Happy Holidays--for E-Tailers, At Least

This year's take should top last year's solid results

Is Alison May worried about plunging consumer confidence? Hardly. After years of living on the edge of the e-commerce bust, the CEO of San Francisco-based RedEnvelope Inc., an online shopping site, expects revenues to jump 50% this Christmas, to around $40 million. That would catapult the privately held company into the black for the first time--and she insists it's no fluke. "The Internet is so ingrained in our lives," May says. "For more and more people, it's the first place they think to shop."

As traditional retailers brace for what could be the worst holiday season in years, e-tailers face a much brighter outlook. Following last year's solid results, e-tail sales should perform well again this holiday season. Forrester Research estimates that after a decline in the third quarter, online sales will register a 15% annual growth rate in the fourth quarter. That works out to sales of about $20 billion, including $9.5 billion in sales between Thanksgiving and Christmas. Compare that with store sales, which are expected to rise a paltry 4%, to $209 billion, according to the National Retail Federation.

True, at just 6% of total retail sales, e-shopping remains a small factor in the overall industry. And its current growth rates seem small compared with the doubling and tripling of sales that occurred from the industry's minuscule base in the 1990s. Still, many e-tailers--both stand-alone sites and the online offshoots of traditional retailers--are showing surprising strength in an otherwise gloomy retail climate. After a strong third quarter, on Oct. 24, bellwether Amazon.com Inc. (AMZN ) hiked fourth-quarter revenue estimates to as much as $1.43 billion, a 28% jump over last year. Fourth-quarter revenues at eBay Inc. (EBAY ) are expected to rise 66%, to $365.5 million. And online sales at Lands' End Inc. (S ) are on track to hit about $174 million, a 45% growth rate. Says Carl E. Steidtmann, chief economist at Deloitte Research: "It's all about convenience."

Indeed, a key factor driving growth is a far broader selection of products, be it the availability of custom-fit khakis or $1,000 necklaces. Amazon is working with a group of big apparel merchants, including Gap (GPS ) and Lands' End, to create a new clothing area on Amazon for its 30 million monthly visitors. At the same time, better targeted and more cost-efficient promotions, such as free shipping on light or big orders, are helping drive sales without quashing profits.

Technology is also playing a role. Powerful search engines and better graphics, combined with the increasing use of fast broadband connections, now make armchair comparison shopping a breeze. Camera seller Ritz Interactive Inc. offers easy comparisons for its top-five-selling categories, including digital and video cameras.

Improved technology has also helped speed transaction time. At outdoor apparel and gear retailer Recreational Equipment Inc. (REI ), sales are up 20% so far this year, thanks in part to a better search engine that zaps product info almost instantly. Just one more reason that even if retail sales stall out, e-tailers such as RedEnvelope's Alison May are feeling pretty jolly right now.

By Heather Green in New York

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