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.
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.
Leslie Walker's e-mail address is email@example.com.