Maybe the End Can Wait

After Forrester Research and the GartnerGroup predicted the end is coming for many of the world’s dot-com retailers, the “glass is half full” market research is now making the rounds.

According to a study by Shop.org and The Boston Consulting Group, business-to-consumer e-commerce reached $33.1 billion in 1999.

Based on data from 412 online retailers, “The State of Online Retailing 3.0” found that total 1999 online business-to-consumer revenues across all categories grew 120 percent to $33.1 billion, representing 1.4 percent of all retail sales. An additional $13.1 billion was spent by businesses (as opposed to consumers) at retail Web sites in such categories as travel, office supplies, and computer software, the report found.

In 2000, the market is expected to grow 85 percent and surpass $61 billion in revenues. The report’s results include $6.8 billion in revenues generated by nontraditional retailers such as manufacturers and person-to-person auctions, which are omitted by the US Census Bureau and other researchers.

“While financial markets for online stocks are in turmoil, the underlying growth of the online retailing industry continues unabated,” says David Pecaut, senior vice president and global co-leader of The Boston Consulting Group’s E-Commerce Practice. “Online retailing is here to stay and will continue to gain significant share in 2000.”

While a few Internet retailers have seen their stock price plummet in recent weeks, many are still experiencing strong revenue growth.

“While some online retailers have had to revisit their business plans and revenue models simply to remain in the game, others have shown tremendous revenue growth in the past six months,” said Donna Iucolano, chair of Shop.orgs Committee on Internet Shopping Research. “The rest of this year promises to be a roller-coaster for e-commerce companies; however, those companies with a strong consumer focus and an eye toward maximizing profits will come through unscathed.”

According to the report, the continued growth of the online retail market is a result of the boom in the online population, an increasing number of offline retailers establishing a strong presence online, and the emergence of new nontraditional retail business models. These new players, which include auctions, buying groups, and manufacturers and distributors that sell directly to the consumer, accounted for more than 35 percent of products sold online in 1999.

The travel, computer hardware and software, financial brokerage, and collectible categories remained strong in 1999, representing 70 percent of the market. In terms of growth, revenues in the automotive category (2,300 percent) took off in 1999 as a number of online retailers began to sell vehicles directly online. Other categories, such as toys (440 percent) and health-and-beauty (780 percent) also grew at an exponential rate last year, according to the Shop.org/BCG study.

By the end of 2000, a number of categories — computers, books, music-and-videos — will have nearly met, or surpassed, 10 percent penetration — posing a very real threat to offline retailers. Many multichannel and offline-only retailers may soon have to consider reducing the number or size of their physical outlets to compensate for the loss in sales.

The “State of Online Retailing 3.0” also found the order conversion rate rose in 1999 from 1.5 percent to 1.8 percent and buyer conversion rate increased from 2.8 percent to 3.2 percent. Improvement in these two critical performance metrics enabled some online operations to reach profitability. The report reveals, however, that there are major opportunities for growth and profitability that remain virtually unexploited. For example, approximately 65 percent of online shopping carts were abandoned before the final purchase transaction took place, representing significant lost sales and highlighting the need to improve the shopping and checkout processes.

The battle for customer acquisition intensified in 1999, according to the report, and the gap between multichannel and pure-play retailers widened. Customer acquisition costs as a whole increased by 15 percent in 1999 — to $38 per customer. This increase was driven by pure-play retailers, whose average acquisition cost jumped to $82 per customer. Acquisition costs for multichannel retailers decreased slightly to $11 per customer. This divide widened over the holiday shopping period when pure plays spent an average of $108 in marketing and advertising for each customer acquired.

Catalog-based retailers seem to be having a relatively easy time making the transition to the Internet, according to Shop.org and BCG. Catalog-based retailers are outperforming their store-based and pure-play counterparts in fulfillment, with the lowest fulfillment costs, 18 percent lower than pure plays and 43 percent less than store-based retailers. They also have the highest on-time shipping rate at 91 percent, compared to 86 percent for both pure-play and store-based retailers. Catalogers are also the most responsive retailers, shipping merchandise an average of 1.5 days after an order is placed. Pure-play and store-based retailers take 1.8 and 1.9 days, respectively.

Traditional offline retailers are also making waves online, according to a study by ActivMedia Research. The study “Top 100 Consumer E-Commerce Web Sites” found offline-based firms such as Dell Computer, Charles Schwab, Gateway, and Cendant near the top of the list when ranking sites by revenue.

“The dot-coms aren’t actually disappearing,” said ActiveMedia VP of research Harry Wolhandler. “Instead, online-only companies are being acquired by companies with complimentary assets. Peapod, for example, is becoming part of an offline grocery chain that has backstage service. Consolidation is the e-commerce world is just the same as what happened in the computer and automotive industries years ago. Industries start with a proliferation of small opportunists. Successful ones gobble up pieces that help make them whole or are absorbed into the traditional mainstream. But talent, resources, and models don’t disappear — they morph into more successful business forms.”

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