This holiday shopping season could mark the first time that online retailers fail to outperform the previous year's sales
Bernardo Huberman has sifted through reams of data from Facebook, YouTube (GOOG), Digg, and Amazon.com (AMZN) to build mathematical models that can predict how popular information posted to a Web site will become based on the speed at which users discover it. The director of HP's (HPQ) social computing lab, Huberman and his team of social scientists have also modeled how users' attention declines over time. One key finding: That the long lists of recommended add-on products commonly featured on e-commerce sites yield diminishing returns. Web shoppers tend to stop paying attention after a certain point. "Attention is truly a currency," says Huberman, an Argentine physicist who studies economics and computer networks.
Earlier this year, the computer giant began applying Huberman's research to its e-commerce site selling home and home office computer gear. Out went the long lists of add-on products; in came more precise recommendations based on Huberman's data. HP showed buyers of its high-priced notebooks certain photo printers that sold well with those models, and more utilitarian printers to lower-end laptop buyers. The result: A 30% increase in customers who paired the products when they checked out. HP saw similar results applying the models to software and monitor recommendations. "With Bernardo's help, we've been able to listen to everything customers are telling us with their clicks," says Mike Ritter, vice-president of HP's home and home office store.
Retailers are going to need fresh thinking amid what's shaping up to be the first Scrooge-like Christmas for online retailing since the category first took off a decade ago. Market researcher ComScore (SCOR) on Nov. 25 forecast no growth in U.S. online retail sales in November and December, vs. last year's 19% increase. Retail analysts are warning of dismal holiday sales (BusinessWeek.com, 11/25/08) overall, and online sellers including Amazon and eBay (EBAY) have forecast yearend softness. The online selling season this Christmas looks to be the historic worst "by a mile," says ComScore chairman Gian Fulgoni.
Retailers Caught Off Guard
The stock market meltdown in late September and early October may have been the last straw for shoppers atop a load of bad news including job losses, inflation, and falling housing prices, says Fulgoni. Retailers have been caught flatfooted. "No one was expecting the magnitude of the slowdown," he says. E-commerce sales, excluding travel, dropped 4% from Nov. 1 to 23, to $8.2 billion, ComScore reported, the first drop since the medium's inception. October e-commerce sales increased just 1% in the U.S., according to ComScore; last October they were up 19%.
Consumers have shut their wallets. Those earning less than $50,000 cut their online spending by 3% in the third quarter compared with a year ago, and households that earned $50,000 to $100,000 increased spending just 1%, according to ComScore. Now, the question is whether the drop in gas prices the past few weeks will free up more disposable income for online purchases, which are almost purely discretionary.
Retailers consider the first Monday after Thanksgiving the symbolic start of their heavy selling season, and they've long counted on Web sales to pad their results. "The story for so many years was that online was this growth channel for retailers," says Sucharita Mulpuru, a principal analyst at Forrester Research (FORR). Now, even that avenue is closing. Forrester forecast on Oct. 21 that U.S. e-tail sales in Nov. and Dec. would increase 12% this year, compared with growth of approximately 20% in 2007. (Forrester conducted its e-tailing research in early October, while ComScore collected its data well before the latest round of dismal economic news.)
Gap Creates an Umbrella
To draw shoppers during a fallow season, e-tailers are cutting prices deeper (BusinessWeek.com, 11/24/08), and earlier than in the past, analysts say. Many are lowering minimum purchasing requirements to qualify for free shipping, and pulling out other tricks.
Starting in May, Gap (GPS) created a common checkout area for all four of its online stores—The Gap, Banana Republic, Old Navy, and Piperlime. That, combined with aggressive e-mail marketing, helped Gap increase online sales 15% in the third quarter, according to Thomas Harpointner, CEO of e-mail marketing company AIS Media. Online sales now account for nearly 8% of Gap's total. "Gap decided to combine all of their offline brands under one umbrella online," says Harpointer. "Shoppers have an easier experience." Gap is also offering customers free shipping on orders of at least $150.
EBay (EBAY) on Nov. 24 began selling two daily holiday "door busters," or loss leaders, for $1, including iRobot's (IRBT) Roomba and Apple's (AAPL) iPod. It's also giving away a few high-priced products for $1, including a Chevrolet Corvette (GM), according to a spokeswoman. The promotion lasts till Dec. 8.
Cutting Back on Tech
Still, retailers are finding that traditional holiday gifts, including computer gear and consumer electronics, aren't resonating with consumers this year. Goods not usually sold in great volume on the Web, like furniture and appliances, and fitness equipment posted healthy gains in third-quarter sales, according to ComScore. But sales of traditional online sellers like computer gear were flat, and sales of clothes, jewelry, and prerecorded CDs and DVDs declined. There's mounting evidence that consumers are cutting back on tech gadgets (BusinessWeek.com, 11/12/08), though tech products like LCD TVs, digital SLRs, and smartphones may hold up well (BusinessWeek.com, 11/25/08).
Yet there's also a sense that retailers need to do more to drum up excitement. Beside sales and free shipping, and a shift away from sometimes confusing rebates, most online retailers haven't done much innovative merchandising this year, says Stephen Baker, a vice-president at market researcher the NPD Group. "The concept of selling extreme values in limited quantities is not anything new," he says.
Blowout prices may help e-tailers weather this year's tepid holiday sales season. Not everyone can turn loose a physics PhD on its e-commerce site. But if the economic downturn persists, stores will need to come up with some fresh ideas of their own.