Welcome to e-tailing Version 2.0.
Growth is slowing, competition online is increasing, and consumers are cutting back online just as they are at the malls.
But all is not doom and gloom. As in the offline world, the strongest e-tailers will survive. Those with unusual and desirable merchandise, good prices, free shipping and a global reach are best poised to weather a shakeout, said merchants and analysts. For brick-and-mortar stores, the Internet still represents an opportunity, while smaller Internet pure plays will be the most challenged because they lack deep pockets and aren’t household names.
Already, children’s wear retailer Parent Co. and contemporary store Active Endeavors shut down earlier this year, and LVMH Moët Hennessy Louis Vuitton’s eLuxury is winding down operations.
Despite these challenges, Web sales are at least still increasing in one of the worst retail environments in decades as more consumers shift their spending to the online channel, said Forrester Research Inc. analyst Sucharita Mulpuru.
“Everyone is cutting back discretionary spending, and apparel is generally viewed as discretionary, so that cannot be helping e-tail or retail in general,” Mulpuru said. “The flip side is everyone is having aggressive sales and discounts, and the fear is these are great deals you can’t miss. That’s what salvaging the business that’s out there to the degree it exists. And you have a larger shift: If anyone is going to be spending, it’s going to the online channel. If you’re going to be spending, there are more people year over year spending online, browsing online, purchasing online.”
According to a report, “The State of Retailing Online 2009: Marketing,” due to come out today from the National Retail Federation and Forrester, online retail in the U.S. in 2009 will increase 11 percent to $156.1 billion, versus 13 percent in 2008 and 18 percent in 2007. Clothing, accessories and footwear will remain the number-one category this year at $27 billion, Forrester predicts.
The firm forecasts online sales in 2010 will accelerate by 13 percent, to $176.9 billion, then slow down again to 8 percent growth to $40.3 billion by 2013.
Profit and Loss
Despite the slowdown, Amazon.com is doing startlingly well and Blue Nile is solid, but not all online pure-play retailers are healthy. Multichannel retailers and big brands have an advantage because they have deep pockets and are trusted and well-known, said Mulpuru, noting Macy’s Inc. and Gap Inc. have reported double-digit growth online for several seasons even as their brick-and-mortar operations suffer in the recession.
Amazon, which includes contemporary retailer Shopbop and shoe store Endless, has grown into a huge powerhouse doing almost $20 billion a year with about $645 million in profit. In the fourth quarter, when some retailers were down more than 20 percent, the company had its best quarter ever and brought in $6.7 billion in revenues, an increase of 18 percent over the same period a year earlier. Net income did not grow as fast as in previous quarters but was up 9 percent to $225 million, some of which was due to the popularity of the Kindle, Amazon’s e-book reader. Gross margin was 20.66 percent.
The company continued to do well this quarter, posting net income of $177 million on net sales of $4.89 billion, an increase of 24 percent and 18 percent, respectively, compared with the same quarter last year.
Shopbop has a new chief executive officer, Jeff Yurcisin. Amazon would not say when he replaced Shopbop founder Bob Lamey nor if Lamey continues in any capacity with the company.
Blue Nile pulled in $300 million in sales last year, and made a profit of $11 million, even though it was down slightly from 2007.
As for other e-tailers, Overstock generated sales of $834 million in 2008, and a small loss of $12,000.
“I always hope for no news because when the news is bad” people panic and no one wants to buy,” said Melissa Payner, president and ceo of Bluefly. “Shopping makes you feel better, even if it’s a little item.”
Bluefly’s customers are spending just as much on individual pieces, but they’re purchasing fewer items per order, Payner said. “Given the promotional environment, I think they’re almost drunk with buying power. Before it was an impulse purchase and now it’s much more considered,” with consumers experimenting with putting things into their cart and taking them out again over a long period, she said.
With about 85 employees, Bluefly has been in business for 10 years but has never turned a profit. Last year, the company produced $95 million in sales, with a loss of $11 million.
Its most recent quarterly filing stated it had enough cash for the year and, like many retailers, its stock has been trading below $1 for several months, putting it in danger of being delisted. On Monday, the stock closed at $1.40.
Payner declined to forecast when the company would reach profitability, citing Securities and Exchange Commission rules, but she said the company is not running out of capital.
“What it shows is that we will have cash at the end of the year. We’re OK. Otherwise we wouldn’t have gotten a clean opinion from our auditors,” she said. Being delisted is “not a concern” because it’s come up before and nothing happened.
(A very low stock price can make a company vulnerable to takeovers. Delisting can also make it difficult to get financing.)
In reaction to the slowdown this year, Bluefly has been buying less inventory, buying closer to season, and decreased its marketing spend by doing less offline and more on the Web. The company is not planning any growth in sales this year.
Marketing has been one of Bluefly’s biggest expenditures (in addition to inventory and executive pay and bonuses). The Bluefly name has been highly visible of late, with tie-ins and mentions on television shows “Project Runway,” “Gossip Girl” and in the film “Confessions of a Shopaholic.” Bluefly buys television commercials, a strategy more typical of products with a potential mass audience, such as Old Navy and Coke.
“For a small company like ours, what we’ve been after the last couple of years is awareness,” said Payner. “We needed to raise awareness because we found that people who know about Bluefly really love it but too big a percent didn’t know about it. That has changed with a few offline partnerships we’ve had.”
This year, the retailer is turning toward more targeted, inexpensive and efficient online marketing, although it would not rule out an unusually good opportunity such as “Project Runway” were one to come along, Payner said.
Bluefly has company. According to today’s NRF report, 30 percent of e-tailers reported they are cutting back on spending this year. Slightly fewer than half (46 percent) of online retailers have not changed their budgets. A quarter of retailers (24 percent) have increased their budgets.
Of those who are cutting back, staff and search marketing are the first to be trimmed. Of those who are spending more, search, e-mail and social marketing (60 percent) will benefit, said the study.
Consumers are trading down, but they’re still buying, said Catherine Chow, co-founder of Tobi, a contemporary retailer that opened a boutique in San Francisco in 2003, followed by a Web site in 2006. The company changed its name from Azealas in 2007. “The market is tough. The clients who buy at the [designer] price point — the percentage of that customer group — is dwindling very fast,” she said.
Tobi’s customers are doing the opposite of Bluefly’s, and buying the same amounts of lower-priced items. Chow has noticed that customers who in the past might buy multiple T-shirts for $50 or $60 from such lines as James Perse, Velvet or Splendid are now buying the same quantities but from lower-priced lines such as Alternative Apparel, which offers an organic cotton T-shirt for $19. Inexpensive items such as hoodies and sweatshirts have also become more popular. The site’s average price point is about $200.
This year, Chow plans to cut the store’s 380 brands by half and focus on three best-selling categories: Dresses, denim and shoes. After the October crash, the store slashed its marketing budget. It will no longer be a sponsor of New York Fashion Week and will continue with a smaller budget for search marketing, which has helped the store become well-known among shoppers looking online for brands such as James Perse and Shipley & Halmos.
So far, the cuts have paid off, with the site seeing a slight decline in traffic but not sales. Revenues are up over last year, and Chow hopes to reach profitability by the end of the year. The entire company has revenues of about $10 million a year, with the online boutique providing about 80 percent of that.
“The opportunity is huge when it comes to the Internet,” she said. Like many online retailers, Tobi has found selling globally helps reach a wider audience and eases the ups and downs of the local economy.
Since the credit markets froze in October, Chow has noticed shoppers considering purchases more carefully while competition online has increased. Because so many specialty retailers such as Opening Ceremony and Oak are now online, “consumers have a very wide selection of merchandise and an opportunity to find niche brands they may not find anywhere else. Second, I’ve definitely seen a lot more competition online in terms of pricing, free shipping and discounts,” she said.
Experiences like Tobi’s demonstrate why multichannel is king, according to Jack Plunkett, ceo and publisher of Houston-based market research firm Plunkett Research Ltd. Revenues increased at 66 percent of multichannel retailers, versus 50 percent of pure-play operators during last year’s holiday period, according to Forrester.
Further proof of the multiplatform model is that more and more luxury firms with well-established brick-and-mortar businesses are turning to the Web to juice sales. “Now e-commerce is a top priority of almost all the brands and ceo’s we’re working with,” said James Gardner, ceo and co-founder of interactive agency Createthe group, whose clients include St. John, Gucci, Stella McCartney and Marc Jacobs. “It’s seen as a channel that helps them weather this storm. Growth has slowed, but it’s still growing. It’s a huge priority for our clients. Either they already have it and they’re really focused on how to increase traffic and conversion rates and aggressively push the channel, or when they do not have it, they are putting a plan in place to implement it very quickly.”
Fame and Fortune
Since they don’t have physical stores but only virtual ones, the challenge for pure plays is to be ever-visible and ever-present in the minds of potential customers and to rack up sales but without spending so much that profits vanish.
Bluefly and other pure plays have the “classic direct selling problem,” Plunkett said. “You have to build critical mass in your customer base and you have to have enough cash on hand to do it.”
Online competition has increased and customer acquisition costs have gone up — particularly paid search. (There is more competition for valuable keywords, whose price is set by auction.) Mulpuru recommends e-tailers focus on retaining existing customers rather than hunting out new ones for this reason.
“In general, the macroeconomic climate is contracting,” she said. “Retailers need to focus on retaining current customers because there are not that many places to mine for customers.”
Conversion rates remain between 3 and 3.5 percent, according to today’s NRF report. Twenty-eight percent of sales are from repeat customers. Marketing cost per order is $14.30.
Just as in brick-and-mortar stores, exclusive and unusual merchandise also helps. “If there’s a boutique in Brooklyn that has something you can’t get anywhere else and they can get a buzz going about it there is every reason in the world to get a Web site enabled and working well so people outside Brooklyn can buy it,” said Plunkett. “There are a lot of companies out there doing some great unique fashion and if you can get a Web site up and improve access, it’s a whole new world.”
Net-a-porter.com is one online-only retailer that has focused on exclusive merchandise, as well as frequent mentions in the press and its own online content, to help establish itself in the minds of consumers. The company has reported impressively strong growth and profits for the last several years, but may not be immune from the same pressures that have affected Neiman Marcus, Barneys New York, Saks Fifth Avenue and other luxury retailers since October. Like its competitors, the company launched markdowns earlier than usual during the holiday and spring seasons.
Net-a-porter is expected to report its financial results for fiscal 2008, which ended earlier this year, in the next month. In fiscal 2007, which ended Feb. 28, 2008, the company made a profit of 3 million pounds, or $4.5 million at current exchange, on sales of 55.2 million pounds, or $82.8 million. For the year previous, which ended Jan. 31, 2007, Net-a-porter posted a 2.1 million pound profit on sales of 37.2 million pounds.
Since its launch in June 2000, the company has strategically expanded to cover a broad range of price points and categories. Its latest endeavor, an off-price outlet called the Outnet, opened last month. Partly owned by Compagnie Financière Richemont, Net-a-porter began by selling high-end luxury ready-to-wear such as Chloé and then quickly moved into contemporary and opened an overseas distribution center to enhance its global business. More recently, the company has added bridal, denim and designer exclusives such as a $1,195 Yves Saint Laurent black leather doctor bag.
Lesser-known startups have relied on creative marketing to get attention without spending a lot of money.
MyShape, a multibrand retailer that matches customers with clothes appropriate to their body shape, has teamed up with indiDenim and dating site eHarmony. MyShape features a custom jeans shop from indiDenim on its site as well as rtw jeans from such sources as Anne Klein. On eHarmony, articles from MyShape about what to wear on a first date and how to spruce up one’s look after a failed relationship appear in eHarmony’s dating advice section. About 550 million women have registered on MyShape since the store opened in October 2006.
“In these economic times, women are looking for significant value and an efficient shopping experience,” said MyShape founder and chief executive Louise Wannier.
Tobi distinguishes itself is by assigning a permanent salesperson, known as a stylist, to each shopper. They communicate via online chat, and each stylist can handle more than 300 clients per month. They find out what sizes, brands and trends the customer prefers and can make suggestions about new things to try or what to wear for a wedding or birthday. Customers have asked how to wear a sheer T-shirt, which leather jackets are the most buttery, and for a hipper alternative to “mom” jeans.
Madewell, the J. Crew spin-off with 13 stores in the real world but no online store, increased its national exposure with an exclusive sportswear denim collection for Shopbop in February.
The Online Advantage
All the activity of brands around e-tailing is related to one simple fact: The channel’s sales continue to increase at a time when offline retailing sees significant declines in comparable-store sales.
“I don’t even know if it’s fair to say that overall online retailers are doing badly,” Mulpuru said. “There are winners and losers in this economy off and on, and there are probably going to be more winners online because that channel is at least growing.”
“I think e-tail in general is in very good shape,” Plunkett said, citing Amazon’s performance in the fourth quarter.
As a result of its growth, online is becoming a bigger part of the overall retail pie, moving from 5 percent in 2008 to 6 percent this year, and 8 percent in 2012, according to today’s report from NRF and Forrester.
Four out of five companies surveyed in the report were bullish on online retail, agreeing the Web is “better suited to withstand an economic slowdown than the offline retail channel.”
“We’re all more cautious,” admitted Bluefly’s Payner. “It doesn’t matter what your disposable income is, you wake up in the morning and you want to hear the economy is turning around. You want someone to tell you that’s the bottom and this is where you’re going. But people are still shopping. It’s not like they’re going to stop shopping. We say they have the shopping gene in their DNA and they can’t help it.”