June 23, 2014, 9:33 AM

It isn’t easy being small

While many small retailers struggle to acquire new customers, innovative startups grow by out-maneuvering their competitors in a variety of ways. According to the newly published Internet Retailer 2014 Second 500 Guide, Second 500 merchants grew online sales 14.1% in 2013, less than last year's growth rate, and lower than their larger competitors in the Top 500 Guide.

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Successful small to mid-sized e-retailers are experts at building loyalty—they appeal to consumers with great customer service, niche product selection and personalized web sites and promotions that can drive consumers back to buy again and again.

But in 2013, many mid-tier web merchants struggled to be discovered by new customers, especially on search engines, merchants ranked in the new Internet Retailer Second 500 Guide say. Ongoing changes in how Google ranks web sites and increased competition from the largest e-retail players is making customer acquisition an increasingly difficult—not to mention expensive—task.

“There’s a lot more noise out there, so it’s harder to break through,” says David Grocer, president of custom invitations e-retailer PaperStyle.com, which experienced a 1.5% drop in online sales last in 2013. “It’s not harder to differentiate ourselves, because we have several legs up on the competition. It’s just that the ability to let everyone know the difference is getting harder. We’ve found that once consumers discover us, they’re thrilled and they come back. The challenge is getting the word out.”

The challenges small retailers like PaperStyle.com faced in 2013 are evident in the numbers. Collectively, Second 500 merchants brought in $4.740 billion in online sales in 2013, up 14.1% from $4.155 billion in 2012. That growth rate is down slightly from 15.6% growth for Second 500 merchants in 2012, and further behind the 17.1% growth of the largest merchants in North America in 2013, those ranked in the Top 500 Guide. The Second 500 growth rate is also below the 16.9% growth of total online retail sales in 2013, according to the U.S. Department of Commerce. As a result, the Second 500’s share of U.S. online retail sales slipped slightly to 1.80% in 2013 from 1.84% a year earlier.

However, that 14.1% growth for the Second 500 is still around four times the 3.7% growth in total retail in 2013, and many small e-retailers posted major growth numbers online in 2013.

Also, looking at the numbers a different way shows that the median growth of Second 500 e-retailers is 11.1%, nearly exactly in line with the median growth among Top 500 retailers. And neither the collective growth of the Second 500 nor the median growth of the individual players takes into account the 12 merchants ranked in last year’s Second 500 Guide that skyrocketed into the Top 500 this year. Those merchants grew 76% to $345.0 million in online sales in 2013, compared with $196.2 million in 2012.

Newcomers to the Second 500 Guide did particularly well—the 64 merchants new to Internet Retailer Top 1000 rankings grew web sales 40.9% in 2013 to $530.1 million from $376.3 million, although many are growing off a relatively small base. And start-up web-only merchants also shined—of the 25 fastest-growing retailers in the Second 500 Guide, 80% sell only online and were founded in 2009 or later.

Certain product categories also out-performed the Second 500 average. The 101 Second 500 merchants that sell apparel and accessories, for example, collectively grew online sales 21% in 2013—slightly above their larger apparel competitors in the Top 500 Guide, which grew 20%. Second 500 food and drug merchants grew 16% versus the 4% in the Top 500; and office supplies merchants grew 14% in the Second 500 versus 3% in the Top 500.

What’s the secret of the fastest-growing Second 500 merchants? There’s no one secret, but each of them is outmaneuvering competitors in some way. Many are growing by investing in their web sites, making them eyecatching and easy and convenient to shop. Others are tapping into unmet demand with a niche product, selling in a new way or aggressively marketing to attract new customers.

Sites run by merchants like fast-growing office supply merchant Chalkfly Inc. (No. 962) rival their much larger competitors in terms of advanced business-to-business e-commerce functionality, for example. Others like gourmet food ingredient e-retailer Plated.com (No. 713) have a fresh take on a product category like food that is ripe for online growth; and some like apparel maker and e-retailer Betabrand Inc.  (No. 842) are deploying crowdsourcing to engender loyalty and engagement among consumers.

Collectively, the Second 500 e-retailers also made big gains in many key areas of online retailing:

  • Social media. Second 500 merchants grew their total Facebook fan base 40% in 2013 to 80.7 million. As a group Second 500 merchants increased their Twitter followers by 111% to 10 million and grew combined YouTube video views by 105% to 2.87 billion.
  • Mobile commerce. A majority—251 retailers—in the Second 500 Guide now operate a mobile-optimized site.
  • Paid search. Monthly paid search spending increased by nearly 30% in 2013. Collectively, the Second 500 merchants spent $14.3 million per month on pay-per-click advertising last year. The median amount spent per month on paid search was about $13,000.

It wasn’t a year of megagrowth for Second 500 merchants in 2013 relative to other years. But there were many examples of true up-and-comers and niche leaders that are effectively competing and succeeding against their much larger competitors.

The Internet Retailer is available in print, digital and online database formats. Click here to order a copy.

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