June 30, 2006, 12:00 AM

Racing Ahead

2006 is shaping up as another year of record sales, with retailers shifting their attention to customer retention from acquisition.

The song is the same for 2006, but it’s hardly a tune web retailers are tired of hearing. Once more, even after more than a decade of extraordinary growth, web retailers are on track to make 2006 another year of record sales with some industry research firms expecting business-to-consumer e-commerce sales to surge past $100 billion.

So far comScore Networks Inc. says web retail sales, excluding travel, are up 24% over a year ago, reaching $31.3 billion through April from $25.2 billion for the same period in 2005. If that growth holds, online sales are expected to reach $102.1 billion in 2006, an increase of 24% from sales of $82.3 billion in 2005. “If sales continue to grow, the industry will easily top $100 billion for the first time,” says comScore chairman Gian Fulgoni.

ComScore numbers are considered by many-along with the Department of Commerce’s-as the authoritative measure of the industry. However, they do not account for retail sales that take place at eBay and other such sites. If those are included in online sales, then online retail sales exceeded $100 billion in 2005, reaching an estimated $109 billion. By that reckoning, online sales could reach nearly $130 billion this year.

Expansion ahead

Web retailing is the fastest-growing segment of the overall U.S. retail industry and will continue to expand for a number of key reasons, Fulgoni says. Consumers are now very comfortable with making purchases online and, as a result, are shopping more frequently and buying bigger ticket items. More Internet users also are switching from dial-up access to broadband, which makes shopping online easier. “The growth in consumers’ online buying during the past five years has been quite remarkable and e-commerce is now very well integrated into Americans’ shopping behavior,” Fulgoni says.

With a steady stream of traffic, web retailers are feeling particularly upbeat about their financial performance for 2006. A recent Internet Retailer web-based survey on web site profitability reveals that 40% of 216 merchants who responded expect their sales to grow by more than 30% this year, with 33.5% also expecting to grow their annual net income by more than 25%.

As a group, web merchants are optimistic because they are doing a better job of building web sites that attract and retain customers, are giving online shoppers the merchandise they want at a reasonable price and integrating the Internet more effectively into their multi-channel operations, say industry analysts.

Retailers also continue to operate their e-commerce businesses in ways that are sustaining longer term profitability. For instance, even though operating margins for retailers’ web channels decreased slightly to 26% in 2005 from 28% in 2004, those margins are still high and will remain consistent for the foreseeable future, according to the State of the Industry 9.0, an annual research report from Shop.org and Forrester Research.

“The online channel will remain very profitable, but the market is changing and becoming even more competitive,” says Shop.org executive director Scott Silverman. “Over their next five-year planning cycle, web retailers will be spending more on technologies and services that drive customer retention more so than on new customer acquisition. There will be more retailers fighting for the existing wallet share.”

In previous years, web merchants took their profits and plowed them back into the business to acquire more customers. But now, with the number of active U.S. web shoppers expected to peak at about 161 million by 2010, web retailers will shift resources and invest more in applications and third-party services that drive more repeat business, says Jupiter analyst Patti Freeman Evans. “In 2006 the key drivers of online sales growth-new online buyers and increased individual buyer spending-will contribute equally to the increase in overall spending,” she says. “But beyond 2006, increased spending by individual buyers will be the primary driver of online sales.”

Creating repeat business

To retain more repeat shoppers, Jupiter says, web merchants will be investing time and money into attracting business from specific customer segments such as teenagers, Hispanics and African-Americans that by 2010 will account for more than one-third of all online spending. “Internet users ages 30 to 50 are more likely to purchase online, while kids and teens are beginning to emerge as a significant online customer base,” Evans says. “By 2010 kids and teens will account for 11% of the online buying population and it’s critical for retailers to consider them in calculating online shopping penetration.”

Today, the average online shopper is female, age 44 and has annual household income of about $68,000, according to research from eMarketer Inc. She also has a college degree, is more inclined to use an advanced Internet connection such as broadband to shop online and spends more than $360 per year on various purchases. “Online buyers are four years younger than the average consumer and have an average household income that is 30% higher,” says eMarketer senior analyst Jeffrey Grau. “They also like to shop online, with 69% having made an online purchase in the past three months.”

The market for online retailing remains robust, but the annual growth rates will begin to slow, particularly as retailers concentrate on retaining existing customers. “From 2001 to 2005 online sales rose by an average annual rate of 26%, but we forecast that over the next three years total web sales will increase by only around 18% to 20% per year,” Grau says.

Applications and services spending

But even faced with the likelihood of slower growth, web retailers are still expected to increase their spending on e-commerce technology. An April survey of about 160 merchants by Internet Retailer demonstrates that web merchants of all sizes are installing new systems or preparing to swap out current e-commerce platforms for new applications. For example, 48.3% of companies taking part in the survey have installed a new e-commerce system within the past year and an additional 14.6% expect to do so within two years. The survey reveals a robust market for new e-commerce platforms, with 65% of manufacturers, 52.9% of pure-play web merchants and 46.7% of chain retailers operating e-commerce systems that are 1 year old or newer.

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