Internet diamond discounter Blue Nile, for example, had a successful initial public stock offering last month. Founded during the dot-com heyday of 1999, Seattle-based Blue Nile turned profitable in June 2002 and reported $11.3 million of operating income on sales of $129 million last year.
But financial data about online retailing is still hard to come by, because many Web-only sellers are still privately held, and store-based retailers and mail-order companies often decline to break out their online results. That makes the Forrester/Shop.org survey particularly interesting, since 110 of the 150 Internet retailers that agreed to respond provided complete revenue and expense data on their online operations.
Not all reported profits. Some 79 percent said they were in the black, up from 70 percent in 2002 and 56 percent in 2001. Shop.org did not name the participating merchants, but said 40 percent were store-based and 35 percent were Web-only sellers. Nearly half reported annual sales of $10 million or more.
The report found several reasons for rising profits. One was a big drop in online retailers' marketing costs -- from an average of $8 per order in 2002 to $4 last year. Another was the falling cost of their merchandise, attributed to their ability to negotiate better deals with wholesalers as Internet retailers start selling in volume.
But the report also found some financial metrics lagging. Average costs to fulfill an order jumped from $6.30 in 2002 to $9.80 last year, thanks partly to free shipping offers. Moreover, customer service costs per order jumped from $1.90 to $2.30 as Internet merchants increasingly recognized the need to offer customers live help via phone or Internet chats.
Another downer for Internet retailers underscores the real power of Internet commerce for consumers: The percentage of people who abandon online shopping carts before clicking the "buy" button jumped to 53 percent last year from 49 percent the previous year. The report attributed this huge bailout rate in part to the popularity of comparison shopping online, where the same product is typically a click away at rival sites, often for less.
"It's easier now for consumers to compare prices and retailers online," acknowledged Shop.org's Silverman.
Sites such as Shopping.com and BizRate.com that help people see prices from many different sites in one spot are becoming big business, ranking among the Web's top 10 gaining categories in April, according to comScore Networks. The research firm reported 37 million people visited at least one price-comparison site in April.
That forebodes increasingly fierce competition among Internet retailers, suggesting their profit margins may eventually get compressed to the same skimpy ones that have long plagued retailing.
