Know thy customer
July 31, 2011 12:00 PM
The U.S. online retail market is big, getting bigger and increasingly dominated by the largest web merchants. But even in an industry where Amazon.com Inc. alone accounted for 20.7%—$34.2 billion—of all U.S. e-commerce sales of $165.4 billion in 2010 and the top 100 retailers, including Amazon, ranked in the Top 500 Guide accounted for 78.2%, or $129.4 billion, there's still of plenty room for highly specialized niche retailers to grow and prosper.
At the top end of the e-commerce market, the biggest companies continue to increase their market share through a mix of organic growth, expanding into new categories and geographies, and by acquisition. In late 2010, Amazon broadened its reach by announcing plans to acquire Quidsi Inc., parent company of Diapers.com, for about $500 million. The deal, which closed in April 2011, added about $300 million in sales on the top line to Amazon and gave the world's biggest retailer a strong base in the fast-growing niche market of e-commerce sites focused on mothers and young families.
But while Amazon and other big e-commerce players grow from the top down, there's a strong group of up-and-coming smaller niche web merchants gaining sales and customers from the ground up. And these smaller entrepreneurial upstarts make up a big part of the 500 online retailers profiled in Internet Retailer's Second 500 Guide, a newly released companion to the Internet Retailer Top 500 Guide. Like the Top 500 Guide, the Second 500 ranks North American retailers by their online sales, and the companies in the Second 500 generated 2010 web sales of up to $13 million. More importantly, they're growing, with their combined web sales increasing 16.5% to $2.47 billion from $2.12 billion in 2009.
In fact, almost all of the companies in the Second 500 are growing. Of the 286 web-only merchants, 90 consumer brand manufacturers, 81 chain retailers and 43 catalog companies ranked in the guide, 93.4%—467—posted an increase in sales in 2010, including 22.3% that met or exceeded the 2010 growth rate of 14.8% for all U.S. e-commerce sales and 20.1% that met or exceeded the collective annual growth rate of 16.5% of the Second 500.
And it wasn't necessarily the biggest retailers in the Second 500 growing the fastest. Retailers ranked 501 to 600 increased their combined sales year over year about 16.2% to $1.04 billion from $893.8 million. But it was retailers numbered 601 to 700 that grew the fastest, increasing their collective web sales 20.9% to $670.6 million in 2010 from $554.5 million in 2009. In comparison retailers ranked 701 to 800 grew year over year almost 13% to $407.2 million from $361.0 million and merchants numbered 801 to 900 increased 13.7% to $241.6 million from $212.5 million. The final segment—Second 500 retailers ranked 901 to 1000—had collective web sales of $112 million in 2010, an increase of 14.6% from $97.8 million in 2009.
Secrets of success
Many smaller Second 500 web merchants are growing because they are niche retailers with a solid business model, uniquely positioned inventories, focused customer service departments, and the smarts to design and maintain e-commerce sites that keep shoppers coming back, says Lauren Freedman, president of The E-tailing Group, a Chicago research firm. "Not every web merchant has to be the biggest retailer on the block to be successful," says Freedman. "What they do have to do, and what many niche operators are exceptionally good at, is present unique merchandise at attractive prices and give shoppers a superior user experience they aren't going to find anywhere else."
The retailers ranked in the Second 500 have found ways to deliver that superior experience in a wide variety of retailing nooks and crannies. The fastest-growing Second 500 retailer is Blank Label (No. 995), a start-up apparel web merchant that grew sales nearly 100 times to $325,000 in 2010 from $4,500 in 2009. Blank Label, whose e-commerce site allows shoppers to design, personalize and purchase dress shirts at prices from about $60 and up, is growing rapidly because the company gives shoppers more web tools to customize a shirt at a moderate price. Blank Label, which has used extensive public relations campaigns and social media to build its brand, also offers shoppers lots of extra perks such as free monogramming and no-charge shipping. "We are out to change the way men shop for design-your-own dress shirts," says Blank Label co-founder Danny Wong. "We are entrepreneurs doing something unique in custom apparel."
While Blank Label registered the fastest growth rate among web-only Second 500 retailers, Lafayette 148 New York (No. 509), a maker of designer women's apparel, was the consumer brand manufacturer with the biggest increase in annual e-commerce sales, growing almost 300% to $12.0 million in 2010 from $3.0 million in 2009. With sales that grew about 86% to $565,000 in 2010 from $304,000 in 2009, Kitchen Stuff Plus Inc. (No. 989) was the fastest-growing store-based retailer, while The Pond Guy (No. 898), a direct marketer of water garden supplies and related merchandise, was the Second 500 catalog company with the biggest jump in annual web sales. E-commerce revenue for The Pond Guy grew around 50% to about $1.8 million in 2010 from about $1.2 million in 2009.
Second 500 retailers on the sales fast track have several characteristics in common, despite the diversity in what they sell, says Jim Okamura, managing director of Chicago retail consulting firm Okamura Consulting. Successful niche web retailers tend to have more specialized and deeper product inventories than many bigger sites and very knowledgeable customer service reps that in many cases are trained to be subject matter and product experts, he says.
Many successful niche web retailers also survived the recent Great Recession by catering to their best and most loyal customers with a good assortment of merchandise priced to move and a full-featured e-commerce site that made it easy to research, compare and purchase products. "If a niche web retailer survived 2008 and 2009 and put up aggressive growth in 2010, they went into the recession with a good business model and came out of it with a clear understanding of what it takes to keep their best customers coming back, even in the most difficult of economic times," says Okamura. "They hung on and emerged ready to grow again."
Some niche retailers put up big numbers in 2010 because, even in a recession, they saw an opportunity to expand. One such e-retailer is Sustainable Supply Co. (No. 974), which launched in early 2009 and recorded only about $10,000 in sales in its first month in business. The company, which sells environmentally sustainable building supplies and green living products for businesses and homes, had a management team with a business-to-business and retailing background selling maintenance, repair and operations—a category often referred to as MRO—products and services to small companies.
While bigger MRO retailers, such as W.W. Grainger Inc., carried some environmentally sustainable products, Sustainable Supply saw a niche to create a business-to-business e-commerce site that carried nothing but "green" maintenance-related products across 13 merchandising categories, including plumbing, break room and cleaning supplies.
Sustainable Supply grew its inventory from fewer than 10,000 items to more than 100,000 products in just about a year. Having a wider selection helped to generate more sales from companies aiming to be environmentally friendly, says Sustainable Supply chief operating officer Brian Fricano.
That shows up in the retailer's growth. In 2010 web sales for Sustainable Supply grew about 774% to $856,000 from $98,000 in 2009. This year Sustainable Supply plans to add more than 100,000 more products, develop relationships with over 100 suppliers and grow e-commerce sales to as much as $2 million.
The retailer also recently launched another B2B e-commerce site that carries protective eyewear and eye wash products with plans in 2011 to develop another web store featuring tools and hardware. "We developed a niche site that's pretty unique because we didn't see anyone else doing this and bigger MRO operators were only stocking a limited inventory," says Fricano. "We are capturing market share because a lot more small businesses want to keep going green."
Retailers ranked in the Second 500 are well represented across diverse categories. The biggest category is apparel and accessories, which includes 100 merchants that collectively grew their annual e-commerce sales 21.4% to $572.1 million from $471.7 million. The smallest category was pet care with eight merchants and category web sales that increased year over year 6.7% to $30.2 million from $28.3 million.
Even in a category like apparel where retail competition is intense, merchants still spotted openings to develop successful niche sites. Jimmy Jazz Inc. has operated a chain of more than 120 urban fashion stores, mostly along the East Coast, since 1989, but saw an opportunity to launch an e-commerce site in late 2009 right before the holidays.
All that Jazz online
In stores the majority of Jimmy Jazz shoppers are men, but the launch of JimmyJazz.com gave the chain retailer a chance to become a national—and international—brand and attract more women shoppers. In its first year in business, JimmyJazz.com has had to expand its web fulfillment space three times from 5,000 to more than 15,000 square feet. Web sales, which totaled about $4 million in 2010, are expected to reach $13 million in 2011 and $25 million in 2012, says senior vice president of e-commerce and direct marketing David Wachter.
"There was an opportunity to bring more urban fashion apparel to the web, and even though we were later to e-commerce than some competitors we also had an opportunity to survey the landscape, talk to customers to see what they wanted and opened a web store that met their expectations," says Wachter. "We expect at least two more years of triple-digit growth and then solid double-digit increases after that."
Retail chains like Jimmy Jazz were the fastest-growing merchants in the Second 500, with sales that increased year over year 19% to $401.4 million from $337.4 million. The next merchant group in terms of annual gain in e-commerce revenue was web-only merchants, up nearly 18% to $1.40 billion in 2010 from $1.19 billion in 2009.
Across all merchant and merchandise categories, niche web retailers still have plenty of room to grow—if they continue to listen to their customers and pay attention to managing expenses and maximizing profitability, says Okamura.
"The big guys always have to worry about being all things to all people and that can be a big advantage for a niche retailer," says Okamura. "When the big players tell customers 'I can't' or 'I won't,' that's an opportunity for the small web merchant to step in and say 'I do.'"