Online retailers reported profitability last year and believe online shopping will be more resilient than other channels in the months ahead, according to a newly released study by Forrester Research for Shop.org. Despite a struggling economy throughout most of this year, the majority of web retailers continue to be cautiously optimistic about how their businesses will perform during the next 12 months.

According to The State of Retailing Online 2008, the 11th annual Shop.org study by Forrester Research, 72 percent of online retailers believe that the online channel is better suited to withstand an economic slowdown than offline channels. "Internet retailers have good reason for optimism, as budget focused shoppers head to the web for value and convenience," said Scott Silverman, executive director of Shop.org. "Online retailers are well positioned to make the best of a potentially lean holiday season."

More than one third (35 percent) of online retailers surveyed said they expect their online business to perform better than expected in the next 12 months, while another third anticipate their online business will perform the same as expected. This optimistic outlook is driven primarily by past results.

According to the report, 81 percent of online retailers reported that their eCommerce business was profitable in 2007, and 75 percent were also more profitable last year than in 2006. Almost half said that their average conversion rate in 2007 was higher than in 2006, and 36 percent of total sales were driven by repeat customers, which is higher than in 2006.

However, 37 percent noted that they have lowered expectations for their online business performance in the next 12 months. The report advised that online retailers must still execute well to capture possible sales. It also cautions that those sales may not necessarily be the highest margin revenue, due to increased input costs and the pressure to offer such promotions as free shipping.

"Although the online sales growth rate will be lower than in years past because of lowered consumer confidence and credit working against all of retail, the good news is that this growth will still outpace nearly every other sector of consumer spending," said Sucharita Mulpuru, Forrester Research principal analyst and lead author of the report. "Given that the web appears to be a preferred channel for many consumers during an economic downturn, retailers would be well served to provide offers that motivate customers to buy, and to encourage the online channel to drive sales in a channel agnostic manner, in order to provide benefits to the entire business."

The report noted that web retailers are still challenged in creating cohesive customer experiences among multiple sales channels. While many web teams continue to operate in silos, apart from store and catalog teams, multichannel retailers report that half of online customers also shop in the company's stores or through its catalogs, exemplifying why online employees should have a vested interest in stores' performance, and vice versa.

The report recommends that online retailers devise practical, measurable goals and incentives to motivate employees in all parts of the company, whether they are tied directly to the web or not, to promote sales in all channels that the retailer offers.

But there are additional signs that some Internet retailers could see an uptick in sales, as consumers look to save money on gas by doing their holiday shopping on the web. Retailers may look to capitalize by spending more advertising dollars online.

"Last holiday season when gas wasn't as high as it is now, nearly a quarter of online shoppers said they were going online because of gas prices," said Mulpuru. This year, she continued, the trend should be even more pronounced, with retailers such as Amazon.com faring well.

Amazon.com reported a 41 percent increase in net sales in September, which could be considered an early indication of how the fourth quarter could look. Mulpuru and others agreed, however, that this good fortune won't necessarily be enjoyed by all online retailers. Those focused on value and price will be most likely to benefit.

The holiday season is expected to be highly promotional, with web retailers using offers of free shipping to entice consumers to shop. However, Ellen Davis, VP at the National Retail Federation, suggested that as transportation costs rise, retailers may pay for the cost of bigger free shipping programs by spending less on advertising and site improvements. "Online retailers would prefer not to offer free shipping, but shoppers may demand it," she said.

The desire to find good deals is even driving a group of first timers to shop online, Davis added. "They see online shopping as almost a necessity," she said, noting that some are not very familiar with eCommerce.

Though conventional eCommerce wisdom had said that online retailers should focus on retention because the number of new consumers in the channel was drying up, "Retailers are starting to acquire a new type of customer, largely due to the economic environment," Davis said.

So far this year, 75 percent of retailers working with Google have not decreased their budgets, despite the economic downturn. "Many retailers say they will increase their fourth quarter spending online," said John McAteer, head of retail at Google, during the recent NRF conference in Las Vegas.

Small Concept, a high end children's clothing merchant with a store in Atlanta and an eCommerce site, increased its Google AdWords budget by 13 percent in the third quarter, compared to second quarter. Chuck Utterback, president of the retail firm, said he expected to raise it even more this quarter, despite a drop in sales.