Published: November 19, 2008 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 truly dreary holiday shopping season ever on the Web, are engaging in price-cutting and discounting so aggressive that it threatens their profit margins and, in some cases, their very survival.
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 it acquired last year, but runs separately. This month, the company is buying more search ads for 6pm.com, where a pair of colorful slip-on Keds sneakers is on sale for $12.73 -- 74 percent off the original price on Zappos.com.
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 unusually early in the season. Kmart, a division of Sears Holding, initiated Black Friday prices on electronics -- 40 to 50 percent off -- on Nov. 2, nearly four weeks before the real Black Friday, the busy shopping day just after Thanksgiving that usually marks the beginning of the holiday buying season.
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 décor 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, Tex., 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.