Net Retailers Face 45 Percent Growth in Market

On the day I write this column, Spaceworks, another promising Internet
company has closed its doors. The fever that once encouraged business writers
to claim dot coms would quickly overcome and obliterate traditional
businesses, is now burning against Net companies. Now it's fashionable for
journalists to scoff at Internet enterprises, ridiculing excesses such as the
goofy 2000 Super Bowl ads.

Ok, we've all had fun with the media backlash, now let's regain our bearings.
Amid the stories of the dot com demise, there is a hidden stream of positive
reports showing a growing base of Internet consumers willing to spend ever
greater amounts online. Is anyone covering this story?

Report after report shows a growing population of Internet shoppers.
High-speed connections are finally catching fire. Cable modems are booming
and telecom companies are struggling to keep up with the demand for DSL
installations. Analysts are saying nice things about Amazon.com's chances of
hitting profitability later in 2001. Some bad news.

One recent piece of good cheer arrived in the form of "The State of Online
Retailing 4.0," a new Shop.org study conducted by The Boston Consulting
Group. The quiet-but-powerful headline of the report reads, "The North
American online retail market is expected to grow 45 percent in 2001,
reaching $65 billion." Not bad growth statistics, especially since we're
supposedly in the throws of a complete collapse of the Internet economy.

Apparently, online retailers continue to improve their functionality while
journalists report that Rome.com is burning. "While consumer demand continues
to propel growth, online retailers have wrestled with operational issues.
They're improving their performance in key areas such as customer acquisition
and buyer conversion, " said Elaine Rubin, chairman (sic) of Shop.org.

She goes on to point out the weakness of some Net companies that contributed
to the very real crash among some of the ill-prepared dot coms. "There is a
steep learning curve in becoming an online retailer - those players that were
unable to excel in all facets of this complex business just didn't make it to
the end of 2000."

Among those retailers who did survive, the news continues to improve. The
report finds that online retailers have been able to reduce their losses as a
percentage of revenues. Operating losses decreased as a percentage of revenue
from 19 percent in 1999 to 13 percent in 2000. As for the elusive
profitability, even more happy tidings. By Internet retail type, 72 percent
of catalogers (sites owned by offline catalogs), 43 percent of store-based
retailers (sites owned by brick stores) and 27 percent of Web-based retailers
(Net-only retailers) are profitable at an operating level.

The report finds that the movement toward profitability is due, in large
part, to online retailers placing tighter controls on their marketing
budgets. You think?. As a result, customer acquisition costs for all online
retailers fell from an average of $38 in 1999 to $29 in 2000. Web-based
retailers (the stickiest of the wickets), in particular, were able to bring
them down from a high of $82 (ouch) to $55 (still not great) over the same
period. The best-performing Web-based retailers (the top 50 percent) reduced
acquisition costs to an average of $14 (yea!) per customer rivaling the
performance of catalog-based retailers.

The report concludes that Internet retailing is alive and very much healthy.
Yet it also warns that each category of Internet retailer still has plenty to
learn about running online stores. "Web-based retailers need to learn the
basics of retailing," said Peter Stanger, vice president and leader of Boston
Consulting Group's business-to-consumer topic area. "Store-based players are
new to home delivery and selling to consumers one-on-one from a distance.
Catalogers have a leg up in many dimensions, but they need to perfect ways to
exploit the relationship-marketing opportunities. The winners will be those
companies that can most effectively acquire or develop the capabilities they
lack and integrate them with their existing strengths." Amen.

Hats off to the Net boom. They say the king is dead. We say, long live the
king.