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Net sales snag brick-and-mortar business

E-commerce's success is largely coming at the expense of offline sales, giving brick-and-mortar merchants further reason to go online.

E-commerce's success is largely coming at the expense of offline sales, according to a new report.

Released today, the study by Jupiter Communications indicates that 94 percent of spending online represents dollars that previously would have been spent offline. That's an estimated $11.2 billion that will be taken out of the hands of traditional merchants this year and placed in the hands of their online rivals. Only 6 percent of online sales this year will be "incremental," or sales added to what consumers would have made without the Web.

Digital Commerce analyst Ken Cassar of Jupiter said that many traditional merchants have hesitated to go online, fearing that their Web sales would cannibalize their more profitable offline businesses. But Cassar argued that traditional merchants are likely to lose those sales regardless of whether they move online.

"Having an Internet strategy will not provide them with new opportunities, but it will provide them the opportunity to defend their market share," Cassar said.

According to the study, incremental sales on the Internet will increase slightly in the near future. Jupiter expects incremental sales to increase to 6.5 percent of online sales by 2002, representing $3 billion of the expected $41 billion in online sales.

The study also found that the impact online sales will have on offline merchants will vary by industry, suggesting that the consumer software market will be hit especially hard, with online sales comprising 35 percent of the market by 2002.

Cassar said the PC hardware business will be hit hard as well. Although Jupiter projects that only 13 percent of hardware sales will be made online in 2002, Cassar said that almost all of those sales will come at the expense of offline merchants.

One victim of that trend, financially embattled offline electronics retailer Good Guys, recently announced that it would be exiting the computer business, which has seen cut-throat price competition lately online and off.

Cassar said that traditional merchants can do little to reverse the movement of sales to the Web. Successful merchants in the future will have strong operations online and off, he said.

"Not having a short-term Internet strategy may not be fatal, but not having a long-term Internet strategy probably will be fatal for many traditional retailers," he said.