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Suddenly, Retail Clicks

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By Leslie Walker
Thursday, June 3, 2004; Page E01

Internet retailers I assumed got killed during the dot-com wipeout keep turning up alive.

This week an e-mail arrived from Bulbs.com, an obscure Web site I profiled when it launched in 1999 vowing to corner the online market for light bulbs. I figured someone had turned out the lights on that site long ago, but I was wrong. The Worcester, Mass.-based company reported its first quarterly profit six months ago and is adding 600 new customers a month, including the managers of big buildings with lots of bulbs to replace.

It shouldn't have surprised me, considering a report released last week that showed profit margins for Internet retailers rose sharply last year, far exceeding the meager returns historically associated with retailing.

Collectively, Internet retailers went from break-even in 2002 to an average operating profit of 21 percent in 2003, according to Forrester Research and Shop.org, the online division of the National Retail Federation. The groups surveyed 150 Internet sellers of all types, including Web-only retailers and the online divisions of stores and cataloguers.

Online sales in the United States last year increased 51 percent, to $114 billion, the report estimated, or 5.4 percent of all retail sales. Travel accounted for more than a third of online sales, or $42.3 billion. Excluding travel, Internet sales claimed 3.8 percent of total retail.

Merchants selling exclusively online experienced the biggest profit leap, the report found, although they remained less profitable in general than Web sites of cataloguers and stores. Cataloguers reported the largest profit margins -- totaling on average 28 percent for their online operations, up from 22 percent a year earlier. Traditional stores reported their online operating margins rocketed from 7 percent in 2002 to 21 percent last year, while Web-only sellers turned a collective loss of 16 percent into a profit of 15 percent.

"The Internet is turning into a very significant profit engine for retailers," said Scott Silverman, executive director of Shop.org.

Even though retailers historically have had average profits of less than 10 percent (behemoth Wal-Mart, for example, reported a profit of less than 4 percent last year), not all retailers are sold on the need to spend big bucks on the Web. "The potential of it still isn't fully understood throughout the retail industry," Silverman said.

Maybe that's because nobody has any idea just how big Internet retail will eventually grow. After all, Web-based retailing is still not quite 10 years old. The first sale at Amazon.com's pioneering online bookstore took place in July 1995, two months before eBay went online as an experimental, free auction service.

Amazon copycats triggered an explosion of dot-com retailing start-ups in 1999, and established retailers quickly joined the race, determined to harness the Web to enhance their operations. While many Internet-only retailers died after the stock market crashed in 2000, some survived and a few are starting to thrive, along with the online divisions of many well-known chain stores.

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