Online sales sped past the $100-billion mark in 2003, surpassing all industry expectations. According to The State of Retailing Online 7.0, an annual Shop.org study conducted by Forrester Research (Nasdaq: FORR) of 150 retailers, 2003 online retail sales jumped 51 percent to $114 billion. The study also reported that online sales represent 5.4 percent of all retail sales.* Shop.org is a division of the National Retail Federation.
While each online product category experienced strong growth in 2003, certain areas were particularly robust. Online travel sales were solid, increasing 91 percent to $52.4 billion. Home and office ($11.1 billion) and computer hardware and software ($11.0 billion) were also major drivers for online growth.
Profitability Reigns In 2003
After breaking even in 2002, online retailers were poised for profitability in 2003. Last year, online retailers collectively raised operating margins to 21 percent. Once again, cataloguers held their post as the most profitable online sellers, with operating margins of 28 percent, up from 22 percent in 2002. Even Web-based retailers joined the trend after taking control of marketing costs; operating margins of those retailers were up to positive 15 percent compared with margins of negative 16 percent in 2002.
“Online retailing has arrived as a profit engine with double-digit operating margins,” said Elaine Rubin, Shop.org Chairman. “Retailers online have found the right balance between selling a product, acquiring and retaining customers, and earning a profit, which is powerful news for consumers and retail investors.”
The study also found that a greater number of retailers are continuing their march to profitability 79 percent of all online retailers were profitable last year, up from 70 percent in 2002.
Strong Sales Growth To Continue In 2004
This year, online retail sales are expected to grow 27 percent, to $144 billion. As online sales increase, some sectors are experiencing extremely high growth, with online sales expected to increase more than 40 percent in the health and beauty (61%); apparel (42%); and flowers, cards, and gifts (41%) categories.
“Consumers continue to expand their online buying into new product categories as they become more comfortable shopping online,” said Carrie Johnson, lead author of the report and Senior Analyst at Forrester Research. This mainstreaming of the Web into consumers’ lives not only fuels online sales, but also creates new opportunities for retailers to successfully grow their online businesses.’
Online sales are expected to reach 6.6 percent of total retail sales in 2004, up from 5.4 percent in 2003. Twelve sectors will experience a retail share of 6.0 percent or higher this year, compared with eight sectors last year.
Cutting Costs: Successes And Challenges
Online retailers took control of marketing costs in 2003, but struggled to maintain budgets in other areas. Overall marketing costs per order fell to $4 from $8, largely due to Web-based retailers, which slashed costs from $10 per order in 2002 to $2 in 2003. Although retailers were able to halve their marketing costs, customer service costs rose to $2.30 from $1.90 per order, and fulfilment costs jumped to $9.80 per order from $6.30 in 2002.
Channel Integration Marches On
Today, retailers understand how much the online sector affects their brick-and-mortar stores. According to the study, retailers believe that 24 percent of offline sales last year were influenced by the Web, up from 15 percent in 2002. As a result, retailers are bolstering their efforts to integrate channels. For example, 87 percent of retailers accept in-store returns of online purchases. In addition to in-store returns offering a seamless shopping experience to customers, retailers said that one in four consumers will make a purchase in the store when returning an item they purchased online.
Retailers have also gotten serious about cross-promoting channels. Last year, three-fourths of retailers (77%) collected customers’ email addresses at their stores, up from just 57 percent in 2002, and clerks at more than half of retailers (55%) are able to place customers’ online orders from their store.
“Retailers understand that, in a Multichannel environment, each channel has unique strengths and benefits,” said Scott Silverman, Shop.org Executive Director. “We are beginning to see retailers crack the code of maximizing each channel so that the whole is greater than the sum of its parts.”
About The State of Retailing Online 7.0
The only detailed survey that is based on information from 150 retailers that shared their confidential data, The State of Retailing Online 7.0 explores the opportunities and challenges facing retailers selling and marketing on the Web, including store-based, catalogue-based, and Web-only retailers.
Forrester Research is an independent technology research company that provides pragmatic and forward-thinking advice about technology’s impact on business. Business, marketing, and IT professionals worldwide collaborate with Forrester to align their technology investments with their business goals. Forrester offers products and services in four major areas: Research, Data, Consulting, and Community. Established in 1983, Forrester is headquartered in Cambridge, Mass. For additional information, visit www.forrester.com
Shop.org is the association for retailers online. It’s where the best retail minds come together to gain the insight, knowledge, and intelligence to make smarter, more informed decisions in the evolving world of the Internet and Multichannel retailing. Founded in 1996, Shop.org became a division of the National Retail Federation in January 2001. The association’s membership includes interactive executives from store-based retailers, catalogue-based retailers, Web-based retailers, and retail solution providers.
* “Retail Sales” include the following categories: sporting goods and equipment; flowers, cards, and gifts; health and beauty; travel, consumer electronics; other (subscriptions, art, and collectibles); apparel; jewellery and luxury goods; home; food and beverage; books; tickets; computer hardware and software; music and video; toys and video games; auctions; auto and auto parts.
