Despite a lack of venture capital investments and some high-profile failures, the North American Internet retailing segment is on pace to surpass $29.3 billion in 2000, a 75 percent increase over 1999 revenue, according to Gartner Group. In 1999, North American online retail totaled $16.8 billion, up 157 percent from 1998 revenue.
“Online retailers must prepare for the reality of industry consolidation,” said Robert Labatt, principal analyst for Gartner’s e-Business Services. “Leading companies with strong consumer awareness and branding will have the upper hand at this time. Smaller niche players need to develop partnerships that drive revenues, not press releases. For the current leaders, this is a time of bargain hunting. Advantageous partnerships with weaker partners that have strong teams, technology, or customer bases are now available at lower cost. In order to survive, Internet retailers have no choice but to demonstrate the capability to achieve profitability in the short term.”
According to Gartner, online retail activity represented less than 1 percent of overall consumer spending in North America. By 2004, Gartner estimates online retailing will grow to about 5 to 7 percent of total retail sales in North America.
The computer hardware/software, consumer electronics segment will continue to lead the market with revenue projected to grow from $7.5 billion in 1999 to $59.7 billion in 2004.
“Despite the size of this opportunity, the real story is that online electronics and computer retailers are operating at the thinnest of margins compared with other categories such as banking,” Labatt said.
|E-Commerce Revenue in North America
|Source: Gartner Group
Banking and financial services are forecast to grow from $3.6 billion in 1999 to $12.3 billion in 2004. Even though revenue in this segment is not as high in other markets, Gartner analysts said this segment carries a high revenue margin relative to other vertical markets.
“Widely expected to be revenue leaders, banks are finding that the benefits that derive from offering online services are largely the result of cost savings rather than increased revenue,” Labatt said. “This is not true for online stock and investment trading sites, which make up the lion’s share of the revenue base through 2004. In 2004, retail online financial trading is expected to grow to $12.3 billion in service revenue, of which only 6.5 percent will be from online banking and bill payment services.”
The strongest growth rates through 2004 are expected to come from the entertainment and home consumables categories. Gartner analysts predict that increased broadband access will remove bandwidth constraints and fuel an increase of audio and video on demand.
“As piracy fears are eased with the introduction of new technology, major labels and studios will release their catalogs for digital download,” Labatt said. “The ease of digital downloading will reduce fulfillment costs and likely lead to increasing consumption.”
Even though the VC well may be close to running dry, and e-commerce stocks aren’t what they used to be, consumer demand for online shopping is healthier than ever, according to a report by BizRate.com.
BizRate’s first quarter 2000 Consumer Online Report found that online retail sales in the first quarter of 2000 increased by 12 percent over the prior quarter, and actual orders increased by 6 percent. BizRate.com forecasts second quarter sales to grow a further 25 percent over first quarter sales — to 10.2 billion.
“Business-to-consumer e-tailing shows no sign of slowing down,” said Chuck Davis, president and chief executive of BizRate.com. “There are plenty of online buyers out there, and shopping on the Web is currently thriving. The problem confronting e-tailers rests in meeting investors’–not consumers’–demands by getting costs under control and showing a clear path to profitability. E-tailers who are able to target buyers cost-effectively should be able to satisfy both audiences. Increasingly, such retailers are turning to pay-for-performance marketing relationships.”