May 2, 2001, 12:00 AM

Online retail spending to reach $65 billion this year

E-retailers are reducing operating losses and customer acquisition costs in the drive toward profitability, says Consulting Group report.

The dot-com shakeout hasn’t stalled the engine of the e-commerce marketplace – retail consumers will spend $65 billion online this year, 45% more than in 2000, according to a new study by and the Boston Consulting Group. “While consumer demand continues to propel growth, online retailers have wrestled with operational issues and improving their performance in key areas,” says chairwoman Elaine Rubin. “There is a steep learning curve in becoming an online retailer – those players that were unable to excel in all facets of this complex business just didn’t make it to the end of 2000.”

The study found that e-retailers reduced operating losses from 19% of revenues in 1999 to 13%, or $5.6 billion, in 2000. While overall performance for online retailers improved in 2000, it was to varying degrees among different types of operations. The study found that 72% of catalog-based e-retailers, 43% of store-based and 27% of web-based retailers are profitable on operations. That makes the primary challenge different for each type, notes Michael Silverstein, senior vice president and global leader of Boston Consulting Group’s consulting practice. “Store-based retailers will need to take steps to carefully manage the delicate balance between their retail channels. Many web-based retailers will need to target niche markets or pursue partnerships to compensate for cost disadvantages and weaker brands,” he says. Catalog retailers, he notes, have been much more competitive in the online market, especially in attracting new customers through the online channel. About 40% of a cataloger’s online customers are new to the company, he says.

In moves toward profitability, online retailers reduced their average customer acquisition cost to $29 in 2000 from $38 the previous year. Web-based retailers in particular excelled at this, reducing their cost to an average $55 from $82 the year before. In fact, the best-performing web-based retailers (the top 50%) reduced acquisition costs to an average $14 per customer, rivaling the performance of catalog retailers.

Travel services, the largest online category at $13.8 billion in 2000, are expected to grow by another 50% over the year. Growth in other leading categories such as books and computer equipment will level off at 25% and 15%, respectively. A second wave of general merchandise categories such as toys and apparel is expected to drive further growth in the online market, according to the study.


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