Online Retailers Feeling Economic Pinch

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Online Retailers Feeling Economic Pinch

Retail sales are down significantly because of the economic downturn, but online stores are feeling the effects also.

For the last few years, e-commerce sales have been steadily growing more quickly than retail sales. But in today’s economy, when retail stores are seeing marked declines in shoppers spending, online e-tailers are starting to feel the pinch as well, as consumers are slamming their wallets shut.

The growth of consumer spending at online retailers in the first quarter of 2009 dropped by 13% from last year. The growth rate dropped even further in the second quarter, to only 6%. According to comScore, growth rates in consumer spending online have dropped every month since the beginning of April.

Many online retailers have been surprised by the drop in online shopping, because e-commerce sites have been able to buy advertising online much more cheaply than retailers as sales took a downturn. And with increasing numbers of people out of work and budgets tightening, the lower prices of online purchases should be more appealing than shopping at retailers. But the slowdown in online shopping continues to rise. Along with the roller-coaster ride of the stock market, consumer confidence is also plummeting, and online sellers are being hit just as hard as retail stores.

Last October, the Consumer Confidence Index, maintained by Conference Board, dropped to 38, which was an all-time low. As a comparison, when the Nasdaq composite index dropped in the spring of 2000, consumer confidence still remained in the range of 140. Also in October, comScore conducted a survey of 1,000 consumers and found similar results. Of the survey participants, 82% said they’re more afraid now about the future economy of the United States than they ever have been. Only 26% of respondents said they think the economy will be better in a year. Consumers usually spend their way out of an economic downturn, and the government is doing all they can to encourage that, but their efforts are failing. Even people who have not been affected financially by the recession are so troubled by the uncertain future that they are tightening their purse strings all around, and putting more thought into purchases of high-end items than they usually do.

For successful online retailers, a drop in sales has nothing to do with the management or business structure of their online operation; even the best-executed online stores are suffering because consumers are not buying. The only exception to this is video games. Online sales of game consoles and individual game software actually grew the most in the third quarter, increasing by 60% over last year. By contrast, sales of computers, cell phones, and consumer electronics were flat, while sales of toys, jewelry, clothing, movies, and music have been down from last year.

Last year’s dismal Christmas shopping season wiped out many years where there had been double-digit rises in spending online. But in the first quarter of 2009, online sales were about $31 billion, with no increase from last year. Online stores marked down all of their unsold holiday items drastically at the beginning of 2009, but once those promotions were over, consumers stopped shopping.

According to Gian Fulgoni, chairman of comScore, the most troubling thing about the slowdown in online sales is the drop in spending by older Americans and wealthy people. Purchases by consumers who bring home more than $100,000 a year dropped by 14% since last year, and people over 45 years old spent approximately 11% less than last year. Fulgoni theorizes that these people believe that they need to protect their net worth by saving money until the stock market rebounds, and online shopping is an easy thing to cut out of their life.

Online commerce is also getting more competitive because of the economy. Three-quarters of the survey respondents said that now they are more likely to look around and comparison shop before making a purchase online. So if multichannel retailers need proof that online marketing budgets should be expanded, now is the time. And whenever the country begins to see the numbers for online spending beginning to rise again, those figures might be a glimmer of hope that the overall economy is on the mend.

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