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Online Retail Continues to Grow Despite Rising Costs

By Cate T. Corcoran
ONLINE RETAIL CONTINUES TO BE A BRIGHT SPOT
in the overall retail landscape thanks not to rising gas
prices or bargain hunting, but because consumers are
increasingly comfortable shopping online.
A report released today by the National Retail
Federation's shop.org and conducted by Forrester
Research Inc. paints a rosy picture of online commerce,
pointing out that retailers expect to see an average an-
nual growth rate of 25 percent and that conversion rates
increased in 2007 versus 2006, the most recent period for
which figures are available. About two-thirds ofthe retail
executives surveyed said they expect their online busi-
nesses to perform the same or better than expected in the
next 12 months. The report cautioned that slightly more
than a third surveyed said they had lowered expectations
in the next 12 months due to the poor U.S. economy.
The report also said that online sales margins may
"We're optimistic about both offline and online,"
said Alex Bolen, chief executive officer for Oscar de la
Renta, which relaunched its online store earlier this
month. "Our business continues to hold up. The chal-
lenges for a retailer are the same online and offline. I
think the way you execute those strategies are different
online and offline."
"We've had such rapid growth because the industry is
so new, this channel is so new," said Ginger Reeder, vice
president of corporate communications for the Neiman
Marcus Group. "We're optimistic about this fall mainly be-
cause we have great product, and our customer every year
becomes more confident with the experience online. And
that just feeds itself."
Nonetheless, the online retail landscape has become
much more competitive in the last two years, with many
brands, old-line brick-and-mortar retailers, young bou-
tiques and new pure plays, such as Amazon's Endless,
coming online. At the same time, the online shopping ex-

"The promise of onrme is that one can develop scale very quickly and
become very profitable. H we hit our goals, then our online store will
become all even more profitable operation than brick-and-mortar."
not be as high as traditional retail because operating
costs - such as adding new features to stay competitive
and promotions such as free shipping - are on the rise.
On average, operating costs, including customer service
and fulfillment, are about 10 percent of revenue, the
survey found.
Online apparel retailers said they continue to experi-
ence high growth in their online businesses.
"I would say our growth is substantially higher than
typical brick-and-mortar sales growth," said Saks Direct
president Denise Incandela. "We were very pleased with
spring and we did see substantial growth of 30 percent.
We think some of the drivers were the innovative content
on the site. We have found it's very effective."
....;.1peaking more generally of why.•online retail con-
tinues to do weI! despite the problems with traditional
retail, she said, "Online retail isa less mature business
than brick-and-mortar, so there is still growth to be had."
Other executives concurred and said they had seen
no hard evidence that high gas prices or, in the luxury
sector, a search for bargains has anything to do with the
growth online.
VI~uol Search
.
- As for updating an online store, Bolen equated it to
Sears' My Virtual Model has increased sales.
Sears' My Virtual Model has increased sales.
..
,
- Alex Bolen, Oscar de Ia Renta
perience has greatly improved - and revenues jumped -
thanks to high-bandwidth connections and better imagery
that shows merchandise more clearly than in the past.
Retailers are finding that they must continuously add
new features such as video to stay competitive and in-
crease conversion rates, just as brick-and-mortar stores
have to remodeL Since January, retail has become more
promotional across the board, and in the past year or so,
free shipping has become expected, at least when cus-
tomers order over a certain amount.
The study found that expenses such as these are on
the rise, with 47 retailers (of 57 who answered the ques-
tion) saying they expect to spend the same or more in
the coming year. But money spent online is well spent,
according to the survey, since 72 percent of respondents
agreed with the statement, "The online retail channel is
better suited to withstand the economic slowdown than
the offline retail channel."
The study found that conversion rates average 2.8
percent, and 49 percent of retailers reported thei aver-
age conversion increased in 2007 compared with 2006.
The shop.org study also found that online, returns av-
eraged 8 percent of sales. The percentage of total sales
driven by repeat customers was 36 percent. Average
order value was $133. The percent of stockkeeping units
offered online was 73 percent, and the percent of sku's
unique to the online channel was 25 percent.
The report was based on responses from 63 retailers
in a variety of businesses, including apparel, consumer
electronics and gifts. Slightly fewer than 40 percent
have been operating online for more than nine years, O
and 22 respondents generate $100 million or more from
their online channeL A quarter surveyed said the Web
is their primary channel. Ofthe respondents, 81 percent
were profitable in 2007. The report also drew on an ear-
lier survey of 125 retailers.
"Certainly today, offline brick-and-mortar, traditional
retail is a more profitable operation, but it's all matter of
scale," said Bolen. "The promise of online is that one can
develop scale very quickly and become very profitable.
Ifwe hit our goals, then our online store will become an
even more profitable operation than brick-and-mortar."
remodeling a physical one: "Like one needs to improve
lighting and replace video screens and introduce new
fixturing, [there are] a lot of things online that I equate
to that," he said. "While it may be accounted for differ-
ently, you have to spend capital to keep stores shipshape.
It's a different expense, di,f ferent kinds of things, but
very analogous to brick and mortar stores. We have a new
large vitrine we're rolling out to our stores to hold small
leather goods and jewelry and the cash wrap that we de-
veloped with an architect at great expense. That kind of
thing happens all time. You've got to keep the customer
experience new and fresh."
The new online store makes innovative and effective
use of unusually large-scale graphics and quick-loading
video. The idea behind the product detail pages, which
blow up to show a runway image bigger than the screen
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to that," he said. "While it may be accounted for differ-
ently, you have to spend capital to keep stores shipshape.
It's a different expense, di,f ferent kinds of things, but
very analogous to brick and mortar stores. We have a new
large vitrine we're rolling out to our stores to hold small
more, see WWD.com.
dise beautifully," she said. "One feature that has been
popular and continues to be is video. Customers like
seeing interviews with designers and fashion shows. "
Neiman's has a blog, and over at Cusp, its contempo-
rary bOJltique, shoppers can post comments on the Cusp
blog, which appear in an RSS feed.
At Saks, video, designer interviews, and outreach to
social sites such as blogs, YouTube and Facebook have
juiced sales, said Incandela. "The content and editorial
portions of our site have changed most dramatically.
We've seen an impact on our designer business already."
This fall, Saks sent out a virtual version of its catalogue
and held virtual trunk shows with special orders, among
other initiatives.
Later this month, N et-a-porter will put up video of
an exclusive Alexander McQueen runway show, and
customers will be able to purchase eight looks from the
pre-spring 2009 collection two months before they are
available generally. .
"I think a lot of the skepticism has now gone out of
the business," said Sven Gaede, chief executive officer of
Net-a-porter. "Clearly it is one of the newer channels and
that comes with a certain momentum, but nonetheless I
think within the online sector there are some companies
that are growing faster than others." Global businesses
like Net-a-porter are in a better position to ride out eco-
nomic problems in particular areas, and all online busi-
nesses have the advantage of getting more business from
customers who live far away from stores, he said.
In August, the company reported strong growth for
the year ended Feb. 28. Sales rose 48.4 percent to 55.2
million pounds, or $110.4 million. Profits rose 41.5 per-
cent to 3 million pounds, or $6 million.
Sears has taken a different approach to driving sales.
Today it will unveil a visual search tool, as well as im-
provements to its existing My Virtual Model. The search
tool will let shoppers scour the site for a product based
on images in Sears' online image dictionary. My Virtual
Model lets customers tryon clothes with a virtual image
of themselves. Three months ago, the company intro-
duced a social community Web site about Sears and
Kmart, called sk-you.com, linked from its main site,
1 equa[e cuswmers wno live rar away rrom stores, he saId.
In August, the company reported strong growth for
the year ended Feb. 28. Sales rose 48.4 percent to 55.2
million pounds, or $110.4 million. Profits rose 41.5 per-
cent to 3 million pounds, or $6 million.
Sears has taken a different approach to driving sales.

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. leather goods and jewelry and the cash wrap that we de-
veloped with an architect at great expense. That kind of
thing happens all time. You've got to keep the customer
experience new and fresh."
ctive
Today it will unveil a visual search tool, as well as im-
provements to its existing My Virtual Model. The search
tool will let shoppers scour the site for a product based
on images in Sears' online image dictionary. My Virtual
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