Online spending down as holiday season nears

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By Ylan Q. Mui
Washington Post Staff Writer
Saturday, October 24, 2009

Online retail's runaway growth has hit a wall as consumers have cut back on the discretionary spending that drives the industry's sales.

According to research firm comScore, e-commerce sales have been steadily declining this year, with spending not including travel dropping 2 percent in the third quarter. That has set the stage for a tough holiday season, which can account for as much as half of annual sales.

"It's not pretty at all out there," said Gian Fulgoni, chairman of comScore. "The consumer just doesn't have spending power."

But the outlook is not all gloomy. Amazon's stock shot up 27 percent on Friday after it reported blockbuster third-quarter earnings. The online retailer has focused on low prices and the popular Kindle to help drive sales, and investors and retailers are hoping that Amazon's performance is not merely an industry aberration.

Other online retailers have not fared as well. Sales at eBay's marketplace division, which includes the flagship Web site, fell 1 percent in the most recent quarter from a year ago. The company attributed the decline to the stronger U.S. dollar and said sales would have risen 4 percent excluding currency fluctuations.

E-commerce had ridden the crest of the economic boom, enjoying several years of more than 20 percent growth annually to become a $130 billion industry, excluding online auctions and travel sales, according to comScore. Not only were hordes of new consumers embracing the idea of shopping online, but they also had plenty of disposable income to buy clothes and computers, the two top-selling categories online.

But the recession hit the brakes on the industry's growth as shoppers began hoarding cash and paying down debt. Luxuries like new clothes and computers took a backseat to necessities such as food and fuel, which shoppers typically buy at bricks-and-mortar stores.

That helped slow online sales to a relatively anemic 6 percent growth in 2008. In the fourth quarter, sales actually fell 3 percent, according to comScore. For the first eight months of this year, sales were down 3 percent.

Still, online retailers have performed better than the industry as a whole, which dropped 7 percent during the third quarter. Fulgoni estimated that e-commerce represents as much as 9 percent of overall retail sales.

Because online retailers have lower fixed costs than their bricks-and-mortar counterparts, they have been able to compete aggressively on price. A survey by research firm Forrester found that 34 percent of online retailers that compete against traditional retailers reported gaining market share.

"They can easily comparison shop on the Internet," said Scott Silverman, executive director of Shop.org, a trade group for online retailers. "They think about the Internet as a place to get a good deal."

According to a survey for Shop.org, nearly 57 percent of online retailers plan to offer free shipping with no conditions at some point this holiday season. About 36 percent said the budgets for such offers are higher than last year, and 30 percent plan to start the offers earlier than last year.

Shoppers also seem anxious to begin crossing off their lists -- and hunt down deals. By early October, more than half of consumers had started at least researching gifts online, according to a survey by Google and research and consulting firm OTX. And Google's Insights for Search tool shows the term "Black Friday," the shopping bonanza on the day after Thanksgiving, began gaining in popularity in the first week of August, a month earlier than in the past two years.

Silverman has a more optimistic outlook for the holiday season. The Shop.org survey, which polled some of the most established online retailers, showed that 46 percent expected sales to improve at least 15 percent from last year.

Such hopes were fueled this week by Amazon's surge in sales during the third quarter. Revenue skyrocketed 28 percent compared with last year, while profit jumped 68 percent. The best-selling item on the site was the Kindle, the company's e-book reader. Amazon also forecast that its fourth-quarter sales would grow between 21 and 36 percent compared with last year.

Forrester predicts that online retailers will rebound along with the rest of the retail industry next year.

"They're not that mature," Silverman said of the sector. "There are still a number of years where online will be outpacing traditional retail."


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