Is Ecommerce losing its immunity to economy woes?

November 28, 2008

Eric Auchard is a Reuters columnists. The opinions expressed in this column are his own.

For years, Web retailers have touted their convenience and efficency over conventional retailers, and enjoyed surging double-digit sales growth, especially in the crucial year-end holiday shopping season.    But the steady draining of consumer confidence reflected in recent government data and the latest market research reports suggest the online retail industry is bracing for a humbling first-ever year of flat or even contracting holiday sales.

Ecommerce, for reasons tied to both the global economic crash and Web-specific factors, is poised to fall harder than the much maligned retail store industry, itself struggling with recent high-profile bankruptcies and widespread signs that consumers are looking to sharply curtail their spending.

“Retail spending has not really dropped,” says Gian Fulgoni, chairman of consumer audience measurement firm comScore Inc. “It’s ecommerce growth rates that have fallen off a cliff.”

This week, comScore once again cut its forecast for U.S. holiday shopping, reporting that sales in the first 23 days of November had fallen to $8.2 billion, down 4 percent from a year earlier.

Forecasts for online holiday shopping issued in October or early November took the “glass half full” view of the coming shopping season — predicting low double-digit growth. That would be below prior years, but healthy versus overall retail.

The declining outlook comes after third-quarter U.S. Department of Commerce data showed dismal October growth online. Forecasters who had clung to the notion that online retailers would prove an exception, have changed their tune recently.

Nonetheless, the consumer tracking firm predicted online holiday sales for November and December could end flat at around $29.2 billion, in terms of year-over-year growth, but only if there is no further decline in the economy in coming weeks.  Until recently, comScore had forecast 6 percent growth in U.S. holiday sales, Fulgoni said. Similarly this week, eMarketer cut its 2008 ecommerce forecast to 4 percent from 10.1 percent.

Flat growth this season would compare with a 19 percent rise in 2007 sales, 24 percent in 2006 and 26 percent in 2005.  Overall, the National Retail Federation forecasts total U.S. holiday sales to grow a tepid, but positive, 2.2 percent to $470 billion. The includes both classic stores and Web storefronts.  In statistical terms, online retailers just had farther to fall than their distressed store-based rivals.

Similarly, in Britain, the exception that once applied to ecommerce is losing steam fast. Visits to UK shopping sites this month have declined by 14 percent as of Nov. 24, according to data from online market research firm Hitwise. Declining traffic has come despite heavy Web discounting activity at big retailers such as HMV, Waterstones and Tesco.

The gloomy forecasts come out just ahead of Cyber Monday, next week’s symbolic start to the U.S. online holiday shopping season.  Retail industry promoters of the Cyber Monday concept will tell you this coming Monday is a crucial test of the American consumer’s waning appetite to spend at the holidays. Don’t believe it.

If anything, Cyber Monday is one of the worst days from which to extrapolate year-end holiday sales trends. Rather it’s a day of special, one-off promotional discounts designed to remind consumers they can shop online instead of in stores. A survey by Shopzilla found 84 percent of retailers will have some sort of Cyber Monday promotion this year, up from 72 percent a year ago, with the biggest come-on in the form of discounts.

Despite the media hype that surrounds the occasion, Cyber Monday ranked just ninth among heaviest shopping days in 2007 and is not expected to behave much differently this time around.
ComScore says online shopping has a few remaining bright spots, in categories like video games, sports and fitness products and furniture and appliances.

But apparel is off and “consumer electronics seems to have lost its luster,” Fulgoni said of falling demand for products like big-screen TVs among online buyers.
“When all is said and done, ecommerce is where disposable income is spent,” says Fulgoni, comScore’s co-founder. “Everything has absolutely fallen apart in October and November.”

Some facets of the online industry may be better positioned than others, but none are immune: Not pure ecommerce players such as Amazon.com or eBay Inc, not gift card purveyors, nor multichannel marketers that operate both stores and a Web site.

Major ecommerce companies derive a disproportionate share of their revenue from fourth-quarter sales. Susquehanna Financial analyst Marianne Wolk estimates companies such as Amazon.com Inc <AMZN.O> or Overstock.com Inc <OSTK.O> derive just over one-third of their sales in the final quarter of the year.
GSI Commerce <GSIC.O>, which delivers ecommerce services to retailers who lack their own Web presence, generates nearly 40 percent of its annual revenue and a whopping 83 percent of its annual cash flow in the current quarter, Wolk estimates.

Stifel Nicolaus analyst Scott Devitt says falling sales forecasts have put in peril expectations for many online retailers, who despite their advantages over offline retailers, can’t alter the fact that consumers are using this holiday season to contemplate all the ways they can pare back spending.
–  At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.

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