May 30, 2008, 12:00 AM

The Top 500 Guide

2007 may have witnessed the start of a down economy, but not for web merchants. The top 500 uniformly outperformed the retail market.

If there is a silver lining to the clouds hanging over the retail industry, it’s the Internet. In 2007, high gas prices, a credit crunch and weaker consumer confidence added up to a tough year financially for many retailers. A sharp drop in revenue and higher operating costs forced several well-known brands, including Lillian Vernon Corp. (No. 105) and The Sharper Image Corp. (No. 176), into bankruptcy. Other prominent retailers such as Linens ‘n Things Inc. (No. 154), which missed a key interest payment and is looking at more cost-cutting, and RedEnvelope Inc. (No. 132), which filed for bankruptcy in April, also have fallen on hard times.

In 2007, many retailers struggled with weak store and catalog sales. By contrast, e-commerce was the retailing industry’s growth engine. In 2007, the business-to-consumer e-commerce market, which includes the Internet Retailer Top 500, grew nearly six times faster than total retail sales. Last year online retail sales reached $165.9 billion, an increase of 21.8% from $136.2 billion a year earlier. Meanwhile, total retail sales grew by 3.9% to $2.41 trillion from $2.32 trillion in 2006, according to the National Retail Federation.

In 2007, the Top 500 grew their combined sales to $101.7 billion, an increase of 21.6% from web sales of $83.6 billion in 2006. The rest of the market, including an estimated $38 billion in eBay Inc.-originated sales that could be considered retail sales, accounted for $64.2 billion in sales, up 22% from $52.6 billion a year earlier. 2007 sales at the Top 100 grew to $87.7 billion-22.5%-from $71.6 billion in 2006.

In 2007 the Top 500 accounted for 61.3% of all sales, up from 60.2% a year earlier. As in previous years, it was the largest web-only retailers and big national chains, catalogers and consumer brand manufacturers with an Internet channel that accounted for the biggest share of the market.

Among the Top 500, the biggest 100 accounted for 86% of sales, or $87.7 billion. The Top 100 did not increase their market share from 86% last year, when their combined sales were $71.6 billion. Smaller niche merchants also grew web sales but not as fast as the Top 100. Last year combined revenue of the Top 500’s 100 smallest merchants-companies with annual web sales ranging from $6.4 million to $13.4 million-rose by 19% to $995.5 million from $836.3 million in 2006.

Clearly, while the performance of stores and catalogs faltered for many retailing companies, it was the Internet that accounted for the most significant growth. At Staples Inc. (No. 2), the largest retail chain in the Top 500, the web represented 29% of total sales in 2007 but made up 58% of annual growth. The financial impact of e-commerce was even more pronounced at Williams-Sonoma Inc. (No. 21). The web represented almost one-third of all revenue at Williams-Sonoma and accounted for 81% of revenue growth across all channels last year, including stores, the Internet and catalog.

Last year the Top 500 web sites received 1.88 billion average monthly visits, compared with 1.68 billion average visits per month in 2006. “We’re seeing a tipping point in retailing where shoppers are going to conduct less business in stores or by catalog and shift even more of their buying to online,” says Nikki Baird, managing partner of retail research company Retail Systems Research. “Customers are getting a better shopping experience online where the merchandise selection is infinitely better than in stores and it’s faster and easier to make a purchase.”

As a direct result of the sophisticated features Top 500 web retailers are adding such as videos, customer reviews and advanced rich media, shoppers are visiting more web sites and making bigger purchases. In 2007, the total number of transactions on all Top 500 web sites rose by 8.8% to 456 million from 419 million in 2006.

Bigger ticket

Last year across all categories web shoppers spent an average of $223 each time they made an online purchase at a Top 500 e-retailer, compared with an average ticket of $199 in the prior year. Factoring out unusually high average orders such as furniture and consumer electronics, the average ticket is $169, up from $132 in 2006. Web shoppers also visited an average of 10 retail sites each month last year. “The fact that consumers are visiting more web sites and increasing the size of their purchase when they buy is another reason chain retailers can’t see their e-commerce channel as just another big store, and other Top 500 merchants have to make their customer experience even better,” Baird says. “Retail growth isn’t coming from traditional channels. It’s being generated online.” (No. 1) remains the web’s most dominant retailer. With 2007 sales of $14.8 billion, Amazon accounted for 9% of total U.S. business-to-consumer e-commerce sales last year and 15% of all sales for the Top 500. In comparison, it would take the combined sales of 406 of the smallest Top 500 merchants to equal Amazon’s annual revenue. Amazon is enjoying record growth because the company continues to invest in new technology and merchandising that improved operating efficiency and lowered costs.

In 2007, Amazon spent 6% of total sales-$818 million-on new content and technology. The online retailer also spent $1.3 billion, or 9% of all revenue, on fulfillment. The ongoing investment in a better infrastructure and diversified merchandising paid off handsomely for Amazon in 2007 as net income grew by 151% to $476 million from $190 million in 2006.

In 2007, 21 retailers, including Amazon, generated annual e-commerce revenue of $1 billion or more. Following Amazon, the biggest billion-dollar online retailers include Staples at $5.6 billion; Office Depot Inc. (No. 3) at $4.9 billion; Dell Inc. at $4.2 billion (No. 4); HP Home & Home Office Store (No. 5) at $3.4 billion; OfficeMax Inc. (No. 6) at $3.2 billion; Apple Inc. (No. 7) at $2.7 billion; Sears Holdings Corp. (No. 8) at $2.6 billion; CDW Corp. (No. 9) at $2.4 billion; (No. 10) at $1.9 billion; and QVC Inc. (No. 11) at $1.9 billion. Web sales for Dell, HP, OfficeMax, Apple, Sears and QVC are Internet Retailer estimates.

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