First Ever, In-Depth Study of Online Retailers Sets New Benchmarks and Identifies Strategic Framework for the Future of Retailing on the Web.

SILVER SPRING, MD--(BUSINESS WIRE)--November 18, 1998--

Shop.org Report, Conducted by The Boston Consulting Group,

Deepens Understanding of Forces Shaping Extraordinary Growth of

E-commerce; Debunks Online Retailing Myths

The first comprehensive, data-rich report on the online retailing industry was released today by shop.org, the online retailers association. The report--"The State of Online Retailing"--is the result of an in-depth survey and analysis of 127 online retailers in seven categories conducted by The Boston Consulting Group (BCG), the management consulting firm.

The shop.org/BCG report illuminates industry best practices and tracks performance benchmarking data based on the study of leading online retailers of apparel, computer goods, food & wine, home & garden products, gifts, entertainment and services. (Industry size estimates in the report were derived based on hard revenue data equating to 61% of estimated online revenues.)

The study is the first in a series of semi-annual reports by shop.org and BCG that will track the online retailing industry from the retailer perspective, providing needed benchmarks for the industry and the general public.

A New Perspective

The shop.org/BCG study is distinctive because it examines hard data from a significant sample of online retailers, as opposed to the behavior of online consumers or a few select businesses. "The State of Online Retailing" provides a formal roadmap for the future of retailing that takes into account the profound and rapidly evolving impact of e-commerce.

The report, designed to deepen understanding of the forces driving online retailing's evolution and growth, clarifies:

o Myths about online retailing and its future o How the convergence of offline and online retailing will drive

future growth o Best practices that leading online retailers are employing o What is and isn't inevitable about e-commerce and its impact on

retailing overall o The challenges to growth that online retailers now face o The size and growth of online retailing to date

"Online retailing is in such a dynamic, pivotal state right now that getting a fix on where we are, where we've been and where we're going is very difficult. Through exhaustive research among online retailers, this report delivers a unique database of best practices, insights and trends that will help online retailers and traditional retailers make smart decisions," said Donna M. Iucolano, vice president--interactive services, 1-800-FLOWERS, Inc. and a founding member and board member of shop.org.

David Pecaut, the senior vice president at BCG who oversaw the study, notes: "The report sends an important message to the retail industry: The most successful players will be the ones who can leverage the Internet to develop a shopping experience that creates value for consumers - and that is difficult for other online and offline retailers to replicate. This means that the industry will be required to develop online business models that are flexible enough to accommodate major growth. The Internet is emerging as a critical selling forum for all types of products and services and all types retailers, including those who will continue to operate traditional stores."

Added Cliff Sharples, president and CEO of Garden Escape, Inc. and founding chairman of shop.org: "This comprehensive study makes it clear that the underlying economics and growth of online retail are sustainable. Online retailers are investing now to reap rewards in the future. The study also challenges the belief that online and offline retailing will remain separate and distinct channels. The shop.org/BCG series of reports can provide all retailers with insights that, until now, had not been at their fingertips but that are crucial in setting effective, long-range strategies."

Key Statistical Findings

The in-depth survey and analysis of 127 online retailers in seven categories resulted in a number of key statistical findings:

While still in an emerging state, the online re experiencing exponential growth--in excess of 200% per year.

o The top-10 publicly traded online retailers have experienced

year-over-year revenue growth in excess of 160%. o Growth in traffic has been rapid, and revenue-per-order is

increasing. o Only 5% of unique visitors to sites become customers; only 1.6%

of visits result in purchases. Small improvements in conversion

result in dramatic increases in revenue.

Online revenues generated by North American-based retailers for the first six months of 1998 were $4.4 billion--less than 1% of overall retail revenue in North America.. o However, full year 1998 online revenues for retailers will surpass $13 billion.

Multichannel retailers migrating to the Internet account for the bulk of online revenues.

o Multichannel retailers, like Dell, Schwab, Eddie Bauer and Lands

End, account for 59% of revenues. o Generally, multichannel retailers experience better conversion

and loyalty.

Online retailers are investing heavily now to grow their customer bases. o 65% of the revenues generated by the shop.org/BCG sample of

online retailers are reinvested in marketing and advertising,

compared with 4% for most traditional stores. o Online retailers' marketing and advertising spending per order

generated is $26, compared with $2.50 for traditional stores.

Although there is a proliferation of retailers selling online, revenues are still concentrated in only a few mature sites.

o The 10 largest sites account for 50% of revenues. o Computer goods, entertainment, travel and discount brokerage 

account for over 80% of the online retail market.

Key Qualitative Findings

The study findings also shatters several widely held misconceptions about e-commerce, concluding:

o E-commerce is not limited in scope to "appropriate" products and

services. An ever-widening range of products and services are

being successfully marketed and sold or facilitated online. o Online retailing often expands overall market demand, rather than

cannibalizing traditional retailing. o Many online retailers are using existing distribution structures

to lower costs or improve convenience. o Online shopping in some cases promotes premium pricing, instead

of "commoditization"--the driving down of prices. o Portals (e.g., AOL and Yahoo) will not capture all of the "value"

in online retailing. The dynamics will shift to give more power

to strong retail sites that succeed in building their own brands

and customer bases. Portals directly drive less than 30% of

online retailing revenues. o Savvy retailers are choosing to invest early to grow their

customer base and achieve critical mass.

Role of "Deconstruction"

The study argues that the Internet poses a fundamental challenge to existing retailing business models. The traditional retail store performs a complex bundle of functions, including display and merchandising of products, fulfillment and warehousing, and sales and service. Traditionally, a customer interacts in one way or another with these areas in the physical store, through packaging, product placement and salespeople.

The Internet, however, enables retailers to disassociate information from the physical environment. This results in a deconstruction of the existing value chains that drive retailing. Online retailers are redefining traditional retail activities, like physical display of merchandise, with virtual displays and rich content and information that enhances and personalizes the shopping experience. This shift has enabled new retailing models. For many of these models, achieving depth and breadth of customer base will be a critical determinant of the retailers' ability to create and capture value.

Richness and Reach

Traditional offline retailers have always been limited in their ability to grow because of the dilemma of "richness" (depth of selection, customer relationships, information and customization) vs. "reach" (size of customer base). Richness and reach have tended to operate in direct opposition to one another: As reach increases, richness shrinks (and vice versa).

The Internet breaks down this fundamental tradeoff by providing online retailers with the benefits of unlimited richness and reach, simultaneously. This creates a tremendous advantage for online retailers over their offline counterparts in scaling their models.

Scaleability and First-Mover Advantages 

The emerging, new business models for online retailing also suggest that the combination of "scale" advantages (i.e., increasing returns as online businesses grow deep, loyal consumer bases) and "scaleability" (i.e., ability to grow quickly) creates a unique growth dynamic. This environment favors first movers that establish leadership positions in their businesses.

Shop.org is the trade association which provides leading online retailers with unparalleled networking opportunities where participants can exchange ideas and solutions with other industry innovators. Its members represent all segments of online retailing. A comprehensive list of the association's members is available at http://www.shop.org.

The Boston Consulting Group, a management consulting firm founded in 1963, works with leading international companies and organizations on issues of strategy, operations and performance. BCG is privately held by its officers and has 45 offices in 32 countries around the world.

Note to Journalists: Additional Report Findings Available

In addition to the top-line findings included in this release, other highlights of the report are available online at www.shop.org, or by calling Shelley Bates of Cone Interactive at [phone] x 120 ([e-mail]) or Linda Butler of The Boston Consulting Group at [phone] ([e-mail]).

The additional available highlights include: o Strategic Insights: Imperatives for Online Retail Growth o Challenges to Growth in Online Retailing: Six Major Hurdles for

Online Retailers o Case Studies of Online Retailing Excellence o Executive Summary of Full Report

(Note: The complete version of the report is available only to shop.org members.)