Wal-Mart may drive online sales with bare-bones margins

Wal-Mart economics made simple: sell it cheap, sell more of it. This strategy seems to be well-received by consumers this holiday season, but may handicap the sales of higher-end competitors.

Discount retail giant Wal-Mart is driving its sales by diminishing profit margins. A random sale item pulled from walmart.com, Garmin's StreetPilot c330 Vehicle GPS Navigator, is cheaper than all competitors by a fraction. The lowest price on most comparative shopping sites is $169.00, today on Walmart.com, the item sells for $168.88. The same product on Amazon.com costs $224.95.

Price reductions like this in today's Cyber Monday sale are expected to continue through the holiday season to encourage spending from wary consumers. Loss-leading is a marketing tactic where products are offered at cheaper than cost in hopes of stimulating sales in other, more profitable areas. Due to Wal-Mart's varied selection, this tactic can be employed in numerous product categories with roughly the same effect.

Furthermore, the "ship-to-store" option offered on Walmart.com leverages the company's existing supply channel to give customers a break they might not get otherwise. The consumer is offered free shipping on items purchased on the company's Web site, provided they are delivered to the nearest brick-and-mortar Wal-Mart location rather than the customer's home address.

As a result, Wal-Mart cleverly uses online sales as a tool for bringing customers in the store; and in so doing, it blurs the line somewhat between the virtual and physical storefronts. Analysts last September estimated the ship-to-store option could be responsible for as much as one-third of its online sales.

Economists had been speculating that this will be the "worst holiday season in five years." But with margins being crushed, it seems it will be worst only on retailers who struggle to sell as cheaply as the ubiquitous Wal-Mart.