Every year around this time, the media take the temperature of Christmas sales by checking with chains like Wal-Mart, whose same-store sales actually fell in November and are expected to rise by less than 1 percent in December. But the performance of traditional bricks-and-mortar retailers tells a smaller and smaller part of the total economic story. The fastest growing retail sector today is online, and it is booming.

Resident Fellow James K. Glassman

In 1997, consumers spent just $2 billion to make purchases over the Internet. This year, Forrester Research predicts they will spend $211 billion, or about $2,000 per family. Sales are rising by one-fifth this Christmas season over last. By 2007, total U.S. online sales should exceed Wal-Mart's domestic sales level in 2004, and within a few more years, Internet revenues will blow right by the world's largest retailer. Why? The online retailing environment is dramatically changing. Americans are rapidly becoming a nation of online shopkeepers. There are, quite simply, more folks out there selling, and doing a much better job of it. A survey conducted by AC Nielsen in July 2005 found that more than 700,000 Americans are using businesses they have set up on eBay as the primary or secondary source of their income. And that's just eBay, a single site. There is no accurate data, but it is safe to say that 3 million to 5 million small and medium-sized businesses are selling over the Internet in the United States alone.

That figure will climb, and so will total online sales--in part because buyers are changing their behavior.

First, new research shows they are purchasing bigger-ticket items, including entertainment and fitness equipment, appliances, furniture and automobiles. The latest figures from the Census Bureau show that online sales of motor vehicles and parts jumped 23 percent in a year while bricks-and-mortar sales of these items increased only 3 percent.

Second, more and more consumers are making spontaneous or unplanned purchases online. In the past, the model for e-retailing was a purchaser hearing about a book and going to the Amazon or bn.com site, typing in the title, buying the book and logging off. Now, while purchasers still go to sites to buy specific items, they often buy something they had not expected to.

To determine the extent and patterns of spontaneous online buying, I worked as a consultant with PayPal in designing a survey that was conducted this fall by Harris Research (1,029 adults between Sept. 15 and 18). The study found that, while shopping online over the past three months, nearly half--45 percent--of shoppers said they had made at least one spontaneous or unplanned purchase. Also, online shoppers said that one-tenth of their total purchases were spontaneous.The survey found that about one-fifth of shoppers had increased their spontaneous buying compared with last year and that the most frequently cited unplanned purchases were clothing and accessories. This is an important change. Americans are now browsing online--really browsing, as they do in stores.

There are several factors driving these behavior shifts:

First, many more Americans now have high-speed broadband Internet connections in their homes.

Second, online retailers are learning, through trial, error, and imitation, how to market on the Net. Even the smallest of online retailers are offering special promotions.

Promotions drive referrals, the Harris survey discovered. If you find a deal on the Internet, you are likely to tell a friend or family member about it--and that person can act on the suggestion quickly. Instead of having to drive to a mall a few miles a way, the friend can go online and make a purchase in minutes.

Many online retailers are using a method pioneered by Amazon.com to boost sales: packaging complementary products together. Verbatim responses to the Harris survey found that spontaneous purchases were often grouped as companion items to what the buyer originally went online to find.

Sherry Bonelli, CEO of PregnancyStore.com, based in Rockton, Ill., says, "Usually the first item a shopper puts in their cart is the item they searched for. Theoretically, all other purchases are spontaneous. We've started putting, 'If you like this item, you may like. . .' in the item listings to drive more impulse purchases.

"Third, online retailers have responded to the concerns of consumers about security by offering safe and seamless payment systems like PayPal, which functions as a middleman between the purchaser and the seller (the seller never sees the purchaser's financial information).The result of these changes in the Internet selling environment--the spread of broadband, better promotional techniques, and higher security--is greater efficiency, sales, and profits, which, in turn, are drawing more small and medium businesses onto the Net.

Online sales remain small in relation to total consumer purchases--only about two or three percentage points--but they are gaining tremendous speed while bricks-and-mortar retailers are laboring hard just to run in place.

James K. Glassman is a resident fellow at AEI and editor in chief of The American.