6/17/10

As web sales grow, so should spending on technology, report says

The race is on to keep up with new e-commerce systems, Goldman Sachs says.

Katie Evans , Managing Editor, International Research

It’s no surprise to most in the retail industry that the web is where the growth is.  But new figures from Goldman Sachs Group Inc., the global financial services firm, estimate that the growth will be staggering over the next decade—and that e-retailers will be investing heavily in technology to keep up with demand.

E-retail will grow at five times the rate of traditional retail and its year-over-year dollar increase will overtake offline retail by 2020, Goldman Sachs predicts. Online sales are currently $134.9 billion, or 8% of equivalent retail sales, according to Internet Retailer estimates.

Goldman notes that e-commerce sales will grow by $68 billion to $624.17 billion in 2020 from $555.92 billion in 2019, as offline retail sales grow $60 billion, to $3.64 trillion from $3.58 trillion.

Since 2000 web sales have more than tripled to achieve a 19% compound annual growth rate, or CAGR, and over the next ten years Goldman projects online growth to be five times the rate of traditional retailing based on its forecast that Internet buyers will grow at a 7% CAGR and spending per buyer will grow 8% over the same period. That puts online revenue’s CAGR at 15% over the next decade, compared to traditional retail’s 3%.

Multichannel and bricks-and-mortar retailers who want to compete online have their I.T. work cut out for them, Goldman says. That’s because web-only players have already realized the importance of investing in web technology. Research from Forrester Research Inc. finds that web retailers spent 7% of their total revenue on technology in 2008, while retailers overall spent just 2%.

To drive the point home, Goldman points to the largest online retailer, Amazon.com. Amazon invested nearly ten times more of its fiscal year 2010 gross profit in technology, compared to a sampling of other retailers that operate in multiple channels. It put 19.1% toward technology while the average of six other big retailers, including Nordstrom, J.C. Penney, Wal-Mart and Target, was 2.7%.

The technology investment by Amazon will continue to pay off, Goldman says. It predicts Amazon’s annual growth rate will account for 25% of the total e-retail growth over the next few years, adding about $7 billion per year in global revenue though 2011, leaving only 75% of the remaining online growth for all other retailers to share.

Goldman also attributes Amazon’s success to the rapid pace of overall online shopping growth, its presence in the top six global economies—the U.S., China, Japan, Germany, the U.K. and France—its breadth of products, and advantages in logistics including fulfillment and software such as product recommendation engines.

E-retailers wanting to thrive in the e-commerce game may find a role model in what is likely one of their competitors, Amazon.com

Topics:

Amazon.com, Goldman Sachs, I.T. spending, industry statistics

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