Internet economy passes new milestone

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Americans spent over 100 billion dollars shopping on the Internet in 2006, and growth in e-commerce is likely to extend its strong pace in the coming years, analysts say.
A report by research firm comScore Networks said online retail spending excluding travel reached 102.1 billion dollars last year, a 24 percent increase over 2005. A large chunk of that came in the holiday season of November and December -- 24.6 billion dollars, up 26 percent versus last year. "E-commerce is becoming more mainstream," said Jeffrey Grau, senior analyst at the research firm eMarketer. "A larger segment of the population is buying online, and people are buying more things than they have in the past." Investment firm Cowen and Co. calculated the 2006 sales figure at 108 billion dollars and sees this growing to 225 billion by 2011. "We estimate that US e-commerce sales will grow 20 percent in 2007, driven by increasing adoption of broadband, lower prices in online channels, and the increased convenience of online shopping," the Cowen report said. This would mean e-commerce would account for 4.7 percent of total US retail sales in five years, up from 2.7 percent at the end of 2006. "Retailers have to take it seriously, if they don't they are really behind the boat," Grau said. "There doesn't seem to be any end in sight as to how large it will grow. It will continue to grow above the rate for offline retail." Grau said more consumers are comfortable with buying online, and are purchasing a wider range of goods such as jewelry, apparel, appliances and furniture. "At the same time retailers are becoming more savvy marketers," he said. "For people who want to purchase a diamond ring online, you may see a guide to understanding the terminology. For furnishings, you're more likely to see streaming videos, and see how it might fit in your living room." Research by eMarketer suggests 22 percent growth in online sales in 2007 to 132 billion dollars, excluding travel. One reason for the upsurge in holiday spending was confidence by consumers in rapid delivery, allowing retailers to extend the season into mid and even late December.


"The flow of online holiday retail spending in 2006, as compared to the previous year, demonstrated that online consumers pushed their buying later than ever," said comScore. The final three weeks of the holiday season saw a major surge in spending as procrastinators came out in full force, driving a 31-percent increase versus the corresponding weeks in 2005, comScore said. "The week leading up to Christmas saw the biggest surge with a 45-percent increase versus the corresponding week a year ago, as consumers showed their faith in online retailers' ability to 'deliver the goods' in time for Christmas." Cowen analysts Jim Friedland and David Geisler argue that online sales will eventually exceed 10 percent of total US retail spending. One reason will be a shift to downloads of items like films and music as consumers become more comfortable with this practice. "We expect a dramatic long-term shift in the media category from physical in-store purchases to Internet downloads," they wrote. "In South Korea, which has the highest broadband penetration in the world, e-commerce sales account for eight percent of total retail sales and are still growing three times faster than offline retail sales." Grau said major retailers such as Wal-Mart and Target are using the Internet and their own stores, giving customers the option of returning items to the store instead of shipping them back. But Internet-only stores such as Amazon.com can often compete better on price, he said. "The Internet channel is cheaper to operate, you don't have to have stores, you don't have to have inventory," he said. In other cases, some Internet retailers try to compete as a "niche" player, "where they have items that you can't find at a Wal-Mart."