North American E-Tail Sales Still Soaring

Despite the recent decline in venture capital funding for Internet companies, North American e-tail sales will exceed $29.3 billion (US$) in 2000, according to new research from Gartner Group.

This figure represents an increase of 75 percent over 1999’s $16.8 billion in online sales, which were up 157 percent from 1998 sales.

The Stamford, Connecticut-based research firm estimates that e-tailing will grow to about five to seven percent of total retail sales in North America by 2004, up from less than one percent in 1999.

Leading the Pack

Gartner analysts say that as the market continues to mature, large vendors will begin to emerge from the pack as leaders in cyberspace. According to Robert Labatt, principal analyst for Gartner’s e-Business Services, “Online retailers must prepare for the reality of industry consolidation.”

He added, “For the current leaders, this is a time of bargain hunting. Advantageous partnerships with weaker partners that have strong teams, technology or customer bases are now available at lower cost.”

The past few weeks have seen online grocery store Webvan acquiring rival HomeGrocer in a $1.2 billion stock deal and Pets.com gobbling up rival Petstore.

In order to survive, Labatt said, “Internet retailers have no choice but to demonstrate the capability to achieve profitability in the short term.” He also predicted that “Leading companies with strong consumer awareness and branding will have the upper hand at this time.”

Labatt’s advice to smaller niche players is to “develop partnerships that drive revenues, not press releases.”

Computer Electronics Out Front

The biggest moneymaker for e-tailers will continue to be the computer hardware/software, computer electronics segment, which will grow from $7.5 billion in 1999 to $59.7 billion in 2004.

Notably, electronics will lead the market even though, according to Labatt, electronics e-tailers have a much thinner profit margin than other online categories, such as banking.

The report predicts that the banking and financial services market will grow from $3.6 billion in 1999 to $12.3 billion in 2004. Although revenue is not as high as in other markets, Gartner analysts said that this segment carries a higher revenue margin relative to other vertical markets.

Labatt said, “Widely expected to be revenue leaders, banks are finding that the benefits that derive from offering online services are largely the result of cost savings rather than increased revenue.”

He added, “This is not true for online stock and investment trading sites, which make up the lion’s share of the revenue base through 2004. In 2004, retail online financial trading is expected to grow to $12.3 billion in service revenue, of which only 6.5 percent will be from online banking and bill payment services.”

Consumables and Entertainment

The strongest growth from now until 2004 will be in the home consumables and entertainment categories. IT research firm IDC recently predicted that U.S. sales of pharmaceutical, health, and beauty products over the Internet will boom from less than $250 million in 1999 to more than $18 billion in 2004.

Another report from IDC predicted that online grocery spending will grow from approximately $200 million in 1999 to over $8.8 billion by 2004.

Growth in the online entertainment category will come as increased availability of broadband access removes bandwidth constraints, fueling an explosion of audio and video on demand.

Labatt said, “As piracy fears are eased with the introduction of new technology, major labels and studios will release their catalogs for digital download. The ease of digital downloading will reduce fulfillment costs and likely lead to increasing consumption.”