SAN FRANCISCO--As deserted malls and department stores struggle to court cash-short consumers with steep discounts this holiday season, a similar and even more ferocious price war is being waged online.
Internet retailers, trying to navigate what is shaping up to be the first
For example, Sony introduced its HDR-SR11 high-definition digital video recorder in April with a suggested retail price of $1,200. This week, Dell.com was selling it for $899, and the electronics retailer Abe's of Maine had it on its site for $750--and both were throwing in free shipping.
At Lori's Designer Shoes, a Web site that sells women's accessories, a brown leather Hype tote bag started at $338, fell to $246 and is now available with a 20 percent discount coupon for $196.80. Lori Andre, the owner, said she generally tried to avoid online promotions "because then you train the customer and they'll expect that, and you're not going to make any money." But last week, traffic hit a wall and sales on the site fell by nearly a quarter. "We've been in business for 25 years, and never seen the bottom drop out like this," she said.
Traditional retailers are facing the same problem, of course, and discounts are proliferating from suburban malls to Fifth Avenue. But the price-cutting is fiercest on the Web, where customers can easily shop for the best price with a quick search on Google or on specialized shopping engines like Shopping.com. Online, the competition is only a click away. For many Web sites, the discounts and price cuts are the only way to hold on to customers as online buying unexpectedly plummets. The research firm ComScore reported Tuesday that sales growth on e-commerce sites slowed to a meager 1 percent in October compared with the previous year--the lowest rate ever for online retail and well down from the industry's typical 20 percent gains.
Sales of music, movies, books, computer software, flowers, and gifts have been hit the hardest, with double-digit declines, ComScore said. "A lot of these retailers aren't running on big margins to begin with, so it's pretty challenging," said Gian Fulgoni, chairman of ComScore. "But it's a Catch-22 situation: they have to run these deals because that's what consumers are looking for this season."
To preserve the sanctity of their brands and some level of pricing control, some Web companies are promoting discount sites separately from their main brands.
Zappos.com, a shoe retailer based in Henderson, Nev., never runs promotions on its site. Instead, it quietly moves shoes that do not sell in six months to 6pm.com, a clearance site
Even when these extreme discounts mean selling shoes for less than Zappos.com paid for them, it is better to recoup some cash than none, said Tony Hsieh, the company's chief executive.
The discounting is not just drastic, but is also occurring
Kmart's discounts are available both online and in stores, but the retailer is throwing in free shipping on Web purchases of $49 or more this week, a measure it has never taken before.
E-commerce experts said they expected the cutthroat price competition to be fatal to some struggling retailers. "Folks that have been on the ropes or near the ropes during the good times are going to go under. There is no question about it," said George Michie, co-founder of the Rimm-Kaufman Group, a search marketing company.
Many boutique stores opened e-commerce sites because they were simple to build and inexpensive to run, yet those same advantages also forced them to compete with thousands of other sites selling similar products, each offering steeper discounts.
Plasticland, now an online boutique selling clothes, home decor and jewelry, started in 2002 as a single store in San Diego. The owners, lured by the global audience of the Web, moved it online in 2005. They were caught off guard this spring, when sales started to plummet.
The company, now based in Plano, Texas, switched to lower-priced merchandise and began moving unsold goods onto its clearance pages a month earlier than usual. A necklace with a red apple pendant now sells there for $32.50, down from $65, and a serving platter for $37.80, down from $54.
"Our profit per piece obviously drops, which means that we have to ship a lot more merchandise to make the same amount of money," said Rebecca Nyhus, the store's co-owner. "Lowering price points has helped us weather the downturn, but it has really bogged us down because shipping is so time-consuming" and expensive.
Like many other small e-tailers caught in the holiday margin squeeze, Plasticland was forced to raise its minimum order for free shipping to $100, from $50 to try to recoup some of the lost profits.
Free shipping is becoming a painful imperative for all e-commerce sites. Three-quarters of online shoppers said in a ComScore survey that they would shop elsewhere if a site did not offer free shipping, and nearly all sites offered it for at least some purchases.
E-commerce giants like
"In our business model, we could not afford to give free shipping on every package. It just would not work," said Dave Weich, director of marketing at Powell's.
To exacerbate matters, a major expense for online retailers seems to be rising: the cost to advertise products on the search engine Google, the source of considerable traffic and visibility for most e-commerce sites.
Over the last year and a half, prices for text ads related to women's fashion have quadrupled, say apparel retailers. In the popular gifts category, the price to advertise alongside results for common search queries like "gift baskets" jumped 50 percent from the 2006 holidays to 2007 and is expected to climb again this year.
For Delightful Deliveries, a 10-year-old company that was selling gift baskets online, that extra expense--plus the challenge of competing on price against its own wholesalers, which also sell on the Internet--proved too much. The eight-employee company, based in Port Washington, N.Y., closed in September.
Eric Lituchy, the founder of Delightful Deliveries, is now watching the Internet price war from the sidelines. "I think everyone is praying that this economy does not get any worse and that people find reasons for optimism and spend some money at Christmastime," he said.
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