U.S. retailers this year geared up for the annual back-to-school shopping season, the parents and children didn't fill the streets and shopping malls – they stayed inside, and online, cruising for bargains on the Internet.
Overall sales this August were up only slightly from last year, failing to give stores the boost they needed after a sluggish summer.
A report from MasterCard's SpendingPulse released yesterday (Wednesday) showed that consumers gave a slight bump to children's clothing and consumer electronics with their back-to-school shopping, but pulled back in other areas of merchandise which cut into sales gains.
But among uneven retail numbers this year exists a bright spot that has been growing for years, and is leading companies to overhaul their traditional business models: the online retail market.
Online sales in August were up for a 13th straight month, rising 7.2% from July compared to a 1.5% gain the same month in 2009, according to MasterCard's SpendingPulse data.
"People are just shifting their dollars to the Web," said Sucharita Mulpuru, vice president and principal analyst for Forrester Research Inc. (Nasdaq: FORR). "The Web is definitely a channel where people are able to find better prices and better values."
Online retail sales will grow 10% a year for the next five years, accounting for 53% of all U.S. retail sales by 2014, according to Forrester Research. Internet shopping growth is outpacing overall retail growth, which is only projected to increase by 2.5% in 2010.
Paradigm shifts like this create new winners, those that can stay ahead of the trend and in tune with consumer needs to beat the competition, even when consumer spending is struggling.
The undisputed online winner is Amazon.com Inc. (Nasdaq: AMZN), which pioneered the online retailing trend when it sold its first book online in 1995. Amazon took a "slow and steady" approach, not expecting to see profit for four to five years while growing its online presence. It survived the dot-com bubble when many e-companies disappeared, and turned its first profit in the fourth quarter of 2001, with revenue of more than $1 billion.
Since then, discount chains and department stores have embraced the Internet to stay competitive, with big names like Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT) reaping profits from successful online marketplaces.
Slower to follow the trend are larger luxury outfits that have traditionally turned up their noses to the Internet. In early 2008, only a third of 178 luxury firms surveyed by Forrester Research sold their products online.
Luxury companies claim online shopping is too impersonal, and that it detracts from the luxury shopping experience by stripping away the glamour that stores and clerks have to offer. They also tend to focus on cost savings – something luxury outlets would rather avoid.
"That's the last thing I want people to think about," one executive told The Economist.
But companies are starting to come around. Oscar de la Renta, for instance has found a substantial online market for its pricey frocks.
"We could not have been more wrong in our expectations of the Internet," said Alex Bolen, the company's chief executive.
Louis Vuitton's site brings in as much money as some of its biggest bricks-and-mortar shops, according to the firm's communications director Antoine Arnault. And Italy's Prada expects that within five years about 40% of its revenue in America will be from Internet sales.
Still, companies need to do more than just offer their products on the Internet to be successful with e-retailing. They have to create enjoyable, user-friendly, and efficient shopping experiences for consumers.
If You Build It, They Will Come
Online shoppers are growing increasingly savvy. They use the Internet to search for deals, learn about products and comparison shop. And they want a convenient and informative online experience.
Nordstrom Inc. (NYSE: JWN) spent three years redesigning its Nordstrom.com site to better serve online shoppers. The site went live last week and offers more vibrant apparel pictures, easier site search, and increased customer interaction.
"The site is just much cleaner and more visually appealing than before," says a company spokesman. "Gone is the busy list of links and multiple tabs on the home page. We've made navigating and shopping the site a lot simpler and more fun for the customer."
The site revamped its search feature and added more options by which to filter a search, reducing the time and number of clicks it takes to search for a desired item. The search also scans Nordstrom's entire inventory for availability.
"Our product pages are much improved," the spokesman said. "We're giving customers better product information and clearer sizing, color and availability details up front."
Successful online retailers also have to become familiar with search engine optimization. Finding ways to compete with informational sites in natural searches means reaching more customers who are not necessarily brand-loyal but are looking to buy a product.
That means retailers need to go a step beyond simply selling online by developing relevant content for their sites. Strategic keywords are replacing attractive storefronts and eye-catching displays as a means of luring shoppers to a merchant's business.
"Smart retailers in info-rich categories like consumer electronics can win strong search result positions with articles, videos and reviews that address consumer questions like "how to choose" and "how to use," Larry Becker, an e-commerce marketing analyst, told Internet Retailer.
And as retailers become more comfortable online, they are starting to branch out to foreign Internet markets.
"The economic downturn has led retailers to take two approaches – either decide to hunker down or to say, 'Yikes, we need to diversify our revenue by going global,'" said Forrester Research analyst Zia Daniell Wigder.
A July Internet Retailer survey reported that international shoppers account for 11% of Web site traffic for one-third of U.S. retailers. More than 60% of online retailers that don't sell internationally are currently looking into the benefits of globalizing.
Not Just A Pretty Site
Companies that have already invested in their Web sites and are tracking online shopping trends will be positioned to profit when consumer spending picks up. Some have called the Internet home since they began, while others have had to transition from traditional brick-and-mortar operations to a new hybrid form of business.
Online DVD subscription service Netflix Inc. (Nasdaq: NFLX) has been an Internet retailer from the start, and saw its number of subscribers grow by 31.6% in 2009, to 12.36 million from 9.39 million. This boosted revenue 22.4%, while rival Blockbuster Inc.'s online sales grew only 5%. Its stock is up 138% this year-to-date and 28% in the past month. Its Internet video streaming ability also has helped fuel the booming growth.
Netflix could benefit if Apple Inc (Nasdaq: AAPL) announces that it will launch a new version of its iPod Touch to include a Netflix application as expected. Apple also is expected to announce a new Apple TV service that supports Netflix streaming.
Analysts predict Apple is unlikely to start a competitive DVD subscription service, meaning Netflix can continue dominating the online DVD market.
"Department stores were a little slower getting online," said Jeffrey Grau, senior analyst with research firm eMarketer. "Now they're making up for it."
Kohl's ranks 43rd on Internet Retailer magazine's list of the top 500 successful online retailers. It increased Web sales 38% in 2009 to $491.5 million and 50% in 2010's first quarter by targeting women shoppers ages 25 to 34 with its online deals and promotions. It opened a new distribution center in California in June.
Kohl's also embraced one of the newest online shopping trends by putting kiosks in stores nationwide, so shoppers who can't find what they're looking for can shop online from the store. The new tool, implemented by a number of U.S. retail chains, is expected to shift even more consumer interest to the Internet while saving inventory space in stores.
Macy's Inc. (NYSE: M) also is taking the plunge online. While Macy's suffered at the hands of the recession, its online sales were up 31% in the first half of 2010. The department store's future could be finding a new home online instead of at the anchor spot in the local shopping mall.
"A bright spot in our business is the Internet," Chief Executive Officer Terry Lundgren told Internet Retailer. "Over time the new store sites and new mall construction sites are going to take longer to become a reality. In the last two years we have particularly focused on our investment in the dot-com infrastructure."
Macy's reported better-than-expected second-quarter earnings of 35 cents per share, compared to 2009's second-quarter earnings per share of two cents. The company's stock is up 20.5% this year.
"Our target customer regularly shops online, and we see continued opportunity to grow our e-commerce business by providing our customers with a seamless retailing experience," Express said in a statement.
Express stays focused on its core market of fashionable twenty- and thirty-something men and women and successfully uses its online presence to send subscribers coupons and online promotions.
Express debuted its initial public offering (IPO) on May 14 at $17 a share and ended August at $13.61. But it saw a lot of money pour into the stock in August, and as consumer sentiment improves, so should its price.
"We had a fairly significant test-and-learning environment in 2009," said Best Buy senior vice president John Thompson. "There was a lot of A/B testing and competitive analysis around our relevance with our consumers. We wanted to make sure we had the customer experience, products and services, and delivery and support mechanisms to support the customers who were choosing our brands."
Getting to know its shoppers allowed Best Buy to give consumers the online tools they wanted, like access to local store inventories. Sometimes shoppers who didn't buy on the Web site would use the tools to see what was available and then go to buy in-store.
Still, there's no question that Amazon.com sits atop the Internet throne. It tops Internet Retailer magazine's list of top 500 e-retailers and its diverse offerings helped it profit during both the back-to-school and holiday shopping seasons. It grew at a pace 14 times faster than overall e-commerce sales last year, and has already seen strong growth in international net sales, which represent 48% of total revenue.
It's now setting the trend in another area of online sales growth: distribution centers.
Amazon has two thirds of its distribution centers in the United States, but has a good presence in Europe as well, with two in France, two in Germany and six in the United Kingdom. It plans to add one in France and one in England this year. With shipping centers near major European metropolitan cities, Amazon can expand free or reduced cost shipping to many European customers while saving on order fulfillment, meaning competitors that have trouble competing with its product offerings will now be hard-pressed to match its shipping deals.
Amazon.com stock is up 66% from a year ago and is positioned to profit from the world's fastest growing economy, China.
"We estimate Amazon's China business may add $1 billion to its revenue growth from 2011 and China may contribute about 10% of the global revenue by 2015," says Goldman Sachs Group Inc (NYSE: GS) analyst James Mitchell, who covers Amazon. "Amazon is emerging as the only Internet retailer globally with a large market-leading business in each of the world's top five economies."
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