Finally, Some Good News for Retailers

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 (Nasdaq: SHLD) recently reported a net margin of 0.4%, while Office Depot (NYSE: ODP) posted 0.2%. Sure, 8,000-pound gorilla Wal-Mart enjoys a 3.6% margin, but many retailers have much less wiggle room, and it's easy to fall into negative territory, as supermarket enterprise SUPERVALU (NYSE: SVU) has recently done.

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.

Going electronic
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 (Nasdaq: AMZN). It's also originating with traditional bricks-and-mortar businesses. Alongside its first retail stores in China, Gap (NYSE: GPS) recently opened an online storefront in that country. The clothier's bringing dozens more countries online as well. Macy's (NYSE: M) saw its online business jump 28% in December, and it's hiring more than 700 people over the next two years for its online operations. J.C. Penney (NYSE: JCP) has killed its catalogs, since it plans to draw $1 billion in online sales within a few years.

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.