No Bricks, Please: Shoppers Heading Online Even for Small Purchases

Consumers are starting to buy a much wider variety of products online -- and if retailers aren't prepared to accommodate them, they could end up losing a lot of the everyday business that drives revenues.

Brick-and-mortar stores have long been go-to destinations for sundry items like health and beauty aids, but new research shows that customers are increasingly turning to the Web for such purchases.

According to the latest MasterCard SpendingPulse report, e-commerce sales rose almost 17 percent in February (compared to the prior year). That was faster growth than other retail categories such as luxury products, consumer electronics and apparel. Online sales have also grown faster than store sales at many major retailers over the last several quarters. Macy's, for one, saw Internet revenues increase by 27 percent in the fourth quarter, while its overall sales decreased one percent to $7.85 billion.
Michael McNamara, SpendingPulse's vice president of research and analysis, noted that the dollar amount of average transactions declined by almost four percent year over year. That's actually good news, indicating that consumers are increasingly willing to make smaller purchases online.
Of course, consumers once grumbled about the shipping costs associated with e-commerce, which is why big-ticket, small-box purchases -- DVDs, books and small electronics, for instance -- did so well. But as consumers became diligent about comparing prices online, they discovered that many Internet bargains more than made up for shipping costs. And they also learned to tap into online coupons and promotional codes that feature no or lower shipping costs.

Bad weather this winter has also played a role. The Super Saturday blizzard in the mid-Atlantic and northeast trapped folks in their homes, and many finished their holiday shopping online. In its second quarter conference call a few days ago, Costco (COSTCO) said that the recent weather, including snow in the East Coast and Midwest, and rain in California, depressed its sales by between one and one-and-a-half percent -- but Web traffic was up eight percent.

But Mother Nature is not entirely responsible for the online sales gains. February was the seventh straight month of double-digit e-commerce growth.
Gains in online shopping may have another source. An analysis of consumer spending patterns just released by The Nielsen Co. reveals that the younger shoppers are visiting stores less often, although they tend to spend more money per visit. The report shows that younger consumers, while interested in buying, don't care much for traditional shopping.
Dividing consumers into four groups, the research shows that the oldest shoppers made the most shopping trips, followed by Boomers then Gen Xers with Millennials trailing. Dollars spent per trip, however, works in the opposite direction with Millennials spending the most, followed by Gen Xers then Boomers with Greatest Gen spending the least per outing.

Where each group shops is informative, too. Millennials and Gen Xers are most likely to shop at stores where they can get a lot done in one trip, such as grocery stores, mass merchants and supercenters. Older consumers are more likely to shop specialized formats such as drug chains and warehouse clubs where options are more limited although specific deals and services are more prevalent.

For a get-in-and-get-it-done shopper, the Internet works. No time wasted in transit and a whole world of choice at hand.

Retailers are responding. Earlier this week, BJ's (BJ) CEO Laura Sen discussed improving the warehouse club results and expanding online capacity. Sears (SHLD) is finding lots of ways to build sales without building stores and many of them are tied directly to the electronic commerce or indirectly through social media. Macy's (M) wants to build on improving online sales and may make its e-commerce initiatives even more prominent going forward. Even dollar stores are coming up with ways to sell online using bulk purchases and other deals that provide value at reasonable distribution costs.

Overall, retailers realize that virtual opportunities are expanding in range and volume. How they respond will be critical to their long-term prospects.