Online retail sales and profitability on the rise

Online sales sped past the $100 billion mark in 2003, according to a recent study.

The State of Retailing Online 7.0, an annual Shop.org study conducted by Forrester Research of 150 retailers, notes that 2003 online retail sales jumped 51% to $114 billion. The study also reported that online sales represent 5.4% 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% 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, according to the report.

After breaking even in 2002, online retailers were poised for profitability in 2003.

Last year, online retailers collectively raised operating margins to 21%. Once again, catalogers held their post as the most profitable online sellers, with operating margins of 28%, up from 22% in 2002, according to the report. Even Web-based retailers joined the trend after taking control of marketing costs; operating margins of those retailers were up 15%, compared with margins of negative 16% 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% of all online retailers were profitable last year, up from 70% in 2002.

This year, online retail sales are expected to grow 27%, to $144 billion, according to the study. As online sales increase, some sectors are experiencing extremely high growth, with online sales expected to increase more than 40% 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% of total retail sales in 2004, up from 5.4% in 2003. Twelve sectors will experience a retail share of 6% or higher this year, compared with eight sectors last year.

Online retailers took control of marketing costs in 2003, but struggled to maintain budgets in other areas, according to the study. 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 fulfillment costs jumped to $9.80 per order from $6.30 in 2002.

According to the study, retailers believe that 24% of offline sales last year were influenced by the Web, up from 15% in 2002. As a result, retailers are bolstering their efforts to integrate channels. For example, 87% 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, 77% of retailers collected customers’ email addresses at their stores, up from just 57% in 2002, and clerks at 55% of retailers 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.”