Commentary: Fewer bargains on the Web

by Carrie A. Johnson, Senior Analyst

Online holiday sales will rise by 20 percent compared with last year, to $13.2 billion--a good but not great increase.

Why the less-than-stellar season for online retailers? As the Web gets more mainstream, online sales suffer from the same tepid sales as offline outlets. Many online retailers will be forced to cut back promotions and push shoppers to stores, the channel in most danger of missing holiday sales forecasts.

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The holiday season, which we define as the period between Thanksgiving and Christmas, approaches fast. As noted above, this year we expect U.S. online holiday sales to increase by 20 percent over last year--to $13.2 billion from $11 billion. This means that instead of delighting in the gift of a shiny new bike on Christmas morning, many online retailers will have to settle for a scooter. The outlook isn't bad, but it's not as good as last year's 31 percent growth over 2002.

We've scaled back our already-conservative projections for the holiday season and the year based on the following factors:

• Weak second- and third-quarter sales send warning signals. Quarter-over-quarter online sales dropped between the first and second quarters of this year--a rare occurrence. Based on conversations with retailers and early sales data, we expect that the books will close on a fairly weak third quarter as well. What's going on? It's the economy, stupid. A more mainstream Web means that online sales now generally mirror offline sales. The National Retail Federation has been reporting soft offline quarterly sales and expects solid offline holiday sales growth of 4.5 percent. Our projections reflect a parallel good, but not great, growth trajectory for online holiday sales.

• Retailers can't afford to promote the Web aggressively in the fourth quarter. To keep profitability levels up and to accommodate for generally slower growth, not all retailers can sell the farm this year to spur online sales, creating a chicken-and-egg sales problem. Consumers will buy less online when faced with fewer free shipping offers and percentage-off deals--even online buyers prefer to shop offline, often buying online only when prices and offers outweigh the benefits of shopping in stores. Also, in fear of Wall Street's reaction to a soft offline holiday season, we expect more retailers to use the Web to push consumers into stores. As in 2002, which was also a weak retail year, huge in-store discounts and promotions will be too enticing for even online shoppers to pass up.

© 2004, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.