NOVEMBER 29, 2006
News Analysis
By Catherine Holahan
O, Come All Ye Online Shoppers
Despite a slow start for some brick-and-mortar stores, e-tailers are poised for a prosperous holiday season
A post-Thanksgiving warning from retail giant Wal-Mart Stores (WMT) that November sales were the worst in a decade raised concerns that retailers were in for a lackluster holiday shopping season. But early measures of Web traffic show online retailers have little to fear.
Microsoft's (MSFT) MSN Shopping, for example, released data on Nov. 28 showing a 21% traffic increase over the Thanksgiving weekend. On Nov. 27, dubbed "Cyber Monday" because of the many online discounts offered by retailers, traffic surged 63%, according to MSN Shopping. Rob Wolf, product manager at MSN Shopping, attributes the traffic boost both to improvements to the online comparison shopping site and growth in the number of online shoppers. "Increasingly, people are turning to online," says Wolf. "They like the convenience of online shopping sites."
Sales statistics also give reason for optimism. Nielsen//NetRatings (NTRT) reported that 19.2 million unique Web shoppers visited online stores on so-called Black Friday this year. The number is a 12% traffic increase over 2005, and retailers say it's a good sign, even if lower than the 30% traffic jump a year earlier. The slowdown is a reflection that fewer new Internet users are logging on to make purchases, says Heather Dougherty, a senior commerce analyst at Nielsen//NetRatings. "The number of new Internet users isn't growing at a significant clip anymore," says Dougherty. "So the growth is going to be from experienced buyers buying more online than they have in the past."
Feeling Stronger Every Day Early data from ComScore Networks, which monitors e-commerce spending, is also positive. Online retailers spent $434 million online the day after Thanksgiving. That amount was 42% more than Web shoppers spent on Black Friday last year. Citigroup (C) Senior Retail Analyst Kimberly Greenberger says she expects a strong online shopping season, given what Web shoppers have seen so far. "It looks like more and more consumers are migrating to online purchases," says Greenberger. "We suspect that the numbers are going to get even stronger as we progress through the holiday season."
Greenberger believes online shopping will do well, regardless of any weakness seen at some of the brick-and-mortar stores, because shoppers are shifting more of their purchases from mall stores to Web sites. It's a trend bolstered both by the increased convenience of shopping online, thanks to comparison sites and better-designed store Web pages, as well as the breadth of products available online, including sell-out items such as the Nintendo (NTDOY) Wii.
The increase is likely to be felt among standalone online stores as well as the online arms of brick-and-mortar retailers. Blue Nile (NILE), an online diamond and fine jewelry retailer, is anticipating growth of 20% to 28% in the fourth quarter compared to last year. So far, says Diane Irvine, Blue Nile's chief financial officer, things are looking good. "I think we feel like we should have a good holiday season and [sales will] just get bigger from here."
Silver Lining at Wal-Mart Scott Silverman, executive director of Shop.org, the online division of the National Retail Federation, says more than a fifth of Shop.org's member stores expect 75% growth in online sales over 2005. Another 29% are expecting growth in the 30% to 74% range. "There is no question that we are going to see significant growth year over year," says Silverman. "The question is going to be: Was it more than was expected or not?"
And that's a good question, considering the negative reaction on Wall Street to the news from Wal-Mart (see BusinessWeek.com, 11/27/06, "Stocks Smacked by Wal-Mart, Google"). Are expectations too high for online retailers? Judging from the reports, expectations of 20% to 30% growth or more are not outlandish for most online retailers.
Even Wal-Mart has seen large growth at its Web site, experiencing an astonishing 191% gain on Black Friday, according to Nielsen//NetRatings. However, for shops with both physical and virtual storefronts, to expect both segments to post strong growth overall is largely unrealistic. The growth in online shopping is not coming from shoppers with lots more disposable income compared to last year. It is largely from shoppers who are buying more of their regular holiday gifts online. That's at least in part why Wal-Mart can experience declining in-store sales and still see phenomenal growth online.
Anticipating a Yearend Surge It's also why there is still some reason for concern about the season. Stores such as Wal-Mart have attracted customers to their online sites by offering enticing sales that cut into their margins. Many other online retailers are offering costly "free shipping" deals and other bargains—they attract Web shoppers, but they also pick away at profits.
Yet, at least right now, the season also appears to have begun solidly for brick-and-mortar stores. ShopperTrak reported that retailers generated $14.66 billion in the two days following Thanksgiving. That's up 3.4% from last year and a good start, says Aaron Martin, a spokesman for the company. Another reason for Martin's expectation that the season will be strong is its extra length this year, with Thanksgiving falling on the 23rd rather than later in November. "We are going to see a surge at the end of the year," says Martin, adding that the Saturday before Christmas should be particularly lucrative for brick-and-mortar stores.
Online stores will see their peak a bit earlier, since consumers want their gifts to arrive in time for the holidays. Analysts expect that by Dec. 19, e-tailers will have a pretty good sense of just how much cheer they got this holiday season.
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