Report: North American E-Commerce To Grow 46 Percent in 2001

In addition, the report predicted that online retailing will show significant growth as a percentage of overall retailing, increasing its piece of the pie from 1.7 percent last year to 2.5 percent by the end of 2001.

In certain categories -- such as computer hardware and software, and books and travel -- online revenue already exceeds 10 percent of total retail revenue.

"Online retailers as a whole have started to conquer the basics, but we've got a long way to go and a lot more potential to realize as we move forward," said Elaine Rubin, chairman of Shop.org, the online arm of the National Retail Federation.

"[E-tailers] have become a lot smarter, more experienced and more competitive in how we're marketing, both in customer acquisition and retention," Rubin said.

CRM Is Key

According to the report, a key to future e-commerce success will lay with a company's ability to leverage its customer data through customer relationship management (CRM) systems.

In moving towards profitability, e-tailers will be able to trim some costs by automating their customer service functions, the report said. However, BCG e-commerce director James Vogtle said that these changes will not necessarily come at the expense of customer satisfaction.

"Customer service makes up only 3 percent of average online retailer revenues," Vogtle said. "E-tailers will hit other bigger areas first, such as marketing and fulfillment, before they hit customer service."

Catalogs Are King

Catalogers are the only consistently profitable e-tailers, the report said. In 2000, 72 percent of online catalogers were operating with a profit.

"[Catalogers] have been able to assume a more aggressive position," said BCG vice president Peter Stanger. "They have the lowest customer acquisition costs among online retailers and tend to focus their marketing on targeted media, such as direct mail with a direct payoff."

Pure Plays Up, But Behind

Internet pure plays still suffer from incurred losses averaging 94 percent of their revenue. Only 27 percent of Web-based retailers are profitable at an operating level, the study found.

Pure plays also have the highest customer acquisition costs -- an average of $55 per customer, or almost four times that of catalog companies.

"The majority of those that are profitable today are niche players with revenues of less than a million," Stanger said. "To be viable, most Web-based retailers will need to focus on a market niche, or enter into partnerships with complementary offline players."

Bricks without Structure

Brick-and-click operations, in contrast, incur average operating losses of 36 percent of revenue.

"Store-based retailers still struggle to provide consistent shopping experiences across all channels -- they have the highest shopping cart abandonment rate and the lowest buyer conversion rates," said Stanger. "They are lacking the fulfillment and customer service infrastructure catalogers have had."

In order to succeed online, the report said, brick-based retailers must achieve "a greater understanding of customer lifetime value, improvement of the online ordering process, and more sophisticated fulfillment systems."

Travel Reigns

Travel, the largest online category at $13.8 billion in 2000, will continue to grow another 50 percent over the rest of the year, the report predicted.

As the online market matures throughout 2001, however, growth in other leading categories, such as books and computer hardware and software, will level off at 25 percent and 15 percent respectively, according to the report.

"High penetration categories share three important characteristics," the report said. "First, they are information intensive. Second, the products purchased do not require physical inspection prior to purchase. Third, these categories involve discretionary purchases, not necessities."