NEW YORK (TheStreet) -- E-commerce continued on its impressive growth path over the 2014 holiday season. While overall U.S. retail spending in November and December increased 4% year-over-year, online spending went up 15% (even excluding purchases made via tablets and smartphones), a result in line with eMarketer's estimate of a 15.7% rise in 2014 U.S. online sales.
Even though bricks-and-mortar stores still handle about 80% of all consumer purchases, the recent decline in same-store sales has turned e-commerce into perhaps the primary engine for growth in the retail industry. As you ponder what the future might hold for online retailers and consumers, keep an eye out for these four trends.
1. Retention Through Subscription
The e-commerce space is both large and expanding, providing shoppers with a vast array of choices, not just in products to buy but in places to buy them. The ease and convenience of online shopping has severely reduced "neighborly" behavior -- i.e., the propensity of people to frequent nearby stores -- so building audience loyalty is now more difficult than ever. With special offers popping up in the click of a flash sale, retailers can't rely on the old standbys of significant, limited-time savings or even traditional sales dates (e.g., Black Friday); they have to find other ways to keep their best customers coming back again and again.
Amazon (AMZN - Get Report) understood this long before most other retailers did, launching Amazon Prime, the current e-tailer gold standard for subscription programs, in 2005. Since late 2011, when the program added Kindle Fire and other benefits to its prepaid two-day shipping benefit, the Prime subscriber base has taken off. While the exact number of subscribers remains a closely guarded secret, a financial analyst recently estimated it at 30 to 40 million U.S. subscribers and about 50 million worldwide. The company just announced that Prime grew more than 50% last year.
Numbers like those -- and the fact that Amazon cares more about cash flow than prices or even profit at this point -- have left retailers scrambling to keep up. Big-box stores have responded by introducing loyalty programs of their own, offering subscribers discounts and free shipping on consumable goods and other purchases. They're also taking advantage of their existing bricks-and-mortar stores, shipping orders from there in an effort to compete on delivery times with Amazon's growing chain of warehouses across the country.
2. Rapid vs. Reduced Price
Shoppers will always look first at the cost of an item, but the ubiquity of low online prices is forcing retailers to set themselves apart from their rivals via promotions, policies, and processes that focus on a wider range of customer needs and interests.
Consider the growth of online groceries services. Most large grocery and general merchandise chains already offer shoppers the ability to order their groceries on a website and either pick them up in-store, usually that day, or have orders over a certain amount delivered to their homes, sometimes as quickly as the next day (although delivery fees of up to $9.95 or more can apply). Many users are regular customers; they often use free store cards on their purchases to save on various items.
In recent years, other providers have joined the online groceries field in select cities, including Google Express (GOOG - Get Report) , Amazon Fresh, and Instacart. Their services are usually more expensive, but they offer much faster delivery. Instacart members, for instance, pay $99 a year to enjoy two-hour delivery for $3.99 or one-hour delivery for $5.99 on orders over $35. Instacart's speed can come at an even greater cost, though: Some customers have paid markups of as much as 20% on their groceries (not including tips, of course).
These two services help to highlight the primary benefit choices that retailers across various categories are considering these days. Both options offer convenience, but one group of providers enhances the appeal of its service by offering savings on purchased items, while the other one does so by focusing on faster delivery. There are clearly sizable consumer audiences for each service, but unless and until some company figures out how to profitably combine low prices with fast delivery, the overall market will remain in flux.
3. Relaxed Returns
Shipping charges are still the leading cause of abandoned carts in e-commerce, but concerns about returns are emerging as another critical factor in consumer purchase decisions. Two-thirds of online shoppers check a retailer's returns policy before placing an order, and 81% are less likely to keep shopping at sites that charge them for return shipping.
Data show that consumers will happily reward stores that have customer-friendly returns policies. One study found that 82% of shoppers will complete their online purchase with e-tailers that offer free return shipping or in-store returns. Another study found that customers who could ship items back for free boosted their purchases at that store by 58%-to-357%, while customers who were charged for return shipping dropped their purchase activity by 74%-to-100%.
However, most retailers either haven't seen or choose to ignore the fact that offering free, convenient returns pays off in the long run. An Internet Retailer survey revealed that only 49 of the merchants in its Top 500 Guide offered free return shipping as of last January. A relaxed returns policy could pose concerns for retailers, particularly smaller ones that can't easily absorb additional costs, but apparel and accessories sellers such as Zappos, Nordstrom (JWN - Get Report) , Neiman Marcus, and others have managed to succeed in a category famous for high return rates, even though they allow their customers to ship items back for free.
Fortunately for consumers, retailers are increasingly viewing online returns policies as customer satisfaction matters rather than just customer service matters. Since a difficult or costly return could become the final interaction a store has with a customer, stores are starting to rethink their policies. Last year, for instance, Amazon quietly began issuing faster refunds to online customers, often before the return shipment arrives, and in Internet Retailer's survey, 38 e-tailers that were charging customers for return shipping said they planned to offer free returns during 2014.
4. Amazon vs. The World
Amazon has been the leading e-tailer for over a decade now, and last year it cracked the list of top 10 U.S. retailers overall, the first pure-play e-commerce firm ever to do so. This week, it reported a better-than-expected holiday quarter, booking about a half-billion dollars in operating income.
Amazon's status naturally puts it squarely in its competitors' sights:
- Walmart (WMT - Get Report) promised to match prices with Amazon.com;
- Target (TGT - Get Report) offered free shipping on every holiday purchase from October 22 through December 20;
- Google enhanced its shopping delivery service; and
- Best Buy (BBY - Get Report) began implementing conditional price-match guarantees and ship-from-store initiatives to better compete on prices and delivery times with the Internet giant.
Individually, these efforts weren't nearly enough to dethrone Amazon, which continues to enjoy significant advantages in cash flow, brand recognition, subscriber numbers, and (sometimes unmet) consumer expectations, among other areas. Collectively, though, they can chip away at Amazon's overall share of the e-commerce market, forcing it to fend off different challenges even as it tries to extend into other categories.
On top of that, Wall Street investors and some analysts are questioning the company's failure to show a consistent profit. Amazon CEO Jeff Bezos doesn't care about that metric, but investors are clearly looking for other opportunities. For example, Alibaba's (BABA - Get Report) initial foray into the U.S. e-commerce market was quite well-received; the Chinese giant's initial public offering set the record for a U.S. listing.
Alibaba isn't an immediate threat to overtake Amazon in the U.S. e-commerce rankings, of course. Amazon's established infrastructure and logistical knowledge here give it a big edge on Alibaba, at least in the short term. Beyond that, the average American consumer knows next to nothing about Alibaba, and while that can and should change over time, the U.S. audience may not be quick to trust a new brand.
On a global scale and longer term, though, Alibaba is a formidable rival. It sells significantly more merchandise than Amazon; has an undeniable homefield advantage in the huge and growing Chinese consumer market; and controls two marketplaces (Taobao and Tmall) that have both demonstrated the ability to deliver remarkable sales numbers. It also owns its own payment processing company, shipping company, and cloud service, and it's enjoyed profit margins of 40% or more in recent years. Given all that, Amazon can't afford to sell Alibaba short.