What the 2011 Top 500 reveals
May 31, 2011 04:59 PM
The big get bigger
The largest web merchants get the biggest bounce as Top 500 retailers rebound from the Great Recession
A healing economy and a slowly improving jobs market gave consumers confidence to spend more in 2010. And when consumers were in the mood to shop, they spent more of their time and money online.
In 2009, a deep recession and a drop in consumer spending caused the U.S. business-to-consumer e-commerce market to grow by just 2% while total retail sales fell by 8%. But in 2010 the North American online retail market didn't just snap back—it grew with gusto.
Sales of the Top 500 retailers grew 18% to $150.0 billion in 2010 from $127.1 billion in 2009 while total U.S. e-commerce sales increased year over year 14.8% to $165.4 billion from $144.1 billion, according to the Department of Commerce. In Canada, based on an Internet Retailer analysis of e-commerce data from Forrester Research and Statistics Canada, the government agency equivalent of the U.S. Census Bureau, online retailing sales grew by 8.1% to an estimated $8.0 billion last year from $7.4 billion in the prior year.
In 2010, total U.S. retail sales grew 7.2% to $3.89 trillion from $3.63 trillion in 2009. But the online channel remains the fastest-growing segment in the retailing industry. "An improved economy certainly helped, but what fueled excellent growth online last year is the fact that shoppers are getting even more hooked on the convenience of researching and then buying products over the web," says Lauren Freedman, president of The E-tailing Group, a Chicago research firm. "Today shoppers can use their computer or smartphone to shop where and when they want."
This year's Top 500 Guide reveals several trends that emphasize consumers' continuing shift to online buying and the gains of large retailers:
- Top 500 retailers grew their collective sales in the U.S. to $127.1 billion in 2010 from $105.8 billion in 2009, an increase of 20.1%. Last year, Top 500 retailers and their U.S. sales accounted for 76.8% of all domestic e-commerce sales compared with 73.4% in 2009.
- In 2010, 178—35.6%—Top 500 merchants met or exceeded the annual e-commerce growth rate of 14.8%. Of those, 146 merchants—29.2%—met or exceeded the annual growth rate of 18%.
- The largest e-retailers grew the fastest last year. The Top 100 grew 18.8% to $129.4 billion in 2010 from $108.9 billion in 2009. In comparison, web merchants ranked from 101 to 200 grew year over year 14.1% to $11.39 billion from $9.98 billion, while retailers ranked 201 to 300 increased their collective sales 11.1% to just over $5 billion from $4.5 billion and retailers numbered 301 to 400 grew year over year 11.3% to $2.65 billion from $2.38 billion. The merchants ranked 401 to 500 grew their combined sales 11.6% to $1.54 billion in 2010 from $1.38 billion in 2009.
- The Top 500 retailers completed an estimated 748.2 million sales transactions in 2010—up 16.5% from an estimated 642 million in '09.
- Total traffic to the Top 500 retailers' web sites increased year over year 9.3% to 2.82 billion visits from 2.58 billion.
- U.S. web sales now account for 7.9% of retail sales in categories of products that consumers often buy online, up from 7.2% a year earlier. That Internet Retailer calculation excluded from total retail purchases at restaurants and gasoline stations, and sales of heating fuel and groceries.
In 2010, all major merchant categories, including web-only merchants, chain retailers, consumer brand manufacturers and catalog/call center companies, increased sales, but it was the web-only merchants that grew the fastest. Driven by Amazon.com (No. 1), the combined sales of all Top 500 web-only merchants grew 30.6% to about $56.89 billion last year from $43.55 billion in 2009. In comparison, sales for chain retailers increased to $55.32 billion, an increase of 11.3% from sales of $49.68 billion in 2009 and consumer brand manufacturers grew web sales year over year 12.5% to $17.41 billion from $15.48 billion. The group with the slowest growth rate—Top 500 catalog/call center companies—grew 10.8% to $20.43 billion in 2010 from $18.44 billion in 2009.
Amazon.com continues to dominate the Top 500 as well as the U.S. business-to-consumer e-commerce market. Overall Amazon grew sales to $34.20 billion in 2010, a 39.5% increase from $24.51 billion last year. Amazon's North American sales, which totaled $18.7 billion, up 46.1% from $12.8 billion in 2009, also were big enough to account for 12.5% of all North American Top 500 sales and 11.3% of all U.S. e-commerce sales. In comparison, the 2010 web sales for Staples Inc. (No. 2) of $10.2 billion accounted for 6.8% and 6.2%, respectively, of all Top 500 and U.S. e-commerce sales.
"It's not quite a market of Amazon and then everyone else but it can sure feel that way if you look at the annual numbers they keep putting up and you are a retailer always chasing the market leader," says Scot Wingo, CEO of ChannelAdvisor Corp., which helps retailers sell through online marketplaces such as Amazon and eBay, and a longtime Amazon observer. "As a company, Amazon just got fanatical early on about low prices, cutting-edge technology and great customer service and that's been their competitive advantage ever since."
Amazon.com was the market leader everyone else chased in 2010. But other merchant group leaders also grew by innovative niche retailing, expanding inventory and rolling out better technology. With web sales that increased 1,150% to $77 million in 2010 from $6.2 million in the prior year, Beyond the Rack (No. 191) was the fastest-growing merchant among all Top 500 retailers and among web-only merchants. Beyond the Rack launched one of the first private-sale sites in Canada and has attracted more than 2.5 million customers since its debut in early 2009.
The fastest-growing merchants among consumer brand manufacturers and catalogers developed a better user experience and added more merchandise and customer service tools to build up their sales. Outdoor apparel manufacturer Columbia Sportswear Co. (No. 314) grew e-commerce revenue year over year 117.2% to $31.5 million from $14.5 million by launching a web store in early 2009 that appealed to shoppers with advanced features such as product zoom and videos, guided navigation, and product ratings and reviews. Among catalog/call center companies, the fastest-growing direct marketer, Allied Electronics (No. 131), beefed up its e-commerce site with more products and now has an online inventory of about 120,000. A deeper inventory and better search marketing are main reasons web sales grew 92.6% to $135 million in 2010 from $70.1 million in 2009, Allied says.
LuluLemon Athletica Inc. grew the fastest among chain retailers, increasing sales 213.1% to $57.3 million in 2010.
The Internet retailing market grew in 2010 because North America's biggest web merchants keep doing a better job of making it easier for shoppers to begin—and end—their transactions online, says Freedman of The E-tailing Group. "Between the convenience of shopping the web, the enhanced ability for consumers to price shop online and then use new technology like mobile commerce to buy what they want and when they want, e-commerce is the channel that in retailing will continue to flourish," she says.
Stick with a niche
Diversity and risk-taking fuel growth for the Top 500 web-only merchants
The Top 500 web-only merchant segment remains dominated by a single company: Amazon.com Inc. But even without Amazon (No. 1), a number of other web-only merchants also managed to grow faster than the U.S. e-commerce market and the Top 500 as a whole.
Instead of trying to outwrestle Amazon.com, which grew its total sales 39.5% to $34.2 billion in 2010 from $24.5 billion in 2009, other web-only retailers found success by concentrating on their niches, making acquisitions or diversifying. Overall, with Amazon included, Top 500 web-only merchants grew 30.6% to about $56.89 billion last year from $43.55 billion in 2009. But even without Amazon, sales for the remaining web-only merchants grew year over year 19.5% to $22.7 billion from $19.0 billion. A total of 68 retailers among 205 Top 500 web-only merchants also met or exceeded the growth rate of 18% for all Top 500 retailers, and 85 grew as fast or faster than the increase in U.S. e-commerce sales of 14.8%.
"If they got through the recession and put up good growth last year, web-only merchants did so by running a very smart and focused operation," says Bernardine Wu, CEO of e-commerce consulting firm FitForCommerce. "They picked the best opportunity to expand and then made the most of it."
Beyond the Rack (No. 191) was the fastest-growing Top 500 web-only merchant. Rather than try to muscle its way into the crowded U.S. e-commerce market, which already included such private-event sale sites as Gilt Groupe (No. 49), HauteLook (No. 156) and RueLaLa.com (No. 82), Beyond the Rack launched one of the first private-sale sites in Canada. In just over two years Beyond the Rack has grown to more than 2.5 million member and sales in 2010 grew 1,150% to C$73.8 million (US$76.9 million) from C$5.9 million (US$6.2 million) in 2009.
Since launching in early 2009, Beyond the Rack has redesigned its web site and added new features such as event category tabs, drop-down menus, and category-specific calendar pages to help customers quickly find what they're looking for. Beyond the Rack also upped the number of daily sales events from 12 to 18 and added more detailed content such as a more robust blog with exclusive fashion tips and trends from a style editor. "As our growth continues to accelerate, we are providing our customers with the most pleasurable shopping experience we can give them," says CEO Yona Shtern. "Many of the improvements came directly from customer feedback."
Beyond the Rack, which has raised more than $12 million in funding from investment bankers such as Highland Capital Partners LLC and BDC Venture Capital Inc., is concentrating on Canadian web shoppers, but providing a wider selection of merchandise than many U.S. flash-sale sites. Rather than limit itself to just a few categories such as apparel and accessories, Beyond the Rack offers a diverse selection of merchandise that includes men's and women's apparel and accessories, children's clothing and toys, beauty, housewares, and home dŽcor, says Shtern. "We attribute our growth to the confidence and satisfaction of our members," says Shtern.
As a young start-up, Beyond The Rack's success is based on organic growth. But other web-only retailers grew their share in a specific niche by acquisition. A prime example is the automotive and accessories segment, which was the fastest-growing merchandising category in the 2011 Top 500 Guide with sales that increased year over year 44.6% to $682.4 million from $472.0 million. By virtue of a substantial acquisition, one web-only merchant—U.S. Auto Parts Network (No. 59)—now accounts for about 48.9% of sales in the category.
In 2010, U.S. Auto Parts Network grew sales 89.2% to $333.5 million from $176.3 million, in part by acquiring Whitney Automotive in a deal valued at $38 million in August 2010. Whitney, which owned JCWhitney.com, StylinTrucks.com, CarParts.com and AllBikeSuperShop.com, added about $71.2 million in 2010 revenue. But even without the incremental Whitney revenue, U.S. Auto Parts Network still managed to grow sales 48.8% to $262.3 million in 2010 from $176.3 million in 2009.
U.S. Auto Parts purchased Whitney to gain a bigger toehold in the do-it-yourself vehicle repair market. By acquiring Whitney, U.S. Auto Parts added more than 6 million automotive parts and accessories to its online inventory, and an Illinois distribution center. "The acquisition allows U.S. Auto Parts to complete a three-distribution center network, and increase our distribution footprint to allow for 95% of customers in the U.S. to receive parts within two days of purchase," says CEO Shane Evangelist. "The combination of Whitney's established brands and focus on the customer experience, coupled with U.S. Auto Parts' capacity to compete online, creates a huge opportunity for growth."
Creating an opportunity for growth can also mean knowing when the time is right to expand—even if the rest of the market isn't. In late 2008, at the height of the financial crisis, Power Equipment Direct (No. 250), operator of nine niche sites selling snow blowers, lawn mowers, sump pumps and tillers, made the decision to launch five additional sites. "We saw the recession coming, saw other people pulling back and decided to plant an entire orchard and not just one seed," says Power Equipment Direct CEO Jon Hoch. "We knew then we were going to spend a lot of time nurturing those sites into successful web stores."
In 2010, the expansion—and nurturing—paid off. Sales for Power Equipment Direct increased 71.4% last year to $49.7 million from $29 million. With five new web sites selling specialized motorized equipment, Power Equipment Direct is now developing faster and more sophisticated ways to shop. The retailer also is working to improve customer service with dedicated equipment specialists for each site.
It's also upgraded site design. Better navigation on niche sites such as MowersDirect.com now help shoppers find lawn mowers and tillers by style, grade, width and brand. Product pages also feature the photos of dedicated sales agents that customers can call or e-mail to discuss specific brands and manufacturer specifications.
"Other sites may kill the customer with kindness, but we are out to overwhelm them with expertise," says Hoch. "A big-box retail site may feature an image, a few brands and only a couple of product specifications, but our niche is power equipment. Three years ago we launched more niche sites to eventually grow the business. Now we are sustaining that growth with our product knowledge and customer service expertise."
As a group, web-only retailers remain the fastest-growing merchant type among all Top 500 merchants because they are running leaner operations following the recession and aren't afraid to take advantage of new opportunity, says Ken Burke, founder and chairman of e-commerce service provider MarketLive Inc. "The web-only merchant category is where you find more entrepreneurs and risk-takers," says Burke. "Many web-only retailers took advantage of new business development opportunities during the recession or jumped on mobile commerce and social media when they showed signs of accelerating."
Looking after the (web) store
Top 500 chain retailers concentrate more resources on e-commerce, their fastest-growing channel
After a dismal 2009 at bricks-and-mortar stores, many retail chains reported improved comparable-store sales in 2010. But web sales grew much faster for many of the biggest chains and now account for a significantly larger part of their total sales.
Consider these facts:
- Total web sales for all Top 500 chain retailers grew to $55.32 billion in 2010, an increase of 11.3% from sales of $49.68 billion in 2009.
- At 42 of 65, or 64.6%, of leading department store, specialty apparel, general merchandise and other chain retailers, the growth online in 2010 exceeded the increase in annual comparable-store sales. That compares with 37 (57%) of 65 Top 500 retail chains in 2009.
- The web accounted for more than 30% of all sales at four big chains—Staples Inc. (No. 2), Office Depot Inc. (No. 5), Williams-Sonoma Inc. (No. 25) and dELiA*s Inc. (No. 175). Six other chains—including Saks Fifth Avenue (No. 38), Urban Outfitters Inc. (No. 48), American Eagle Outfitters Inc. (No. 57), Recreational Equipment Inc. (No. 62), Coldwater Creek Inc. (No. 93) and The Talbots Inc. (No. 112)—reported that e-commerce generated more than 10% of all sales last year.
- E-commerce paid big dividends for Toys 'R' Us Inc. (No. 29) in 2010. Web sales increased 29.9% to $782 million last year from $602 million in 2009 while total sales grew only 2.2% year over year to $13.86 billion. Internet Retailer calculates the web accounted for 5.6% of total sales in 2010, and generated 60% of growth across all channels.
E-commerce continues to outperform same-store sales at many chains because shoppers increasingly are researching products online, and then in many cases taking advantage of the speed and convenience of online retailing to complete a transaction, says Jim Okamura, managing director of Chicago retailing consulting firm Okamura Consulting.
"The chains are getting better at enhancing the user experience on their e-commerce sites and that's accounting for more sales shifting from the stores to the web," says Okamura. "Consumers know they can research product availability and price online and then go to the store, but once they are on a chain retailer's site they're choosing to complete their purchase online."
It's no longer news that the web is the fastest-growing channel for retail chains, but the online growth for some chains is striking.
Following are examples of the five fastest-growing Top 500 chains online:
- LuLuLemon Athletica Inc. (No. 229). Web sales increased 213% to $57.3 million in 2010 from $18.3 million in 2009. Total sales increased year over year 57% to $711.7 million from $452.9 million while comparable-stores sales increased by 30%.
- The Men's Wearhouse Inc. (No. 363). E-commerce revenue increased 155% to $25.5 million last year from $10 million in the prior year. Total sales increased year over year 10.5% to $2.10 billion in 2010 from $1.90 billion in 2009 while comparable-store sales increased by 4.7%.
- Belk Inc. (No. 296). Web sales increased 70% to $34.8 million in 2010 from $20.5 million in 2009. Total sales increased about 5.1% to $3.51 billion from $3.34 billion in 2009. Comparable-store sales increased 5.1%.
- Ann Inc. (No. 95 and formerly Ann Taylor Stores Corp.). E-commerce sales increased 55.8% to $189.5 million in 2010 from $121.6 million in 2009 while total sales rose year over year 8.8% to $1.98 billion from $1.82 billion. Comparable-store sales increased 18.7%.
- Express Inc. (No. 124). Web sales rose 55.3% in 2010 to $147.5 million from $95.0 million in 2009 and total sales increased year over year 11.8% to $1.90 billion from $1.70 billion. Comparable-store sales increased 7%.
"There's a return on investment mandate for spending more on the web channel at many of the big chains," says Okamura. "More chains see their growth coming online, and that's where they are committing more resources."
For consumer electronics chain Best Buy Co. Inc., the growing investment in e-commerce will be accompanied by some paring back of its bricks-and-mortar stores. Over the next four years Best Buy expects to shrink the square footage at some stores, although it hasn't disclosed details. At the same time Best Buy (No. 11), which posted web sales in fiscal 2011 of $2.5 billion, up by 14% from $2.2 billion in fiscal 2010, expects to reach $4 billion in annual e-commerce revenue by as early as 2014.
To reach that goal, which would require annual online growth of nearly 17%, Best Buy over time will expand its online merchandise selection and add new services and digital content, the retailer says. "We plan to expand on our e-commerce success," Best Buy executive vice president Shari Ballard recently told Wall Street analysts at the company's annual investors' day meeting. "Already 60% of Best Buy store purchases are researched online and 40% of online purchases are picked up in stores."
Kohl's Corp. (No. 31) is another chain that's investing heavily in its e-commerce future. The web is also the fastest-growing channel for Kohl's—e-commerce sales grew 51.3% to $743.4 million in 2010 from $491.5 million in 2009. In comparison, total sales increased 7% last year to $18.4 billion from $17.2 billion in 2009 while comparable-store sales increased 4.4%.
Kohl's is investing $100 million to open its third Internet order processing and fulfillment hub this July in Edgewood, Md. With a new East Coast e-commerce pick, pack and ship facility to complement its Internet distribution operations near San Bernardino, Calif., and Monroe, Ohio, Kohl's now has the infrastructure in place to support a fast-growing web channel that the retailer predicts will generate at least $1 billion in sales this year. "I would expect us to achieve $1 billion in e-commerce sales in 2011," CEO Kevin Mansell told analysts on the retailer's recent year-end earnings call. "In order to achieve that goal, we will continue to invest in the business."
While big-box chains like Kohl's and Best Buy recorded strong online gains in 2010, some of the best e-commerce results among Top 500 chain retailers last year came from specialty apparel retailers, especially those that catered to more fashion-conscious and web-savvy younger shoppers. Web sales for Abercrombie & Fitch Co. (No. 56) grew year over year 41.3% to $352.5 million from $249.4 million, while Internet revenue for Chico's FAS Inc. (No. 129) rose 39.8% in 2010 to $137.4 million from $98.3 million in 2009.
In the early days of e-commerce many chain retailers took a wait-and-see attitude toward e-commerce and used the web mainly as a marketing and merchandising tool to support store operations. But as consumers step up their product research and buying online, more chain retailers are pouring money into e-commerce. Belk, for one, is investing $150 million in new e-commerce applications and information technology in order to grow its web channel and use the Internet to drive more revenue across the Internet and stores. In 2011, Belk will upgrade its network of 305 stores in 16 southern states with web-enabled cash registers that will allow sales associates to check inventory across all channels and to complete an order online if a particular piece of merchandise isn't available at the store. "We can invest in the web to make the shopping experience seamless across both of our channels," says Belk senior vice president of e-commerce Ivy Chin.
More chain retailers are investing in mobile commerce and other emerging Internet-based technologies to keep up with competitors, says Paula Rosenblum, managing partner of research and advisory firm RSR Research LLC. But in the future retail chain CEOs will need to think seriously about adding more resources, including possibly cutting back store operations, to grow the web side of the business even faster, says Rosenblum. "People just aren't going to the store as much because the shopping experience is just so much easier and convenient online," she says. "A lot of chains don't need to worry about what's going to happen with their web site going forward because that is going to grow. Their biggest concern will be what to do with a lot of unnecessary store space."
Top 500 catalogers lay aside paper and ink to concentrate more fully on e-commerce
Times have been tough for many of the Top 500 catalog and call center companies. Times also haven't been easy for other Top 500 merchants with large catalog operations as they hasten the transition from a focus on print catalogs to the web. A case in point is J.C. Penney Co. (No. 20). In the mid-1990s, J.C. Penney was able to leverage its big catalog operation to emerge as a substantial web merchant and was the first department store chain retailer to achieve $1 billion in annual web sales in 2007. But times change and now Penney is done using its traditional catalog business to grow e-commerce.
Penney is ceasing to publish its well-known Big Book and 25 other specialty catalogs. The retailer, which grew web sales only 2% to $1.53 billion in 2010 from $1.50 billion in 2009, also is swapping out the older catalog computer systems it used to build its first e-commerce platform. Penney instead will publish more direct marketing pieces such as its 43-page "Little Red Book" and "Matter of Style" publications that showcase current merchandise such as men's and women's fashions available in the chain's 1,107 department stores in the U.S. and Puerto Rico and online at JCP.com.
Penney, under the watch of group executive vice president Tom Nealon, also is implementing a new e-commerce platform from ATG Oracle that will provide the technology it needs to launch more sophisticated online marketing and merchandising programs, including mobile commerce and social marketing. "We knew we had to transition out of the catalog business to much more of a digital format," CEO Myron Ullman told attendees at the Goldman Sachs Retail Conference in New York in September 2010. "We are transitioning from the catalog as essentially a static vehicle to really what we call 'find more,' which is print material that takes the consumer to the Internet or to the store."
J.C. Penney isn't alone as a catalog operation looking to morph more quickly into online retailing. For some catalogers, making that transition, and cutting the heavy costs of print operations, is literally a matter of life or death. In late 2010 and early 2011, some of the biggest names in traditional direct marketing and cataloging were filing and then reorganizing under Chapter 11 bankruptcy protection. In February, nearly a year after filing for Chapter 11 protection, Oriental Trading Co. (No. 64) emerged from bankruptcy. Other Top 500 catalog companies also filing for bankruptcy and reorganizing include Orchard Brands Corp. (No. 79) and Harry and David Holdings Inc. (No. 103).
"A lot of traditional catalogers are struggling with growing the web side of their business and making a bigger transformation into e-commerce because they still need to support the print side of their operation where the costs of publishing and mailing continue to increase," says Ronald Ramseyer, managing partner, Ramseyer & Associates, a Doxbury, Mass., retail consulting firm, and a former senior direct marketing executive with Casual Male Retail Group (No. 330), Bass Pro Shops (No. 86) and The Talbot's Inc. (No. 112). "For some traditional catalogers generating more business online isn't just a necessity, it's all about survival."
In 2010, the collective web sales of all catalog/call center companies ranked in the new Top 500 increased year over year 10.8% to $20.43 billion from $18.44 billion—the slowest growth rate among the four types of online merchants: catalogers, consumer goods manufacturers, retail chains and web-only merchants.
The catalogers growing the fastest and making the most rapid transformation from traditional direct marketing to online retailing are reaching out to new types of customers and doing more segmented marketing. PC Connection Inc., for instance, is streamlining its business model and rethinking parts of its e-commerce strategy to keep pace with a rapidly changing information technology market, chief financial officer Jack Ferguson recently told Wall Street analysts.
Ferguson described how PC Connection (No. 37) has been organized into five major units, with each unit serving a distinct customer segment. One unit, PC Connection, now focuses on small- to medium-sized businesses, while another unit—GovConnection—serves local, state and federal government agencies in addition to schools, colleges and universities. MoreDirect now services medium-sized to large corporate customers and Merrimack Services Corp. targets the health care and professional services market. "We're building a multiple brand strategy that leads with solutions selling," Ferguson told analysts.
But the segment undergoing the most change is PC Connection's business-to-consumer e-commerce unit. In 2010, PC Connection launched PC Connection Express, which focuses on consumers, home office workers and small businesses with fewer than 20 employees. In mid-January, PC Connection also launched PCConnectionExpress.com as a separate web site with nearly two dozen merchandising categories. The new business-to-consumer site features live chat, daily "hot" deals and free shipping on orders over $99, with some restrictions.
To support its new consumer web site and other business-to-business web sites, PC Connection is spending more than $6 million on search engine marketing and other forms of digital promotion, the company says. The reorganization—and the ongoing transformation into a more diverse web retailing operation—helped PC Connection grow e-commerce sales 29.3% to $605.9 million in 2010 from $468.6 million in 2009. "We are building a compelling online experience with an analytics and a customer-driven model," Ferguson told analysts.
To survive and then prosper in e-commerce, more catalogers, especially smaller, more traditional direct marketing companies with annual sales of less than $15 million, need to control their print and mail costs, invest more time and money online and develop Internet marketing strategies that will attract more web shoppers, says Jim Padgitt, managing director of catalog and e-commerce consulting firm Direct Marketing Insights Inc. "When it comes to e-commerce, more catalogers need to do a better job of building an effective site that will attract and retain more shoppers," says Padgitt. "They need to control costs and put the savings into the web in a way that's going to do more than just maintain their business."
In 2010, Potpourri Group Inc. (No. 141), which operates multiple niche catalog and e-commerce brands such as TheStitchery.com, Expressions.com and NorthStyle.com, turned to new technology to boost sales by recommending more relevant products to visitors. After installing a product recommendation engine from iGoDigital, Potpourri was able to recommend more relevant products to shoppers based on their previous buying history. The iGoDigital engine also uses other collective demographic and merchandising information stored in Potpourri's customer service database to make better recommendations of related items for products already in a customer's shopping cart, says the retailer's director of e-commerce Bob Morrison.
The improved technology helped Potpourri increase web sales 27.3% to $118 million in 2010 from $92.7 million in 2009 and improved sales conversion rates in some instances by double digits. "We used to spend a lot of time and energy manually merchandising products on all 13 of our web sites, especially as new items became available," says Morrison. "A personalized recommendations platform enabled us to streamline this process across multiple sites and channels and improve the shopping experience by helping customers quickly discover the most relevant products."
Identifying and then retaining more new web customers will become an even greater priority for catalogers as they look to make a faster transition from conventional direct marketing to more emphasis on e-commerce, says Padgitt. "One advantage smaller niche retailers have is the unique products that a bigger retailer doesn't carry, such as a ham that's just injected with smoke flavor at the grocery store versus placing an order with a second-generation family catalog operation that only sells hams that have been cured in a smokehouse," he says. "But the small catalogers have to make sure any new and repeat customers can keep on finding them online, and that won't happen unless they develop a first-class e-commerce site."
Manufacturing more web sales
Top 500 brand manufacturers have yet to reach their full e-commerce potential
Their deep product expertise puts consumer brand manufacturers in a strong position to become major online retailers. But as a group, consumer brand manufacturers lag behind other web merchants and aren't living up to their full e-commerce potential, say retail industry experts.
In 2010, consumer brand manufacturers ranked in the Internet Retailer 2011 Top 500 Guide put up solid—but not spectacular—results. The combined web sales of all Top 500 consumer brand manufacturers grew year over year 12.5% to $17.41 billion from $15.48 billion. In comparison, the fastest-growing group—web-only merchants—increased their collective e-commerce sales 30.8% to about $56.9 billion last year from $43.5 billion in 2009.
In fact, consumer brand manufacturers failed to keep pace with the growth of the Top 500 last year, and accounted for only 11.7% of all Top 500 sales of $150.0 billion in 2010, down from 12.2% of 2009 Top 500 sales of $127.1 million. "E-commerce rebounded nicely in 2010, but there are still a lot of consumer brand manufacturers sitting on the sidelines still not in the game and others that could be doing a lot more online," says Kasey Lobaugh, retail analyst and principal with Deloitte Consulting LLP. "Lots of manufacturers aren't doing anywhere near all they can to make e-commerce a significant revenue generator."
Even as more consumers research and buy online each year, many consumer brand manufacturers don't sell on their corporate web sites for fear of alienating their network of retailers and distributors that account for most of their sales. Some manufacturers still don't see online retailing as a top priority, says Lobaugh. "If you look at this group from an e-commerce capability standpoint, they are lagging," he says. "Growing a serious web retail operation takes a commitment from top management, but for many manufacturing company CEOs, e-commerce isn't their highest strategic priority."
At the same time, there are examples of consumer brand manufacturers that are putting their web stores on a fast track and using their e-commerce operations to create a strategic advantage. A case in point is Ralph Lauren Media LLC (No. 70), the e-commerce arm of apparel maker Polo Ralph Lauren Corp., which grew web sales 50% to $300 million in 2010 from $200 million in 2009.
Ralph Lauren credits a more diversified e-commerce operation as the key reason for its growth. In 2010, Ralph Lauren opened its first European web store in the United Kingdom, and projects e-commerce expansion in Asia in 2011. "While our European e-commerce initiative will be managed in-market, we are leveraging our RalphLauren.com team in the United States, and our existing technology and distribution partners, to help ensure a successful launch," chief operating officer Roger Farah told analysts on a recent earnings call. "We are excited about the long-term sales and profit potential of international e-commerce."
Among the current Top 500 Guide's 50 fastest-growing web retailers, six companies were consumer brand manufacturers with existing e-commerce operations: Fossil Inc. (No. 196), Ralph Lauren, Under Armour Inc. (No. 190), Tempur-Pedic International Inc. (No. 203), Burberry Ltd. (No. 400) and Jones Retail Corp. (No. 204). With web sales that grew 117.2% to $31.5 million in 2010, Columbia Sportswear Co. (No. 314) was the fastest-growing Top 500 brand manufacturer, followed by Fossil, which grew e-commerce revenue year over year by 50.2% to $75.5 million from $50.3 million. With 2010 web sales of $5.2 billion, Apple Inc. (No. 3) was the biggest manufacturer ranked in the current Top 500 Guide, followed by Dell Inc. (No. 4) with 2010 web sales of $4.8 billion and SonyStyle.com (No. 14), the e-commerce arm of Sony Corp., with 2010 e-commerce revenue of $1.96 billion.
Consumer brand manufacturers have certain advantages over other types of online retailers. In addition to controlling the inventory and most product information, many manufacturers can also sell online with a well-known brand consumers recognize. They can also choose to be one of the few sales channels for a hot product as Apple did recently when it used its 236 Apple stores in the U.S. and the Apple Online Store as a venue to purchase an iPad 2. Apple also sold through its iTunes store almost $5 billion worth of downloaded entertainment content and related products and services in the 2010 fiscal year ended Sept. 25, 2010.
But Apple is a rare example of a consumer brand manufacturer using its own brand exclusivity—and the web—to sell a hot product directly to the public. "What Apple did by making its stores and web store a place to buy an iPad 2 right from the start should raise a lot of eyebrows because it was a key example of how a consumer brand manufacturer can use the Internet to create a strategic advantage over other online retailers," says Mark McGuire, president of Alice.com (No. 467), an e-marketplace for household goods with products from 350 manufacturers, featuring everyday items such as trash bags, detergent and shampoos. "Apple's move will be a wake-up call to other manufacturers who should be asking: 'If they can offer exclusive product deals online, why can't we?'"
While many consumer brand manufacturers have snoozed historically compared with Top 500 web-only merchants, catalogers and retail chains in the race for e-commerce sales, there are trends forcing manufacturers to pay more attention to the web.
One was the decision by Procter & Gamble to start selling online, launching its PGeStore.com in May 2010 with the help of e-commerce services provider PFSweb Inc. P&G is one of the world's biggest consumer product manufacturers with annual sales of $79 billion and about 100 well-known household brands such as Tide detergent and Gillette razor blades. PGeStore.com carries over 50 P&G brands. "Procter & Gamble taking the web seriously enough to open an online store will be looked back upon as a watershed event that got other consumer brand manufacturers more interested in e-commerce," says McGuire.
Another trend forcing manufacturers to consider selling online is the consolidation in retailing. In some segments one or two large chains, such as Wal-Mart Stores Inc. (No. 6) in mass merchandise and Best Buy Co. Inc. (No. 11) in consumer electronics, can increasingly dictate terms, including pricing and inventory levels, to manufacturers, says Lobaugh. Meanwhile, the fact that more retailers such as J.C. Penney Co. (No. 20) are expanding their private-label brands represents a threat to brand-name consumer goods manufacturers. "There is going to be significantly more pressure on consumer brand manufacturers because many of their markets and distribution channels are undergoing radical change," says Lobaugh. "One area where they do have a chance to grow, protect their brand and deal directly with consumers is online."
One consumer brand manufacturer that set up shop on the web in 2010 was Carter's Inc. (No. 459), a manufacturer of children's apparel brands, including Carter's and OshKosh B'gosh. After deciding that the web was a good way to reach new and repeat shoppers, Carter's, which also operates a network of 400 stores, launched Carters.com and OshkoshBgosh.com on an e-commerce platform from Demandware Inc. with additional e-commerce processing and fulfillment services from PFSweb in April 2010.
In its first year of e-commerce, web sales for Carter's exceeded $14 million. The new web channel also helps Carter's to attract a new and more diverse customer base. "This past year, over 230,000 people have purchased from us online, 60% of whom had not previously shopped with us in our retail stores," Carter's says in its recently released annual report. "Those who shop both online and in our stores are among our best customers, spending 2.8 times more per year than store-only or online-only customers. The new sites have quickly become important sales channels and marketing tools for our brands."