Amazon Hums Slowdown Jingle

Online retailers confront an increasingly competitive holiday-season landscape.
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Christmas is looking like less of a bell-ringer this year for

Amazon.com

(AMZN) - Get Report

.

Analysts are predicting that sales at the world's largest Internet retailer will rise 21% in the fourth quarter to $3.1 billion, according to Thomson Financial. Though that's a solid gain, the increase would mark Amazon's smallest fourth-quarter sales rise since 2001. Like most retailers, Amazon

depends on the holiday season for much of its profit.

The projected slowdown highlights the challenge facing online retailers this holiday season. The number of U.S. households shopping online will rise 6.3% to 42 million, according to data from Forrester Research. That's down from last year's 9.7% gain. The slowdown is forcing companies to squeeze more sales from existing customers.

"Amazon is going to have to be more and more aggressive on pricing," said Martin Pyykkonen, an analyst with Hoefer & Arnett who rates Amazon sell. "The competitive pressures are greater on them than they used to be."

An Amazon spokeswoman declined to comment. Analysts are forecasting $8.6 billion in sales this year for Amazon, which may find it more difficult to keep sales growth humming because it already ia so big.

"Tell me a product that you can't already buy on Amazon," said Pyykkonen, who doesn't own the stock.

To be fair, Amazon is continuing to add new products and services to entice customers. It's offering a service that helps people design their own rings, as well as a line of clothing based on the Fox television show

The O.C.

And it's clear that people aren't abandoning the Web. Consumers continue to increase their purchases online at a faster rate than at traditional stores. The online market, which makes up only about 2% of overall retail sales, has plenty of room to expand, said Patti Freeman Evans, an analyst with JupiterResearch.

"You may have to work harder to poach somebody rather than putting your net in the water and having someone jump in it," Freeman Evans said.

Forrester Research estimates that industrywide, online sales will jump 22% this year to $172 billion. The National Retail Federation is forecasting that overall retail sales will gain 5.4% to $2.2 trillion this year.

As a result, competition for consumer spending will intensify, forcing Amazon and other merchants to step up their use of promotions, such as free shipping and buy-one-get-one-free offers, according to the consulting company WebTrends.

"Free shipping was the top promotional vehicle used by retailers last year and based on our study, the majority of retailers we surveyed will again rely on free shipping as a key promotional program this year," according to a report from WebTrends.

More Web sites also are going to offer special deals, such as providing an additional memory card for buyers of digital cameras. The WebTrends survey says that 33% of online stores will offer consumers "special repeat buyer" discounts this holiday season, compared with 14% last year.

"These merchants are doing everything that they can to differentiate their offerings," said Rob Solomon, a vice president at

Yahoo!'s

(YHOO)

Yahoo! Shopping service, which helps consumers compare prices offered by online merchants, in an interview. Unique users and traffic to Yahoo! Shopping is up about 25% this year, he said.

Savvy buyers increasing their use of comparison shopping sites like Yahoo!'s will have an impact on Amazon's holiday sales, Pyykkonen said.

"It's kind of an unknown," he said. "It's a question of magnitude how it will be a factor in terms of Amazon's profitability."

Amazon's shares closed Thursday up 89 cents to $42.14.