Service problems nearly knocked them out of the game a few years back, but online retailers have made a triumphant return. This past holiday season, shoppers clicked away at record rates, pushing online sales to a new high. From Oct. 29 to Dec. 23, U.S. shoppers ordered $30.1 billion worth of clothes, iPods, "Chronicles of Narnia" boxed sets, electronic games, and other merchandise from online retailers. That added up to a whopping 30-percent increase over 2004 figures, according to the 2005 Holiday eSpending Report from Goldman, Sachs & Co., Nielsen//NetRatings and Harris Interactive.

On Amazon.com alone, customers ordered a record 3.6 million items—the equivalent of 41 items per second—on the site's busiest day, Dec. 12. Over the eight-week holiday selling season, shoppers ordered more than 108 million items from that site, a new record. As for sales overall, clothing remained the most popular item. Online shoppers forked over $5.3 billion for clothing, $4.8 billion for computer hardware and peripherals, and $4.8 billion for consumer electronics.

What makes this all the more remarkable is that online retailers had to overcome a crisis in consumer confidence to get to this point. It wasn't so long ago that online merchants were dogged by a reputation for poor service and lengthy shipping delays—the result of crippling order fulfillment woes. The low point may have been the 1999 holiday season, when a deluge of holiday orders caught the nascent industry unprepared.

When the retailers failed to ship goods on time for Christmas, consumers complained. Within months, the Federal Trade Commission had fined online retailers Toysrus.com, Macys.com and KBkids.com $350,000 each for giving buyers inadequate notice of shipping delays or continuing to promise specific delivery dates they couldn't possibly meet.

The confidence game
Winning back those disappointed customers has been a long and costly battle. Online retailers have invested in new order fulfillment systems, increased their fulfillment staffs and expanded their distribution centers. But it appears that those investments have paid off. Amazon.com, for example, reports that despite the heavy volume—its worldwide fulfillment network shipped more than 2.7 million units on its busiest day—it shipped more than 99 percent of orders in time to meet holiday delivery deadlines worldwide. That's not to say online retailers have achieved order fulfillment perfection. Stockouts and shipping delays still occur. But today, they're the exception, not the rule. A record 64 percent of the shoppers surveyed for the Goldman, Sachs & Co., Nielsen//NetRatings and Harris Interactive report said they were somewhat or very satisfied with their online shopping experience. Meanwhile, consumer dissatisfaction hit a four-year low; only 6 percent reported being somewhat or very dissatisfied.

Another indication that consumers have learned to trust online vendors once again is their increasing tendency to place mid- to late-December orders, says Anthony Noto, an Internet and entertainment analyst at Goldman Sachs. "Consumers continue to shop later in the online holiday season as their trust in on-time delivery grows," says Noto.

Though soaring gas prices and New York City's transit strike may have given online sales a boost, the online retailers themselves deserve much of the credit. "Retailers have ... worked hard to [improve] their back-end operations ... and are also a lot better at predicting volume," says Patti Freeman Evans, a retail analyst at JupiterResearch, which predicted online sales of $26 billion back in November. They're also setting more realistic expectations, she adds. "[W]hat retailers have found from consumers is that it's not as important to ship really fast as it is to ship on time. If you know you can ship it in two days, tell them two days, and not one." As a result of these improvements, she says, complaints have dropped steadily over the last couple of years.

That bodes well for the future. "The consistently high level of satisfaction each year increases the future expectations for online sales," says Heather Dougherty, a senior retail analyst with Nielsen//NetRatings. "More consumers are taking advantage of the benefits of e-commerce to avoid holiday crowds and to purchase competitively priced gifts. Many of the free shipping promotions help level the playing field among the sales channels, which elevates satisfaction amongst online shoppers."