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Constant change

June 3, 2013 12:28 PM
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A decade ago, when Internet Retailer first ranked North America's retailers by their online sales, e-commerce was an emerging sales channel. Today it's mainstream, and the most powerful driver of retail growth. But one thing remains the same: E-commerce is still rapidly evolving, and the retailers that adapt to change most quickly and effectively are the ones making gains.

In 2012, the combined sales of the Top 500 retailers grew 17.5% year over year to $216.17 billion from $183.93 billion, while total e-commerce as measured by the U.S. Department of Commerce increased about 15.8% to $225.50 billion last year from $194.70 billion in 2011. By contrast, total retail sales grew only about 4.0% to $3.09 trillion in 2012 from $2.97 trillion in 2011. While e-commerce represented only 7.3% of total U.S. retail sales in 2012, it accounted for 25.4% of the growth.

Innovation is the watchword for retailers seeking to ride the e-commerce growth wave. And that's true whether they are perennial Top 500 merchants such as Amazon.com Inc. (No. 1), FragranceNet.com Inc. (No. 153), Oriental Trading Co. Inc. (No. 86), Fanatics Inc. (No. 43), or newcomers such as Groupon Inc. (No. 65), the fastest-growing web merchant ranked in the 2013 Top 500 Guide with sales that increased nearly 2100% to $454.7 million in 2012 from $20.8 million in 2011. These retailers' growth strategies include diversifying their e-commerce operations with new merchandise and product categories and digging even deeper into the details of web analytics, web site traffic logs and other data to gain nuggets that will lead to better understanding of customer behavior—and surpassing expectations.

They're also mastering how to maximize customer acquisition and sales from new opportunities in mobile commerce and social media. "This isn't the same market we all knew 10 years ago, and the changes in technology, marketing and customer expectations are coming faster than I've ever known," says Sam Taylor, CEO of Oriental Trading, an 81-year-old direct marketing company that today uses the Internet and e-commerce to drive about 70% of its sales. "If we aren't willing to change and keep up with innovation someone else will."

Not every retailer made the right choices when faced with the rapid changes of the past decade. Many well-known retail brands that at one time made the Top 500 rankings have since gone bankrupt, were sold or went out of business for other reasons. A prime example is Circuit City Stores Inc., which reached $1 billion in web sales in 2007 but was bankrupt by 2009, the victim of a flawed discount pricing strategy and stiff competition from Best Buy Co. Inc., Amazon and others.

Meanwhile, some e-commerce brands that struggled on their own, such as RedEnvelope.com, have been revived under new ownership. "A lot of online retailers that aren't around anymore may have had a good run for awhile, but in the end the value proposition they offered shoppers just wasn't good enough," says Jim Okamura, managing partner of retail consultancy Okamura Consulting. (See the Memory Lane chart on page 46 for more details.)

Today the Top 500 retailers growing the fastest are the merchants that are flexible and willing to embrace change, especially new developments in mobile commerce and social media, Okamura says. "The Top 500 retailers growing the most consistently over the next 10 years of online retailing will be the merchants really mastering these two channels."

Many leading e-retailers recognize the opportunity in mobile commerce. In 2012, 322 Top 500 merchants operated a mobile commerce site or app compared with 135 in 2011 and 76 in 2010.

But some Top 500 retailers are embracing mobile commerce more aggressively than others and gaining shoppers—and sales—as a result. RueLaLa.com (No. 76), which sells designer fashion for a limited time to registered shoppers, generated 16.9%—$67.5 million—of its overall 2012 e-commerce sales of $399.9 million from mobile commerce. For ShopNBC.com (No. 98) mobile sales reached $60.0 million in 2012, accounting for 22.4% of its $268.2 million e-commerce sales. Flash-sale site Fab.com (No. 150) brought in roughly $45.0 million in mobile sales last year—30% of its Internet Retailer-estimated total of $150.0 million.

Mobile commerce is especially suited for private-sale sites such as RueLaLa.com because deals sell out quickly, and members rely on their smartphones and tablets to snag time-sensitive offers. And RueLaLa.com strives to keep up with the latest developments in mobile commerce technology because its shoppers want to do a lot more with their mobile devices than just receive promotions and buy, says founder Ben Fischman.

Recognizing that mobile shoppers want to see, search and size apparel, RueLaLa.com released new mobile apps prior to the 2012 holiday shopping season that let shoppers quickly determine the availability of desired sizes and colors. Another new feature, a "Right Now" screen, shows shoppers which items have sold out or are close to selling out, without having to navigate off the home screen. "It is our mantra to make certain that we are moving as quickly as our members when it comes to technology," Fischman says.

Flexibility and adaptability are also important when it comes to social commerce, which some Top 500 retailers are embracing more quickly—and successfully—than others. A decade ago there were no social metrics in the Internet Retailer Top 300 Guide because online social networks had yet to become a mass phenomenon. In 2003 Facebook CEO Mark Zuckerberg was a Harvard student a year away from writing the code that would become Facebook; Twitter did not launch until March 2006.

But in 2012 and today virtually all Top 500 retailers reach out to consumers via social media: 99.2%, 496 retailers, have a Facebook page; 97.2%, 486 merchants, operate on Twitter; 88.0%, 440 retailers, have a YouTube channel; and 78.0%, 390 merchants, are on Pinterest. Between 2011 and 2012, the combined number of Top 500 Facebook Likes grew 28.1% to 477.5 million from 372.9 million, while the collective number of Twitter followers increased 84.4% to 34.3 million from 18.6 million.

Social media marketing is a top priority for FragranceNet.com, which at nearly 39% has the best compound annual growth rate for the last decade among the web-only merchants ranked in the Top 500 Guide. Social media is particularly useful as the e-retailer diversifies beyond just selling perfumes and colognes into beauty and skin care products, says CEO Jason Apfel. "We've survived for 16 years as an online retailer against a lot of bigger companies because we've always been really good at getting up close and personal with our shoppers, but we've got to get social media just right," he says. "It's how our customers are communicating."

Today revenue from social media is a small but growing part of FragranceNet.com's annual web sales of about $145 million, although Apfel won't disclose a specific figure. But FragranceNet.com is making social media promotions and integrations a big part of its upcoming web site redesign. The new product pages will feature social tools such as photo walls, interactive questions and answers, and other features.

FragranceNet.com will also integrate its product pages more closely with Facebook, Twitter and Pinterest. "We will use our site redesign and social media to promote a competitive advantage we think we have, which is providing deep content and lots of online beauty advice to shoppers," Apfel says. "We've been around this long because we've gotten pretty good at getting to know who our customers are and how they relate to us, and social media will only deepen that relationship."

Among all the web-only retailers that have held spots in the Internet Retailer rankings over the past decade, FragranceNet.com had the biggest 10-year gain in sales. It reached $145.0 million last year from $10.5 million in 2003. But among all merchants, chain retailer Urban Outfitters showed the biggest jump—more than 9000% to $663.3 million in 2012 from about $7.3 million in 2003. The fastest-growing catalog/call center company was 1-800 Contacts Inc. (No. 78), which over the course of a decade grew web sales about 1880% to $392.0 million from $19.8 million. Apple Inc. was the biggest-growing consumer brand manufacturer thanks to the explosive growth in digital music sales from iTunes, which launched in 2001, and online sales of such innovative products as iPods, iPhones and iPads. Over the course of a decade e-commerce sales for Apple (No. 3) grew 2078% to $8.83 billion in 2012 from $405.5 million in 2003.

The fastest growers over a decade in e-commerce have been the ones that have adapted to the web more quickly and aggressively than other merchants, with Amazon.com being the best example, says Scot Wingo, CEO of ChannelAdvisor Corp., a vendor that helps merchants manage stores and list on marketplaces such as Amazon. Today Amazon dominates the online retail industry—and the Top 500. In 2012, Amazon's total sales of $61.09 billion accounted for 28.3% of total Top 500 sales, 32.7% of Top 100 sales of $187.07 billion and 66.7% of all Top 500 web-only merchant sales. Minus its 2012 international sales of $26.28 billion, Amazon still single-handedly accounted for 15.4%—$34.81 billion—of all U.S. e-commerce sales of $225.50 billion and 20.2% of all U.S. Top 500 sales of $172.27 billion.

Amazon hasn't always been so dominant. A decade ago Amazon was the top-ranked Top 300 merchant, but its 2003 web sales of $5.26 billion accounted only for 13.1% of all Top 300 sales, 14.3% of the top 100 and 9.0% of all U.S. e-commerce sales. It wasn't until 2009 and 2010, when consumers began regaining confidence after coping with the biggest recession since the Great Depression, that Amazon truly emerged as a dominant retailer, Wingo says.

In the years prior to the recession Amazon steadily expanded into new merchandise categories on its own and via acquisitions, such as its $900 million purchase of online shoe retailer Zappos.com in 2009. The e-retailer added millions of square feet of fulfillment space to offer same-day delivery in many major U.S. cities and in 2007 launched Amazon Prime, a program that offers free two-day shipping on all orders along with a growing list of perks for an annual fee of $79. Amazon also was busy rolling out new products of its own, including the first version of the Kindle electronic book reader in 2007.

"All of the innovation and change Amazon put into its business coming into and out of the last recession really resonated with shoppers because it had the best deals, the most products and gave consumers a dependable and convenient online shopping experience," Wingo says.

Amazon's above-market growth is a major reason the biggest online retailers account for such a large share of all Top 500 sales. The combined 2012 web sales of the top 10 online retailers total $107.99 billion and account for 50% of all Top 500 sales; the collective sales of the top 100 are $187.07 billion, or 87% of the total web sales of merchants ranked in the Top 500 Guide.

Nonetheless, there remains room for innovative Top 500 newcomers and established merchants to grow sales. Capitalizing on its base as a daily-deal operator and trying to turn the corner on profitability, Groupon sees e-commerce and the continued success of Groupon Goods, which sells products—as opposed to vouchers—directly to consumers via the web, as essential to its future. E-commerce sales for Groupon Goods could hit $2 billion in 2013, up 339.6% from $455 million in 2011 and 9515.4% from $20.8 million in 2011, says Faisal Masud, now Staples Inc.'s vice president of global e-commerce, who, as vice president and general manager of Groupon Goods until May 2013, oversaw the division's growth. "The business is poised to grow globally," he says.

Other Top 500 merchants aren't growing nearly as fast as Groupon or NoMoreRack.com Inc. (No. 202), a flash-sale retailer that boosted e-commerce revenue year over year 1023.6% from $8.9 million to $100.0 million (See page 62 for more details). But some perennial Top 500 merchants such as Oriental Trading and Fanatics believe they're doing the right things to survive and grow.

Oriental Trading's future was in doubt just three years ago. In the span of just a few years the private equity company and banks that owned Oriental Trading put the company up for sale at least twice and in 2011 filed for bankruptcy to reorganize and shed nearly $420 million in debt.

But today Taylor says Oriental Trading is profitable—although he won't reveal the company's financial figures—and is happy with the relationship with its new owner, financier Warren Buffet's Berkshire Hathaway Inc., which purchased Oriental Trading for an undisclosed sum in November.

But even while it was for sale or reorganizing under bankruptcy protection, Oriental Trading continued looking for ways to innovate and grow its e-commerce operations, Taylor says. In 2012 web sales for Oriental Trading only grew 6.3% to $340 million from $320 million in 2011. But the company is busy diversifying its e-commerce channel by developing more private-label merchandise, which now accounts for about half of the company's current inventory of about 40,000 products, and developing new product lines for specialty events such as proms and party merchandise, including men's Hawaiian shirts, Taylor says.

Oriental Trading also continues to invest in its 750,000-square-foot Omaha, Neb., distribution center, which has the capacity to store as many as 100 million individual SKUs and pick, pack and ship up to 77 million packages per year, Taylor says. "Ten years ago e-commerce was 25% of our business and now its 70%," Taylor says. "We've changed the mindset around here of being a catalog company treating the web as a support channel to making e-commerce our growth engine now and going forward."

Embracing change and building its niche e-commerce base also has been a top priority for Fanatics, which grew web sales 45.5% to $764 million in 2012 from $525 million in 2011. The 2012 web sales include about $100 million in revenue from Dreams Inc., a competing licensed sports apparel web merchant Fanatics acquired for $183 million in June 2012. That acquisition helped Fanatics grow roughly 65% a year over the past decade, the second-best compound annual growth rate among Top 500 retail chains, behind Urban Outfitters.

Fanatics began operating an e-commerce site in 1993 from the back of its lone store in Jacksonville, Fla. It fulfilled web orders from store shelves and dropped off packages for shipping at a nearby UPS location.

Its lightbulb moment came when company executives realized they could use the Internet to sell caps and jerseys to displaced sports fans—such as a diehard Boston Red Sox supporter living in Chicago. "Our first innovation was identifying a niche nobody else had, and that was serving the displaced fan who wanted to use the web to buy licensed gear for their team they couldn't find anywhere else," says Fanatics president Jamie Davis.

Over a decade Fanatics grew its inventory from a few thousand licensed products to more than 1 million items, including gear for more than 200 teams, Davis says. "Now we are after the local fan," Davis says. "We want the guy that wants that licensed gear right after a big event and right now, without leaving the couch."

In the next two years Fanatics plans to double the size of its distribution center network. The company already operates a pair of fulfillment centers near Jacksonville and Chicago, and in a few months will open a third 500,000-square-foot warehouse near Columbus, Ohio, and a warehouse of similar size on the West Coast in 2014 or 2015.

"We don't feel like we've peaked over the last 10 years. We think e-commerce is just now really getting started."

mark@verticalwebmedia.com

@markbrohan

 

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