Online retailers collectively make profit

updated 8:03 a.m. ET May 25, 2004

Online retailers collectively made a profit last year for the first time as sales jumped a better-than-expected 51 percent, in a sign of continued resilience in e-commerce, an industry survey found.

Online sales surged to $114 billion last year, surpassing forecasts of $96 billion, fueled by the travel category, according to an annual survey of 150 retailers conducted by Shop.org, the online arm of the National Retail Federation, and Forrester Research, an Internet research company.

The online retailers broke even in 2002 as sales, which include those from brick-and-mortar and catalog companies as well as strictly Web-based companies, totaled $76 billion, the survey, being released Tuesday, said.

"This positions online retailing as a real profit engine for retailers," said Scott Silverman, executive director of Shop.org., noting that typical brick and mortar stores have an operating profit margin of between 3 percent and 10 percent compared with 21 percent margins among the online retail shops.

The report, published annually since 1997, is considered one of the most comprehensive assessments of the health of the online retailing industry. It offers a wider measure of online retail sales than the Department of Commerce reports, as it includes transactions from travel, event tickets and auctions.

Excluding travel, online sales increased 34 percent to $71.8 billion last year.

Survey officials declined to disclose the names of the merchants polled, but said 45 percent of online retailers surveyed had $10 million in revenues or more.

Still, online revenues represent a small portion of total retail sales, 5.4 percent in 2003. But online sales are rapidly gaining share in certain categories, such as computer hardware and software, where 43 percent of sales last year were over the Internet.

Silverman said online retailers, particularly the Web-based merchants, were able to achieve better profitability by slashing marketing costs per order. Those retailers reduced their costs to $2 per order in 2003 from $10 per order in 2002. That was due largely to companies' increasingly paying search engines for prominent placement in consumers' keyword search results.

The study projected that online retail sales should increase 27 percent to $144 billion in 2004. In certain categories, online sales are expected to expand more than 40 percent. As more women shop online, health and beauty should see a 61 percent increase, apparel should expect a 42 percent jump, and flowers, cards and gifts should post a 41 percent gain this year, the report said.

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