State of the Industry

As consumers demonstrate they like the convenience of online shopping,
retailers are stepping up their investments in the web channel

By Kurt Peters

Last year’s booming growth in online retailing may have cooled a bit, but consumers are still shifting their buying to the web. While total retail sales grew 6.9% through June, online sales grew 13% through mid June, reaching $21 billion from $18.6 billion, comScore Networks Inc.’s Media Metrix reports. Average weekly online sales so far this year are $875 million vs. $775 million a year ago.

One of the standout categories is online apparel, where sales for the year are running 37% ahead of last year, averaging $135 million a week, comScore reports. In fact, online apparel sales are picking up steam, averaging $141 million a week for the six weeks ending June 1, 51% ahead of the same six weeks last year. “While this trend echoes strength in offline retail sales, the scale of growth suggests a continued shift in apparel buying from offline to online,” comScore says.

Walking into higher sales

The general trend in increasing sales is reflected at individual sites and the particular boost in apparel is evident at individual apparel sites. Shoe retailer Zappos.com, for instance, is on track this year to double sales to $65 million from last year’s $32 million. Toy and game site eHobbies.com also expects to double online sales this year, while auto accessories retailer J.C. Whitney Inc. has experienced accelerating growth throughout the year—as high as 40% year-over-year the first two weeks in June. Drugstore.com Inc. and ShopNBC.com expect smaller growth—but still outpacing total retail sales growth; 10% at Drugstore and 8% at ShopNBC.

The growth is general in the online retailing sector and reflects a commitment by retailers to getting the basics in place as a foundation for more growth. “All of our clients are looking for incremental gains,” says Jim Okamura, Chicago-based partner with retail consultants J.C. Williams. “They’re doing a lot of the basic blocking and tackling. They’re asking how e-mail campaigns will affect sales, whether a catalog drop will get returns, or they’re refining the search capabilities of their sites.”

While it’s clear that consumers are becoming more comfortable buying online, each site has its own reason for growth. Zappos.com CEO Tony Hsieh attributes his site`s fast growth, in part, to a high level of customer service that pays shipping both ways—out to the customer and back to the warehouse if the shoes don’t fit or aren’t right in some other way. “Buying shoes online can initially be a scary process for people,” Hsieh says. “But Zappos has withstood when other dot-coms have failed because we provide the best customer experience, such as free shipping both ways. Even though free shipping of both orders and returns has cost us more, it has enabled us to keep our customers longer.”

Similarly, eHobbies.com president Seth Greenberg attributes growth to a number of initiatives, including an innovative site-search box that eHobbies places on affiliate partners’ sites. The search box on affiliate sites allows visitors to search eHobbies’ database for products. A customer either navigates the search function through a series of drop-down menus or inputs a search term. When the customer clicks Go, the browser either launches a new window displaying eHobbies.com or sends the user directly to eHobbies.com. Those searches are now responsible for as much as 10% of eHobbies’ sales, Greenberg says, and he expects that portion to continue to grow. “We’re just scratching the surface,” he says. “I still have some key strategic sites I want to get to.”

Channel shifting

The growth at JCWhitney.com is the result of channel shifting as customers adopt the convenience of online shopping, says Geoff Robertson, director of technology at Chicago-based J.C. Whitney. Online sales in January and February were 10% higher than January and February 2002, while March and April sales were up 15-20% over the same months a year earlier. Then suddenly in early June, growth accelerated to 40% over the same weeks a year ago. Meanwhile, companywide sales were flat. “Channel switching is continuing,” Robertson says. “A lot more of our Internet sales are coming from the catalog; customers like the convenience.”

At the same time that volume is growing, J.C. Whitney’s average order value is increasing. In May, it was 5-10% above May 2002, Robertson says. He attributes that to the growth of products available at the web site. J.C. Whitney is growing its online catalog to all 55,000 SKUs, which, when applied to all the makes and models of cars they can fit, represents 3 million variations of products. “As more product goes up on the site, people buy more,” Robertson says. “It’s so fundamental.”

Placing the right products in front of shoppers at the right time is one of the key elements of retailing that is growing in importance online. Drugstore.com, for instance, is re-designing its pages to present fewer but better targeted and merchandised products to customers, says Ramer Holtan, customer retention manager. “One of the directions we’re going is simplification,” he says. “We want to present customers with fewer but clearer options. Our pages had become more and more crowded and confusing, so we decided to stop just adding things and start taking away.”

Homing in

Now, even though Holtan says Drugstore.com continues to live up to its boast that it offers way more products than a corner drugstore, it is presenting products in a more directed fashion. “We’re homing in on specific messages and value,” he says.

Directed marketing is becoming the norm in external marketing efforts as well. Internet search is becoming the marketing technique of choice for many retailers. Retailers are attracted to search by the fact that consumers searching on a product are already in the mind to buy it. Thus retailers are stepping up their search efforts, with nearly two-thirds of marketing executives who use search engines recently surveyed by Jupiter planning to increase their spending on search. They also are refining their tactics and undertaking such initiatives as directing customers straight to the product page from search results.

Similarly, retailers are getting smarter in their e-mail marketing. In fact, with the concerns earlier this year over e-mail spam, they’ve had no choice but to get smarter. Among the techniques: targeted e-mail newsletters. ShopNBC, for instance, uses an e-mail newsletter to keep in touch with watch enthusiasts. In spite of a perceived general antipathy toward unwanted e-mail, consumers are signing up for e-mail newsletters. “The watch newsletter is growing at a phenomenal rate,” says Lyn Mueller, senior vice president of ShopNBC Interactive.

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Closer scrutiny

And affiliate marketing, too, is coming under scrutiny as retailers seek to focus their affiliate networks. Some retailers have recently started trimming back their affiliate networks, believing that there is in fact an administrative cost to keeping on the books affiliate partners who don’t produce revenue. But at the same time, affiliate marketing continues to be effective. “It continues to be a major source of customer acquisition for us,” says Holtan. Drugstore.com recently turned over management of its affiliate network to LinkShare Corp. after managing it in-house and expanding to 30,000 affiliates. “It’s a very steady and reliable channel for us,” Holtan says.

And then there are the shopping aggregator sites, which are a hybrid of affiliate and search marketing. According to a recent poll by BizRate.com Inc., site aggregators drive a significant amount of traffic. For one thing, customers are taking advantage of the power of the web in permitting comparison shopping. In a new survey from BizRate, 54% of consumers said they are focusing more on deals than they did last year and only 4% of respondents said they never comparison shop when they shop online. 44% said they do so most of the time and 20% said every time. The remaining 32% said they comparison shop some of the time.

That comparison shopping adds up to a lot of page visits, BizRate says. An online buyer visits four sites before making a purchase and visits the site where she buys 2.6 times before purchasing. “There’s a deal-centricity going on and it has been since the economy got bumpy,” says Chuck Davis, CEO of BizRate. “Rather than walking into deals, consumers are proactively seeking them.”

That focus on deals is further illustrated by shoppers’ starting points. 47% of online shoppers start at shopping aggregator sites, with 18% starting at search engines, 17% at comparison sites, 7% at shopping portals and 6% at auctions. The balance--53%--start directly at a merchant’s site. “Two years ago that was 70-30 merchants,” Davis says. “Shopping on the web is so fragmented that aggregators will continue to play an important role. There will eventually be an equilibrium, but we’re not there yet.”

Shifting attitude

While retailers are trying out all manners of marketing, they are more cautious about technology. “‘Make do with what we’ve got’ is still the theme out there,” Okamura says.

As the economy starts to show little signs of improvement, however, that attitude may be changing. In fact research company IDC reports that information technology spending in the retail industry this year will reverse last year’s decline, setting the stage for five years of growth at an average compounded rate of 5.4%. IT spending in retail last year fell 3.4% from the year before.

“The retail industry ended 2002 much weaker than it began the year," says Christopher Boone, program manager for IDC’s United States IT Opportunity: Retail and Wholesale program. “IT budgets were negatively impacted as the year progressed and retailers struggled to manage costs and meet profit goals. Despite the setback in 2002, we expect retail IT spending to resume growth in 2003 and beyond.”

Boone says retailers’ IT spending will focus on improving margins and will favor technology that can be implemented in a short time with a measurable return on investment. By 2007, retailers will be spending nearly $30 billion a year on IT, IDC projects.

The Yankee Candle Co. Inc. is a good example of a retailer spending to get a return on investment. It invested in a revamp of its custom-candle section and immediately experienced a 70% reduction in calls relating to custom candles, as well as a 25% increase in orders and a 25% increase in the average order size. “The day the new custom features went up, the calls went down,” says Darryl Gehly, vice president of Molecular Inc., the company that redesigned the section and, subsequently, the entire site. Yankee Candle obtained a six-month return on investment, Gehly says.

While Gehly will not reveal how much Yankee Candle paid for the revamp of the custom candle section, he says similar technology would have a list price of $250,000.

Yankee Candle, a $450 million-a-year multi-channel retailer with about 200 stores, hired Molecular to make the custom candle section of its web site more appealing and less cumbersome. Molecular solicited feedback from 150,000 customers and got responses from 30,000. From them it learned that customers wanted to see their finished candles before they placed an order. “It’s not profound, but sometimes it’s the simple things that really make a difference,” says Bob Stetzel, director of development at Yankee Candle. “If you give customers better feedback, you increase their confidence in buying and reduce returns.”

Before the redesign, 96% of custom candle orders were handled by call center reps, Gehly says. “The lengths of time were incredible,” he says. “Customers could take 20 minutes to talk about what a finished custom candle would look like.”

With the redesign, a customer who clicks on the custom candle portion of the site gets a choice of candles, then a pop-up window that starts the customization. Customers choose a label, a fragrance, a message, and, if desired, a wrap, a ribbon and a flower. Each element is displayed on a candle and a customer can change any element without having to start over. Before the redesign, customers simply checked off the element they wanted from a list but did not get to see the finished product. Sales of extras like wrap, ribbon and flowers also went up with the redesign, Gehly says. Now calls to the call center are brief, in the nature of a customer wanting more specific description of a scent, for instance, and most customers return to the web to complete the order.

Broadband = buyers

Molecular used Macromedia Inc.’s Flash technology to create the customization. One of the benefits of Flash is that Flash comes pre-installed on most computers and so customers don’t need to download a plug-in or have broadband access to make it work. Recent surveys from Nielsen/NetRatings show that retailers might be well served to offer more rich-media applications, even those requiring broadband. With a few exceptions, Internet users with broadband connections are more likely to purchase in any category than dial-up users. 18- to 24-year-olds are 15% more likely to make a purchase if they use broadband rather than narrowband. Among 25- to 54-year-olds, that rises to 26%; it grows to 32% among consumers 55 or older, according to Nielsen/NetRatings @Plan survey, conducted in the spring.

As broadband spreads, it’s a safe bet that online shopping will increase even further. And some retailers are starting to look for staff to prepare for that growth. “It’s very encouraging when I get calls from vice presidents of e-commerce looking for marketing managers,” Okamura says. “Somehow, they’re able to scrape together enough for another body. That wasn’t happening before.”

The bottom line: “Many of our clients are very happy with their online numbers, enough so that they’re revising them upward,” Okamura says. “Last year’s growth was not an anomaly.”

kurt@verticalwebmedia.com