The Top 500 Guide

2005 was another banner year for the Internet retailing industry with merchants across the board achieving significantly higher sales, average tickets, conversion rates and traffic.

By Mark Brohan Internet retailing has seen a decade of extraordinary growth. What’s more, during the past 10 years the web consistently has outperformed many multi-channel retailers’ store and catalog sales channels. Regardless, many retailers and industry analysts expected a softer year in 2005. After all, national economic indicators suggested shakier consumer confidence due to higher energy prices, a cutback in consumer spending brought about by a cooling housing market and overarching worries over the sporadic economy.

Expectations, however, were defied. Internet retailers matched sales growth in 2005 with that of 2004—to the number. According to The Internet Retailer Top 500 Guide to Retail Web Sites, 2005 was another year of 25% growth for the industry. Total business-to-consumer e-commerce sales reached $109.4 billion, 25% higher than 2004’s $87.5 billion, which was 25% more than 2003’s $70 billion.

The nation’s top 500 Internet retailers include a diverse mix of chain stores, catalogers, virtual merchants and consumer brand manufacturers. They led the way to higher online sales last year. The top 500 online retailers combined rang up sales of $68.9 billion in 2005—63% of all U.S. Internet-based sales. In comparison, the top 400 web retailers ranked by Internet Retailer in 2004 generated combined web sales of more than $51 billion, or 58.3% of all U.S. Internet sales.

Also, this year’s research finds two trends from 2004 continuing in 2005: higher average tickets and more traffic to the largest retail web sites.

Ranks and stats

The Top 500 Guide identifies the 500 largest retail web sites, ranking them by their 2005 sales. It also measures other key statistics for each e-commerce site, including monthly visits, monthly unique visitors, sales conversion rate and average ticket.

In 2005 the top 500 retailers recorded an estimated 523.9 million separate sales at an average ticket of $118. By comparison, 2004’s top 400 retail web sites had an estimated 401.5 million individual sales with an average ticket of $107. To present a true picture of average orders, this measurement eliminates sites with unusually high average orders; some furniture sites, for instance, have average orders of $1,350 and some computers/electronics sites have average orders of more than $400. When those higher value sites are factored in, the average ticket climbs to $167.

When web retailing began catching on in the mid- to late 1990s, right before the dot-com investment bubble burst in late 2000, many analysts predicted online shoppers—at the time mostly upper income, highly educated and computer literate men and women—would limit their spending to a few merchandise categories.

A decade later, Top 500 Guide research clearly shows the industry is diversifying its merchandising base, as evidenced by the fact that 11 major categories—apparel/accessories, books/CDs/DVDs, computers/electronics, flowers/gifts, food/drug, health/beauty, housewares/home furnishings, mass merchant/department store, office supplies, specialty/non-apparel and sporting goods—each generated more than $1 billion in their retailing segments.

Ten years ago, the books, CDs and DVDs category—consisting of items easy to pick, pack and ship—topped the list of categories generating the most web sales. Today the diversity of web retailing mirrors that of overall retailing, meaning most items consumers could once find only in a store or catalog now can be found online as well.

In 2005 mass merchant sites such as Amazon.com, Sears.com and others generated the most per-category sales. For the year, the mass merchant and department store category’s online sales totaled $18.3 billion, followed by: computers and electronics with $17.7 billion; office supplies with $10.3 billion; apparel and accessories with $7.1 billion; and books, CDs and DVDs with $2.5 billion.

Home improvement improves

Not too long ago, traditional merchants questioned what appetite their customers had, if any, for buying very small-ticket or fairly big-ticket items for the house and yard over the Internet. The Top 500 Guide, however, reveals that today hardware and home improvement is the web’s fastest growing sales category, increasing at an annual rate of about 50%.

For instance, a direct comparison between the 10 merchants ranked in the Internet Retailer Top 400 Guide to Retail Web Sites and those very same merchants in the Top 500 Guide reveals that year-over-year spending in the hardware and home improvement category increased 46.4% from $482 million in 2004 to $705.6 million in 2005.

The top merchant leading the hardware and home improvement category was The Home Depot Inc. (No. 41), with 2005 Internet Retailer estimated sales of $279.7 million, followed by Lowe’s Cos. Inc. (No. 69) with estimated web sales of $148.8 million. The category is growing because retailers are stocking multiple SKUs at prices that appeal to consumers. They’re also updating their web sites with more do-it-yourself content, ratings and reviews.

For example, Home D'cor Inc. (No. 107), which operates multiple e-commerce sites focusing on different segments of the market, grew e-commerce sales 58.3% to $79 million from $49.9 million in 2004. Sales are up because Home D?cor has been adding categories such as higher-end appliances, a merchandising segment that generated sales of $10 million, 13% of Home D?cor’s total web sales.

Other product categories also posted impressive annual gains, particularly office supplies. Online office supplies sales for the same merchants ranked in both the Top 400 Guide and Top 500 Guide grew 60% from $6.4 billion in 2004 to $10.3 billion in 2005. The field was led by Office Depot Inc. (No. 2) and Staples Inc. (No. 3), each with 2005 web sales of $3.8 billion, and OfficeMax Inc. (No. 6), with e-commerce sales of $2.6 billion.

After office supplies, other online retail categories with fast-growing annual sales from 2004 to 2005 include: apparel and accessories, up 42% to $6.3 billion; books, CDs and DVDs, up 36% to $2.3 billion; mass merchandise, which increased 26.8% to $18.3 billion; food and drug, up 26% to $1.8 billion; and toys and hobbies, up 24% to $705 million.

Sporting goods merchants listed in both the Top 400 Guide and Top 500 Guide also posted a good year, growing their combined annual web sales in 2005 24% to $1.2 billion from 2004’s $998 million. Sporting goods was followed by: flowers and gifts, up 20.3% to $1.1 billion; jewelry, up 19.7% to $515.6 million; computers/electronics, up 16.1% to $16.6 billion; specialty/non-apparel, up 12.2% to $1.9 billion; and health and beauty, up 11.3% to $1.7 billion.

The chain gang

As is the case for offline retailing, chain retailers accounted for the biggest portion of total online sales in 2005. As befits their substantial investment in technology, marketing, merchandising, distribution and customer service, retail chains amassed 40.3% ($27.8 billion) of all online sales last year, followed by virtual merchants with 30.2%, consumer brand manufacturers at 15.3% and catalogers at 14.3%.

By comparison, chain retailers had 2004 e-commerce sales of $19.9 billion, 38.9% of all web retail sales, followed by: virtual web merchants, with $13.9 billion (27.2%); consumer brand manufacturers, with $9.6 billion (18.8%); and catalogers, with $7.8 billion (15.2%).

Retail chains are widely represented in the mass merchant category—nine chains are included among the 27 mass merchant sites ranked in the Top 500 Guide. Consolidation in both the online and general retailing markets is creating mass merchant sites with bigger economies of scale—and market share.

Due mostly to its acquisition of Lands’ End in 2002 and its merger with Kmart Corp. in 2005, Sears Holdings Corp. (No. 7), for example, now is the second largest mass merchant on the web, with annual Internet Retailer estimated e-commerce sales of $2.2 billion.

With 2005 e-commerce sales of $8.5 billion, an increase of 22.7% over 2004’s $6.9 billion, Amazon.com (No. 1) is the top retailer in the mass merchant category, with market share of 12.3%. But other major retailers are beginning to close the gap. The Internet retailing market now has 14 companies that generate more than $1 billion in annual web sales, compared with just 10 in 2004.

In addition to Amazon, the other 2005 top 10 sites, all in the billion-dollar club, include: Office Depot Inc. (No. 2), $3.8 billion; Staples Inc. (No. 3), $3.8 billion; Dell Inc. (No. 4), $3.78 billion; HP Home and Home Office Store (No. 5), $2.8 billion; OfficeMax Inc. (No. 6), $2.6 billion; Sears (No. 7), $2.2 billion; CDW Corp. (No. 8), $1.8 billion; SonyStyle.com (No. 9), $1.6 billion; and Newegg.com (No. 10), $1.3 billion. Web sales for Dell, HP, Sears and Sony are Internet Retailer estimates.

Billions and billions

More companies are hitting $1 billion or more in annual online sales by sticking with business-to-consumer e-commerce for the long haul and building online brands—bolstered by multi-channel support—consumers have grown to trust. For instance, J.C. Penney first developed an online channel in 1994 but didn’t achieve more than $1 billion in annual web sales until last year.

But the chain began building an online base long before many of its competitors and was among the first retailers to develop a merchandising strategy aimed at customers who shop online from work with a broadband Internet connection. As a result, JCPenney.com now routinely attracts more than 20 million monthly visits from 7.9 million monthly unique visitors, according to comScore Networks Inc.

Overall the 14 companies with more than $1 billion in annual web sales represent 61.2% of all online sales among the top 100 retailers, which continue to dominate the overall Internet retailing market.

In 2005 the web’s top 100 retailers, which include 37 chain retailers, 25 catalogers, 31 virtual merchants and seven consumer brand manufacturers, racked up combined sales of $59.6 billion—54.5% of all online sales, up slightly from 53% in 2004 and 52.6% in 2003. The top 100 are getting bigger as a direct result of building web stores with broader inventory, faster search, better graphics, deeper content such as consumer product reviews, more rich media applications and more personalization.

Some top 100 companies, though, are growing as a direct result of a merger or acquisition. IAC/InterActiveCorp. (No. 23) grew web sales 105% to an Internet Retailer estimated $621 million in 2005 from $303 million in 2004 as a result of its acquisition of Cornerstone Brands in March 2005. The acquisition gives IAC 12 e-commerce sites: HSN.com, the e-commerce arm of the Home Shopping Network; Improvements.com; Alstos.com; AmericasStore.com; HomeFocusCatalog.com; BallardDesigns.com; Frontgate.com; GarnetHill.com; Smith+Noble.com; TheTerritoryAhead.com; TravelSmith.com; and IsabellaBird.com. Further, IAC/InterActive continues to grow through acquisition. In January the company purchased Shoebuy.com (No. 127) for an undisclosed sum.

Other top 100 companies also are making acquisitions to grow their market share. Federated Department Stores Inc. (No. 29) completed its takeover of May Department Stores Co. in 2005; it is consolidating a dozen diverse web stores into flagship brands Macys.com and Bloomingdales.com. Liberty Media Corp., which owns QVC, acquired Provide Commerce Inc. (No. 56) in early 2006 for $477 million.

While chain retailers had a solid 2005 with an average growth rate of about 38%, other top 100 online retailers in other business segments also enjoyed solid growth. Among web-only merchants, Zappos.com posted the highest growth rate by increasing web sales 101% to $370 million from 2004’s $184 million.

Zappos, which expects to generate online sales of about $600 million in 2006 and sales of $1 billion within five years, was followed by: RealPlayer Music Store (No. 92), up 100% to $97.5 million; MLB Advanced Media (No. 82), with a 67% increase to Internet Retailer estimated sales of $116.2 million; Overstock.com (No. 18), with a 63% year-over-year growth rate to $804 million; Provide Commerce (No. 56), up 37.5% to $177 million; Peapod (No. 45), up 31.2% to $240 million; Newegg (No. 10), up 30% to $1.3 billion; FreshDirect (No. 68), up 25% to $150 million; and Blue Nile (No. 52), up 20.1% to $203.2 million.

Among consumer brand manufacturers, the company posting the biggest annual gain in 2005 web sales was Shoes.com Inc. (No. 192), an e-commerce unit of Brown Shoe Co. In 2005 web sales for Shoes.com reached $34.6 million, an increase of 95.5% from 2004’s $17.7 million. Shoes.com was followed by: Ralph Lauren Media LLC (No. 101), up 70% to $85 million; Apple Computer Co. (No. 15), up 64.7% to $900.8 million; Clinique Laboratories Inc. (No. 319), up 50% to $13.9 million; LEGO Direct Marketing Inc. (No. 136), up 46% to $56.8 million; Coach Inc. (No. 162), up 40% to $46.9 million; The Timberland Co. (No. 275), up 37.9% to $18.6 million; and A|X Armani Exchange (No. 239), up 37.1% to $23.4 million. The web sales for Apple, Clinique, LEGO, Coach, Timberland and Armani are Internet Retailer estimates.

Cataloging sales

Overall the 45 consumer brand manufacturers ranked in the Top 500 Guide grew by an average 26.1% in 2005, an impressive figure given that many manufacturers, concerned about alienating their retailers and distributors, were slower to embrace business-to-consumer e-commerce than chain retailers, catalogers and web-only merchants.

While many manufacturers trailed the market in e-commerce business development, however, companies in another segment, catalogers, were among the very first to leverage direct marketing and fulfillment expertise and begin selling on the web. As a result, many catalogers, including L.L. Bean Inc. (No. 22), now list the web as their biggest sales channel. In 2005 many individual catalogers continued to post impressive numbers, though catalogers as a whole only accounted for 14% of total 2005 web sales.

In 2005 CDW was the largest catalog/call center operator listed in the top 100 and grew its online sales 16% to $1.8 billion. It was followed by: QVC (No. 14), up 38% to $1 billion; L.L. Bean (No. 22), up 25% to $653.8 million; Avon (No. 25), up 24.1% to $566.5 million; PC Connection (No. 33), up 38.7% to $375.5 million; 1-800-Flowers.com Inc. (No. 35), up 17.4% to $361 million; and Scholastic Corp. (No. 42), up 22.7% to $270 million. The web sales for L.L. Bean, and Avon are Internet Retailer estimates.

Other catalog and call center companies turning in a solid performance last year include: Musician’s Friend Inc. (No. 50), which posted web sales of $211.9 million, an increase of 25% over 2004; and Northern Tool + Equipment Catalog Co. (No. 75), with an increase of 26% to 2005 e-commerce sales of $131 million.

As in previous years, Internet Retailer’s 2005 annual ranking of the top retailers based on annual web sales finds that many companies with an established online marketing and merchandising base continue to post solid gains year in and year out. The Top 500 Guide also has identified a number of fast-growing companies, which includes a surprising mix of brands both old and new.

For example, one of the few bright spots Blockbuster Inc. can point to these days is e-commerce. Blockbuster (No. 70) has struggled financially for several years as it copes with changing consumer demand for leisure and entertainment products and an overall industry decline in movie-related sales.

In 2005 Blockbuster’s total revenue slipped 3.1% to $5.86 billion from $6.05 billion in 2004. But Blockbuster also is reporting that revenue from its start-up online movie rental business grew 17-fold in 2005 to $146.7 million from $8.6 million in 2004, making it the fastest-growing online retailer in the Top 500 Guide. As a result of making e-commerce a bigger part of its multi-channel strategy, it now represents 3.5% of the company’s total movie rental revenue vs. just 0.2% in 2004.

But Blockbuster’s e-commerce program is under fire. In April Netflix Inc. filed a patent infringement suit against the company and asked a federal court to shut down Blockbuster’s 18-month-old online rental service. The lawsuit also seeks unspecified damages. Blockbuster says the lawsuit is without merit and that it will “defend itself vigorously.”

Generally speaking, the Internet enables retailers of all sizes with a viable business plan the opportunity to generate record sales early on. Housewares and home improvement site The Inside Store, for instance, had the second fastest growth rate in the Top 500 Guide. The company (No. 476) saw its 2005 sales rise 477.8% to $5.2 million from just $900,000 in 2004.

Looking ahead, however, most retailers plan on settling for more realistic results. With U.S. Internet retailing sales historically growing at an average 20% to 25% annually, the industry is on track to achieve total sales of about $136 billion in 2006, which would be a 25% increase over 2005’s $109 billion.

The Top 500: Key operating statistics

Industry concentration

The concentration of the e-retailing industry mirrors that of all retailing. The Top 500 e-retailers account for 63% of all online sales, but the top 100 dominate. The top 100 control 54.5% of retail web sales. By comparison the top 100 store-based retailers control more than 60% of all retail sales in the U.S., not including automobile and restaurant sales.

Web site traffic

In 2005 the Top 500 retail web sites received 1.42 billion average monthly visits. There are 147 million Internet users in the U.S., who visited an average of four retail sites in 2005.

Performance averages

The Top 500 retail sites recorded an estimated 523.9 million separate sales in 2005 at an average ticket of $118. Sales conversions based on monthly visits vary widely, ranging from 0.45% to 23% for chain retailers, 0.39% to 23.5% for catalog/call center operators, 0.10% to 31% for virtual (web-only) merchants, and 0.75% to 20.2% for consumer brand manufacturers.

Percentage of web sales

The sales of the top 100 retail web sites in 2005 accounted for 54.5% of the total corporate sales of the retail chains, catalog companies and manufacturers that operate those sites.

Methodology

Researchers contacted hundreds of retailers over five months. The starting point of data gathering was the rankings of retailers’ web traffic from comScore Networks Inc. and Nielsen/Net Ratings Inc. That list was supplemented with retailers that Internet Retailer has covered.

Web sales. Whenever possible, web sales listed in the guide came from the company. If the company did not provide sales figures, Internet Retailer estimated sales based on traffic and an assumed conversion rate and average ticket for that retailer’s category—as well as on analyst interviews—to formulate estimates. Retailers were given the opportunity to respond to estimates.

Visits and unique visitors. Official numbers were supplied by many retailers. When a retailer did not reveal figures, researchers used comScore, Nielsen/Net Ratings or Internet Retailer estimates. Retailers were given the opportunity to respond to estimates.

Conversion rates. In most cases, researchers used category data and analyst interviews to formulate estimates if a retailer did not reveal a number. Retailers were given the opportunity to respond to estimates.

Average ticket. If a retailer would not reveal an average ticket, researchers estimated the figure based on averages within a category and input from market analysts. Retailers were given the opportunity to respond to estimates.