Ecommerce loses immunity to economy woes

November 27, 2008

— Eric Auchard is a Reuters columnist. The opinions expressed are his own –

For years, Web retailers have touted their convenience and efficiency 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.
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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.

CYBER MONDAY: MISLEADING DATA

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 or Overstock.com Inc derive just over one-third of their sales in the final quarter of the year.

GSI Commerce, 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.–

5 comments

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It would be nice if consumers would do more to support local retailers who live and work in their own communities. Online stores are hurting local economies on an unprecedented scale. While I fully understand that it is not always possible to buy items locally, people do not understand the positive dynamic that shopping at community stores makes.

In the long-term, e-tailors contribute greatly to the same effect that Wal-mart does; lower wages and benefits, reduced tax revenues, local small retailers closing up. This is not good for the country. Buy local!

Posted by ADR | Report as abusive

I agree with what ADR said. Also, as a parent I’m sick of the all the commercial gifts we’re pressured to give. I’m as bad as anyone else, but frankly this year, we’re making a point of donating money in lieu of gifts. A lot of people will be needing help this year, so if you’re in the fortunate position of having a secure job, maybe this is the season to spend some money within your own community to help others, whether small retailers or a shelter or a kids’ after-school program or soup kitchen or what have you.

Posted by KYH | Report as abusive

Consumers benefit from online retailers. Online retailers provide a much greater selection of products. The products they provide are often technologically superior, and of higher quality, when compared to traditional retailers. The benefits they provide, are in the savings of time and the savings of cost. In the final analysis, these savings help every family to have a better quality of life.

anyone who goes on the buy local line isn’t a capitalist because they are against pure market forces which is the apotheosis of the capitalist.most people are actually like this but it is maintained by the elite few

Posted by tom hepplewhite | Report as abusive

“Pure market forces” give us depressions, slavery, predatory management, monopolies, and anarchy. Not really something I like to wake up to in the morning. The local shopkeeper pays the same bills you do, has his son in the same football league, goes to the same local grocers, and supports the same local charities. He actually contributes to your quality of life and pays some of the costs you would be paying (taxes etc) without him.
I’ll buy online if I can’t find it locally, but that’s not very often.

Posted by Rufus | Report as abusive

[...] to live up to the expectations of the retail association that created it back in 2005. It ranked ninth among the heaviest online shopping days in 2007, and it’s clearly not going to do much better this year, given the prevailing economic [...]