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E-tailers no longer holiday upstarts

With the holiday shopping season quickly approaching, analysts are predicting another year of healthy returns for online retailers, as U.S. consumers continue to shun overcrowded malls and traffic jams to do their holiday gift-buying over the Internet.

With the holiday shopping season quickly approaching, analysts are predicting another year of healthy returns for online retailers, as U.S. consumers continue to shun overcrowded malls and traffic jams to do their holiday gift-buying over the Internet. But this year, analysts say the rush to shop online may not be as robust as in years past.

After several seasons of blockbuster sales and logistical snafus, Internet retailing is showing signs of maturity, these analysts say, and given subdued predictions for holiday retailing overall, some prominent industry watchers are forecasting a slightly lower growth rate in online holiday shopping in 2004.

The latest holiday online shopping forecast from comScore Networks, which tracks the behavior of online consumers, predicts that e-commerce will exceed $15 billion in the months of November and December, up between 23 and 26 percent from the same period in 2003.

While that growth rate might sound impressive, it actually represents a drop of about 5 or 6 percent from last year's holiday season, notes Dan Hess, senior vice president at comScore.

“These are not the growth rates we have seen in years past, but that’s to be expected with any new medium in this stage of its development — after an initial peak, you reach a point where comparisons are hard,” Hess said. “But nevertheless, this is shaping up to be a solid holiday shopping season for the online retailers.”

Jupiter Research and Forrester Research offer similar predictions, with both Internet research firms forecasting online holiday sales growth over 2003 of about 20 percent. Carrie A. Johnson, Forrester’s Internet retail analyst, sees Internet retailers netting $13.2 billion in 2004, down slightly from last year’s growth of 31 percent to $11 billion.

The reasons for the more conservative projections are weaker-than-expected online sales growth in the second and third quarters of 2004 and online retailers’ likely aversion to aggressively promote the Web as a shopping venue this holiday season, which means fewer free shipping offers and percentage-off deals, notes Johnson.

“In fear of the Street’s reaction to a soft offline holiday season, we expect more retailers to use the Web to push consumers into stores,” Johnson wrote recently in a research note. “Like in 2002, which was also a weak retail year, huge in-store discounts and promotions will be too enticing for even online shoppers to pass up.”

Online retail still bright
Online shopping is again expected to be one of the bright spots in retailing this holiday season, although it still represents a small slice of the overall holiday retail pie, with estimates pegging its share at about 5 percent.

The National Retail Federation, a national trade group for the retail industry, predicts overall holiday spending will increase 4.5 percent this year over 2003, bringing overall holiday spending to $220 billion, down from growth of 5.2 percent growth last year. Sales in the holiday season account for nearly one-quarter, or 23 percent of annual retail sales, according to the group.

Consumers continue to gravitate to the Internet for their holiday purchases primarily for convenience, notes comScore’s Dan Hess, as many prefer the comfort of shopping at home and want to avoid the cost of a car trip to the mall to battle the crowds. They are also making good use of shopping advice Web sites and comparison shopping "bots," which allow them to compare prices for products on a series of e-commerce Web sites.

The continued penetration of broadband Internet connections is also making shopping online effortless and faster, and for many with an always-on Internet connection checking the Internet for local weather or to look for a phone number has been part of their daily routine, Hess adds.

Just a few years ago, online retailing was riddled with problems, with Web sites crashing and shipping overly expensive. And in 1999, Internet retailer eToy famously failed to deliver many of its orders before Christmas, with reports of toys arriving in the mail in February.

“Internet retailers have been preparing for the holiday period for months, if not for years, and they are better prepared then ever,” said Hess. “Retailers keep upping the ante on themselves and on their competitors.”

Consumers, too, are becoming more comfortable with Internet retailing, notes Young-Bean Song, director of analytics at Atlas DMT, which tracks consumers’ buying habits online and helps advertising agencies and Web sites better target them.

He cites the results of a recent study that shows the period between Christmas and the peak of online shopping activity has shortened in recent years, reflecting a greater confidence on the part of consumers that their products will reach them before Dec. 25.

“A few years ago the peak time in online shopping was two weeks before Christmas because vendors needed time to make sure their products arrived in time, but companies have spent the time investing in their infrastructure to make sure deliveries happen on time, and so this year we expect the peak day to come in the middle of the week of Dec. 13,” Song said.

Big-ticket items sought
Another indication that consumers are becoming more comfortable shopping online is seen in their apparent willingness to purchase items that are traditionally bought in a store, according to Hess. Research by comScore Networks shows sales of jewelry in 2004 are set to grow by 67 percent over 2003, while shopping for household appliances and furniture are likely to grow by 58 percent.

“We are seeing more big-ticket items bought online, and as consumers get more comfortable buying online, in some cases they are willing to spend up to $20,000 on an item of jewelry,” he said.

Established bricks-and-mortar retailers with Web sites have done a “masterful” job of blurring the lines between their sites, their catalog divisions and offline stores, said Hess.

“This is turning the idea of online shopping on its head. We are increasingly seeing retailers let consumers buy in the store through [Web kiosks], and they are giving consumers the ability to buy a product online and pick it up in store, or for larger items they are letting them have the item delivered to their door from the store,” he said

Retailers have also improved technology on their sites, with search options making it easier for shoppers to wade through huge inventories to find exactly what they want. The shopping process has been simplified, he adds. Shoppers no longer need to configure a logon name and password for every site they visit.

“The theme for online retailing this year is an effort on the part of retailers to simplify the shopping experience on their Web site,” Hess said. “But there are still some online retailers that are stuck somewhere in 2001, so from a marketing and design point of view there is still room for growth here.”