E-tail is making headway, but is it too reliant on Christmas?

Did the e-tail sector have a merry Christmas or a grim one, Alasdair Reid debates.

Have we really just witnessed the UK's first e-commerce Christmas? Depends on your benchmark, obviously. Some wild enthusiasts in the industry actually claimed that last year and early January was the breakthrough holiday period, despite the fact that sales figures were nowhere near as high as forecast and order fulfilment performance was, by and large, shockingly poor.

So here's a better benchmark. £1 billion. This, all things considered, is a nice, round number. OK, it's still a small fraction of total UK retail sales (somewhere around 4 per cent) but, to paraphrase that hilarious old US Treasury Department quip, take the odd billion here and there and you could soon be talking serious money. In November, the online shopping market was worth £1 billion and the market pushed through this significant barrier again in December, according to figures from the Interactive Media in Retail Group.

There was more good news from the US, where Amazon (now a fully fledged virtual department store, not just a book and record shop) had a great year and e-tail performed strongly across the board.

The only blot on the landscape as far as the UK was concerned was a report from the Verdict retail consultancy indicating that growth in penetration has stalled. Verdict reckons that, although online retail sales were up 10 per cent across 2002, the number of shoppers using the internet remained static at around 8.2 million.

Worrying? Only if you believe the figures. James Roper, the chief executive of the Interactive Media in Retail Group, doesn't. The Verdict report, he asserts, is just plain wrong. "The truth is that 14.3 million people in the UK shopped online in 2002, compared to ten million the year before," he maintains.

Maybe so. But here's another nagging worry. A good Christmas may be nice (and, after all, the whole retail sector is geared around a bumper final quarter) but it does tend to highlight the fact that e-tailing is far too reliant on a couple of months in the year. More than a third of all online purchases are made in the run-up to Christmas.

Can the online sector now look to break out of its Christmas bridgehead?

Nigel Sheldon, a managing partner in m-digital and an associate director of The Henley Centre, thinks so. "The more people go on to the web, the more they will start using their credit cards - but there's always a gap between when a person becomes familiar with the web and their decision to use their credit card. There's also purchasing progress. If you try it and have a reasonable experience you're liable to trust it again. I think the people who tried it last Christmas came back again this Christmas. The evidence from the US is also that more women are buying online."

Charlie Dobres, the chief executive of i-level, agrees that, almost without realising it, we've reached critical mass. He says: "It has become an everyday thing to buy online. If people spend long enough with something they become comfortable with it. Experience has now taken over from expectation - and, before, expectations were unreasonably high, perhaps, because of the hype. The thing is that a lot of this activity is about real shops online. Surprise, surprise - brands are important on the net."

The increasing penetration of broadband helps too. When people get broadband access they typically start spending 20 hours a week on the internet as opposed to less than nine hours previously on their old dial-up modems.

The more time people spend online, the greater their propensity to shop.

But both Sheldon and Dobres agree that to take the market on to the next level, the serious players will have to start investing - in content and site functionality, in fulfilment, and, tellingly, in coherent marketing strategies. Is it likely to happen, though?

Roper says we're seeing the complete opposite of the conditions that prevailed during the dotcom bubble. "At the moment, it's being driven almost entirely by consumer demand. When the dotcoms went pop, the demand that there was transferred to the retail brands that had sites capable of sales."

The irony is that the arguments put forward by the dotcoms are as true now as they were then. "Online retail is about choice and convenience but the truth is that some services are still bloody awful. You could argue that it's high time there was some proper structured investment in this area," Roper adds.

The problem is that the people who now dominate - the established retailers who've diversified - don't really have a coherent approach. They know e-tailing won't go away but they're nervous about cannibalising their established business base.

Perhaps we need a second crusade. A New Wave. One way or another, retailers will have to re-invest in content, site functionality, fulfilment and marketing.

Are we likely to see a surge in spend and offline for e-tail operations?

It's a question that makes everyone nervous - they don't want bad memories of the dotcom era to be evoked, nor do they want embarrassing analogies drawn.

"Two-and-a-half years ago, when this issue affected people's share prices, they threw money at it. They made bad investments but those bad assets have been carrying the business ever since. You suspect that they won't go back to throwing money at it," Roper says.

"But everyone recognises that the internet is becoming the backbone that facilitates commun-ications and relationships with customers, even if they're not actually spending online. And when e-tail was 1 or 2 per cent of the business, senior management wasn't interested.

Now it's 4 per cent of trade they are. I would be astounded if consumer demand doesn't draw more investment into this area," he concludes.

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