Barely noticed in the shadow cast by the dotcom crash over each of the past few years, online retailing has virtually doubled as shoppers have turned to the net to make their purchases.
UK shoppers spent £4.75bn online in the first half of 2003, up from £2.37bn in the same period of 2002 and £1.28bn in the first half of 2001, according to the Interactive Media in Retail Group. E-tail spending for July 2003 alone reached £1.14bn, possibly assisted by an IMRG campaign to promote internet shopping.
Each Christmas shopping season has set a new benchmark, with online spending exceeding £1bn in a month for the first time in November 2002. E-tailing accounted for four per cent of the UK's retail sales in the third quarter of 2002.
About 9.3 million people, 43% of UK internet users, had shopped online in the four weeks prior to June 2003, according to the NOP Internet User Profile Survey 2003.
Books accounted for 26% of those purchases, followed by clothes (21%), CDs (19%), holidays (13%) and groceries (12%).
"People are just getting on with it and they're going and buying," says Jo Tucker, managing director at IMRG. "Once they've shopped online, they feel comfortable with it."
Shoppers are attracted to the internet by its convenience; the availability of unique products and services; and the opportunity to research major purchases, such as cars and property, says Tucker. Electrical retailing has been successful, as has - despite predictions otherwise - clothing. "People said that clothes wouldn't sell online, but catalogues have been around for ever," says Tucker.
Increasing user trust The role of Amazon in popularising e-commerce has also been critical. "Amazon's advertising, familiarity and longevity all help to increase the trust of the user in the site and in e-tailing in general," says Tom Ewing, European market analyst at Nielsen//NetRatings. "This has a knockon effect for other sites."
Also, early problems such as poorly designed websites have been remedied. "Usability has improved," says Tucker. "The retailers have realised that they don't need to have an all-singing, all-dancing site. People buying online are regulars and they know what they want."
Other commentators make similar points. "Usability, security, quality of navigation - all those things have been improved," says Ashley Friedlein, chief executive of Econsultancy.
"The bigger players, to a reasonable degree, have sorted them out. A few years ago they were a real mixed bag. They've learned a lot in terms of basic principles.
"Most of the bigger players haven't changed [their websites] that much over the past year. It's reached a certain point of maturity now."
Also remarkable is the extent to which the big highstreet retailers - having been eclipsed by new "pure-play" e-tailers during the dotcom boom - have become some of the most popular destinations for internet shoppers.
There are five traditional high-street operators among Nielsen//NetRatings' rankings of the 10 most popular internet retailers, for example.
Solid high-street brands "A lot of the sites are high-street names which did well out of the dotcom bust by being solid brands that obviously weren't going to vanish - it was 2000 when highstreet etailers really took over," says Ewing.
"The bigger retailers were a bit slow out of the blocks, but it has become just another channel to market," says Ewen Sturgeon, development director at the digital agency Wheel. "They've traded on their brand equity and trust. For example, Marks & Spencer [a Wheel client] - it's focused on getting the fundamentals right and now the online business is a very solid one."
And new "pure-play" concepts have benefited as trust in online retailing has grown and shoppers increasingly look for low prices rather than known brands. "Kelkoo and Dealtime are doing well because they promise links to the cheapest goods," says Ewing. "It also explains a bargain operator like CD Wow! getting into the top 10."
In fact, it is middle-ranking retailers, unable to compete with big retailers on price or justify the cost of a complex and comprehensive online retail operation, that have been squeezed out, says Friedlein. "There definitely is a market for the specialist and for the big groups - but it's harder for those in the middle."
With a level of maturity achieved, priorities have changed. Now, the focus is on cutting the cost of customer acquisition and - bluntly - on increasing sales to those customers. "Now it's about optimisation and margins," says Freidlein. "It's about how to sell more for less."
A key development has been the increasing popularity of performance-based marketing. "Initially retailers tinkered with media models and that has become outmoded by affiliate marketing in the past 24 months," says Sturgeon. "It 'de-risks' sites. CPM just doesn't work, because of the cost of customer acquisition. In the past six-to-nine months, the search market has really exploded in two ways. One is the way in which sites are tagged for natural searches - that's all to do with the way sites are built. The other is paid-for search - bidding for keywords. Our clients will tend to do that through their affiliate partners."
Although the use of conventional online advertising - such as banners - is still relevant for online retailers, search and affiliate networks have a much higher rate of conversion to sales, says Simon Anderson, chief executive of digital media agency Unique Digital.
"A traditional brand advertiser is looking for eyeballs online so it uses banners, rich media. If you're a retailer, you're looking for a return," says Anderson. "The main one that everyone in online retail should be looking at is search. They should be looking at affiliate schemes, too, although it can reach a ceiling in terms of the revenue it can bring in. A retailer should be optimising for sales - both the number of sales and the revenue generated. It should know, down to the penny, the return on each placement."
Sturgeon confirms that, while a lot of agency work involves looking at first- and second-generation sites and improving the buying experience, the focus is increasingly on customer acquisition, conversion and retention.
Key to this is the collection of customer data - ranging from permission-based e-mail addresses to information about visitor behaviour on websites - and its use and analysis for marketing and strategic purposes.
"The big retailers are making more effort to understand at a granular level what's happening on their sites - and managing a dialogue with customers, principally through e-mail," says Sturgeon.
Ironically, the capability to track internet activity in great detail does not always make that understanding any easier to achieve. "There's a large number of different technologies to track what's happening and integration's a total nightmare," says Sturgeon.
Nevertheless, says Friedlein: "[The big retailers'] sophistication in terms of how they use data is similar to the financial services sector."
Low awareness In addition, with many clicks-and-mortar retailers finding that awareness among their store customers of their online operations is "amazingly low", in-store activity and mailings to this group is increasingly seen as a costeffective means of customer acquisition, says Sturgeon.
It is not just the dotcom start-ups that have been eclipsed by traditional retailers. Attempts by media businesses to move into e-commerce have also been disappointing. Potentially the biggest player, the BBC, closed its commercial web division, Beeb Ventures, which housed the shopping portal Beeb.com, in April 2002. Once valued at £240m, Beeb Ventures was a joint venture with a US investment firm.
Media businesses moving into retail were often doing so for the "wrong reasons", says Tucker. "It was because they thought they should rather than because it would enhance what they do. It does need proper management and proper buying."
Nevertheless, media companies such as the BBC and Channel 4 do sell their own merchandise through their websites. Many online retailers also run white-label services on media sites, such as Ebookers' deals with Yahoo! and Lycos to provide them with integrated booking engines (see case study).
Views are mixed as to whether one of the most hyped changes in internet use - the growing reach of broadband - will have much impact on online retailing.
Tucker believes broadband will be significant for retailers: "They'll be able to give a better service and, if something's quick, it's much more encouraging."
But, observes Friedlein, customers want simplicity and most are using dial-up connections, both factors that militate against the use of complex rich-media design.
Broadband would, for example enable call-centres to be integrated with websites, but most retailers want to redirect call-centre transactions to the web because it is cheaper, says Sturgeon. Similarly, broadband would facilitate more detailed and sophisticated product presentation - but creating that content would, itself, add another layer of cost. "Again, would retailers want to do this?" asks Sturgeon.
Top 10 retail websites
Unique visitors in '000s:
1. eBay - 8,876
2. Amazon - 6,650
3. Kelkoo - 3,059
4. Tesco - 2,930
5. Argos - 2,523
6. Dealtime - 1,897
7. Comet - 1,506
8. John Lewis - 1,444
9. B & Q - 1,419
10. CD Wow! - 1,185
Quarter ending June 2003 Source: Nielsen//NetRatings
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