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Analysts See Cold Holiday Season for e-Commerce

Analysts are warning that online retailers could be headed for a long, cold winter if they don't offer aggressive pricing and other perks, like free shipping and coupons.

Online metrics firm comScore is looking for tighter household budgets and eroding consumer confidence to sap online spending this holiday season. The firm is projecting holiday e-commerce revenue to increase six to 10 percent over last year, well off from the previous year-to-year growth of 17 percent.

The problem is acute in lower and middle-income households, which are finding their discretionary income shrink against inflating prices of food and gas, goods that are typically bought offline.

"We've got a situation where households making under a hundred thousand dollars a year are just not increasing their online spending in a meaningful way," comScore Chairman Gian Fulgoni told reporters on a recent conference call. "We need to get disposable income dollars up in the low-to mid income segments."

In the third quarter, households earning less than $100,000 spent just three percent more online than they had the same period last year. Spending among high-income households increased 15 percent. If that trend continues, online retailers' hopes for a successful season will be almost entirely staked on wealthy families.

This is not the first warning that online spending growth could tumble this year as the economic crisis continues. Earlier this month, a prominent financial analyst cut his holiday forecast for the second time this fall.

Online retailers are still benefiting from the continued shift in consumer shopping habits that sees more people making purchases every year. So the measure of success is not whether total e-commerce sales increase, but rather how much.

Shop.org, the industry association representing online retailers, recently canvassed its members and arrived at a similar conclusion as comScore -- that this holiday season will be extremely competitive, with Internet merchants tripping over each other to lure cash-strapped shoppers to their sites.

"Online retailers are resilient, but not immune, to the challenges of this holiday season," Shop.org Executive Director Scott Silverman said in a statement. "Retailers will be heavily promotional to attract shoppers on a budget, but have also invested in new site features to improve the online buying experience."

comScore's Fulgoni said he first became worried about a protracted slump when his firm tallied the final sales figures from last holiday season. Seventeen percent growth, while an enviable benchmark for offline retailers, was a significant drop-off from several previous years of growth rates of more than 20 percent.

"It suggested to me that disposable income was getting tighter and that we might be headed for some problems as we headed into 2008, and that certainly turned out to be the case," he said. "Food and gas are really what is curbing online spending."

The Department of Labor reported that gas prices in September were 38 percent higher than the same month in 2007. Prices have dropped in recent weeks, but they are still well above last year.

comScore's survey found that prices remain the biggest concern among consumers in all income brackets, but worries over job security and unemployment, volatility in the financial markets and housing prices are all weighing more on people's minds than in the firm's surveys earlier this year.

Respondents to Shop.org's survey indicated that they are aware of the tough road ahead and many are working to make their stores more appealing in a competitive market.

Seventy-eight percent said they would offer free shipping, subject to minimum-purchase conditions. Slightly more than 40 percent are trying to cut shipping costs by renegotiating terms with their providers, and 21 percent said they plan to increase the minimum purchase amount required to receive free shipping.

The survey also found that retailers are souping up their sites with improved search engines and features like product videos and customer reviews.

Fulgoni said that with the consumer-spending crush, this season could be the "tipping point in the use of coupons on the Internet." Coupons are one shopping feature that has struggled to make the transition from traditional retail to e-commerce, but this year has seen a surge in niche players such as RetailMeNot, Coupons Inc. and MyCoupons.com trying to grab market share as price becomes increasingly important to cash-strapped shoppers.