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After the New Economy bubble burst, pundits were quick to write off the future of Internet sales in countries like Brazil, where they hadn't really taken off yet. Surprisingly, the opposite occurred. More and more Brazilians are shopping in virtual stores than ever before.

Online consumer sales during the first half of the year grew 45% over the same period last year, according to Camara-e.net, Brazil's electronic chamber of commerce. Using a wider measurement that includes online airline and automobile sales, the consumer retail market online totaled US$722 million during the first half of the year.

"We had quite a good run," says Pedro Guasti, director general of E-bit, an online research and marketing firm. Brazil now accounts for more than 60% of e-commerce in Latin America, says Guasti.

One of the reasons that consumer sales continued to grow even as traditional retail sales plunged in the country is that Internet users in Brazil generally have higher average income and purchasing power. Online shoppers in Brazil spend $75 per purchase, compared to roughly $45 in the United States, according to Camara-e.net. Yet there are other reasons underlying the virtual sales boom. For one, there is a huge pool of Internet users that are only now discovering online sales.

"Brazilians were timid at first to buy on line but now many of their fears have subsided," says Gastao Mattos, president of Camara-e.net. With the development of more sophisticated encryption software and considerable advertisement highlighting safety features, security concerns have faded.

Also, unlike other countries in the region, Brazil's public postal service, Correios, is cheap and reliable, bringing down the cost and time of transportation. In fact, Correios specifically launched a special overnight parcel service in response to requests by dot.com retailers.

Despite the booming market, competition is tough and profit margins are still tight. Companies are trying to broaden their market share to gain economies of scale. Already, the market is highly consolidated. Of the 4,000 online stores, the 10 largest players account for 85% of turnover.

Looking for more traffic and sales, online sellers are trying to increase exposure of their product. Gol, the discount airline, whose Internet sales jumped to a projected 65% of total revenue in 2003 from 14% in 2001, recently began installing computer terminals in shopping centers and in the Carrefour and Lojas Americanas supermarket chains. The airline allows customers to pay for tickets using their bank cards and to cancel flights online. It linked up with Bradesco bank and Shell gas stations to offer a frequent-flyer credit card. The airline expects total sales of $454 million is year, up from $245 million last year.

Such measures should help Gol reach its target of selling 90% of its tickets via Internet within two years, says Wilson Maciel Ramos, the company's online sales manager. "Many people said we'd fail on the Internet, but the figures show it has been a success" he says. Competing airlines sell less than 5% of their tickets online, Ramos says, because of internal red tape that requires hard-copy sales receipts. Magazine Luiza, a traditional retailer in the interior of Sao Paulo state, draws customers by offering free Internet. access in their owl cyber cafes. There they can buy from online catalogs. Every bit helps; in some towns in Brazil, even setting up a free Internet account can take two months.

With only 15% of the costs and 10% of the employees of traditional stores, these brick-and-click shops "are extremely profitable:' says Oderi Gerin Leite, manager of electronic commerce for the retailer.

Magazine Luiza occasionally sets up stands with its computer terminals in large companies such as the power company CPFL in Sao Paulo and inretailers, such as U.S. video rental chain Blockbuster. "Our business model is constant innovation and top customer service;" says Leite. "That is the only one that works in this business."

As online department stores offer ever more products, smaller operators that haven't already staked out their turf fear for survival. The exception, analysts note, are those that have successfully focused on niche markets.

One such outfit is Flores Online, an upscale flower delivery service that is doing well and broke even last year. "There was no flower brand in Brazil so we invested heavily into advertising to create one" says Alexandre Borges, partner and director.

Online department stores plan to sell flowers next year, but Borges is unafraid, he says. "Flowers are not like books or CDs. They require special care that a smaller outfit can provide better. They may have financial muscle but they won't put us out of business," he says. In anticipation of heightened competition, Flores Online made a deal to have a link to its Web page displayed on Submarino, one of the larger online retail stores.

Most analysts expect Brazil's virtual sales boom to continue for some time. Currently only 10% of Brazil's 24 million Internet users buy online, although analysts expect that figure to rise to around 40% in coming years. "There is room for more growth," says Camara e.net's Mattos.

Still, not everyone is optimistic and there are signs that the economic downturn has proven a double-edgedsword for e-commerce in some sectors. Ponto Frio, one of the country's largest retailers, has seen Internet sales growth slow in recent months as customers turn to its sales call center for personal help instead. "People check out goods online and then call in hopes of negotiating a discount," says Ike Zermati, executive director of Ponto Frio.

The same phenomenon seems to have occurred in the auto industry. Online automobile sales for General Motors and Ford fell by 13.6% and 14.7%, respectively, during the first half compared to a 7% decline in the industry's total sales.

Reducing large inventories in show rooms through online sales improves the bottom line. Even so, automobile firms are beginning to see the limitations to Internet sales. "I don't want to sell 100% of my cars via the Internet," says Reinaldo Faga, direct sales manager for Ford. He says it is important to maintain a physical distribution network not only for customer service but also for sales. "People want to sit in the car, test drive it. That's something the Interact will never replace."