Cause for alarm
June 1, 2016 03:31 PM
Talk about being on-trend: Color It, a maker and purveyor of coloring books for adults, turns 1 this month, and has sold $1 million worth of the books exclusively online.
Co-founder Mike Jackness says hitting these marks would have been impossible without the existence of Amazon.com Inc. and online shopping. Jackness, though, isn’t an Amazon acolyte. He’s pragmatic, and understands that more U.S. online shoppers look to Amazon first than any other e-retailer. That’s borne out by the results of Internet Retailer’s first-ever survey of U.S. online shoppers about their web shopping habits: 90% of respondents said they were Amazon customers. Tellingly, 51% said they made more than half of their online purchases in the last 12 months with Amazon.
That’s why it made sense for Color It to debut its first title on Amazon last June, seven months before ColorIt.com began taking orders. It was also right on time to capitalize on the adult coloring book market, which exploded last year. The Nielsen Co.’s BookScan service estimates U.S. consumers bought 15 million coloring books for adults last year, up from 1 million in 2014.
“The way we launched the brand is on Amazon,” Jackness says. “This is an unprecedented time in history, especially online. To start a coloring book company before Amazon was a big, million-dollar venture. You needed a whole catalog before you could sell your first book.” But Color It debuted its first book on Amazon a mere handful of months after Jackness, his cousin (the artist behind the books) and other family members decided to get into the adult coloring book business. It printed a limited quantity, listed the book for sale on Amazon as a marketplace merchant, and the sales and reviews started rolling in. The team used the feedback from reviews to refine the product before committing to a bigger production run, creating more titles (it now has 12) and launching ColorIt.com.
“Consumers are discovering us on Amazon,” he says. For a company like Color It selling its own products and not having to compete with other merchants selling identical products, selling on Amazon “is just found business,” Jackness says. Today, about 45% of Color It sales come through Amazon, and 55% from ColorIt.com, as the company makes branding and advertising investments, particularly on Facebook, Jackness say.
Color It’s example demonstrates the power of Amazon today to rewrite retailing and move the market. U.S. consumers spent $341.7 billion on retail goods online last year, per U.S. Commerce Department estimates, accounting for 10.6% of total retail sales of $3.22 trillion, up from 9.7% in 2014. (These figures factor out the sales of goods generally not available for sale online, such as automobiles, fuel and restaurants.) Amazon reported $63.71 billion in North American net sales in 2015 (it doesn’t break out sales for the United States separately). Those are just products Amazon sells itself. Adding in the sales of marketplace sellers and estimates of the value of goods sold to U.S. consumers via Amazon range from $100 billion (Forrester Research Inc.) to $112 billion (ChannelAdvisor Corp.). In short, Amazon accounts for about 30% of U.S. online retail sales. Macquarie Research estimates say Amazon’s gross sales—sales made by Amazon and by other merchants selling on Amazon—in 2015 accounted for 24 cents of every $1 of retail sales growth. Within e-retail, it calculates Amazon commanded 51 cents of every $1 in sales growth.
Amazon’s pervasiveness and its outsized role in U.S. shoppers’ online shopping habits is evident from the results of the Internet Retailer 2016 Online Shopping Survey, which 535 U.S. adult online shoppers took online in late April. The survey examined consumers’ online shopping frequency, their responsiveness to common e-retail marketing tactics like free shipping, mobile shopping and the role online research and online retailers play in their overall purchase path. When the results are further filtered according to consumers’ shopping frequency on Amazon and whether they are members of Amazon Prime—Amazon’s $99 annual membership program that provides free fast shipping and a host of other perks including streaming video—the results put the steep uphill battle e-retailers and retail chains face into sharp relief.
First, the good news: Just more than half, 51.6%, of U.S. online shoppers, say they place at least two orders online each month, and 63.9% of shoppers say they shop more online than they did three years ago. (28.8% say their online shopping frequency has stayed the same and 7.3% say they shop less.)
When factoring in Amazon Prime membership—which 59.4% of the respondents who said they shop Amazon have or have access to through a household member—64.8% of Prime members say they place at least two orders online each month, and 71.8% say they shop online more frequently than three years ago.
Examined through the lens of frequent online shoppers (those placing orders online twice a month or more), the Amazon tilt is even more evident. 94.5% of these consumers say they are Amazon customers, and 71.0% report access to a Prime membership. 73.6% say they shop more online now than they did three years ago, and—here’s the e-retailer wake-up call—54.8% of frequent shoppers say they made 51% or more of their online purchases over the last 12 months on Amazon. Factor in Prime and frequency, and 77.7% shop more online now than three years ago, and 63.6% say they made 51% or more of their online purchases over the last year on Amazon. Breaking down that 63.6% figure further, 34.2% say they made 76-100% of their purchases on Amazon, and 29.4% report making 51-75% with Amazon. These figures show that Prime membership makes consumers coalesce their online shopping with Amazon.
“With Amazon Prime in so many American households, when you have a choice of buying online from Amazon or from someone else, when with Amazon you can get it shipped in two days, you are going to go that route,” says Marshal Cohen, retail industry analyst with NPD Group Inc. NPD Group estimates 24% of U.S. households have Amazon Prime. Amazon does not release membership figures for Prime, but says U.S. membership grew 47% last year. Amazon CEO Jeff Bezos, in his 2015 letter to shareholders, wrote: “Prime has become an all-you-can-eat, physical-digital hybrid that members love. ... There are now tens of millions of members worldwide. There’s a good chance you’re already one of them.”
E-retailers that sell through Amazon’s marketplace and hire Amazon to manage their packaging and shipping with Fulfillment by Amazon (FBA) can tap into Prime consumers and capture some of these sales. Marketplace sellers sold 47% of the products sold on Amazon in 2015’s fourth quarter, and about 50% of those items were fulfilled by FBA, Amazon chief financial officer Brian Olsavsky said in the company’s Q4 earnings call in January.
By using FBA, marketplace merchants can have their products flagged as eligible for Prime shipping—and also get access to Amazon’s volume shipping discounts—which can make FBA doubly attractive to sellers.
Jackness at Color It uses FBA for all its books, including the ones sold on ColorIt.com. He says that while he pays Amazon $1 extra per shipment to fulfill ColorIt.com orders in a plain box—“so they don’t think it is coming from Amazon”—the shipping cost is still less than what it would pay any shipping company directly.
Stepping aside from the direct Amazon effect for a moment, survey respondents also shared more nuances on how they like to shop online and what makes them buy more—namely free shipping. Nearly half, 48.6% of respondents say that if they get to the checkout process and see they haven’t met the free shipping threshold they put more product in their cart to do so. Paying for shipping is a sore spot for 19.7% of respondents who say they would leave the site and shop elsewhere.
Free shipping is a common offer for e-retailers—61% of the retailers ranked in Internet Retailer’s 2016 Top 500 Guide offer it, though most require a minimum order—and they see how it can drive order values up and create larger margins. For example, ColorIt.com sells its coloring books for $15.99 each, and sets the threshold to get free shipping at $30, which Jackness says more often than not convinces consumers to put a second book in their cart, bringing their order total to about $32. The weight of the second book adds only about $1 to the total shipping cost, increasing the margin the merchant makes on the total sale.
Consumers also have expectations about how quickly they receive their online orders. More are willing to wait when they get free shipping, but are less patient when they’ve paid for it. Asked how long they are willing to wait for an order that shipped for free, the most popular answer was 4-5 days, cited by 42.5%. But if they’ve paid for shipping, half of all U.S. online shoppers, 50.5%, expect to have their goods in hand in 2-3 days. Consumers who’ve been exposed to Prime have higher expectations for free shipping, with 42.6% of respondents saying they expect orders with free shipping to arrive in 2-3 days versus 14.2% of non-Prime customers expecting the same.
When it comes to when and how consumers shop online, shopping while at home wins, with 67.4% of respondents selecting placing their orders from their home computer as one of the top two ways they most often shop online. The No. 2 answer, with 58.8% of respondents, was to shop at home from their computer, smartphone or tablet while watching TV or doing another leisure activity.
Fewer consumers say they shop from their smartphones while on the go, 10.3%, but the majority are incorporating mobile shopping to some degree. 83.3% of respondents say they own a smartphone capable of connecting to the Internet, and of those 62.0% say they’ve made a purchase through their phone. (This figure too is weighted by consumers who are Amazon Prime members, with 68.4% of Prime members saying they’ve made a mobile purchase versus 54.9% of non-Prime consumers.) Across all smartphone shoppers, 57.9% say they made less than 25% of their online purchases over the last year on their phone.
Merchants are making mobile a priority, as web traffic and some sales move in that direction. 1-800-Flowers.com Inc. rolled out new apps for both Apple Inc. iOS and Android devices in the fourth quarter, and this spring began testing a way for shoppers to place orders through the Facebook Messenger mobile app. “We want to position our brands and products in front of where the customer is and where they are spending their time,” says president Chris McCann, adding that he considers mobile and social channels the “next wave” of commerce.
Macy’s Inc., the department store chain that has struggled with store sales in recent quarters, in May said its mobile sales more than doubled last year and is its fastest-growing digital sales channel. It also is putting money into improving its mobile site and app, including adding more ways to search and navigate, including for when shoppers are shopping while in a Macy’s store.
More than half of online shoppers say they incorporate physical stores into their online shopping. 54.3% say they’ve placed an order online and then gone to a nearby store to retrieve it. Consumers who buy online two or more times per month are more likely to have done so, with 60.1% saying they’ve used store pickup.
Retail chains are capitalizing on some consumers’ willingness to visit the store for order fulfillment, and are investing to build it up even more. The Home Depot Inc. says more than 40% of online sales are picked up at a Home Depot store. Meanwhile, Target Corp. says 15% of the value of goods sold on Target.com get picked up in store, and the total number of Target.com orders consumers picked up in store increased 60% in 2015 from 2014. The mass merchant this spring also began testing ways to introduce more Target store shoppers to its digital assets. 25 Los Angeles-area stores now feature “digital service ambassadors” at stations at the front of the store. The advisors are meant to help direct customers on where and how to pick up their Target online orders and to show off other Target digital assets, such as its mobile apps.
While retail chains are raising their digital prowess, the results of Internet Retailer’s consumer survey show how Amazon and other web-based retailers are eroding their sales. When asked to select how they most often shop when they need a low-consideration product, such as a toaster or bath towels, 63.2% selected “I go to a nearby store and buy what I need” as one of their top two choices. The No. 2 answer was to visit Amazon and see what’s available, without immediately buying, at 27.1%. The “go to a nearby store and buy” percentage falls significantly among Amazon Prime members, to 53.2%. 39.3% of Prime members make Amazon their first stop to see what products are available, and 31.1% say they will go directly to Amazon and buy what they need, eliminating stores from the purchase process entirely.
Prime membership is swelling and these survey results demonstrate its powerful sway. It’s clear a dangerous road lays ahead for stores and online merchants as they seek to figure out how to counteract that influence and pull consumers their way.