Is Online Retailing Recession-Proof?

Does that mean online shopping is recession-proof? Most analysts say no, and point to a number of reasons why e-tail is still expanding, although not at the exponential growth rates of seasons past.

With many brick-and-mortar retailers recently reporting sluggish holidays sales and high rates of merchandise returns, the impact on Internet sellers has been just as acute, if not quite as apparent, analysts said.

Moreover, industry analysts caution that a number of online marketers will be reeling for months to come due to the economic downturn.

"Online retailers have been hit every bit as hard as, if not harder than, the traditional retailers," Jupiter Media Metrix senior analyst Ken Cassar told the E-Commerce Times. "It's just more evident among traditional retailers because many of them are showing fairly stagnant growth rates."

Holiday Jump

Despite the tough economic times, online shopping over the 2001 holiday season did register incremental growth year over year. Research firms Jupiter Media Metrix and Harris Interactive have found that the post-Thanksgiving buying period in 2001 saw about a 15 percent jump over year 2000.

However, analysts warn that the increase may very well have masked the financial straits in which many Web merchants currently find themselves.

"We did see considerable impact in terms of the recession in online shopping, just as we saw in retail," said Lori Iventosh-James, director of e-commerce research at Harris Interactive. "But the difference is that traditional retail has been around for a long time, whereas online is still in the growth mode -- although it certainly is maturing."

Reality Check

As a result, many e-commerce players, having ridden in on a strong and unsustainable economic tide, now find themselves awash in fiscal malaise instead of bathing in long-awaited millions.

"When you look at online retailers, though, they are taking bigger percentage hits to their business because of September 11th," Cassar said.

The harsh reality of the situation has been all the more painful for those online retailers whose goal of achieving profitability by the end of 2001 seemed to be within reach prior to the financial conditions that took hold during the fourth quarter.

"I've spoken with one retailer recently who was very close to becoming profitable, and the business took such a big hit during September and early October that it basically killed them," said Cassar. "At the end of the day, we're probably going to find a lot of online retailers will be going out of business because the events of September 11th made an already difficult situation more difficult."

Going Mainstream

According to industry watchers, the primary driver of growth during the recent holiday season was the increase in the size of the online shopping population. Both the number of new online users and the increased likelihood that a given user would make an online purchase caused revenue to spike.

In terms of raw numbers, Jupiter has estimated that during the 2001 holidays 33 percent of Internet users shopped via the Web, compared to 29 percent who did so over the previous season. The research firm also found that the size of the online population by the end of 2001 was roughly 142 million, a jump from the 125 million users online at the end of 2000.

"The newer people coming online are moving to make a purchase online more quickly than they have in the past, and it's just a mainstreaming of e-commerce," said Iventosh-James. "People are more familiar with it since there's a whole lot more communication about security and privacy issues."

Thrifty Spenders

Despite the modest increases in online retail, analysts maintain that belt-tightening by consumers helped to offset the growth.

"I'd argue that if it weren't for the weak economy, which was exacerbated by the events of September 11th, we may well have seen a 25 percent increase in holiday retail growth over the previous year," said Cassar.

Similarly, Iventosh-James said her firm found in a number of surveys conducted throughout the holiday buying period that consumers did rein in their spending.

"There was definitely a portion of people who said somebody in my family has been laid off or my salary has been cut, so I'm only buying necessities this year," the analyst said. "That was more the mentality than it had been in the past."

Population Control

Although the events of September 11th and their aftermath produced an economic anomaly, analysts assert that slowing e-commerce growth rates are also the natural result of a sector whose population is reaching the market saturation point.

"Now that growth rates have come down to earth, we're starting to find that the macroeconomics are increasingly visible," said Cassar.

On the upside, however, Internet retailers that are able to spur the current pool of online users to become consistent Web shoppers stand to reap considerable benefits.

"We know that 60 percent of all U.S. households are online now and among people who have online access some 85 percent have made a purchase," said Iventosh-James. "Given those factors, the potential is quite large."

Riding the Storm

While finding ways to ride out the recession is a daunting challenge, there may be avenues for Internet sellers to explore without falling by the wayside. For some, consolidation -- either through mergers or buyouts -- may be the key.

"I suspect that we will see some fairly strong Internet retailers up for sale over the next couple of quarters," said Cassar. "I think many of them will be purchased by their traditional competitors, such as brick-and-mortar or catalog companies."

Internal Affairs

On an operational level, another option is for retailers to target their business blueprints on niche consumer segments.

"Retailers that might have been conceived with fairly aggressive market strategies may realize that they're never going to live up to what might have been the unrealistic hopes of a couple of years ago," said Cassar.

"Instead, they're going to go after smaller markets."

Additionally, analysts advise brick-and-click retailers, as well as catalog companies with Web sites, to focus on devising strategies that help snag a larger percentage of a customer's overall spending dollars.

"It's a great opportunity for traditional retailers who have an online presence and for catalogers," said Iventosh-James, "because they can really understand their shoppers and figure out how to capture a much larger percentage of their spending across all these different mediums."

Driving Growth

Looking ahead, Cassar believes that the greatest driver of e-commerce growth over the next five years will be from the growing percentage of Internet users who conduct online transactions.

"The longer someone has been online, the more likely they are to buy online and the more likely they are to buy more products online," he added. "The one thing we can be confident of is that average online tenure will only increase over time."