ll have to play catch-up.”

Keep ‘em coming back

Drugstore.com already demonstrates the value of repeat customers. Returning customers account for 71% of sales vs. the industry average of 50%, and they spend $154 a year, three times what they spent in 1999. “The most important thing we do is take care of the customers at the site,” Raman says. “We want to give a great shopping experience. And that’s the most important thing any retailer can do.”

As any market matures, growth slows and, a resurgence of growth this year notwithstanding, online retailing will be no different. The only question is how long the new boom will last. Early measures of third quarter growth show a dip in the growth rate—sales were up 20% in July from July last year.

Growth will also depend to a certain extent on the economy, of course. But even if the economy slips this year, observers expect online sales growth to outstrip overall retail sales. By how much is the great unknown. “But there aren’t a lot of places you can find double-digit growth,” says Daniel E. Hess, vice president of comScore, “whether the economy is slowing or not.”

kurt@verticalwebmedia.com