Online retailers cash in on growing Net popularity

WASHINGTON — Las Vegas shoe merchant Zappos.com more than doubled its sales last year to $184 million, upgrading all customers to expedited shipping from the Kentucky warehouse where it stashes 1.7 million pairs of shoes.

“We specialize in service,” said founder and chairman Nick Swinmurn.

Zappos is one of many online merchants that sprang to life during the Internet’s manic phase six years ago and have hung on long enough to benefit from the fast broadband connections that finally made Internet shopping mainstream.

As Web shopping turns 10 this year, it has grown bigger and more popular than most analysts had predicted. Excluding travel, online sales in the United States grew 24 percent last year, to about $90 billion, accounting for nearly 5 percent of all retail sales, according to the National Retail Federation. Most Internet retailers are profitable, with operating profits rising to 28 percent in 2004 from 21 percent in 2003, according to Shop.org, the online arm of the retail industry group.

Yet Internet commerce is a fast-changing industry that regularly redefines itself, especially as the large, brick-and-mortar chains are marching more aggressively online, doing cross-promotions between their Web sites and stores. Analysts say some of the biggest retail chains have yet to hit their stride online. When they do, it’s anyone’s guess how that might affect the army of small, specialty retailers such as Batteries.com and BBQGuys.com that use the Internet to offer huge selections to a growing national audience.

“There is an argument going on about whether smaller merchants will continue to proliferate and grow disproportionately or whether you will see big-name, off-line retailers like Wal-Mart, Best Buy and Home Depot compete more effectively online and take over this medium,” said Graham Mudd, spokesman for Web analytics firm ComScore Networks.

The heavyweight of Internet retailing is still Amazon.com Inc., a virtual department store that started as an online bookstore in 1995 and today sells stuff in more than 30 categories, including the loose diamonds it added in May. Amazon catapulted to the top not only by simplifying online shopping, but also by recruiting thousands of small merchants to sell on its site and running other sites on behalf of such big merchants as Target Corp. and Borders Group Inc.

Amazon racked up total Internet revenue of nearly $7 billion last year, more than twice the $3.2 million that No. 2 player Dell Inc. sold online in 2004, according to Internet Retailer magazine.

Internet Retailer’s top 400 offers a rare glimpse of closely held Web sales figures, which the trade magazine obtained directly from most of the 400 merchants profiled. The list shows that sales are distributed fairly widely among various types of retailers. And while big players still outsell peewees, a fat chunk of the total sales is coming through niche sites.

Nine companies had Web sales of more than $1 billion last year. Other than the two big office suppliers, Sears, Roebuck and Co. was the only brick-and-mortar chain to make the $1 billion club. The others were computer and electronics retailers: SonyStyle.com, CDW Corp. and Newegg.com. Nine more merchants racked up Web sales of more than $500 million last year, including off-line giants Best Buy Co., Wal-Mart Stores Inc., J.C. Penney Co., Target and Circuit City Stores Inc., along with Web-only players Overstock.com Inc. and mail-order movie pioneer Netflix Inc., the magazine found.

A total of 75 retailers had online sales exceeding $100 million, and 208 sold more than $20 million. All 400 companies on the list had sales of more than $3 million.

Nobody knows how many retailers are online. But ComScore Networks, which measures Web traffic and sales, reports that more than 1,000 retail sites attracted more than 100,000 visitors apiece last month.

Shop.org projects online sales will grow by more than 20 percent this year, but there are wild cards that could slow it down.

One is credit card fraud, which runs much higher for Web retailers than for brick-and-mortar stores. So-called “phishing” attacks, in which fraudsters send bogus e-mails to trick people into providing their credit card data, have been rising. Another potential snag: More than 20 states are lobbying to force Web retailers to pay state sales tax, from which most are now exempt.

The type of goods sold varies widely. After travel, computers and electronics is the biggest online-sales category. While apparel sales are much smaller, they are growing faster, as are sales of jewelry and home decor items.

Cars have become huge sellers online, surprising those who thought Web shoppers would insist on personal inspections. Last year, cars accounted for roughly one-third of the total $34 billion in merchandise sold through eBay’s online marketplace.

Tires are big Internet sellers, too, along with furniture. Several furniture Web sites made the top 400 list, including Furniture.com, RoomsToGo.com, ClubFurniture.com and EverythingFurniture.com. Discount flooring retailer iFloor.com ranked No. 115.

Specialty retailers of all kinds are racking up sales. Among others in the top 400, paintball supplies are the draw at Xtremez.com, area rugs at RugsDirect.com, wedding supplies at BrideSave.com, fitness stuff at BodyBuilding.com, and you can guess what’s available from Headsets.com.

Success online is hardly automatic. It still requires a knowledge of the customer and the competition.

Sinmurn, of Zappos, said the company did some soul-searching and realized its real competition was off-line shoe stores. “How can we make online shoe shopping as easy as off-line?” Sinmurn and his colleagues asked themselves. They decided one way was fast, free shipping. Another was to give customers 365 days to return shoes, no questions asked. They even pay for return shipping. “Now the main driver of our sales is word of mouth,” he said. “And on any given day, over 60 percent of our customers are repeat customers.”

“The Internet has really leveled the playing field in retail,” said Kurt Peters, editor of Internet Retailer. “You no longer have to be able to invest in a store and a lot of inventory and a big staff to become a national retailer.”