Online holiday shopping to double

Web holiday sales to double

November 23, 2000: 12:15 p.m. ET

Online holiday purchases in U.S. seen reaching $11.4 billion
by Staff Writer David Kleinbard

NEW YORK (CNNfn) - The amount that U.S. consumers spend online this holiday season is slated to almost double from last year's total, and consumers are off to an earlier start with their online shopping this year than last, analysts say.

Several reports on Web retailing conclude that consumers plan to spend more per order this year and are better educated about online shopping. Online retailers, meanwhile, have become more sophisticated about customer service and inventory management, reducing the chance that they will fail to deliver merchandise before Christmas.

Gomez, a Lincoln, Mass.-based company that measures the performance and quality of Web retailers, estimates that U.S. consumers will spend $11.4 billion online between Oct. 1 and Dec. 31, 2000. That's almost double the $5.8 billion spent during the same period last year, according to Gomez. Estimates made by other research firms of this year's holiday spending range from $9 billion to $12.5 billion.

While online holiday spending is growing rapidly, it will represent only about 6 percent of the $198 billion consumers spend both online and offline this holiday season, according to the National Retail Federation.

The holiday season is a crucial, make-or-break period for online retailers such as Amazon.com (AMZN: Research, Estimates), Barnesand-Noble.com (BNBN: Research, Estimates) and eToys.com (ETYS: Research, Estimates) The holiday period represents 34 percent of total U.S. spending on business-to-consumer Web sites, Gomez says. Goldman Sachs analyst Anthony Noto estimates that Amazon, which is by far the largest Web retailer, will do more than $1 billion in sales this holiday season.

Off to an early start
U.S. home Internet shoppers spent about $1.2 billion during the week of Nov. 6-12, a study by Goldman Sachs and PC Data found. That was a more than a six-fold increase over the comparable time last year, when $186 million was spent.

The survey also revealed that 88 percent of respondents said they plan to

spend the same or more than they did last holiday season.

"We are seeing a sharper ramp in online sales this year vs. last year," Goldman Sachs' Noto said. "This is an early indication that online sales are less of a vulnerable to slower consumer spending, as the industry is benefiting from both new shoppers in addition to the incremental purchases of individual shoppers."

	CONCLUSIONS FROM GOMEZ STUDY ON ONLINE SHOPPING
		98% of merchants said that e-mail customer service will be available 93% will have toll-free telephone customer service 80% will increase their customer service staff for the holidays; the average increase will be 51% 53% of online merchants plan to use product discounts, coupons, or rebates to lure consumers 87% of those surveyed plan to post a "last day to purchase" date on their Web site for delivery before Christmas The median posted last day to shop is Sunday, Dec. 17

In an interview with CNNfn.com, Noto said that more consumers are shopping online this year with the intention to purchase a specific item, instead of just browsing to see what is available. The Goldman Sachs/PC Data study found that more than half of online shoppers choose where to shop based on prior experiences with a site, which may benefit more established e-commerce veterans that have sold online for more

than one holiday season. Fewer than a quarter of online shoppers said they visited a site because they knew the brick and mortar brand.

"The data show that online consumers are more educated, are spending more, and are more satisfied than they were last year," Noto said.

Jupiter Research estimates that a total of 35 million people in the United States will purchase gifts online this holiday season, versus 20 million who shopped online last year. The New York-based authority on Internet commerce also estimates that 6.3 million U.S. residents will spend the majority of their holiday budget online this year, an increase of 294 percent from 1999, when only 1.6 million spent the majority of their budget online.

The research firm NPD Group Inc. says that the top 10 sites for online shopping will be: Amazon.com, BarnesandNoble.com, eBay.com (EBAY: Research, Estimates), ToysRUs.com (TOY: Research, Estimates), JCPenney.com (JCP: Research, Estimates), CDNow.com, eToys.com, LandsEnd.com (LE: Research, Estimates), Buy.com (BUYX: Research, Estimates) and Yahoo.com (YHOO: Research, Estimates)

Doesn't translate into profits
While online shopping may be convenient for consumers, it's bah humbug for shareholders of business-to-consumer Web companies. Most Web-based retailers haven't managed to turn a profit, and many of their stocks are trading in the low single-digits.

Despite the estimated $11.4 billion in online spending by U.S. consumers this holiday season, online retailers will struggle to turn a profit, and many will experience multi-million dollar losses, a study by the research firm IDC concluded. On the other hand, companies that provide services or logistics to Web retailers, such as i2 Technologies (ITWO: Research, Estimates), are poised for explosive revenue growth, IDC said.

"The reward for going through the trouble of picking, packing, and shipping millions of holiday packages from expensive warehouses will be an impressive $200 million in aggregate losses for the online retail industry," said Jim Williamson, senior analyst for IDC's Internet Economy research program. "This figure masks the extent of damage that will be sustained by a large number of Web retailers."

According to IDC, unprofitable Web retailers will lose a collective $700 million, while money-making firms will turn a joint profit of $500 million. IDC believes the most successful online retailers this holiday season will be those that offer in-store returns and that have improved their logistics infrastructures to avoid the delivery problems that plagued the online retailing industry last year.

Goldman Sachs' Noto has drawn similar conclusions about the profitability of online retailing.

"The strength in holiday shopping is not likely to create a broad rally among consumer Web stocks," he told CNNfn.com "Amazon and eBay are likely to be the only strong beneficiaries. The other Web stocks are plagued by uncertainty over their cash positions and ability to raise capital."

eToys, for example, recently traded around $1.25, down from a 52-week high of $70.50

Focus on Amazon
Since Amazon is by far the largest Web-based retailer, analysts focus on Amazon to measure both the revenue growth of the industry and its ability to deliver merchandise on time.

Amazon shipped about 20 million items last holiday season, delivering more than 99 percent of them on time, said company spokesperson Ling Hong. Last year at this time, Amazon had seven distribution centers in the U.S. and two in Europe. Now, the company has eight in the U.S., three in Europe and one in Japan. The company had 15 million customers in its database last November, versus more than 25 million now.

Amazon placed a "Delight-O-Meter" on its site on Nov. 2 which shows the number of items Amazon has shipped since that date. As of Nov. 22, the company had sent out 10 million, placing the Web retailer on track to easily exceed last year's total. Securities analysts have used the Delight-O-Meter as a "Revenue-O-Meter" to estimate the company's key holiday sales number, even though Amazon discourages them from doing so.

"Our estimate for fourth quarter product revenue is approximately $1 billion," said Merrill Lynch analyst Henry Blodget in a recent research note. "To achieve our estimate, we believe Amazon has to book about $750 million in the eight week holiday season. Our back-of-the-envelope analysis of the Delight-O-Meter suggests it is off to a solid start."

UPS wins in the end
Perhaps the largest beneficiary of the booming online retailing business is United Parcel Service (UPS: Research, Estimates), rather than the retailers' shareholders. Unlike almost all Web retailers, UPS is highly profitable, making $702 million in profits on $7.4 billion in revenue in the third quarter. The company ships about 13.5 million packages per day. No matter what Web site a consumer buys from, UPS or the U.S. Postal Service is likely to deliver the package.

Of course, FedEx Corp. (FDX: Research, Estimates) benefits from those last-minute purchases that need rush delivery and the shipment of food items that need to remain fresh. In the quarter ended Aug. 31, FedEx reported net income of $169 million in revenue of $4.8 billion. FedEx Home Delivery and FedEx Express delivered 250,000 Harry Potter books for Amazon.com on the first day of release with a 99.97% service level, the company says.

Finally, no holiday would be complete without gift wrap. Amazon wrapped more than 1.4 million gifts last year. This year, the company employs 600 people to do the wrapping, and it has purchased 2,148 miles of ribbon to tie them up with a bow.