FragranceNet.com has had a good run. Over the 10 years the online fragrance retailer has been ranked in Internet Retailer’s Top 500 Guide, the merchant posted the highest annual growth rate among web-only retailers at almost 39%.

FragranceNet.com, No. 153 in the 2013 Top 500 Guide, had 2012 web sales of $145 million, a 16% increase from $125 million in 2011. The retailer originally specialized in perfume and cologne, but in recent years added other personal care lines including beauty and skin care products. CEO Jason Apfel says the merchant built a competitive advantage over other retailers by offering brand name fragrances at reduced prices and by staying in tune with customers’ needs.

The retailer has made money every year since it launched in 1997, Apfel says, but he didn’t reveal any dollar figures. Profitability for his company depends on merchandising and marketing skills honed as a web-only retailer, including developing e-commerce technology in-house to meet customer needs and a steadily expanding product selection.

FragranceNet.com and the other 26 web-only retailers listed in the Top 500 rankings for the past decade had a combined annual growth rate of 27.1%. But sales growth tells only part of the tale. Web-only retailers need to show profits to existing and potential investors in order to fund growth. Three public companies among the web-only retailers ranked for the past decade have had very different profit histories. Overstock.com Inc. (No. 31), which reported a 2012 sales increase of 4.3% to $1.1 billion, has reported a net profit in only three of the past 10 years. Amazon.com Inc. (No. 1) made money from 2003 through 2011, but posted a net loss of $39 million in 2012.

Other online-only retailers that struggled with profits include flash-sale retailer Bluefly Inc. (No. 206), parent of Bluefly.com. The company, which has yet to file its 2012 financial report with the U.S. Securities and Exchange Commission, estimated its 2012 net loss would be around $24 million, following a net loss of $11.4 million in 2011. Bluefly is seeking new funding or a buyer. And Drugstore.com, which formerly was ranked in the Top 500posted losses for 2009 and 2010 before itwas acquired in 2011 by Walgreen Co. (No. 36).

Profitability is increasingly important to attracting investors, and web-only retailers could be facing more difficult prospects as competition from retail chains and catalogers heats up. When excluding Amazon, online-only retailers ranked in the Top 500 had a combined annual growth rate of only 15.6% over the past 10 years, the third-highest rate among the four categories that the Top 500 uses to describe merchants. Catalogers led with a 17.0% annual growth rate, followed by chain retailers at 16.7%. Consumer brand manufacturers were fourth at 14.7%.

Historically, competition has forced web-only retailers to focus on efficiency and leveraging technology, says Scott Savitz, managing partner at venture capital firm Data Point Capital, and founder and former CEO of Shoebuy.com Inc. (No. 93). That will need to continue because web-only retailers also are competing with other merchants when it comes to attracting investors.

“Firms like Data Point Capital will only invest in companies with sound metrics that are real businesses, with real customers, a real value proposition and real margins,” Savitz says. “These are businesses that are differentiating themselves and raising the bar on the consumer experience.”

To read previous Top 500 Insider stories, click here.

More on these and other metrics and analysis is contained in The 2013 Top 500 Guide.

The 2013 Top 500 Guide is available in three formats: print, digital and as part of the all-new and completely updated Top500Guide.com. Information on how to order the brand-new 2013 Top 500 Guide is available here.

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