What began as a strong shopping season for online retailers may fizzle as cash-strapped consumers quickly exhaust tight holiday budgets. Lured by steep discounts, consumers showed a propensity to spend as yearend shopping got under way after Thanksgiving. By late afternoon on Nov. 30, the day's online sales were up 11% from a year earlier, according to online marketing firm Coremetrics. That matched the percentage increase registered on Nov. 27, the day after Thanksgiving, when Web sales climbed 11%, to $595 million, according to researcher comScore (SCOR). With unemployment high and expected to keep rising, households are setting aside less money for yearend holiday shopping. That means the late-November shopping surge may not last, retailing experts say. "People could be spending a lot of their budget up front," says Jeffrey Grau, senior analyst at online marketing research firm eMarketer. "Things are going to slow down as people have less money to spend, and they are going to exhaust their money earlier." The average consumer plans to spend $682.74 on goods purchased online and offline during the holidays. That's 3.3% less than last year, according to a National Retail Federation (NRF) survey of 8,431 consumers conducted in September and October. Despite the recent brisk traffic, online sales for all of November and December may still rise by only 5.4%, to $30 billion this year, according to eMarketer. Deeper, Wider Discounts This YearTo encourage further spending, retailers may have to resort to even deeper discounts, which can crimp margins and reduce revenues. More than 70% of holiday shoppers will purchase from discounters this year, according to the NRF. The home page for JCPenney.com (JCP) boasted "30,000 deals" and said that Nov. 30 would be the last day shoppers could receive free shipping on purchases of at least $25. During the week that included Nov. 27, dubbed Black Friday, retailers cut prices on LCD TVs by an average of 22% from earlier in November. As a result, sales of those sets rose 6% from a year earlier, according to consultant iSuppli. Early discounting was rampant. At retailers including Amazon.com (AMZN), Best Buy (BBY), WalMart (WMT), and Target (TGT), price cuts on Apple (AAPL) products "were more aggressive than usual, with discounts as much as 20% vs. previous years' [cuts] of 11% to 13%," wrote Shaw Wu, an analyst at Kaufman Brothers, in a Nov. 30 report. Compared with last year, when the U.S. economy was still in recession, "more items will be on sale" this holiday season, says Scott Silverman, executive director of Shop.org, a division of NRF. "Across the board, we'll see a higher percentage off." Aggressive discounting and marketing may do less harm to online retailers than to brick-and-mortar stores. "It potentially lowers margins for the offline players," says Aaron Kessler, an analyst with Kaufman Brothers. Online retailers are expected to make up at least part of the margin shortfall with higher volume and sales of a greater variety of goods. Amazon, for instance, could benefit from sales of such high-margin items as clothing. For Amazon, a "Perfect Storm"Forrester Research (FORR) expects Web shopping to rise 8% in November and December, year over year, while overall retail may stay flat or even decline from 2008, according to various estimates. The Web's share of holiday spending may rise to 6.7% of the total, from 6.3% last year, according to Susquehanna Financial. Electronic retailing giants Amazon and eBay (EBAY) may have the most to gain from heavy discounting, analysts say. "Amazon literally has unbeatable prices," says Charlie Wolf, senior analyst at Needham & Co. "Their share of the wallet is going to continue going up. Amazon could experience the perfect storm this Christmas." Amazon, which said sales of its Kindle electronic book reader reached a record in November, is luring traffic while some online and offline rivals see declines. On Thanksgiving Day, traffic to Amazon.com rose 30% from a year earlier, according to consultant Hitwise, while traffic fell by 3% to Sears.com (SHLD) and by 7% to Kmart.com. Some smaller e-tailers lost share as well, with traffic to Overstock.com (OSTK) falling 17% from last year. Amazon has forecast fourth-quarter sales growth of 21% to 36%. That may be too modest, says Lindsay, who says Amazon may gain more than 40%.
Before it's here, it's on the Bloomberg Terminal. LEARN MORE