Sector Watch: On-line retailing

Record-high gas prices this summer will likely dampen overall retail sales but may fuel increased opportunities for on-line retailers as cost-conscious consumers opt to shop on-line instead of in stores. Online sales experienced strong growth last year, rising 25% to $219.9 billion. Excluding travel, e-commerce sales rose 29% in 2006 to $146.5 billion. For the current year, online sales are forecast to grow 18% to $259.1 billion and on-line sales excluding travel are projected to rise 19% to $174.5 billion. According to a Forrester Research survey for the National Retail Federation, 10% of all clothing and accessory sales will occur on line in 2007, up from 8% last year. Overall online retail sales excluding travel are expected to account for 7% of the total retail market in 2007, up from 6% last year.

The main challenges to even faster online growth are delays between ordering and receiving products, and consumers’ desire to physically examine certain items (such as apparel) before purchasing. Online order security and data protection have also emerged as a major industry issue.  Gartner Group estimates that as much as $2 billion in additional online sales were lost in 2006 because of consumers’ security concerns. Online retailers must also be better prepared for heavy holiday e-commerce traffic. Last year several major retailers experienced website crashes and slowdowns during the holiday season.  Forrester’s report also noted that 83% of online retailers who responded to its survey were profitable last year, and 78% reported increased profits.

Data from comScore Networks indicates consumers spent more online than ever before during the 2006 holiday season. E-commerce revenues exceeded $100 billion for the first time ever and spending was 22% higher than last year. comScore noted the largest surge in online buying came during the three weeks leading up to Christmas; e-commerce sales rose 45% from the previous year. The strong e-commerce results stand in marked contrast to overall sales for major U.S. retailers, which showed weak same-store sales comparisons and single-digit sales growth for the 2006 holiday season.

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