September 28, 2006, 12:00 AM

Pressures on stores could spell more online retailing

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Does the success of such initiatives-or not-suggest that more multi-channel merchants will be weighing investment in store infrastructure against investment in Internet infrastructure and other technologies to which the web has accustomed shoppers, if current trends continue? As always, merchants will do whatever it takes to keep selling. “Clearly, they are going to be making sure that money is being spent to ensure they are driving customers into the stores and maintaining share,” Doiron says. “And increasingly, a percentage of that has got to be dedicated to online.”



E-retailing faces its own challenges

While e-retail is benefiting from some economic and consumer trends, it’s not impervious to the potentially adverse effects of others. For starters, with a larger portion of consumer spending shifting online, states will become even more eager to collect sales tax from online merchants, which would end an advantage banked on by many. And the flip side of rising gas prices causing more shoppers to buy online instead of driving to the mall is that fuel costs are going up for the shippers online retail depends on as well. For some online retailers, the sales tax and shipping cost issues are linked, with an imbalance between the two having potential negative impact on their margins.

Carriers such as United Parcel Service, feeling the pinch of higher fuel costs, have added surcharges for deliveries into certain areas, and some retailers are considering or implementing them as well. That leaves retailers with a choice: absorb those higher costs, or pass them on to consumers, which could make them less competitive with offline stores that don’t have to add shipping charges to the bill.

As a New York City resident, for example, David Wyss, chief economist for Standard & Poor’s, says that in addition to the retailer’s shipping cost, built into the overall delivery charge, he now pays a 95-cent surcharge on deliveries from online grocer FreshDirect. “95 cents on a $75 grocery order is not a big deal,” he says. “But at some point, maybe you start to think otherwise. Part of why we buy there is convenience, but part of it’s price also.”

Wyss adds that while shippers’ costs are rising with energy costs, it’s unclear as yet where the trade-off to be made among the consumer, the shipper and the retailer will settle. “There’s a cost to the individual of driving on the one hand, and the cost of distribution on the other. To some extent, it’s going to depend on the kind of goods involved,” he says.

Bernard Baumohl, director of The Economic Outlook Group, notes that online retailers and shippers have contractual arrangements that offer more flexibility on shipping charges. “Internet retailers may have to be concerned about the fact that shippers are gong to raise prices but they don’t have to be concerned with rising labor costs or higher real estate costs, so that makes them more flexible in their pricing strategy,” he says. “We haven’t yet seen to any significant degree higher energy costs showing up in Internet sales.”

Yet the issue is surfacing among individual online retailers, particularly in view of increasing pressure among states to collect taxes on online sales where they don’t already. Gary Imig, executive vice president of Sierra Trading Post Inc., in July told a U.S. Senate subcommittee hearing on the Sales Tax Fairness and Simplification Act that shipping costs paid by Internet retailers are in most cases bigger than the state sales tax charged by stores, and that having to charge state sales tax on top of shipping would make online retailers less competitive with offline stores. “In this day and age of ever rising fuel charges and postal rates, this will substantially impact our bottom line,” Imig said.

To the extent that consumer spending moves online, states will push harder to collect sales tax from online retailers. SB 2152-the Sales Tax Fairness and Simplification Act-would allow states adopting a streamlined sales tax structure to require out-of-state merchants-including online retailers-to collect sales tax on merchandise sold to residents of their states. And that would end an advantage enjoyed by online retailers and catalogers who can currently ship to out-of-state customers without collecting and paying sales tax to the state where the customer resides.

“It varies from state to state,” says Wyss. “You can ship to New York if you don’t have a physical presence in that state without having to charge the customer in that state sales tax. But states are becoming much more aggressive in defining what constitutes nexus.” That effort is supported by some multi-channel merchants forced to charge state sales taxes under laws governing nexus, and opposed by other online merchants that don’t have to charge state sales tax under current law.

Amid these sometime-conflicting trends, one thing already seems clear. “The rising cost of shopping will shift who the winners and losers are in retail,” says Chad Doiron, strategist in the Internet practice of retail consultants Kurt Salmon Associates.

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