High street suffers as online sales soar

With overall UK retail sales up 2.5% on December 2005, the anticipated nightmare on the high street failed to materialise at Christmas. But high-street retailers have little reason to feel smug: a surge in online spending suggests that if their online strategy isn't just right, their long-term outlook is not good. Shoppers spent a record £7.66bn online in the ten weeks running up to Christmas a rise of 54% on the same period in 2005.

E-retail body IMRG estimates that online shopping now accounts for more than 10% of retail sales. "This has definitely been an online Christmas," James Roper, IMRG's chief executive, told The Guardian.

"We think 25 million people now shop on the internet."

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And who can blame them? Wrestling your way through the Christmas hordes is rarely a pleasant experience, even for the biggest fans of retail therapy particularly when you factor in the joys of British winter weather. Better still, prices for most goods and services are generally cheaper online than in store. Walk into Currys on The Strand in London and you'll have to fork out £189.99 for a 30GB I-pod; on their website it costs £175.65. An increase in the number of people banking online has also made consumers more comfortable about sending their credit and bank-card details over the internet.

But the key driver behind the enormous take-up of online shopping isn't just the convenience, or even the savings it's the fact that "the widespread domestic take-up of broadband internet access has now brought the ingredients together in a workable way", says Robert Cole in The Times. Broadband is now cheaper, faster and more accessible than ever thought possible. There were 300,000 broadband connections in 2001, says Ofcom. There are now 13 million, and most are used for shopping: of 15,323 broadband users recently surveyed in a YouGov poll, 87% said they buy goods online. All this, says Hamish McRae in The Independent, points toward a revolution in how we shop, on a par with those that came with supermarkets in the 1950s. Back then, people took to their cars and drove to outlets on the outskirts of towns in search of cheaper products that could all be bought at once. A similar process is currently developing with the internet, which "shifts power from the producers to consumers and indeed from governments to consumers That, surely, is wonderful: a global democracy of consumers, voting with their money for the best products and driving the providers to do better".

It may be wonderful for consumers, but like most revolutions, this one is claiming heads. Music stores, for example, have been hit hard by the rise in downloading music. Tower Records went to the wall in August, while both Woolworths and HMV issued profit warnings in December, before Christmas Day had even arrived. And the City doesn't expect things to get better anytime soon HMV has recently become one of the most "shorted" UK stocks of all time, The Sunday Times reports. Meanwhile, all the worries that beset retailers in 2006 are set to get worse in 2007 interest rates are rising at a time when consumers are more indebted than ever, while insolvencies are continuing to increase. This makes it even more important that firms get their online strategy correct. Online sales will certainly keep growing, but only by taking away custom from the high street.

Two unusual internet firms

Talk of online shopping brings to mind well-known internet retail stocks, such as Amazon, eBay or UK minnow ASOS. But as big players like Tesco throw more money at their online offerings, the early movers' of the dotcom days are facing far more intense competition. And with the likes of Amazon trading on a forward p/e of 85, their shares are not priced for disappointment.

A less obvious route to online riches is to look at firms that already have mail order catalogues. Philip Rodrigs of Investec Asset Management reckons that these will do well, as they already have the "distribution infrastructure" to cope with mail-outs and returned goods. N Brown (BWNG) owns catalogue brands including JD Williams. Online sales leaped 43% in the 21 weeks to 20 January, and the group is to return £80m to shareholders. The real excitement could be its Zenith unit, which aims to provide logistics for other online retail start-ups. The shares currently trade on a 2007 p/e of 20.4.

Also look at firms that will benefit from rising internet usage. BT is upgrading the telecoms network with IP' equipment, which will improve the rate and reliability of transferring data over the internet. One stock to watch is BATM (BVC), which has "a world-leading position in IP'," says Investec. The company's shares are currently trading on a forward p/e of 25.77.