Tuesday - September 19, 2000

$12 Billion to be Spent on Internet Christmas Shopping

Despite the numerous challenges online merchants faced in the past year, consumers will continue to shift their holiday budgets online and will spend an estimated $12 billion this holiday season, which Jupiter defines as November 1 through December 31. After what was a tumultuous year for many companies, merchants must refocus efforts to reach profitability by narrowing their estimation of their natural market—the audience of consumers that already appreciate the merits of a merchant's product, have the means to purchase it, and are willing to buy it online.

"While Wall Street's love affair with the online retail sector has ended, consumers continue to spend more money online, which will drive impressive sales gains," said Ken Cassar, an analyst with Jupiter. The online holiday season will yield $12 billion in sales in 2000, representing a 66 percent growth above the $7 billion generated during the 1999 holiday season. Online retail sales will account for $9 billion, and travel products such as airline and hotel reservations will account for the remaining $3 billion. Jupiter attributes the continued growth to two factors: online shoppers spending a larger share of their holiday budget with online merchants; and six million Internet users who will make their first online purchase during the 2000 holiday season, driven by a need for convenience and increasing confidence in the channel.

Jupiter analysts believe that for every product category there is a natural market. In the 1999 holiday season, many online retailers did not accurately assess the size of their natural market, leading them to spend excessively to appeal to customers who had no interest in the products that were being offered—an expensive, and sometimes fatal, error. According to Cassar, "The best example is Boo.com, which spent extraordinary sums of money chasing a market—buyers of hip, urban apparel—that could have been a lucrative niche market, but was not a mass market."

"With financing scarce, profitability is more important than ever," said Cassar. "As such, it is critical that online retailers understand the size of their natural market and the costs of expanding beyond it. Only when the Internet retail channel reaches maturity, which is not expected for some time, should companies aggressively invest in extending their businesses outside of their natural market."

Jupiter analysts expect that online retailers will spend less on advertising and focus more on marketing efficiency this holiday season than they did last holiday season. This assumption is based on several factors, such as the fact that traditional retailers, whose brands are well known to consumers, will comprise a growing share of the online retail market. Additionally, the online retailers that invested their marketing dollars poorly last year—and survived to learn from it—will make smarter investments this year. Furthermore, online retailers will focus their limited resources on reactivating past customers, which will be less expensive than acquiring new ones if the retailers have served their customers well in the past.

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