Online Retail Sales Shake Off Weak U.S. Economy and Continue to Grow

By Jennifer Yousfi
Managing Editor

Online retail sales continue to defy the economic downturn while their brick-and-mortar counterparts struggle. But while online sales continue to grow, the rate of growth is slowing.

Web-based selling is still a relatively new way of retailing and has yet to be tested by a true economic contraction. So while theories are plentifuly and varied, there's no historical standard to point the way this time.

Experts agree that online stores continue to do well despite the current slowdown in U.S. consumer spending, but their reasons for the continued success of Web-based retailers differ.

"Store sales will be hit harder than Internet sales because affluent shoppers, who form the core of online buyers, tend to ride out economic downturns better than lower- and middle-income consumers," said Jeff Grau, eMarketer senior analyst.

But others believe that bargain hunting, not higher incomes, is driving Web traffic.

"Disposable incomes are being squeezed and what is drawing people online is the perception that the internet is cheaper and that they can shop around to get bargains and lower prices," said Malcolm Pinkerton, senior retail analyst at Verdict Research. "Broadband is also cheaper and it has broadened the spectrum of people who can shop online."

It's likely to be a combination of both, as even higher income consumers search for ways to offset the crippling cost of gas.

Online is Big Business

There were $127.7 billion in U.S. e-commerce sales in 2007, according to eMarketer data. The research firm estimates that number will hit $146 billion in 2008. But while those numbers are impressive, online sales only account for about 4% of total U.S. retail sales.

First quarter sales for Inc. (AMZN), one of the best-known names in online retailing increased 37% to $4.13 billion in the first quarter of 2008 compared to $3.02 for the same period a year ago.

"Our sales growth this quarter was driven by low prices and millions of in-stock items available for immediate shipment," said Chief Executive Officer Jeff Bezos, founder of, in the company's earnings release statement. "We're grateful to our customers."

Story continues below...

Traditional retail outlets such as Wal-Mart Stores Inc. (WMT) have been able to cut costs and continue sales growth with heavy discounting. Wal-Mart sales grew 10% in the retail giant's fiscal first quarter. But Wal-Mart is the exception, not the rule, as other retail businesses such as The Home Depot Inc. (HD) and J.C. Penney Co. Inc. (JCP) have posted losses and sales declines.

Penney is hoping the Web holds the key to improved sales for the struggling clothing and home furnishing retailer. Online sales are the fast growing division for the firm and management is allocating the marketing budget accordingly.

"We see as the No. 1 priority as we go forward as far as where that money will go," Mike Boylson, executive vice president and chief marketing officer, said Tuesday in a keynote address to the Internet Retailer Conference & Exhibition in Chicago, Internet Retailer reported.

No One Knows What the Online Future Holds

Even with more traditional retailers jumping on the Internet bandwagon, the recent rapid growth in online retail sales is going to slow, according to a recent eMarketer report. Sales growth in 2008 is expected to slow to 14.3% from a growth rate of 19.8% in 2007. Future projections see a similar steady decline (see chart below).

"A drop in the number of new online buyers is an inevitable sign of the maturation of the online retail channel," said Grau. But as more people gain Internet-access, "Retail e-commerce could get a boost from underserved consumer segments such as seniors and Hispanic-Americans."

More people are jumping on the net daily. Philadelphia already offers free wireless Internet access to its residents. As the price of computers comes down and if more cities follow Philly's lead, millions of consumers who didn't have access to the Web before could become new online shoppers.

"Online retail sales are maturing and the lion's share of future growth will primarily come from existing buyers spending more in the online channel," Patti Freeman Evans, senior analyst at JupiterResearch, said. "Assuming growth continues in a similar trajectory over the coming decades, U.S. online retail sales will plateau at 10% to 15% of total U.S. retail sales, barring a dramatic change in the online shopping experience that promotes an inordinate spending shift among buyers"

Technology is always changing and an "inordinate spending shift" doesn't seem too far out of the realm of possibility. Just a decade ago, a phone like Apple Inc.'s (AAPL) new 3G iPhone seemed impossible. If more and more people are carrying full Internet-access around in their pockets, it's almost impossible to predict what the effect will be on Web-based retail sales.

News and Related Story Links: