Growing Despite New Pressures

Investor's Business Daily

Web-based retail in 2012 could be characterized as "Revenge of the Stores.

Competition is heating up in the space, and the pressure isn't just coming from Web stalwarts.

Department store chains Nordstrom (JWN), Macy's (NYSE:M), Target (TGT) and others are making a significant push to challenge digital natives like Amazon.com (AMZN) and eBay (EBAY) for a bigger share of the multibillion dollar e-commerce market.

They're going where the action is. Internet sales are a fraction of overall retail sales, but they continue to outpace the growth of the broad industry.

Nordstrom has committed $1 billion over the next five years to spruce up its online operations. Target is also retooling its Web strategy.

Meanwhile, second-quarter online sales for Macys.com and Bloomingdales.com increased 36% from a year ago as Macy's boosts its online operations.

After years of stumbling, physical stores are launching more aggressive online game plans to better appeal to cyber shoppers, says Jessica O'Brien, an analyst for research firm Gartner.

"They want to be able to leverage their stores, leverage a single inventory pool and just have more flexibility in their supply chain in order to compete with people like Amazon," she said.

Traditional retailers have to adopt a winning Internet formula or risk losing sales, says Shawn Milne, an analyst for Janney Montgomery Scott.

"Consumers just want better selection, better pricing and convenience," he said.

Online retailers have often been able to provide exactly that, and overall they've continued to prosper this year. IBD's Internet retail group ranked No. 28 out of 197 groups as of Friday's edition.

Haves And Have-NotsE-commerce, the act of selling goods and services online, is practically synonymous with the Internet. But not all of the 22 companies in IBD's Internet retail group compete on the same Web page.

Amazon is the Web's top online retailer, while eBay is the Internet's leading auctioneer and platform for helping businesses and consumers sell goods online.

Other top players in the sector serve more niche markets. Argentina-based MercadoLibre (MELI) is the leading e-commerce player in Latin America and partly owned by eBay. Liquidity Services (LQDT) helps companies sell returned goods and excess inventory.

CafePress (PRSS), a thinly traded microcap, sells topical T-shirts and related items produced by the company and other vendors. Another company, Groupon (GRPN), is the leader in daily deals — limited-time discounts on goods and services sold to consumers.

Most are growth companies. Amazon's revenue gains in the last four quarters have ranged between 44% and 29%, although a spending spree has led to profit declines.

Liquidity's sales growth has ramped up from 13% to 46% in the same time frame, while eBay's has ranged between 32% and 23%. MercadoLibre's revenue growth has come in between 46% and 28% over the past four quarters.

But Groupon, while still growing, has seen its revenue gains decelerate from 426% to 45% over the last four quarters. The daily deals pioneer, along with most of the names in the 22-member industry group, trades under $10 a share. Many institutions won't buy stocks unless they're above that level.

E-commerce is a market of haves and have-nots, says Janney's Milne.

"The market is very strong. Within that there are very disparate performances in the Internet retail group," he said. "Everything is not created equal.

Growing But Deceleration SeenE-commerce overall continues to thrive. Global sales of goods and services on the Web will reach $1.3 trillion in 2015, up from $0.8 trillion last year, researcher IDC says.

U.S. e-commerce is also growing. By 2015, online sales to consumers in the U.S. will hit $354 billion, up from $245 billion in 2011, IDC says.

But unlike the global picture, annual e-commerce growth in the U.S. is expected to decelerate from 11% this year to 8.2% by 2015.

In Q2 online sales in the U.S. grew by 15% vs. the year-ago period, slowing down a little from 17% year-over-year growth in Q1, says ComScore, another research firm.

ComScore cited the weak economy as the top reason for the slowdown. But Greg Girard, an IDC analyst, says it's a competitive issue.

"It's because online retail is coming up against the intrinsic value of the store, which it can't replicate," he said. "The store is a social place. It's multisensory, it's interactive, which online retailing is not.

Other Internet retail markets are flourishing. E-commerce grew in Latin America by 43% to $43 billion in 2011, says AmericaEconomia Intelligence and Visa.

Niche markets could also be a boon for some e-commerce players. Millions of small businesses in the U.S. provide a promising opportunity for Stamps.com (STMP), which sells U.S. postage online, says Craig-Hallum Capital analyst George Sutton.

"If you look at the online penetration, meaning someone using a service like Stamps.com, we are still in the early-adoption phase," he said.

Taxing Like Regular StoresSales taxes will also become an issue for Internet retail. Congress is considering several bills that would require online retailers to collect sales taxes. That could amount to $20 billion annually.

Internet retailers have avoided collecting sales tax by relying on a 20-year-old Supreme Court ruling concerning mail-order merchants. The court exempted mail-order merchants from collecting sales tax on transactions in states where they don't have a physical presence.

Amazon's aggressive warehouse expansion plan has helped reduce that defense. It collects taxes on its sales in six states and plans to add California and Pennsylvania this month.

It's unclear whether a Web sales tax mandate would be detrimental to Amazon and a boon for physical stores, says Gartner's O'Brien.

"I don't know if the sales tax is going to drive a ton of business back into stores, but it might give the (physical) retailer a little bit more of an advantage," she said.

Go Mobile Or ElseMobile devices are one of the biggest concerns for online retailers. In Q2, global tablet shipments reached 24.9 million vs. 14.9 million in the year-ago period. Smartphone shipments in the U.S. in Q2 reached 23.8 million, down 5% from a year ago, says Strategy Analytics, a research firm.

Amazon and several online and offline retailers have jumped on the mobile bandwagon. Many offer mobile versions of their websites to stay in step with shoppers wanting to compare products and prices on the go, says Janney's Milne.

"They are no longer tethered to a PC, and they are no longer tethered to shop while they are at work," he said. "It's just providing a better convenience option for consumers.

EBay is working on improving its core Marketplace business to make it more competitive with Amazon's own third-party seller business. EBay's mobile program and its acquisition of Web services company GSI Commerce last year are helping, says Nick Landell-Mills, an analyst for Indigo Equity Research in a July 21 report.

"Marketplaces have been boosted by the GSI acquisition, better website experience, more fixed price sales, increased focus on selling new goods, better advertising and mobile commerce," he wrote.

Outlook: It's ComplicatedOnline retail is growing. But the percentage increases are slowing as the market matures. The economy is also making consumers more concerned about scoring the best price and free shipping offers.

Amazon continues to push into new areas of growth with its cloud-based computing business that allows consumers and businesses to store and access data on the Internet. The e-commerce king also continues to beef up its streaming video business with content partners such as CBS (CBS). Plus on Thursday, it unveiled new Kindle e-readers and tablets, which boost buying of e-books and movies.

An uneven economy might be good news for Liquidity Services, which thrives on handling returns for large retailers, says Janney's Milne. "You are talking about retail returns in the U.S., which are somewhere between a $60 billion and $100 billion opportunity for them," he said.

But economic woes continue to pressure the industry. In July, CafePress lowered revenue guidance for 2012 to between $208 million and $217 million, up 19% to 24% from last year. In May it had expected annual growth of 27% to 35%. Europe continues to be soft. The presidential election also isn't producing as expected, Milne says.

"People are just not buying the Obama T-shirts and Romney T-shirts that was nearly expected," he said.

The growth of goods sold on MercadoLibre could be challenged in the near-term, says Mark Miller, an analyst for William Blair in an Aug. 3 report.

"We expect local-currency (gross merchandise value) growth will continue to decelerate as the company laps difficult year-over-year comparisons and as economic growth has slowed in Latin America," he wrote.

Groupon also has growing pains, Milne says.

"The problem is the daily deal business looks like it's tapped out a bit," he said. "The growth now is coming from the Groupon goods business, and it's difficult to see whether they are going to be able to scale that business up."

View Comments