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Online Retailers See Merry Holidays Ahead

The mouse is gaining on the mall, and that could be good news for your investment portfolio.

Online shopping used to be viewed as a secondary option used by the tech savvy and those too busy to head to the mall. That perception is changing.

This holiday season, more than half of the 116 retailers surveyed (51.4 percent) by BizRate Research anticipate online revenue to grow by more than 30 percent over last holiday season. Consumers themselves also expect to shop at, and spend more of their budgets with, Internet-based merchants. More than 34.7 percent of the 2,695 online shoppers polled by BizRate Research plan to do more of their shopping online than a year ago.

Why? Retailers are finding that as shoppers get more familiar with buying online they seek out Internet stores as an alternative to in-store crowds and restrictive store hours.

Another factor: bargain hunting. In this slowing consumer environment, shoppers are hunting and picking prices before they purchase. More than 36.2 percent of shoppers like the ability to compare prices online and report that items are often easier to find online than in stores (29.9 percent).

Online stores, or “e-tailers”, are responding to these changing consumer preferences by offering more online promotions.

Traditional retailers are also expanding their Internet stores as an additional shopping channel.

The added competition is creating a war for market share between the online and "bricks-and-motar" retailers, and it is also closing the gap between the offerings and forcing the retailers to compete for consumer dollars.

Nearly two-thirds of retailers (63.0 percent) will offer online-only sales this year, up from fifty-nine percent just two years ago. Many companies will also be touting early shopper discounts (35.0 percent), repeat buyer discounts (37.0 percent) and "refer a friend" promotions (55.6 percent).

Why are retailers willing to risk charging less for their products and taking on the additional cost of paying for free shipping? Winning "mindshare" (being "the retailer of first resort for shoppers") and gaining any edge in winning over consumers is key during the holiday season. After all, just like brick and mortar stores, online retailers book around 40 percent of their revenue during the holiday sales events of the fourth quarter.

Are there any investable trends? Citigroup analyst Mark Mahaney says online marketplace eBay and jewelry retailer Blue Nile are two retailers who will benefit from the increase in Web traffic this season.

"EBay is a place where people go to get the best and cheapest deals. It’s also the place where sellers can turn to as kind of a channel of last resort," Mahaney said. "When times get tough you can always find those few extra things in the attic and sell them on eBay."

With an average ticket price of $1,500 for its jewelry, Mahaney thinks high-end e-tailer Blue Nile is "insulated" from any weakness in consumer spending.

While we won't get a handle on just how robust holiday spending is until well after the Christmas holiday, the one clear winner from all of this competition is the consumer. Mahaney says expect holiday promotions to be steeper and prices even cheaper than in 2006.

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