Study: Some E-Commerce Sites Profitable

Contrary to public belief, not all online retailers are losing money. In fact, 38% of online retailers say they're making an operating profit, according to a survey conducted this month by Shop.org and Boston Consulting Group Inc. (BCG).

The most profitable Web retailers are the online arms of existing catalog merchants, the survey found, while the least profitable are the "pure-play" Web merchants, who must build their entire business from scratch, said the survey.

"Publicly owned pure plays are not profitable, because they're investing more money on marketing," said Anita Bathija, an analyst at Boston Consulting Group, based in Boston. "The (pure-play Web merchants) that are profitable are all privately owned."

Traditional retailers who sell online and at physical locations fell in the middle as far as profitability, according to the study.

The results are contained in an update to The State of Online Retailing 3.0 study, which was released last month. It was conducted by Shop.org, a San Jose-based trade organization, and the BCG, and based on a survey of 221 online retailers.

The survey asked about the firms' operating profits, which take into account money spent on everything related to the business except capital investments.

It also asked only about the profitability of the online operations of the catalog-based and store-based retailers, not those companies' overall profitability.

A summary of the study said many people assume all online retailers are losing money because they focus on the large, publicly traded companies that sell only over the Web.

"Most efforts to gauge the health of online retailing focus on 60 or 70 companies - the publicly traded pure plays," the summary said. "Although these retailers accounted for 29% of total online revenues in 1999 and certainly can't be ignored, they are far from representative of the overall market."

BCG said the total online market is far larger and broader than the small group in the spotlight. BCG estimates that there are approximately 1,000 online retailers with annual sales of more than $500,000 and more than 10,000 smaller niche players.

Some 72% of catalog-based retailers said their online operations are generating operating profits. BCG said they are the most profitable because they already have an existing customer base that can be steered online, thereby reducing their customer-acquisition costs.

In addition, the study said that these firms can use existing marketing campaigns to promote their online businesses at little or no additional cost.

The pure-play online retailers - 24% of which said they're achieving an operating profit - are the least profitable, because they must build everything from a customer base to fulfillment capabilities from scratch. The study found that 38% of online operations of store-based retailers had an operating profit last year, ahead of pure plays but lagging behind catalog-based firms.

Store-based retailers are struggling on line because it's inefficient for them to use their existing infrastructures - designed to move large quantities of products from warehouses to store shelves - to deliver individual items to homes, the study said.

"In fact, store-based retailers may now be in a more precarious financial position than pure plays," according to the study. "Many of their online operations are losing money, (and) at the same time those online operations are pulling sales away from their (bricks-and-mortar) stores."

The original study, which surveyed 412 online companies, found that business-to-consumer e-commerce reached $33.1 billion last year.

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