Holiday Sales Prognosis: Great Online, Modest Overall

Online retail sales for the fourth quarter will hit $26.2 billion, a 21.9% increase over last year, according to a report issued this week by online research aggregator eMarketer.

“We expect to see strong sales gains this year, driven largely by shoppers shifting their purchases online,” eMarketer senior analyst Jeffrey Grau said in a statement. “Several factors are behind this growth: a longer shopping season on the Internet; improved order fulfillment, which allows shoppers to make purchases nearly until Christmas, and intense competition among online retailers, which leads to aggressive promotions, all benefiting the deal-seeking consumer.”

Online sales remain a small percentage of holiday shopping overall, however. According to the National Retail Federation (NRF), total holiday retail sales are expected to increase a modest 5% over last year, bringing holiday spending to $435.3 billion. In comparison, holiday sales in 2004 rose 6.7%, to $414.7 billion, according to the NRF.

Merchants face multiple challenges heading into this season. Hurricanes and $3-per-gallon pump prices pushed consumer confidence down 18% in September to a two-year low, according to the Conference Board.

“A combination of many factors, including energy prices, the job market, disposable income, and consumer confidence, will ultimately affect retailers’ sales this holiday season,” the NRF’s chief economist Rosalind Wells, said in a statement. “Though it might be easy to label gas prices as the make-or-break factor for the holidays, it is crucial for analysts to look at the big picture instead of isolating one economic indicator to project sales.”

One-fifth of retail industry sales are made during the holiday season, according to the NRF.

Meanwhile, the online channel has at least one factor working in its favor, according to eMarketer: Merchants are finding that the online holiday shopping season begins earlier than the traditional offline holiday season. As evidence, eMarketer cited LaGarde, a provider of e-commerce technology, which surveyed online retailers in July 2005 and reported that more than 25% of respondents believed online shopping would start in August or September; more than 60% stated they believed the season would start before November 1st.

“It seems that the convenience of shopping online, coupled with improved delivery services, is actually extending the holiday season to the full fourth quarter of the calendar year,” eMarketer said in a press release.

The report also referred to data from the 2004 eSpending Report, produced by Goldman Sachs, Nielsen//NetRatings and Harris Interactive, which showed that consumers have moved a portion of their gift spending to Websites from stores in recent years. In 2004 holiday shoppers spent 22% of their gift budget online, compared with 16% in 2002. At the same time, consumers decreased the amount spent in physical stores to 72% in 2004 from 78% in 2002. eMarketer said it expects this trend toward online holiday shopping to continue.

“The Internet is ideally suited for the holiday gift-buying season,” said Grau. “It offers a convenient and comfortable way to find good values and a wide product assortment without having to negotiate crowded malls or wait in long post office lines. Wild cards like high gasoline prices and bad weather may even spur shoppers to do more of their holiday buying over the Internet.”

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