June 11, 2002 9:00 PM PDT

Online retailers continue strong growth

Once known for dot-com excess, online retailing is on its way to becoming a profitable industry, according to a Shop.org study to be released Wednesday.

Some 56 percent of retailers surveyed by Shop.org reported profits at their online operations in 2001. Meanwhile, the study projects that the total U.S. e-tail market, combining the results of all the companies involved in online retailing, will hit breakeven on operating margins this year.

"Consumer adoption of the online channel has reached critical mass and retailers have been able to respond by turning this trend into profits," Elaine Rubin, chairman of Shop.org, said in a statement.

The online operations of catalog companies fared the best in 2001, posting aggregate operating profit margins of 6 percent, according to the study. While online and traditional merchants on average posted a loss in 2001, they both showed year-over-year improvement, the study found.

Representatives of Shop.org were not immediately available for comment, nor were representatives of Forrester Research and Boston Consulting Group, which helped produce the report.

In the early days of e-commerce, many online stores ran up huge losses attempting to attract customers. Although sales grew exponentially as a result, the stock market crash and the subsequent withering of venture capital left many start-ups hurting for funds and focusing increasingly on the bottom line.

Many e-tailers, including Living.com, eToys, Pets.com and Egghead.com were forced to shut down when their funds ran out. Meanwhile, many traditional retailers such as Wal-Mart, KB Toys and Kmart reeled in their online operations, bringing them back in house to cut costs and integrate them with the parents' operations.

For the companies that have survived the online shakeout, profits have become the new measuring stick for success. Amazon.com, for instance, posted its first net profit in the fourth quarter, exceeding the expectations of many in the industry. Online payment company PayPal posted profits in the first quarter. And Drugstore.com is promising to become cash-flow positive, a precursor to profitability, by next year.

Despite the downturn in the economy, online commerce is continuing to grow, the new study indicates. E-tail sales increased from $42.4 billion in 2000 to $51.3 billion in 2001, a 21 percent jump, according to the survey. The study projected that consumer e-commerce sales will jump 41 percent to $72.1 billion this year.

At the same time, online stores are drawing a greater percentage of overall retail sales. Online sales comprise more than 5 percent of the overall market in seven retail categories, according to the study.

Leading the way is computer hardware and software. Some 17.9 percent of such sales were made online last year and Shop.org projects the figure to hit 23.4 percent in 2002. Other leading retail categories include books, event tickets, music and video products, travel, toys, and consumer electronics.

Shop.org surveyed more than 100 retailers for its study, including traditional brick-and-mortar merchants, catalog companies and online retailers.

 

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