US retailers shrug off Net threat to profits

It has become the received wisdom of the retail sector that the internet is exerting considerable pressure on profit margins. Interesting, then, to see some counter intuitive new research suggesting that margins in some of the most vulnerable sectors, such as books and consumer electronics, have actually risen in the past three year, in the United States at least.

It has become the received wisdom of the retail sector that the internet is exerting considerable pressure on profit margins. Interesting, then, to see some counter intuitive new research suggesting that margins in some of the most vulnerable sectors, such as books and consumer electronics, have actually risen in the past three year, in the United States at least.

According to figures compiled by Mercer Management Consulting the gross profit margins of Barnes & Noble and Borders, two of America's biggest booksellers, rose from 26.9 per cent in 1996 to 27.4 per cent last year. In consumer electronics, where Mercer focused on Circuit City and Best Buy, gross margins rose from 19.2 per cent in 1996 to 20.3 per cent. Car dealers saw their margins stay flat at 12.9 per cent, the study says.

Mercer says the rises have been achieved thanks to good volume growth from a fixed cost base. "It's hard to point to a sector where the internet has had a significant impact on margins," says Rick Wise, from Mercer's Boston office.

The same cannot be said here. Waterstone's has certainly seen margin erosion over that period. This has not all been due to the internet, however. The collapse of the Net Book Agreement, which fixed book prices, five years ago led to increased price competition. And though the price of as typical paperback seems to have risen well ahead of the rate of inflation in the past few years this does not appear to have been sufficient to make up for price-cutting on bestsellers, particularly in hardbacks. Booksellers have further exacerbated the problems by opening significant numbers of new stores to a market that was not growing.

This leads to an additional point. In the US the internet is perceived to have helped grow the book market whereas in the UK it has stayed broadly flat. So while Barnes & Noble and Borders have managed to show good underlying sales growth, UK booksellers have found internet sales cannibalising their existing operations.

The margin picture is also different in consumer electronics. In the US, the higher penetration of higher margin digital technology products has helped boost margins. This has not been the case in the UK as figures from Dixons last week underlined. Its gross margins fell by 1 percentage points last year due to price deflation in old analogue product ranges as well as price competition both from traditional rivals like Comet and online newcomers like buy.com and jungle.com. Buy.com deliberately targeted Dixons with a price comparison on a digital camera during its launch earlier this year. The move forced Dixons to match the price, decimating its margin in the process.

While this might all seem depressing for UK retailers, the US experience might present a light at the end of the tunnel. As internet penetration grows to American levels and sales of digital technology products grows too, perhaps the likes of Dixons and Waterstone's will be enjoying fatter margins in a couple of years time. Perhaps that's why HMV Media decided last month that it wasn't going to sell Waterstone's after all.

Ad spree rolls on

The level of dot.com advertising spending rose to its highest ever figure in May, confounding fears that the e-commerce advertising boom may have come to an end. New figures compiled by AC Nielsen/MMS/Zenith Media show that the advertising by dotcoms and the e-commerce operations of traditional companies, rose from £61m in April to £71m in May. The spending even beat the months of January, February and early March when the dot.com boom was in full swing.

Advertising by pure dot.coms (excluding companies like BT and so on) jumped from £14.9m to £25m in May after a sharp fall in April. The biggest e-commerce advertisers in the month were Freeserve, Easier.co.uk, Cellnet, Travelstore.com and NatWest's online banking service. Other big spenders included thetrainline.com, Lycos, AOL and FT.com.

Zenith Media warns against placing too much emphasis on a single month's figures as advertising is seasonal and often booked several months in advance. That may means that the full ramifications of boo.com's collapse in May has yet to be fully reflected in the advertising figures.

Jargonbusters

The mobile age is bringing whole new range of acronyms, and not just the ubiquitous WAP (Wireless Application Protocol).

PDA: personal digital assistant. As in Palm Pilots, the handheld mini computer of the urban trendsetter. Includes electronic diary and e-mail capability.

SMS: short message service. The ability to send short text messages from one mobile phone to another. Messages must be brief such as "You're late. Dinner in dog."