Online Retailers Tightening Belts, Too

Faced With Nervous Consumers and Slower Traffic, Many Cutting Back on Marketing

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NEW YORK (AdAge.com) -- With the economy sending bricks-and-mortar sales into a tailspin, web retailers are no longer immune to slowing sales or shrinking marketing budgets.

In a Shop.org holiday survey, 30% of online retail marketers said they were trimming marketing budgets, while 16% said they were reducing promotional spending. "[Retailers] are looking to save costs wherever they can," said Scott Silverman, executive director of Shop.org. "And they're investing in some of the tactics that they know are going to pay off."

Free shipping popular as ever
Free shipping, a consumer favorite, is one of those tactics. In the survey, 45% of retailers said their budgets for free-shipping promotions were either significantly or somewhat higher compared to last year.

Online retailers, who have become accustomed to holiday sales increases in the 20% range, have reason to put on the brakes. Forrester projects sales this holiday season will grow at the slowest rate ever, 12% vs. 21% a year ago. Sales are expected to reach $44 billion during the months of November and December, compared with $33 billion a year ago.

"While e-commerce has traditionally been resilient to negative offline trends, an unprecedented financial crisis has reined in the optimism," said Sucharita Mulpuru, a principal analyst at Forrester. She notes that 45% of online consumers plan to buy less overall this holiday due to uncertainty about the economy, up from 20% in 2007.

Less traffic online
Traffic to websites has also slowed, according to Hitwise, an online measurement firm. The company had seen nine consecutive weeks of declining traffic as of Oct. 31. Typically, traffic would be growing as consumers begin to look for holiday gift ideas and establish price ranges for items, said Heather Dougherty, research director at Hitwise. Surprisingly, even shopping comparison sites are showing lower traffic figures than they did a year ago.

"It points very directly to fear [among] consumers, in terms of spending," Ms. Dougherty said. "They're definitely very, very cautious about what they're spending money on."

The music and office-supply categories have been particularly hard hit, showing 21% and 15% declines in traffic, respectively, during the one-week period ended Oct. 31. By contrast, the grocery and alcohol category saw an 8% uptick in traffic, while health and beauty saw a 9% increase.

Still, despite slowing online traffic and sales growth, experts say retailers should be cautious about cutting back too much in an area that continues to outperform bricks-and-mortar. Overall retail sales are projected to grow only 2.2% by the National Retail Federation, making online growth projections of 12% downright cheery.

Online share still growing
Deloitte's annual holiday survey also presents several compelling reasons to maintain spending online. The category is ranked by consumers as the No. 2 shopping destination this year behind discount department stores. A full 21% of consumers plan to shop primarily or entirely online this season, up from 19% last year. And 24% of total dollars spent this season are expected to be spent online, compared with 22% last year.

"Retailers should be viewing [online investments] as a way to capture lost sales and prevent them from going to a competitor," said Mr. Silverman. "I'm not going to say the growth in online is all additive -- a lot of it is shift. However, if you haven't been investing in your online store, that shift may not go to you, it may go to a competitor."
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