Retailers set growing store by the online customer

Web sales are soaring and high-street giants are vying for a slice of the cake

Online shopping could bring an end to high street crowds

Tesco.com’s decision to invest in next-generation Web 2.0 technology underlines the growing importance of online sales to traditional retailers.

Web shopping is now growing at its fastest rate since the dot com bubble burst. Growth is almost 13 times faster than in the overall retail sector. UK sales were up 33 per cent to £11bn last year, and are expected to triple again to £28bn in the next five years, according to the latest study by retail analyst Verdict Research.

As all the high-street retailers look to the online market, Tesco.com has been one of the winners. The web site generated more than £1.2bn in sales last year, with profits of more than £80m, and expects to achieve a similar 29 per cent growth rate this year.

But competitors are hot on Tesco’s heels.

Financial results from Sainsbury’s earlier this month showed a 49 per cent growth in the chain’s online customer base, and web sales are accounting for 64,000 transactions every week. Chief executive Justin King says Sainsbury’s will be using its £300m ring-fenced IT budget to double online sales in the next three years.

Marks & Spencer (M&S) is also one to watch. Web sales grew an impressive 60 per cent last year, and revenues through its M&S Direct business – which includes online, phone and in-store web ordering – were up to £160m.

Chief executive Stuart Rose used last week’s financial results to announce a goal of £500m for web sales.

‘M&S Direct is extremely important for us over the next year, and the opportunity is there to increase sales and traffic, improve customer retention rates, increase the frequency of purchase and increase the order values,’ he said.

How conventional high-street retailers respond to the potential of the internet will make or break them, says Datamonitor retail analyst Alex Kwiatkowski.

‘The most successful firms will have to balance the move online with traditional offline sales, but while it sounds like a simple concept, it can be difficult to execute,’ he said.

Tesco.com’s strategy is the opposite to that of M&S.

With IT spending going up from £39m to £114m, M&S is developing a single order platform across all channels, integrating the web business into its central structure.

But Tesco uses an entirely separate business to run its online operations.

‘Tesco.com was split off from the main business because we wanted to ensure there was tight alignment between the company and its aims,’ said IT director Jon Higgins.

‘In 2000 we were just another department within the main firm, but now we have our own IT department, our own budget and independent decision-making responsibility,’ he said.

Rather than just implementing the technology, Tesco.com’s IT department takes a key role in setting the business strategy.

The Tesco.com model certainly seems to work. The site has more than 850,000 regular customers – defined as those active in the past 12 weeks – and processes more than 250,000 transactions a week. The challenge is to ensure the systems behind the site can cope with spikes in demand that can top 5,000 transactions per hour.

Tesco.com runs on a Microsoft infrastructure, with 60 Windows Server 2003 web servers and a SQL Server 2005 database. Each individual Tesco store has a Windows Server 2003 system on site, and staff use wireless mobile devices to fulfil online orders.

The combination of growing competition from rivals, and the ease with which shoppers can take their custom elsewhere, makes smooth-running technology essential, says Higgins. ‘Keeping up with expanding demand will be the biggest challenge facing all retailers,’ he said.

Online sales are already becoming more than just an optional extra for established firms. High-street giant Mothercare’s disappointing sales figures for 2006, announced last week, were offset by strong growth in its web ordering service.

While overall growth languished at just 1.6 per cent, online sales jumped 17 per cent and sales at stores where customers can order via the net shot up 21 per cent.

According to Mothercare chief executive Bob Gordon, internet sales accounted for £47.8m of overall revenue.