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Retailers Love Holiday E-Commerce Growth, but That Doesn't Mean It's Profitable

Barely profitable in-store sales can quickly become unprofitable online.

Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

For a brick-and-mortar retailer, fast-growing online sales are often something to brag about. But during the holiday season, strong e-commerce sales numbers can come with a big trade-off: Tiny profits or even a loss.

Online retailers recorded double-digit growth for Black Friday* and the weekend that followed, compared with last year, according to data from Adobe, ChannelAdvisor, Custora and Monetate, all of which make e-commerce or marketing software for online retailers.

Cyber Monday online sales are also up more than 15 percent according to Adobe and ChannelAdvisor. But what often goes unsaid is the price big retailers have to pay for this growth.

“Almost all big holiday sales come with some form of free shipping,” said Jason Goldberg, vice president of commerce strategy at the digital agency, Razorfish. “And shipping costs have gone up for most customers outside of Amazon and Walmart. Returns are also much higher online, especially in apparel. You roll all that up and what was a barely profitable in-store sale is shifting to an unprofitable online sale.”

Online profit margins also get hit because retailers pay banks a larger transaction fee for credit card purchases accepted online than for in-store purchases, because of the higher likelihood of fraud. What’s more, online sales have hurt impulse buying in physical stores, too.

These trends aren’t going away. Discounts and some sort of free shipping have become table stakes for many of the biggest retailers like Walmart, Best Buy and Target, which are oftentimes competing for the same customer wallet. While there appears to be no end in sight to the race to the bottom on holiday sales, retailers are attempting to cut some costs in other ways. Big chains such as Walmart and Target are treating some stores as warehouses, from which they pull and ship online orders. They are also heavily promoting the ability to purchase an item online and pick it up in a nearby store.

* While these software companies say their data shows double-digit percentage growth among their retail customers, the National Retail Federation estimated online sales were flat this weekend compared with last year. The NRF’s study is based on a survey of 4,500 people about their holiday shopping habits; most of the firms above are pulling data directly from retail sites. It is unclear why there is such a disparity between the two approaches.

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