Is Online Retailing Recession-Proof?

Although retail revenues were down overall during the 2001 holiday season and for the year, online retail saw double-digit growth. The e-tail holiday season saw growth in terms of both traffic and dollars spent.

Does that mean online shopping is recession-proof? Most analysts say no, and point to a number of reasons why e-tail is still expanding, although not at the exponential growth rates of seasons past.

With many brick-and-mortar retailers recently reportingsluggish holidays sales and high rates of merchandise returns, the impacton Internet sellers has been just as acute, if not quite as apparent, analysts said.

Moreover, industry analysts caution that a number of online marketers willbe reeling for months to come due to the economic downturn.

“Online retailers have been hit every bit as hard as, if not harder than, thetraditional retailers,” Jupiter MediaMetrix senior analyst Ken Cassar told the E-Commerce Times.”It’s just more evident among traditional retailers because many of them areshowing fairly stagnant growth rates.”

Holiday Jump

Despite the tough economic times, online shopping over the 2001 holidayseason did register incremental growth year over year. Research firms Jupiter Media Metrix and Harris Interactive have found that the post-Thanksgiving buying period in 2001 saw about a 15 percent jump over year 2000.

However, analysts warn that the increase may very well have masked thefinancial straits in which many Web merchants currently find themselves.

“We did see considerable impact in terms of the recession in online shopping, just as we saw in retail,” said Lori Iventosh-James, director of e-commerceresearch at HarrisInteractive. “But the difference is that traditional retail has beenaround for a long time, whereas online is still in the growth mode — although itcertainly is maturing.”

Reality Check

As a result, many e-commerce players, having ridden in on a strong andunsustainable economic tide, now find themselves awash in fiscal malaiseinstead of bathing in long-awaited millions.

“When you look at online retailers, though, they are taking bigger percentage hits to their business because of September 11th,” Cassar said.

The harsh reality of the situation has been all the more painful for thoseonline retailers whose goal of achieving profitability by the end of 2001seemed to be within reach prior to the financial conditions that tookhold during the fourth quarter.

“I’ve spoken with one retailer recently who was very close to becomingprofitable, and the business took such a big hit during September and earlyOctober that it basically killed them,” said Cassar. “At the end of the day,we’re probably going to find a lot of online retailers will be going out ofbusiness because the events of September 11th made an already difficultsituation more difficult.”

Going Mainstream

According to industry watchers, the primary driver of growth duringthe recent holiday season was the increase in the size of the online shopping population. Both the number of new online users and the increased likelihood that a given user would make an online purchase caused revenue to spike.

In terms of raw numbers, Jupiter has estimated that during the 2001 holidays33 percent of Internet users shopped via the Web, compared to 29 percent whodid so over the previous season. The research firm also found thatthe size of the online population by the end of 2001 was roughly 142million, a jump from the 125 million users online at the end of2000.

“The newer people coming online are moving to make a purchase online morequickly than they have in the past, and it’s just a mainstreaming ofe-commerce,” said Iventosh-James. “People are more familiar with itsince there’s a whole lot more communication about security and privacyissues.”

Thrifty Spenders

Despite the modest increases in online retail, analysts maintain that belt-tightening by consumers helped to offset the growth.

“I’d argue that if it weren’t for the weak economy, which was exacerbated by the events of September 11th, we may well have seen a 25 percent increasein holiday retail growth over the previous year,” said Cassar.

Similarly, Iventosh-James said her firm found in a number of surveysconducted throughout the holiday buying period that consumers did rein in their spending.

“There was definitely a portion of people who said somebody in my family hasbeen laid off or my salary has been cut, so I’m only buying necessities thisyear,” the analyst said. “That was more the mentality than it had been in thepast.”

Population Control

Although the events of September 11th and their aftermath produced aneconomic anomaly, analysts assert that slowing e-commerce growth ratesare also the natural result of a sector whose population is reaching themarket saturation point.

“Now that growth rates have come down to earth, we’re starting to findthat the macroeconomics are increasingly visible,” said Cassar.

On the upside, however, Internet retailers that are able to spur the currentpool of online users to become consistent Web shoppers stand to reapconsiderable benefits.

“We know that 60 percent of all U.S. households are online now and amongpeople who have online access some 85 percent have made a purchase,” saidIventosh-James. “Given those factors, the potential is quite large.”

Riding the Storm

While finding ways to ride out the recession is a dauntingchallenge, there may be avenues for Internet sellers to explore withoutfalling by the wayside. For some, consolidation — either through mergers orbuyouts — may be the key.

“I suspect that we will see some fairly strong Internet retailers up forsale over the next couple of quarters,” said Cassar. “I think many of themwill be purchased by their traditional competitors, such as brick-and-mortaror catalog companies.”

Internal Affairs

On an operational level, another option is for retailers to target theirbusiness blueprints on niche consumer segments.

“Retailers that might have been conceived with fairly aggressive marketstrategies may realize that they’re never going to live up to what mighthave been the unrealistic hopes of a couple of years ago,” said Cassar.

“Instead, they’re going to go after smaller markets.”

Additionally, analysts advise brick-and-click retailers, as well as catalogcompanies with Web sites, to focus on devising strategies that help snaga larger percentage of a customer’s overall spending dollars.

“It’s a great opportunity for traditional retailers who have an onlinepresence and for catalogers,” said Iventosh-James, “because they can reallyunderstand their shoppers and figure out how to capture a much largerpercentage of their spending across all these different mediums.”

Driving Growth

Looking ahead, Cassar believes that the greatest driver of e-commerce growthover the next five years will be from the growing percentage of Internetusers who conduct online transactions.

“The longer someone has been online, the more likely they are to buy onlineand the more likely they are to buy more products online,” he added. “Theone thing we can be confident of is that average online tenure will onlyincrease over time.”

4 Comments

  • Any analyst who asserts that “slowing e-commerce growth rates are the natural result of a sector whose population is reaching the market saturation point” is wrong!

    Slowing rates are due to the fact that in conventional retail, stores “store” and buyers and sellers can access that storage to efficiently exchange goods — but in online retail, no comparable storage space exists, and since the typical means of exchange is for goods to be insecurely left outside of consumers’ locked homes, most consumers won’t risk ordering in the first place.

    The way to solve this problem is similar to the way the US Post Office solved its own home storage/access problem many years ago — only this time, with bigger/more functional mailbox-like devices. Such devices must enable access by all authorized vendors, must both track and notify who delivered what and when, and must also enable two-way return/pickup as well as delivery.

    Since consumers aren’t charged to walk into conventional stores, quickest implementation would logically occur if they weren’t charged for their delivery box either. Companies financing their deployment could earn revenue from two sources: (a) sales [or delivery fees if deployed by FedEx, UPS, the USPS, etc.] which never would have been made without them; and (b) small but ongoing fees that are levied each and every time some other company accesses their box. For coincidentally, that’s how revenue is made with conventional stores: (a) stores enable sales, and (b) margins are made on most all products sold through them.

    Sincerely,

    David Porter

    • I wholeheartedly agree with you, David; all of the Net’s e-tailers need to start dealing with the home delivery security issue. You’re right, it’s a serious problem. Most people won’t ever buy anything online until their package theft concerns are resolved. I think your idea of using bigger, more secure mailbox-like devices has merit, something that you might consider running by Shop.org, the Net’s e-tail sector trade association.

      • Thanks very much for your agreement, Admark. Unfortunately, even though I’ve written to Shop.org’s Elaine Rubin and Scott Silverman multiple times, they haven’t yet responded. I’ve also tried contacting many of the analysts that are routinely quoted by E-Commerce Times writers; but haven’t had much luck with them either. …Can I ask a favor? Since I think I’ve compiled some pretty compelling rationale for deploying such boxes, if you have a pipeline to any of these folks, would you mind asking them to review the info found on my Web site at http://www.fastlaundry.com ?

        Thanks again,

        David

        • I exchanged email notes with Elaine Rubin a few years back, but I don’t really know her well enough to help you out. If I were you, David, I’d just give Elaine a call and see if you can set up an appointment with either her and/or with one of Shop.Org’s committee chairpersons, all of whom work as brick-and-click executives or operate pure-play retail stores. It’s certainly worth a try.

          Again, I think your “secure delivery box” idea has lots of merit. Like you, I’m convinced that the public won’t ever embrace the online shopping process until the Net’s leaders initiate safeguards to reduce the public’s concerns about credit card fraud, privacy intrusion and package theft. I’ve researched the security issue inside and out, and there’s no doubt in my mind that the industry has totally underestimated the impact that these unresolved security issues have had in terms of driving up the retail sector’s customer acquisition cost. I’m also convinced that the Dot.com crash never would’ve happened if the Net’s leaders would’ve dealt with these security issues back during the Net’s early days.

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