Internet Spending To Survive U.S. Consumer Confidence Drop

Analysts disagree on whether Tuesday's downbeat economic news, including a reported drop in consumer confidence to its lowest level in nearly five years, is likely to drag down e-commerce spending levels.

The Conference Board (TCB) reported that its Consumer Confidence Index fell in February for the fifth consecutive month and now stands at 106.8, its lowest level since June 1996.

In addition, the U.S. Department of Commerce reported a 19-month low in orders for durable goods, such as automobiles.

"The erosion in consumer confidence continues to be fueled by weakening expectations regarding business and employment conditions," said TCB Consumer Research Center director Lynn Franco.

Franco told the E-Commerce Times that "the tendency is that as consumers become more and more apprehensive, they curtail their spending and that would clearly affect e-commerce spending."

Bear Stearns analyst Jeff Fieler agreed that the drop in consumer confidence will have an impact on e-commerce.

"Basically, it's gonna haircut the growth rate," Fieler told the E-Commerce Times. "There is a component of online commerce that is tied to the overall activity of the economy. Just because it's online, it's not immune to that."

On the Upside

However, Franco said that "the silver lining is that consumers see the economy is in slow growth period, not a recession, so they are not going to curtail spending as much as perhaps they would in a recession."

Fieler noted that other growth factors remain that will propel online shopping, including increases in the number of people online, the number of those who are comfortable with the concept of shopping online and the amount of money being spent per person when shopping online.

"Some competitors go by the wayside," Fieler also said. "As eToys closes its doors, there's a natural traffic increase for the Amazon/Toys 'R' Us site. The competitive environment gets a little better as well, so marketing spending becomes more effective."

Added Fieler: "For the survivors, the environment may be better than it was a year ago, because they're not fighting the same level of noise."

Not Jumping Ship

Indeed, Forrester analyst Christopher Kelley told the E-Commerce Times not only that "consumers are definitely not going to abandon shopping online," but that e-commerce could benefit from the drop in confidence.

"People might be aware that the economy is headed for a downturn, but they're not going to be giving up [the online] channel," Kelley said. "Basically, if you're really going to buy something, the Web is a more convenient way to get the confidence that you need to make that purchase."

E-commerce will need its customers to retain that confidence if it wants to maintain its pre-shakeout growth rate. A report released earlier this February by the U.S. Census Bureau and Media Metrix estimated that online purchases jumped to US$28 billion in 2000, about 62 percent higher than the $17.3 billion spent in 1999 and nearly quadruple the 1998 total of $7.7 billion.

"Getting the right price is all about confidence, and also control: controlling the amount of money you spend, controlling the personal information [you release]," Kelley said. "Long story short, I think that the Web is really positioned well in a downturning economy because it really does give consumers what they need in a very effective package."

Price is Right?

According to Franco, the consumer confidence drop is primarily affecting decisions about buying big-ticket items -- items that have not traditionally been the primary focus of e-commerce sales.

The Commerce Department said orders for big-ticket items, whether purchased online or offline, fell in January to $202.02 billion, the lowest amount since June 1999. New-home sales dropped by 10.9 percent in January, the biggest fall in seven years.

When asked to connect the Commerce Department report to e-commerce, Fieler said, "I think [the report] is not as big a factor from a purchase point of view -- but to the extent that over half the people buying cars are researching it online first, you're going to see less traffic to those sites."

Fieler added that the companies most likely to be affected by the decline in big-ticket sales are those, such as Travelocity, that sell airplane tickets and other discretionary items.