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Commentary: Watching e-commerce grow

New converts to online shopping are helping push sales ever upward. Retailers are doing their part by making the experience richer and more personalized.

Commentary: Watching e-commerce grow
By Forrester Research
Special to CNET News.com
August 11, 2004, 2:45PM PT

By Carrie A. Johnson, senior analyst

By 2010, online sales will reach $316 billion.

The growing population of households doing online shopping, combined with retailer innovations and site improvements, will drive e-commerce to account for 12 percent of total retail sales in 2010, up from nearly 7 percent this year. Between 2004 and 2010, online sales will grow at a 14 percent compound annual growth rate.

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In the next six years, online sales will more than double--from $144 billion in this year to $316 billion in 2010--thanks to some factors:

• New households that shop online for the first time. By 2009, 77 percent of U.S. households will have regular online access, and 40 percent will shop online. This growth will occur in two very distinct phases. Between this year and 2007, the number of new households that shop online will be limited to a trickle, averaging just 1 million new households per year. But between 2007 and 2009, when half of all U.S. households will have broadband at home, that trickle will regain momentum and an average of 2 million households will shop online for the first time each year, bringing new spending power to the Web.

• Consistent growth across all categories. As these new and existing consumers open up their wallets online, most categories will grow at between a 10 percent and 20 percent compound annual growth rate over the next six years. The notable above-average exceptions: late-blooming categories in which consumers waited to make purchases until their comfort level with online shopping increased. These include tools and hardware, which will grow by a 37 percent compound annual rate; garden supplies, which will grow by 24 percent; and flowers, which will grow by 26 percent as consumers continue to shift spending away from phone ordering

Online retailers find their groove
Along with organic growth from consumers, retailers will propel online sales over the next six years by capitalizing on past successes and investing in site and multichannel strategies to grow future sales. They're in a better position to do this today than ever before: In 2002, online retailers in aggregate reached breakeven profitability and, despite skeptics' warning, reached it again and then some in 2003.

This milestone represents the maturation of the industry, as well as one that now has more fixed than variable costs and therefore long-term sustainable operating margins. Ultimately, this means growth for online retailing through:

• Improved multichannel cooperation and innovation. Profitability opens the door for many online retailers to finally achieve greater respect and trust within overall retail organizations, which will translate to better multichannel cooperation and bigger budgets for multichannel integration and technology development. The most effective and popular multichannel technologies have a twofold effect of boosting store and online sales. As more retailers offer the ability to buy online and pick items up in stores, we expect categories like home decor and health and beauty to experience sales lifts similar to those of electronics today. In-store kiosks, which just 19 percent of consumers have used and 26 percent of retailers offer today, will bring similar sales boosts to online sales through expanded assortments and backup product availability.

• Richer online merchandising experiences. It's back: Retailers are now uttering the once-maligned three C's--commerce, content and community. As they emerge from a daze of commerce platform tweaks and checkout process optimization, retailers can now focus on keeping customers on their sites with enhanced features like eBags' customer reviews, Circuit City's buying guides, and Home Shopping Network's message boards. The key difference between implementations of these features today versus tomorrow? Integration. Unlike past isolated implementations, retailers will now integrate customer comments from message boards and buying guide checklists right onto product detail pages.

• "Personalized" site and product offers. While true personalization never really panned out, retailers now work to make site experiences and products more relevant to individual shoppers. On sites, wish lists and "save for later" options represent the first generation of this shift toward personalization, and retailers will next use those lists to run personalized e-mail campaigns and site promotions. And while true customization a la Lands' End Custom Clothing remains out of the financial and strategic reach of most retailers, mass customization has proven a much more viable option. Look for more retailers to offer monogramming and "design your own" products similar to Nike's ID program and Apple Computer's successful engraved iPods.

• Distributed online marketing campaigns. As the growth of online shoppers temporarily slows over the next two to three years, retailers will invest in marketing tactics beyond search to find new customers. By targeting appropriate Web logs, chat services and message boards, retailers will run advertising and insert product links to reach customers as they're discussing their products or content related to products. This new version of one-to-one marketing not only targets new potential customers to grow incremental sales, but it also helps retailers develop crucial customer feedback for site design and product R&D efforts.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.