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Outlook for Local Retailers Online Called "Dismal"

Local retailers will see their share of online sales decline to just 6 percent by 2003, while national players extend their dominance to the Internet, says a new industry report.

Despite the Internet's promise to level the commerce playing field -- enabling small businesses to expand their geographic reach and compete on equal terms with larger firms -- the Net will only accelerate the nationalization of commerce, says the report from Forrester Research Inc.

"The outlook for local retailers online is dismal," said Charlene Li, senior analyst in New Media Research at Forrester. "Off-line, small and medium-sized retailers have a 50 percent share of retail revenues. In contrast, they are barely capturing 9 percent of Web sales today. This picture is only going to get worse as the Wal-Marting of America continues."

Large national merchants enjoy inherent advantages in technology, brand, and scale that ensure their e-commerce success, the report says. With the cost of building a full-featured commerce site running well over $1 million, few local merchants can create a commerce-friendly online store.

Likewise, without a recognizable brand, local merchants have difficulty driving site traffic through advertising and portal deals. The results are sites that lack the scale to create an optimal merchandising environment that can fully utilize more advanced features like personalization and one-stop shopping, the report contends.

Web superstores like Amazon, CDNOW and eToys are using their wide selection and low prices to dominate the online sales of commodity products such as books, music, and toys, the report says. Similarly, large businesses are using sophisticated online ordering tools, inventory management and promotions to wrap up the market for replenishment goods like food, health and beauty products.

For products where decision-making tools like comparison engines and reviews are needed, companies like Cyberian Outpost and Travelocity have invested heavily in technologies to provide the best buying experiences.

The good news is that local service providers face better prospects. Because most services require a personal transaction, only part of the service process -- like reservations, information, and order tracking -- will go online, the report says.

The service transaction itself will remain off-line, where location remains a competitive advantage. E-mail and affiliate marketing programs will help local providers reach the Internet audience for services.

"Virtual nationalization will have unanticipated consequences for retailers and consumers alike," said Li. "Many local retailers will experience flat or declining revenues. Meanwhile, consumers can expect to pay more for service on the products they purchased at rock-bottom prices online."

For the report, "Local Commerce Goes National," Forrester surveyed 20 national marketers and 30 local marketers to determine how they are selling and advertising locally.