Retailing tends to come with low profit margins. But as e-commerce expands, many retailers may begin to find that's no longer the case.
The bad old days
Most classic retailers sport razor-thin margins. Sears Holdings
Low margins are clearly less attractive than high ones, and fat margins reflect a healthy competitive edge. Still, strong companies can survive and even dominate with low margins, provided they have high volume. A piano store may enjoy a 30% markup, but if it only sells one piano per month, steer clear.
Doing business online has helped retailers provide that extra volume, even if their margins remain rail-thin. According to ComScore, online holiday sales topped last year's levels by 12%, while MasterCard saw December sales online jump nearly 18% over last year. The future could be even more impressive: Goldman Sachs expects global e-commerce to reach nearly $1 trillion in value by 2013, growing at an annual rate of 19%. In the U.S., it expects $235 billion and a growth rate of 12%.
That growth isn't all coming from online outfits such as Amazon.com
Clicks vs. bricks
Growing online commerce bodes well for retailers. Beyond enabling greater volume, it may also help them plump up those skinny margins. Traditional stores require hefty investments in property, staffing, and inventory. Online commerce requires far less of that overhead, and can achieve various efficiencies by centralizing inventory at streamlined regional warehouses. Gap's online operations have helped boost its operating margin to a 10-year-high.
The online path to prosperity is not a sure thing for many retailers, though. Amazon.com remains a fierce competitor, expected to generate $100 billion in sales by 2015. But all online commerce might take a hit the U.S. government institutes an Internet sales tax. Furthermore, online price wars and hefty ad spending both threaten to depress profits.
Bigger profit margins aren't guaranteed, but with a little boost from online business, they're now much more within retailers' grasp.
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Longtime Fool contributor Selena Maranjian owns shares of Wal-Mart. Wal-Mart is a Motley Fool Inside Value pick and a Motley Fool Global Gains choice. Amazon.com is a Motley Fool Stock Advisor recommendation. The Fool owns shares of SUPERVALU, and Wal-Mart. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.