Web Retailers Engage in Price Wars

Brick-and-mortar retailers will be marking down prices on many items this holiday season to attract reluctant shoppers, but their holiday “price war” is a mere skirmish compared with that being waged online, writes the International Herald Tribune.

The price-cutting and discounting is so aggressive that in some cases it may threaten more than just profit margins: Online retailers forced to sell below cost face going under.

The online channel is particularly brutal for retailers because of Google and specialized shopping engines like Shopping.com, which make the competition merely a click away, forcing retailers to deepen discounts or lose their customers.

Moreover, many retailers - especially sellers of music, movies, books, computer software, flowers, and gifts - are not running on big margins to begin with, so price cuts can be deadly. Sales plummeted well into the double-digit for most of the these categories (see table) in the third quarter, according to comScore data.

In fact, the overall retail e-commerce growth rate fell to just 6% in the third quarter, a vast slowdown from the 18-20% during 3Q07. In October, sales growth on e-commerce sites was barely positive, up just 1% from Oct. ‘07. year - the lowest rate ever for online retail.

To get an edge on the competition, some retailers - like Kmart - are running their promotions early this year. The Sears-owned company started Black Friday pricing on electronics (40-50% off) nearly four weeks early. Kmart is also offering free shipping on web purchases of $49 or more for a limited time.

Free shipping is becoming a norm for e-commerce sites: 75% of online shoppers say they would shop elsewhere if a site did not offer free shipping, according to a recent comScore survey. Online giants like Amazon can absorb shipping costs, but most smaller retailers cannot.

Another strike against online sellers is the rising cost of online advertising. Prices for text ads on Google relating to women’s fashions, for example, have quadrupled over the last year and a half, apparel retailers claim.