Logging Onto Profits

In 2001, 56 percent of retailers reported profitable online operations, up from 43 percent in 2000, according to “The State of Retailing Online 5.0,” an annual Shop.org survey conducted by The BostonConsulting Group and Forrester Research.

Further profitability and growth is anticipated in 2002, due to continued growth in consumer spending online and additional cost efficiencies. According to the newly released report, shoppers spent $51.3 billion online in 2001, up 21 percent from the year before. In 2002, consumer spending online is expected to increase 41 percent, to $72.1 billion.

The overall U.S. online retail market also moved closer to profitability last year. Operating margins rose from a net loss of 15 percent in 2000 to a loss of 6 percent in 2001, with break-even expected this year. Catalog-based retailers continued to have the most success, with positive margins of 6 percent. Store-based and web-based retailers posted aggregate losses, though both groups showed year-over-year improvement and are trending toward break even.

Online penetration by product category also grew. Out of 15 categories studied, sales in seven — including computer hardware and software, books, music and video, toys and consumer electronics — represented more than 5 percent of all retail sales for those respective categories, with penetration in some categories as high as 17 percent.

“Consumer adoption of the online channel has reached critical mass, and retailers have been able to respond by turning this trend into profits. This is all the more remarkable in a year like 2001, which experienced a weakened economy,” said Elaine Rubin, chairman of Shop.org, an association of online retailers. “Multi-channel retailers, who are driving much of this profitability, are achieving this goal by creating shopping experiences that take advantage of multiple channels and contact points.”

Significant drivers of improved profitability in 2001 were increased consumer spending online and continued operational performance improvements in a variety of areas, such as increased marketing efficiency, an increase in the number of repeat online buyers and tighter expense control. Marketing efficiency increased significantly, resulting in marketing costs per order falling to $12 in 2001 from $20 in 2000 and customer acquisition costs dropping to $14 in 2001 from $29 in 2000. Repeat buyers account for over half of sales, with 53 percent of revenue in 2001, up from 40 percent in 2000.

Based on data from more than 100 retailers who participated in a detailed survey, “The State of Retailing Online 5.0” explores the opportunities and challenges facing retailers selling merchandise on the web, including store-based, catalog-based and web-only retailers.