Forrester Research and Shop.org announced the release of The State of Retailing Online 8.0 which found that online sales rose 23.8 percent to $141.4 billion in 2004. The report predicts that online sales excluding travel are expected to reach $109.6 billion this year.

Search engine marketing is the reported leader as a source of new customers, according to the report. The combined report found that retailers who used search engine marketing delivered 43 percent of overall customers to their sites. Pay-for-performance search placement was up in 2004 at $877,630 from $399,923 in 2003 among retailers surveyed by Forrester.

The report also found that multichannel retailers posted increase profitability with catalog-based retailers performing the best.

"With profitability behind them, retailers can now focus on innovation and growth through things like increased integration of their online and offline businesses and internationalization of their sites. One way retailers will grow sales over the next several years will be by launching country-specific sites and operations to accommodate a growing number of international customers," says Carrie Johnson, lead author of the report and principal analyst, Forrester Research.

The report predicts women's retail categories will experience much growth in 2005 due to the increasing number of online women consumers. Categories such as cosmetics and fragrances are expected to grow 33 percent this year.