Nothing says Memorial Day like visiting, um, a memorial. I did just that this past long weekend in Gloucester, Mass., home of the now-famous Perfect Storm crew that died in the Atlantic in 1991. On the beach near the memorial to Gloucester residents lost at sea, the water was relatively calm, making it difficult to imagine the force of the storm that swallowed the Andrea Gail. Note that my two-year-old son Zach disagreed -- he naively ran into the ocean, then bolted out crying "Oh my goodness!" as the puny waves splashed over his shorts.

Zach's experience with what he considered tsunami-category waves, which were actually small ripples to an adult, highlights that everything is relative when it comes to changing forces. In online retailing, the results of The State of Retailing Online 2006, a report that we conduct in partnership with Shop.org, indicate that we're facing a calm before the storm. For those retailers that faced the tsunami of 1998 to 2001, the next few years may feel like a light windstorm, but for the majority, 2006 to 2009 will indeed bring the tumult of a hurricane at the very least. Here's the evidence from this year's 174 participating retailers that a storm is on the horizon:

• Online retailers have successfully weathered the early days of eCommerce. The Web is no longer new to most sellers, making differentiation and once-important designations like first-mover advantage harder. All product categories grew in 2005, including traditional slowpokes like cosmetics and fragrances, which grew 38% from 2004 to 2005. Growth means that most retailers have reached profitability online as well: 83% of the companies in our survey achieved operating margin profitability in 2005, with average operating margins of 26%. Also, most companies that have multiple channels no longer keep them separate from each other -- only 21% keep the Web separate from stores or catalogs.

• Offline marketers flood the channel. Thanks to growth and profitability metrics mentioned above, fewer and fewer online retailers have to go it alone, or fight tooth and nail for resources. That's the good news. The challenging news is that not only do offline departments see the value of the Web, but they also want in on its success. Of the total online marketing budget, online retailers now allocate 13% to driving sales in other channels and 11% on branding. This means that average spending on once seemingly dead online marketing tactics rose: Portal deals (yes, those old AOL and Yahoo! deals) now top even search in average spending, and spending on banners (yes, who knew?) rose to just over half a million dollars in 2005. This all means that prices and competition are rising.

• Innovation in online selling ebbs -- for now. Despite the swirl of interest in and excitement over tools like A/B testing, customer reviews, and buying guides, retailer usage of these next-generation selling tools mostly held steady or even fell in 2005 over 2004. What gives, you ask? We think that this data, along with solid performance metrics and increased attention from offline divisions, signals the calm before the storm. Many online retailers are in long-term planning mode, carefully sketching out a larger plan and the technology investments and innovations that will support it. It won't prove as dangerous as hunting swordfish on the eastern seaboard, but the next few years will bring more intense competition in online retailing as these plans come to fruition.

If you're thinking about embarking on a long-term plan for eCommerce and multichannel retailing, make sure you know where you fit into the industry first. The State of Retailing Online 2006: Executive Summary, and its companion report The Performance Benchmarks, aim to help retailers gauge how their key metrics stack up to the industry. If you find yourself caught in the middle of a nor'easter over the next few years, don't say we didn't forecast it.


Regards,

Carrie Johnson
Research Director and Vice President, Consumer Markets

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