Commentary: E-commerce, steady as it goes

By Forrester Research
Special to CNET News.com
August 13, 2003, 11:30AM PT

By Carrie A. Johnson, Senior Analyst

Fueled by a steady stream of new online shoppers and new product category sales, U.S. e-commerce will grow at a 19 percent compound annual growth rate over the next five years. Most significant, online retail will reach nearly $230 billion and account for 10 percent of total U.S. retail sales by 2008.

After some industry sources released soft online retail growth numbers in the late spring and early summer, a lot of people asked if e-commerce growth was hitting a wall. Our answer for those Chicken Littles is that the e-commerce sky is not falling; although compared with the explosive growth of 1997 to 2002, e-commerce growth has begun to slow. Two trends will set the pace for the next five years:

• A growing and maturing online shopper base. Roughly 5 million new U.S. households will shop online each of the next five years, creating a total of 63 million U.S. online shopping households in 2008. And as a growing percentage of these households use broadband, they'll research more products and shop online more than their dial-up counterparts. Experienced shoppers will also continue to diversify their online purchasing, keeping sales on a steady climb: For the next five years, food and beverage, sporting goods, and home products will grow the fastest, outpacing more mature categories like books and travel.

• Retail site improvements. As retailers invest in site design and usability testing, online shopping continues to evolve--from an experience resembling a trip to a bare-bones strip mall to one more akin to shopping the Miracle Mile. Retailers have spent the past two years crafting better online and multichannel e-commerce sites: 84 percent of the top 92 sites now offer zoom-on product detail pages, retailers like J.C. Penney and Lillian Vernon offer catalog quick-shop features and online versions of their offline circulars, and Sears, Roebuck and Office Depot serve the Hispanic market with Spanish-language sites. In response, consumers open their wallets more often: Average online retail conversion rates have risen from 2.2 percent in 2000 to 3.2 percent last year, according to Shop.org's "The State of Retailing Online 6.0" Report.

What's hot
It's hard to imagine, but a few years ago, a chat with friends about buying online led to the inevitable, "I've bought some books from Amazon." Now, books generate just 3 percent of all U.S. online sales, versus 14 percent in 2000. As the following categories enjoy the strongest growth in the next five years, chats among friends will change from "What have you bought online?" to "What haven't you bought online?"



		Related Story Amazon stretches deal with Target E-tailer extends contract to provide Target's back-end Web operations.

• Food and beverage lead in absolute growth. There's nowhere to go but up for this fledgling category: Sales will grow by a 36 percent compound annual growth rate over the next five years, from $3.7 billion to $17.4 billion. With Safeway expanding into new markets like Seattle, and Peapod, Albertsons, Publix and FreshDirect all chugging along, consumers who were originally drawn to the convenience of grocery delivery will get back on the bandwagon--especially those with broadband. These shoppers have a higher average household income than those who don't buy groceries online, and they spend more: The average order size for Safeway.com is $125--versus the average weekly spending in supermarkets, which is just $83.

• Sporting goods score in the used market. Sports enthusiasts gravitate toward hockey skates and gloves one year, then golf clubs the next, making sporting goods sales a perfect fit with auctions and used goods marketplaces--witness the success of offline retailer Play It Again Sports. And companies like Nike and Finish Line succeed with sales on the opposite end of the product life cycle by collecting advance demand for the hottest footwear styles. Online sales of sporting goods will grow at a 31 percent compound annual growth rate over the next five years--from $1.7 billion to more than $6 billion, with nearly a third of sales coming from used products.

• Home products get a lift from tools and toner. This category includes diverse products from drapes to drill bits--all products that benefit from the macro trend of increased home ownership--but they don't all contribute equally to the 30 percent compound annual growth rate that the category will enjoy over the next five years. Tools and hardware will grow the fastest, as supply finally catches up with demand: Home Depot and Lowe's both just kicked online selling efforts into high gear. Office supplies will continue to be the largest home subcategory: As experienced Web shoppers get more comfortable ordering replenishment items like printer cartridges and paper, sales will grow from $3.3 billion in 2003 to $14.1 billion in 2008.

• Flowers, cards and gifts bloom just a little late. Although the popularity of eCards has barely translated into revenue, flower and gift sales fit perfectly with the convenience of the Web. But this category has taken a while to mature because gift-giving behaviors--like ordering or picking up gifts at the last minute--take time to change. Between 2003 and 2008, this category's sales will grow at a 27 percent compound annual growth rate, fueled by an increased focus of leaders like 1-800-Flowers.com, RedEnvelope and Macy's, and the increasing popularity of buying gift certificates online.

• Health and beauty products flourish. These items have one megatrend going for them that will result in a 25 percent compound annual growth rate over the next five years: Women now make up 52 percent of U.S. Web buyers. Why should these shoppers get assaulted with perfume at the department store makeup counter when they can reorder online at sites like Gloss.com? Or they can buy Viagra for their husbands without worrying about inquiring minds at the drugstore. Although some retailers like CVS and Walgreens have approached the Web with caution, innovators like Drugstore.com, Avon and The Vitamin Shoppe have built solid online businesses and will keep investing in site optimization and marketing.