Online retailers bank on snowstorms

Reed Stevenson

SEATTLE: Web shoppers are expected to spend more money than ever during the annual holiday shopping season, but online retailers could face a tough time making much of a profit out of the $12 billion in projected sales.

That's because many Internet retailers, who are increasingly viewing traditional stores as competition, are offering steep discounts and free shipping, cutting into their profit margins, said Carrie Johnson, an analyst at Cambridge, Massachusetts Forrester Research.

Although Forrester predicts that online holiday sales will rise 42 percent to $12.2 billion this year, Johnson said that online retailer profitability will be up only slightly from break-even last year.

"Enough online retailers have made their online operations profitable at a base level so they have the liberty to offer these promotions without going completely into the red," Johnson said, "but some retailers will still take a hit in the bottom line."

Even so, a snowstorm over the weekend in the Northeastern United States kept many shoppers at home, lifting hopes that they turned to their computers to spend their holiday money.

"When there's big snow, online sales usually do well. With this being the penultimate weekend, online shopping is probably going to disproprotionately benefit," said Helen Malani, a spokeswoman at online shopping comparison and research site BizRate.com.

In order to lure more shoppers to its Web site, top online retailer Amazon.com Inc. announced last week that it would extend its deadline to Dec. 15 for free shipping on orders $25 and above to be delivered in time for Christmas.

But the clearest illustration of where the online price war is being waged is in the top holiday product category: toys.

The brutal toy price war in bricks-and-mortar stores has already sent one traditional retailer, FAO Inc., parent of posh toy store FAO Schwarz, into bankruptcy. Cut-throat pricing is pitting retail stores and online Web sites against each other, even within the same company.

Wal-Mart Stores Inc., the top U.S. toy seller and discount retail heavyweight, is charging a shipping fee of only 97 cents for selected toy products online in addition to discounts on in-store prices, making it cheaper in some cases to buy online than drive to a Wal-Mart.

"Toys are a good vehicle for online sales,' said Sharon Weber, a spokeswoman at Bentonville, Arkansas-based Wal-Mart.

Seattle, Washington-based Amazon, which sells toys through a partnership with No. 2 toy retailer Toys R Us Inc., is also offering free shipping on toy orders of more than $75.

Reflecting slimming margins on toys, Internet auctioneer eBay Inc. has now become the top place to buy and sell new toys online since buyers can often find new or barely used toys below retail price, according to Chris Byrne, an independent toy analyst.

Steep price and shipping cuts, which started a few years ago, are hurting margins but are still crucial for growth and attracting new customers, said Byrne.

"For companies like KB Toys or Toysrus.com and Amazon, that was investment spending that's starting to pay off, but it's just not the kind of immediate payoff that Wall Street wants," Byrne said.

Investors could be in for a disappointment if profits don't come through, especially for Internet stocks, which have run up this year. Amazon, whose stock is up 173 percent, has a projected price to earnings ratio of 53 for 2003, according to analysts' estimates provided by Reuters Research, a unit of Reuters Group Plc.

NEW CATEGORIES CHASING PROFITS

Online retailers are also promoting a wider and more exotic array of products this year, since their higher price tags translate into higher profit margins aimed at making up for low-margin mainstream holiday gift items.

Amazon began selling gourmet food on its Web site in time for the holidays, offering exotic steaks, lobsters, chocolates and gift baskets from specialty food makers.

An 8-pound prime rib of roast from Omaha Steaks on Amazon costs $139, within a range of products from a $20 basket of fruit to a 2.2 pound of Beluga caviar for $2,200.

Amazon recently started selling jewelry on its Web store as well, something that Wal-Mart said it had been doing with success for a while.

"The reason why jewelry sales and apparel sales are up is because more women now shop online than men," Forrester's Johnson said.

Dell Inc., which became the top personal computer seller by offering its products on the Internet, has also expanded its range of products to boost profitability.

Dell is now selling flat panel televisions and digital music players in addition to its laptop and desktop computers.

"Customers are gravitating toward music and imaging products," said Dell spokesman Venancio Figueroa, adding that Dell offers discounts for consumer electronics bundled with computers.

The increased drive for profitability from new categories is particularly relevant at Amazon, which recently reported its first quarterly profit outside the holiday season.

Amazon is betting that another holiday season of strong sales will help fourth-quarter revenue grow as much as 33.6 percent over the prior-year period, which analysts say could give it a good chance of reaching its first full year of net profit.

(With additional reporting by Angela Moore in New York)

Reuters