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Retailers Must Get Onboard With Online Sales


Only companies that adjust their business model to appease the evolving consumer will survive.

As overused as the tagline may seem, "the new normal" is a phrase the retail industry can't ignore. Significant changes in consumers' shopping habits are taking place. While many executives are addressing the growing trend of fiscal conservatism, many are failing to address the non-monetary changes among consumers.

Online shopping -- while far from a new concept -- is emerging into the spotlight as one of the most notable changes. For the 2009 holiday season, overall sales rose 1.1%. However, online sales rose 15.5% and at 5% of sales, that means brick-and-mortar retail sales inched up just 0.3%. In other words, online shopping was the major source of holiday sales growth.

At just 5% of total shopping revenue, online sales may not seem like such a big deal. But eMArketer Inc. predicts that e-retail sales will grow to more than $189 billion by 2013 -- representing a 9.56% annually compounded growth rate from 2009.

With price becoming such an important factor in shopping, it's no surprise that online shopping is expected to grab market share from storefront locations. Not only does cyberspace allow consumers to price compare, it allows retailers to sale at lower price points because of lower operational costs.

Like in any industry shift, retailers need to adapt to this trend. And investors need to evaluate whether retailers are making the necessary adjustments to their business models to capture this shift. A few key qualities to look for -- along with companies that are good examples -- include:

  • Strong existing direct-to-consumer distribution networks -- J.Crew (JCG)

  • Ongoing website user improvement -- Walmart (WMT)

  • Meticulously planned, slow growth physical presence -- Urban Outfitters (URBN)

  • Prioritizing Web marketing over more traditional channels -- J.C. Penney (JCP)

For the retailers who haven't over-expanded and were early market movers in online retailing, the shift to online shopping is a favorable one. It can help boost margins because overall costs are lower in comparison to brick-and-mortar sales. It also allows companies to learn about their customers -- an invaluable asset.

While eBay (EBAY) and Overstock (OSTK) have more or less fallen out of the race, Amazon (AMZN) is a prime example of how big of a destination cyberspace is becoming for shoppers. Even in the heart of this recession, the company is expected to post a 34% increase in sales. Over the next five years, analysts peg the company to grow 26% annually.

Some industry experts suggest that brick-and-mortar stores will eventually become obsolete. I disagree. The Internet can't completely replace the physical shopping experience. That said, it will likely continue to become a more popular method of purchasing and thus become a key business segment analysts need to consider.

This certainly builds a case for Gilt Groupe and other up-and-coming online retailers focused on price rather than in-store experience (See also, Up-and-Coming Retailers: Gilt Groupe). There certainly are creative ways for online retailers to juice up their website interface and it's this kind of innovation that will lure customers online.

With the upcoming release of fourth-quarter results, keep an eye on which firms generate strong online sales. And in the future, maintain a close watch over management teams that stress investment in online operations. Times are changing for consumers and retailers that don't adapt will be left lying in the "damaged goods" pile.
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No positions in stocks mentioned.
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