May 31, 2006, 12:00 AM

Following the money trail

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Skin game

Most web retailers taking part in the survey are primarily self-funded. Though there have been some very high profile initial public stock offerings in the past year, including Harry and David Holdings Inc. and BabyUniverse Inc., only 1% of survey respondents raised money with the proceeds of an IPO. Of all respondents, 54% are current owners who use their own money in addition to revenue generated by the business to support growth. Another 21.4% used additional capital from a short or longer-term bank loan to sustain operations in addition to incoming revenue and 1.5% relied on venture capital money.

With most of their own skin in the game, most retail companies in the survey say they won’t have to trim expenses going forward to hit profit and loss targets-60.5% have no intention of cutting costs to boost profits vs. 39.5% who will. But even in times of fast growth-the web remains the retail industry’s fastest growing channel-web merchants are keeping a close eye on both the top and bottom lines. And if they do cut expenses, their first reduction will come in general and administrative overhead. The Internet Retailer survey reveals 19.9% would first reduce their administrative overhead, followed by marketing and advertising, fulfillment and distribution and technology.

The biggest area all respondents say they would cut first is general and administrative overhead which typically includes spending on rent, office supplies, communications and other business operating expenses. Consumer brand manufacturers are the most likely to reduce general and administrative expenses first, according to the Internet Retailer survey. Next in line are catalogers, virtual merchants and chain retailers. 31.8% of manufacturers indicate that they would cut their administrative overhead to sustain profits, followed by catalogers at 29.4%, virtual merchants at 17.5% and chain retailers at 17.1%

Marketing and advertising is another area ripe for budget cutting. Most web retailers use a mix of affiliate, e-mail and search engine marketing to build their brand, attract new customers and retain existing ones. But with the high cost of search engine marketing brought about by increasing keyword bids, some web merchants are looking to cut back.

The survey found that catalogers were most likely to reduce their spending on marketing and advertising while consumer brand manufacturers were far less inclined to trim any marketing-related expenditure. 29.4% of catalog companies said marketing and advertising spending would be subject to cost-cutting, compared with 17.5% of virtual merchants, 8.6% of chain retailers and just 4.5% of consumer brand manufacturers.

Sacrosanct technology

Not surprisingly one of the budget areas that accounts for a typical web retailer’s highest fixed operating costs-technology-is also the least likely expense to be trimmed. E-commerce technology is expensive. Retailers’ e-commerce systems budgets range from $300,000 to $3 million per year, depending on the size of the company and the order processing volume, says Jupiter Research. It’s also not uncommon for a small web merchant to pay as much as $100,000 per year for a typical third-party e-commerce platform.

But having the right technology base is crucial to sustaining an online business and meeting customer expectations. The Internet Retailer survey finds that technology is the least likely area to be targeted for a budget cut. Only 5.9% of catalogers would cut back technology spending to preserve profits, compared with 8.6% of chain retailers, 9.1% of consumer brand manufacturers and 10.3% of virtual merchants.


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