June 12, 2008, 12:00 AM

Chain stores ignore online retailing at their own peril

Retail chains have the ability to generate significant online sales, but they’re the laggards in the 2008 Top 500 Guide, Internet Retailer publisher Jack Love told attendees this week at the Internet Retailer Conference & Exhibition in Chicago.

With their deep pockets, recognized brands and deep supply chains, retail chains have the ability to generate significantly more sales in the business-to-consumer e-commerce market.

But while chain retailers accounted for 39.9% of online sales among Top 500 retailers, that segment of the market grew by only 18%, compared with 30% for catalog/call centers, 22% for web-only merchants and 22% for consumer brand manufacturers. "Chain retailers have the power, brand and expertise, but they are not dominating the online retailing market," Internet Retailer publisher Jack Love told attendees this week at the fourth annual Internet Retailer Conference & Exhibition in Chicago.

In 2007, online merchants generated total sales of $166 billion, which accounted for about 6.3% of total retail sales of $2.62 trillion, excluding petroleum, auto and food service sales. "Why do we spend so much time and effort looking at 6.3%?" Love asked attendees. “Because the online retailing market grew by 22% last year and remains the fastest growing channel. In this industry online retailers are moving in a whole new direction and stores are not.”

Three online merchandising segments-jewelry, books/music/video and mass merchandise-generated combined sales last year that were above the market average. The growth in all three markets also came from a diverse range of companies. The online jewelry segment grew the fastest in 2007, registering a 36% increase in year-over-year sales to $1.05 billion. But the fastest growing retailers in the category were online merchants and not stores.

Market leader Blue Nile Inc., No. 48 in the Internet Retailer Top 500 Guide, grew by 27% in 2007 to $319.3 million, while runner-up Bidz.com Inc. (No. 74) generated web sales last year of $187 million, an increase of 42%. In comparison, the third player in the category - Tiffany & Co. (No. 88)- grew its annual sales by only 14% to $150 million. “There is a huge growth rate in this category, but where are the chains?” said Love.

In books/music/video-the category that launched web-based retailing-sales rose by 32% to $4.12 billion based largely on the performance of Blockbuster, (No. 35) which grew its total 2007 web sales to an Internet Retailer estimated $526.4 million and accounted for 28% of the increase in the category. “This is one example in a segment where a chain retailer drove the growth,” Love said.

The mass merchandise category grew by 31% to $29.3 billion in 2007. “The growth in this category can be summed up in one word: Amazon,” said Love. Amazon.com (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. “The chains have a long way to go in this category,” Love said.

While an editor with Business Week in the 1970s, Love said he wrote a cover story on Sears that discussed why Sears, the dominant retail chain at the time, was losing market share to specialty retailers and ignoring a threat from a new up and coming competitor: Wal-Mart Stores Inc. Today Wal-Mart is the world`s biggest retailer. Using that as an analogy, Love said he sees a similar comparison with Amazon. “Can they be the biggest retailer?” Love asked attendees. “I wouldn’t scoff at the notion.”

In conclusion, Love said the 6.3% of the market represented by online retailers, is the year’s most telling statistic. “This not a small or insignificant number,” Love said. “It represents a 22% growth rate in an otherwise flat market.”

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