Online Merchants Keep on Truckin'


By Heather Green If you suspect more colleagues were scrunched over their computers peeking at sweaters or DVD players at Amazon's or Best Buy's

sites this year, you're right. While the rest of the retail world is

holding its breath until after Christmas to learn how this holiday season stacked up, analysts are confident that e-tailers will match the heady expectations set for them in the fall. From Nov. 1 through the week ended Dec. 13, online sales reached $10.8 billion, up 32% from the same period last year and slightly above forecasts, according to comScore Networks (see BW Online, 12/20/02, "Online Retailing Finds Its Legs").

E-merchants pushed the envelope this holiday season with broader selections of products and by spiffing up their sites with better graphics and more powerful search engines. They also offered standard shipping much later than has been the norm, giving consumers more time to keep buying. In the past, online sales have dropped off around Dec. 12, when e-tailers stopped offering cheap or, in some cases, free package delivery via trucks. After that point, they could offer only more expensive air deliveries because of the time required to process orders at their warehouses.

LATER AND FASTER. This year, big e-tailers like Amazon.com, eBags, Best Buy, and gifts retailer RedEnvelope provided standard shipping until much closer to Christmas. In Amazon's case, it was extended until Dec. 18, vs. Dec. 14 in 2001, allowing sales to keep chugging along until later in the shopping season. "The market is maturing," says Barry Judge, senior vice-president and general manager of Bestbuy.com. "We have just gotten better at being able to ship later."

These days, online merchants are more capable of taking those kinds of risks. After disastrous and embarrassing fulfillment snafus during the 1999 holiday season, e-tailers put a hard focus on whipping their operations into shape, particularly at picking orders off warehouse shelves and packing them for shipment. Over the past 12 months, for example, eBags cut the time required to process a typical order by 20%.

Merchants also now huddle with delivery services, such as Federal Express and United Parcel Service, to speed warehouse pickups. UPS began working with Amazon months ago to plan for the holiday season, figuring out how many extra trucks would be needed at which warehouses on what days.

REAPING THE REWARDS. So far, that work appears to have paid off. According to a survey by e-tailing industry association Shop.org, almost half of online retailers polled during the first two weeks in December said that the time required to fulfill orders has significantly or slightly improved, vs. 2001.

Still, by going after last-minute sales, e-tailers risk skyrocketing costs, not to mention shoppers' anger if gifts don't show up in time. This year, Best Buy extended its free shipping by two days, to Dec. 18. Typically, free shipping means delivery by truck. But to ensure that gifts make it on time, no matter whether they're heading for Seattle or Minneapolis, Best Buy will have to eat the cost of upgrading some orders to overnight delivery.

That could end up hurting gross margins and pressuring the generally lofty stock prices of public cybermerchants (see BW Online, 12/20/02, "E-Tailers: 'Tis the Season to Be Wary"). But e-tailers are betting that the overall increase in revenue will make up for higher shipping expenses. eBags expects gross margins to suffer by 2%, but it says overall profit margins will be stronger. "It's a convenience for consumers," says Jon Nordmark, CEO of eBags. "We're able to predict better when we can get the product into the homes."

MATCHING DEALS. Some online merchants feel they have no choice. Gift retailer Redenvelope this year offered ground shipping through Dec. 17, vs. Dec. 11 in 2001. Originally, the plan had been to offer it only through Dec. 13 -- but because competitors, including gift merchant Harry & David and 1-800-Flowers, provided customers with later shipping this year, RedEnvelope CEO Alison May says she felt compelled to match her rivals.

Will the online merchants' bet pay off? The real test will come

after Dec. 25, when the gifts have all been opened and shoppers' complaints and returns indicate if they are disappointed. As earnings reports begin creeping out in January and February, the risks and rewards of pushing the shipping envelope will be in full view. Green covers the Internet for BusinessWeek in New York


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