The Dark Side of Online Sales for Wal-Mart Stores, Inc. (WMT) and Peers

Retailers are investing heavily on online operations but the reality is less inspiring. According to an article by The Wall Street Journal, most retailers are losing money on the Internet. However, they seem to have no choice because sales are moving there, and they have to be online to make sales. In the U.S., retail giants such as Wal-Mart Stores, Inc. (NYSE:WMT), Best Buy Co Inc (NYSE:BBY) and Target Corporation (NYSE:TGT) are struggling. The issue is uncertainty in the e-commerce space.

It has emerged that retailers are spending more to get online sales that in turn eat into their profits. While pure e-commerce retailers such as, Inc. (NASDAQ:AMZN) are making razor-thin profit margins, most retailers are losing money on the Web. Wal-Mart Stores, Inc. (NYSE:WMT), Best Buy Co Inc (NYSE:BBY) and Target Corporation (NYSE:TGT) do not break down their online sales and profitability. However, analysts believe they are on the losing side.

The challenges for big box retailers trying to move online are many. For example, they are currently investing heavily to build their online stores and fulfillment centers. Add to that the costs associated with shipping and handling of online orders. Additionally, the rate of online returns is higher than in the stores, which in effect puts a drag on online profitability.

Wal-Mart Stores, Inc. (NYSE:WMT) reported strong Cyber Monday orders, supported by an increase in mobile traffic. However, the company did not update on the size of the orders or the profitability of its Cyber Monday online sales. Nonetheless, the retailer warned that it expected to lose money in its online operations at least until 2016.

Best Buy Co Inc (NYSE:BBY) reported that its online site crashed for more than an hour because of the overwhelming traffic during the Black Friday weekend. The outage only validated the challenges of retailers online. The retailer warned that it expects a negative impact on its profitability as online sales increase compared with store sales.

Target Corporation (NYSE:TGT) continues to boost its store operations. The company announced plans to hire about 250 new workers for its new stores in Hawaii. Target Corporation (NYSE:TGT) also highlighted that its profit margins were shrinking as online sales grow popular.

However, analysts predict online sales in the U.S. to reach $414 billion by 2018, or 11% of the total U.S. retail sales. Currently, online sales account for 9% of the U.S. retail sales. The paradox is that online sales are increasing faster than store sales, yet retailers are not making or expecting good profits online.