Byline: Steve Alexander; Staff Writer
One sign of the growing importance of online holiday retailing can be found in the pickup line at 660 Best Buy retail stores.
To save on shipping, Best Buy's online customers are encouraged to pick up merchandise at the nearest store. The company is pushing the concept this year because it says customers spend more if they don't have to pay for shipping.
Others are looking to boost online sales as the growth rate of consumer e-commerce - while still sizable - slows. As a result, e-commerce firms are trying to boost sales with techniques ranging from Web page-retail store tie-ins to glitzy technology features aimed at customers who have high-speed Internet access at home.
While analysts forecast U.S. online retail sales will be up about 20 percent this holiday season, that growth rate is down sharply from about 30 percent a year ago. Analysts say that online shopping remains healthy and that the slowing growth reflects that so many people already are buying online. By last year, 73.3 million U.S. residents shopped online, and this holiday season that number is expected to grow to 86.1 million, or nearly three people out of 10, says Jupiter Research of New York. Experts also believe the economy is helping to slow online sales growth.
Forrester Research of Boston predicts that during the Thanksgiving-through-Christmas period, online sales will rise to $13.2 billion; Jupiter predicts online sales for all of November and December will rise to $21.6 billion. Online sales are just a fraction of total U.S. retail sales, but they're more significant during the holidays, when they rise to nearly 6 percent of the total, double the level of the rest of the year, Jupiter says.
One indication that the economy was affecting consumer e-commerce came earlier this year. Forrester Research said there was an unusual drop in total online sales between the first and second quarters, which it attributed to the economy.
In addition, analysts are predicting that the average online shopper won't spend any more during the holidays than he or she did last year.
"It's not about their comfort being online, but about their comfort on spending this year," said Jupiter analyst Patti Freeman Evans.
But if the economy is having a dampening effect, e-commerce companies can take comfort in the fact that online shoppers tend to be better off financially than the average retail store customer.
"This year, 41 percent of online shoppers will have average annual household income of over $75,000," Freeman Evans said. "Another 27 percent have household incomes of $30,000 to $50,000." Average U.S. household income is about $43,300, according to the U.S. Census Bureau.
Not everyone is expecting a slowdown in online sales growth; niche players may have a different experience. One company with a different outlook is the Sportsman's Guide of South St. Paul, an e-commerce site (www.sportsmansguide.com) for outdoors products ranging from hunting clothes to John Deere-motif electric trains.
Sportman's Guide now gets more than 40 percent of its revenue from online sales (the rest come from telephone and catalog ordering), and expects sales growth this year to be similar to that in 2003, although it's too early to be certain, said Greg Binkley, the CEO. Sportsman's Guide began in 1977 as a newsletter for deer hunters, later became a catalog business and has been online since 1996. The firm also operates an outdoors discount site (www.bargainoutfitters.com) and a sports equipment site called The Golf Warehouse (www.tgw.com.)
Online retailers are employing a variety of strategies to bolster their sales growth, including old-fashioned incentives like reduced shipping costs, marketing strategies that offer a broader array of merchandise than most stores, and new technology features such as showing video clips of Hollywood movies to improve the shopping experience for customers with high-speed Internet connections.
Best Buy's strategy is to use Bestbuy.com as a carrot to get people to visit its retail stores.
"This year we made it quicker for online customers to pick up products in the store," said Sam Taylor, Bestbuy.com senior vice president of online stores and marketing. "We cut in half the time it takes from when the customer places the order to when we e-mail the customer that the purchase is ready for pickup. It's now less than 30 minutes."
Having online customers pick up merchandise at stores has two benefits, Taylor said. Customers spend about 30 percent more money at Bestbuy.com if they don't have to pay for shipping. And online customers are likely to make additional impulse purchases at the store. Taylor declined to say how much this boosts revenue per customer but said it is significant.
Not all online merchants have the advantage of Best Buy's network of retail stores. But if online retailers feel sales are too slow, they can stimulate sales by offering free shipping (normally available only on larger orders) or free upgrades to next-day shipping (handy for last-minute purchases.) While absorbing shipping costs eats away at profit margins, online retailers typically have locked-in holiday shipping rates and know precisely what it will cost to offer such incentives.
Free shipping is costly
Not everyone favors the free shipping strategy.
"The shipping cost is fairly expensive," said Binkley of Sportsman's Guide. "Even though online order-taking is less costly than taking an order over the phone, it's not enough less to compensate for giving away free shipping." His firm's golf site offers free shipping for orders over $75, but the company's other two shopping sites don't offer it at all.
Larger online retailers are in a better position to cut shipping costs for consumers, said Craig Stevenson, worldwide marketing manager for multi-channel retailing in IBM's e-commerce operations in San Francisco. IBM sells software that helps retailers coordinate sales through Web sites and stores.
"Online retailers have better profit margins than a retail store, and so they have the ability to absorb the cost of shipping and still have great margins," Stevenson said.
In addition, online merchants can count on technology working in their favor. Analysts predict e-commerce will be helped by the proliferation of broadband, or high-speed, Internet connections such as cable modems from cable TV firms and DSL (digital subscriber line) service from telephone companies. A study this year by Nielsen/NetRatings said 51 percent of U.S. homes with Internet access have broadband, which analysts say makes it easier for consumers to buy online.
"Broadband users spend more time on the Internet because they are not frustrated with slow Web page loading times," IBM's Stevenson said.
In addition, broadband allows online merchants to make more elaborate sales pitches. At the click of a mouse, Bestbuy.com customers soon will be able to view video clips from movies or video games and sportsmansguide.com customers already can enlarge photos of online merchandise. With slower dial-up Internet connections, such technological glitter often isn't practical.
Technophiles to the rescue
While all these factors might affect online shopping this year, it may be shopper demographics that offer e-commerce sites their best hope for the future. There is a huge untapped reservoir of potential e-commerce customers, because 40 percent of all Web surfers still haven't bought anything online, said Freeman Evans of Jupiter Research. And there is the youth factor. Some e-commerce retailers expect sales growth will continue as the technologically savvy younger population ages.
"There probably are some people who won't be shopping online, and they probably are older," Binkley said. "But as younger people grow up and become consumers, they are definitely going to be Internet shoppers."
Steve Alexander is at alex@startribune.com.
Fastest-growing online sales product categories
January to September 2004
. Category 2003 sales 2004 sales Change (millions) (millions) Jewelry and watches $443 $739 67% Furniture, appliances and equipment $1,083 $1,707 58% Computer software (except PC games) $857 $1,228 43% Flowers, greeting cards, miscellaneous gifts $782 $1,118 43% Home and garden $1,058 $1,352 28%
- Source: ComScore Networks
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