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Includes data from Consumer Technographics January 18, 2008

US eCommerce Forecast: 2008 To 2012

B2C eCommerce Expected To Top $300B In Five Years
by Sucharita Mulpuru with Carrie Johnson, Brendan McGowan, and Scott Wright

EXECUT I V E S U M MA RY
US online retail reached $175 billion in 2007 and is projected to grow to $335 billion by 2012. Businessto-consumer (B2C) eCommerce continues its double-digit year-over-year growth rate, in part because sales are shifting away from stores and in part because online shoppers are less sensitive to adverse economic conditions than the average US consumer. Despite the continued growth of the channel, online retailers face several challenges to growth: Online stores are broadly perceived as a second choice for shoppers, online retail is becoming increasingly seasonal, and online shoppers rarely admit to browsing, which can drive valuable incremental dollars during their Web shopping experiences. B2C eCOMMERCE CONTINUES ITS DOUBLE-DIGIT UPWARD TRAJECTORY Non-travel eCommerce sales in 2007 reached $175 billion, representing a 21% increase over the previous year (see Figure 1). While on the surface, declining year-over-year growth percents for online commerce may represent a maturation of the eCommerce industry, it is important to also recognize that the industry will add approximately $30 billion in additional revenue every year for the next ve years. This is a sizable amount, equal to the annual revenues of FedEx, Best Buy, or American Express. Furthermore, the good news for companies serving online shoppers is that:

Online retail penetration is also strong and growing. In addition to its high annual growth

numbers, online retail sales penetration reached approximately 6% in 2007. When we exclude large retail categories that are poorly penetrated online from that calculation particularly autos and food (which are 50% of total US retail sales) online penetration of retail sales is more than 13%, or about $1 out of every $7 spent by consumers. In fact, several retail categories have online penetration greater than 20%, including computer hardware and software, music and video, books, and event tickets. Furthermore, the vast majority 88% of US online consumers say that theyve purchased online in the past (see Figure 2).

Online retail continues to outpace store growth. The reality is that there is a channel shift

happening, and consumers are in fact spending dollars online that had previously been spent in stores. While the breadth of selection and 24x7 accessibility of the Web have certainly contributed to some incrementality in overall consumer spend, a portion of overall spend is the dreaded C word cannibalization of store sales. Furthermore, the compounded annual growth rate (CAGR) of retail sales from 2007 to 2012 is expected to be just 2.6%, while the CAGR of online sales is expected to be 14% for the same time period.

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US eCommerce Forecast: 2008 To 2012

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Online retail is less sensitive to economic shocks. In large part because online shoppers

tend to be more auent than average consumers, their overall retail behavior exhibits less sensitivity to changes in economic conditions.1 In fact, only 20% of consumers in a survey that we conducted prior to the holidays just as the subprime mortgage conundrums were gaining traction said that they would reduce spend during the holiday season due to uncertainly around the US economy. In contrast, other surveys canvassing the entire US population report signicant consumer cutbacks in spending in 2008.2

Challenges Do Loom On The Horizon For Online Sellers Despite strength in overall online retail numbers, there is no denying that eCommerce is beyond its earlier years of unbridled growth. Several characteristics innate to the eCommerce industry limit the percent of the retail pie that it will ultimately comprise, which we expect to be about 11% of the total US by 2012. The biggest obstacles to eCommerce growth are:

The fact that most consumers still prefer stores. The in-store experience is, for most customers,

categorically better: It is immediate, tangible, and social (see Figure 3). And by shopping in stores, consumers can touch and feel items, avoid issues surrounding returns, and avert pesky shipping costs (see Figure 4). While 22% of online consumers love the convenience of the Web and prefer online shopping to all other channels, the Web is still primarily a second choice after stores.3

The increasing seasonality of the channel. Seasonal businesses have notorious challenges in

managing every aspect of their business, from their merchandise to their employees to their cash ow. These conditions could prove to be choppy waters for online retailers as the industry matures. While online retailers have in the past grown so rapidly that the seasonality was less pronounced, this is no longer the case. Slower growth means that every quarter now gets scrutinized for its contribution to the overall retail pie. The overall growth rate for 2007 was 21%, but Forrester estimates that eCommerce growth in Q4 was north of 30% and comprised approximately 30% of overall sales. This computes to an average annual growth rate of approximately 17% for the remaining quarters in 2007.

The fact that online shoppers are very directed. While the variety and selection of the Web is

often touted as one of the channels primary assets, consumers in general say that they do not use the Internet to browse leisurely. While catalogs can often serve to drive customers to new products or stores, the spearshing mentality of most shoppers means that there is less opportunity for retailers to eectively drive higher average order values or units per transactions. This is in contrast to the in-store experience. Most consumers shopping online have specic products in mind and generally go to one retailer when theyre prepared to research and begin their research in a single place, often on Amazon.com or eBay (see Figure 5). Forty-four percent of online consumers said that during their last online shopping purchase, they had both specic Web sites and products in mind, and 44% also visited only one retailer prior to making their purchase.

January 18, 2008

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Figure 1 Forecast: US eCommerce, 2007 To 2012

Actual Forecast

2007 Total US online sales (US$ billions) $174.5 Apparel, accessories, and $22.7 footwear Appliances and tools Autos and auto parts Baby products Books Computer hardware, software, and peripherals Consumer electronics Cosmetics and fragrances Flowers and cards Food, beverages, and groceries Gift cards and gift certicates Home furnishings Jewelry Movie tickets Music and videos* Oce supplies Over-the-counter medicines and personal care Event tickets Pet supplies Sporting goods and apparel Toys and video games
$7.5 $16.8 $1.8 $7.6 $20.7 $13.5 $1.0 $3.3 $6.2 $7.3 $12.3 $6.4 $1.2 $8.2 $7.7 $1.8 $5.7 $1.1 $6.9 $6.7

2008
$204.0 $26.6 $9.0 $19.3 $2.1 $8.1 $23.9 $16.3 $1.2 $3.9 $7.3 $8.9 $14.8 $7.6 $1.5 $8.9 $9.3 $2.2 $6.6 $1.4 $8.1 $8.0

2009
$235.4 $30.5 $10.7 $21.9 $2.4 $8.5 $27.1 $19.4 $1.4 $4.5 $8.7 $10.5 $17.6 $8.8 $1.8 $9.8 $11.1 $2.6 $7.5 $1.8 $9.4 $9.4

2010
$267.8 $34.4 $12.6 $24.8 $2.7 $8.9 $30.4 $22.6 $1.6 $5.2 $10.2 $12.1 $20.5

2011
$301.0 $38.2 $14.6 $27.8 $2.9 $9.2 $33.7 $26.0 $1.8 $5.8 $11.9 $13.8 $23.6 $11.3 $2.4 $11.1 $15.0 $3.6 $9.1 $2.8 $12.3 $12.0

2012
$334.7 $41.8 $16.9 $30.9 $3.1 $9.5 $37.1 $29.5 $2.0 $6.4 $13.7 $15.4 $26.7 $12.6 $2.8 $11.7 $17.1 $4.2 $9.7 $3.4 $13.9 $13.2

Online % of total category sales in 2012 10.7% 18% 9% 4% 30% 28% 55% 29% 16% 22% 2% 35% 15% 20% 18% 35% 22% 12% 43% 9% 14% 32%

$10.1
$2.1 $10.5 $13.0 $3.1 $8.4 $2.3 $10.8 $10.7

Source: North American Technographics Benchmark Survey, 2007 *Totals represent online retail estimates based on the most recent Forrester estimates of US retail sales for each category.
41592 Source: Forrester Research, Inc.

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Figure 2 Why Non-Buyers Dont Buy

2-1 Most US consumers have shopped online Have you ever bought anything online and paid for the purchase online?
No 12%

Yes 88%

Base: US online consumers

2-2 Online shopping holdouts resist eCommerce for many reasons

Why havent you bought products or services online?
I dont want to share my nancial information online I want to be able to see things before I buy them I dont have a credit or debit card I prefer to research online and purchase in stores Ive heard about others bad experiences buying online Delivery costs are too high I dont want to wait for products to be delivered
21% 20% 18% 14% 10% 44% 40%

Base: US online consumers who have never shopped online (multiple responses accepted) Source: North American Technographics Retail And Customer Service Online Survey, Q2 2007
41592 Source: Forrester Research, Inc.

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Figure 3 Shopping Channels Of Preference

Please rank each channel in order of your purchasing preference. Rank 1 Traditional oine stores
Consumers prefer stores rst, the Web second, and then catalogs.

Rank 2 19% 52% 18% 2% 9%

Rank 3 4% 11% 50% 9% 26%

Rank 4 2% 7% 24% 22% 45%

Rank 5 2% 8% 7% 64% 19%

74% 22% 1% 1% 2%

Online Print catalog Television By telephone

Base: US online consumers

Source: North American Technographics Retail Online Survey, Q3 2007

41592 Source: Forrester Research, Inc.

Figure 4 Customer Attitudes Toward Oine Shopping

Thinking of a product you researched online but purchased oine, why did you purchase the item oine?
I wanted the product immediately I wanted to see the item before I purchased it I did not want to pay shipping costs I found the best price oine 19% 26% 39% 45%

I knew it would be easier to return the product 12% if I purchased it in the store Base: US online consumers Source: North American Technographics Retail And Customer Service Online Survey, Q2 2007
41592 Source: Forrester Research, Inc.

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Figure 5 How Consumers Research And Buy Online

5-1 Consumers are directed shoppers Thinking of your most recent online purchase, which of the following best describes how you found the product? I had both a Web site and a product in mind I had a product in mind but not a Web site I had a Web site in mind but not a product I had neither a Web site nor a product in mind 7% 3% 33% 44%

5-2 Online shoppers often visit just one or two retailers

When shopping for this product online, how many online retailers did you visit during the research process?
One retailer Two retailers Three retailers Four or more retailers 24% 19% 12% 44%

Base: US online consumers Base: US online consumers Source: North American Technographics Retail Online Survey, Q3 2007
41592 Source: Forrester Research, Inc.

R E C O M M E N D AT I O N S

ADDRESS ONLINE SHOPPING OBSTACLES NOW

To ensure that online retail sales continue on their upward trajectory and do not alienate otherwise loyal consumers, retailers should:

Focus on improving the overall online experience. Arguably, consumers prefer stores
because the Web has not mastered basics such as comprehensive product descriptions, accurate product availability, and reliable delivery. The growth of key pure-plays that have mastered these elements (Amazon.com, Blue Nile, Buy.com, eBags, Zappos.com) is evidence that consumers do exhibit loyal behavior to the channel, provided that retailers are able to meet and exceed customer expectations. By focusing more energy on accurate product information, improved imagery/photography, and exibility in payments and returns and by reducing the hurdles of shipping costs, online retailers can go a long way in currying favor with shoppers.

Embrace seasonality. The reality is that the seasonal nature of retail and eCommerce will
not change. Given this formidable challenge, online retailers should focus their businesses to address this reality, paring down assortments or considering drop-ship solutions during oseason time periods to better manage cash ows. This, of course, also means making much bigger bets to capture the upside associated with Q4.

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Address shrimpers too. While many consumers have very specic objectives in mind
when they visit a Web site, consumers online are less likely to browse because few enticing solutions actually exist that enable them to replicate the process of discovery that works so eectively in stores. Recommendation engine vendors such as Certona and Aggregate Knowledge and social shopping tools like Kaboodle are certainly steps in that direction, exposing customers to items or stores that they might not have experienced otherwise.

SUPPLEMENTAL MATERIAL Methodology Forresters ve-year eCommerce forecast is based on a series of inputs: the overall retail size of various subcategories (derived from estimates from the US government or trade organizations) and consumer estimates of spend levels online in those same categories (derived from responses to various Forrester Consumer Technographics surveys). The underlying spreadsheet, which details specic numbers and assumptions that were involved in the creation of the forecast, is available online. There are some important dierences to note from this forecast and previous iterations. Please note that previously published gures for the music/video industry from The State of Retailing Online 2007 were based on total global retail estimates, versus only US retail totals for the category. ENDNOTES
1

The most active online shoppers comprise half of the online shopping population and generate two-thirds of the online retail spend. They also have an average income of nearly $100,000. See the September 17, 2007, Benchmark 2007: Retail report. Two-thirds of consumers report that theyll cut back their spending at least a little due to economic conditions in 2008. Source: Connie Prater, Poll: Gas Prices Will Make 08 Economy Sputter, CreditCards. com, December 18, 2007 (http://nance.yahoo.com/banking-budgeting/article/104039/Poll-Gas-PricesWill-Make-08-Economy-Sputter). Fifty-two percent of online consumers rank the online channel second as their channel of purchasing preference. Source: North American Technographics Retail Online Survey, Q3 2007.

Forrester Research, Inc. (Nasdaq: FORR) is an independent technology and market research company that provides pragmatic and forward-thinking advice to global leaders in business and technology. For more than 24 years, Forrester has been making leaders successful every day through its proprietary research, consulting, events, and peer-to-peer executive programs. For more information, visit www.forrester.com. 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each gure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reect judgment at the time and are subject to change. To purchase reprints of this document, please email resourcecenter@forrester.com. 41592