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BEST INDUSTRIES 2013

Thinking of Starting a Business? Click On Specialized Online Retail

Online shoppers are searching--for high-priced, niche goods.

E-commerce is nothing new. What is new? As the number of people who have access to broadband Internet connections skyrocketed, online shoppers have expanded their appetites, especially when it comes to landing deals on an ever-widening spectrum of niche items that range from custom-cut button-down shirts to made-to-order eyeglasses and vintage furniture.

Consumers are also increasingly looking online for niche retail services like photo printing, in which consumers upload photos and then receive printed copies in the mail. Helped by the fact that some 73 percent of homes now have access to cheap digital photography technology, according to a consumer study conducted by NDP Group, online photo printing has grown into a nearly $2 billion industry.

Similar forces have helped propel online greeting card sales: Young, tech-savvy consumers are increasingly buying custom and niche cards and stationary online rather than making the trek to the local drugstore or stationary store.

Yes, it's still growing--a lot.

Online retail sales are forecasted to reach $262 billion in 2013 and $370 billion by 2017 as Web retailers continue to strip sales away from brick-and-mortar competitors, says e-commerce analyst Sucharita Mulpuru of Forrester Research.

Leading the charge? Discounted fashion. Several sites, including Gilt Groupe, Rue La La, and Haute Look established the practice of flash sales, in which items like designer apparel, accessories, and jewelry are offered at deep discounts for a limited amount of time. The popularity of those sales helped the category grow by almost 50 percent from 2007 to 2012. And it's projected to grow another 12 percent a year through 2017, according to research firm IBISWorld.

Online sales of greeting cards also remained strong through the recession as Internet retailers offered discounted prices compared to brick-and-mortar competitors. Budget-minded consumers, especially in the 25- to 34-year-old age bracket, have also increasingly turned to sending online-only cards. As a result of that combination, IBISWorld expects the online greeting card industry to grow 5.9 percent to $4.7 billion by 2017.

...But forget shoes and eyewear

Though online shoe sales account for 3.6 percent of all online retail sales, it’s a crowded market with some 1,166 online shoe sellers. And it's expected to get even more competitive: the number of shoe retailers is forecasted to surge to 1,313 by 2017. Plus, the market for shoes is dominated by giant retailers, two of which-- Amazon's Zappos and Foot Locker--already own a combined 16 percent of the market share. New entrants will find it difficult to compete with established reputations, brand names, and the marketing power of those large players, says Nikoleta Panteva, a senior retail analyst with IBISWorld.

Similarly, the rising demand for eyeglasses and contact lenses has led to a flood of new competitors into the online market, especially as former brick-and-mortar retailer establish online shops of their own. That means profits will be hard to come by.

Entrepreneurs would be wise to find less crowded markets. “There are more opportunities around niche specialty products that aren’t searchable from a price-point situation,” says Lauren Freedman, president of the e-tailing group, an e-commerce consultancy in Chicago.

Tech savvy matters

Getting attention can be expensive, so you'll need to find the best IT talent to develop your retail site. You'll also need to invest in social media outreach. Not only do you need to keep up with the latest trends in mobile shopping, payments, and analytics, but also protecting your customers' information from the rising threat of hackers remains an ever-present challenge.

You’ll also need to take advantage of the latest innovations in website technology to stand out from competition, especially technologies that replicate the experience a customer might receive in a brick-and-mortar shop. The development of the virtual “try-on” system in the online eyeglasses market, which allows consumers to upload photos of themselves and try-on glasses online, for example, has been a key factor in driving online sales.

Of course, finding the best IT talent may be a challenge depending on where your business is based. Nearly 50 percent of all online greeting card companies are based either on the West Coast or in southeastern cities like Atlanta, where IT talent is easier to come by. IT talent can also be costly, particularly if you have specialized engineering needs. “The war for eCommerce talent is, and will continue to be, fierce; internship programs and explicit career development support can help a company ensure that it will be a top consideration of leading candidates,” writes Mulpuru of Forrester in her U.S. Online Retail report.

Bootstrapping is common...

...but established retailers are buying. Think Thrillist's acquisition of trendy men's fashion site JackThreads.com, Nordstrom’s $180 million purchase of Haute Look, and Shutterfly's acquisition of stationery company Tiny Prints. Another example was the recent purchase of Justeyewear.com, a website that sells eyeglasses directly to consumers in the United States, by Coastal Contacts, a retailer that holds 9 percent of the market for contact lenses, eyeglasses, and vision care accessories.

The growth in specialized online retail has also led to a number of interesting partnerships between largely online shops and brick-and-mortar traditionalists. For example, Shutterfly struck a deal with Hallmark Cards in June 2012 to sell Hallmark cards through its website. And Vision Direct, an online retailer of contact lenses, reading glasses, and sunglasses has formed a partnership with eyewear maker Luxottica Group to help that company launch its own branded online sites like Lenscraftercontacts.com and Pearlevisioncontacts.com.

Ideal prior job?

Techie with an eye for flair and care. Though having deep knowledge about a particular market is valuable, it may not be enough anymore just to have the best prices or even the best products. Case in point: Zappos's 365-day return policy and fanatically loyal customers. Successful e-tailers provide great customer service.

The Quick and Dirty on Specialized Online Retail

How big is it?
Every year, more than 100 million Americans purchase goods from the online retail marketplace, one of the fastest-growing industries in the United States.

Competitive advantages
Online retailers have significant advantages over brick-and-mortar competitors in several ways, including the ability to reach a wider geographic market, the lower overhead costs, and the ease of tracking consumer browsing and buying behavior.

A crowded dance floor
Though there is more opportunity in online retail than ever, competition is fierce. “For every retail idea, there are at least five other sites offering the same product,” says Panteva of IBIS. And competition comes not only from other start-ups but also from more established brick-and-mortar retailers who are finally making their way online.

Consider shipping costs
Consumers now expect to get free shipping when they buy something, even if it means tying that to a minimum purchase, says Freedman of the e-tailing group.

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Last updated: Jul 26, 2013

DARREN DAHL

Darren Dahl is a contributing editor at Inc. magazine, which he has written for since 2004. He also works as a collaborative writer and editor and has partnered with several high-profile authors. Dahl lives in Asheville, North Carolina.




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