Online holiday sales to flourish, but at a lower rate

Analysts predict strong online spending but say that companies hoping for long-term success need to be sharp on the basics of retail: customer service and order fulfillment.

4 min read
Online sales will grow again--but more slowly--this holiday season, according to a pair of market research firms.

E-tailers who plan to reap success beyond the next few months, those analysts say, will need to be solid on the basics of retail: customer service and order fulfillment.

New studies released today by market research firms Jupiter Communications and Gartner found that despite some of the mishaps during the past two holiday seasons, people will continue to spend portions of their holiday budgets online.

Jupiter predicts that consumers will spend about $12 billion online this holiday season--that is, from Nov. 1 through Dec. 31. That forecast represents a 66 percent increase in spending from last year's $7 billion tally. The New York-based firm said online retail sales will account for $9 billion, and travel-related products such as airline and hotel reservations will account for the remaining $3 billion.

Jupiter said the continued growth will be fueled in part by online shoppers who are spending a larger share of their holiday money with e-tailers as well as by the 6 million Internet users who will make their first online purchases during the 2000 holiday season. First-time Net shoppers will be driven by old-fashioned convenience and by increased confidence in online shopping in general, the report found.

Gartner forecasts that worldwide, online holiday-shopping revenue will surpass $19.5 billion this year.

Although sales will grow at a healthy clip from last year, they will not grow as feverishly as they had earlier. The $7 billion in online sales in the 1999 holiday season were up 126 percent from $3.1 billion in 1998, compared with projections of 66 percent growth from 1999 to 2000, according to Jupiter.

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Internet sales for the upcoming holiday season will increase, but not like last year. 
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As market figures get larger, it's more difficult to maintain net growth rates, said Jupiter analyst Ken Cassar. In addition, most companies have less free capital today than they did last year and are more serious about turning a profit, he said.

Cassar said that although growth-rate percentages have slowed from previous seasons, the results do not necessarily reflect a negative trend.

"Some (observers) would see this as a bad thing...but we see it as a positive sign to move toward profitability," Cassar said. "Profitability was irrelevant last year, whereas this year, it has become far more important, which becomes healthier in the long-term view of things."

For the study, Jupiter surveyed quarterly results from a list of online retailers including well-known public companies such as CDNow, Amazon.com and eToys.

Moment of truth
While market figures show strong growth even after the demise of several dot-com businesses, both Jupiter and Gartner agree that this season will be the true test of online merchants' sustainability.

Web merchants that fail to provide a positive Internet shopping experience this year risk being out of business by the second quarter of 2001, according to Gartner.

Special report: End of the Beginning "After two online holiday-buying seasons of lost orders, late deliveries and broken promises, consumers have little patience for late or lost orders and poor customer service," said Gartner analyst Geri Spieler. "Without customer loyalty, e-tailers will eventually fail to earn new business."

During the last holiday season, the volume of customer calls crippled about 23 percent of commerce sites, Jupiter found. The Federal Trade Commission last month fined several Web sites, including Toysrus.com and CDNow, essentially for poor customer service during the 1999 holiday.

Many online retailers are preparing themselves for a busy holiday season, making sure they are well equipped to handle the traffic. And while some Web sites still are struggling with refining their customer service options, most have said they are better prepared this year.

Overall, Jupiter's Cassar expects many online retailers to do a better job this year than they did in previous seasons.

"Many (companies) have learned from their mistakes," said Cassar, who pointed to the example of Toysrus.com, which recently partnered with e-tail giant Amazon for product fulfillment. "Bear in mind that last year was the first significant holiday season for a number of players."

Staying in touch
In today's study, Gartner said some areas that still need attention are order fulfillment, customer service, and information regarding shipping costs and delivery dates.

The study found that most e-tailers lack real-time information about the availability of inventory and actual order updates, a shortcoming that can drive frustrated shoppers away. Web sites need to be equipped with several reliable customer service options as well, including email, online chat, phone and fax, Gartner said.

Jupiter found that because financing, for the most part, has dried up for online retailers, many companies must also be smarter about zeroing in on their target audience and being careful about expanding beyond that zone.

disservice Jupiter analysts believe that for every product category there is a so-called natural market. Last year, many online retailers did not accurately assess the size of their natural markets, leading them to spend excessively to appeal to customers who had no interest in their core products.

According to Jupiter, the best example of this was Boo.com, which spent a lot of money chasing consumers of hip, urban apparel--a product area that could have been a lucrative niche market, but not a mass market.

The British fashion site, which closed its doors in May, is expected to re-emerge later this month as an apparel portal. Fashionmall.com recently acquired the cash-strapped company.

Jupiter also found that dot-com stores that invested their marketing dollars poorly last year will make smarter investments this year. Online retailers will focus their limited resources on reactivating past customers, an effort that will be less expensive than trying to acquire new ones.