The country's biggest brick-and-mortar retailers, from Wal-Mart Stores Inc and Target Corp to Toys "R" Us , are gunning for Amazon, competing more aggressively on price and offering speedier delivery through spruced-up websites and stores that double as distribution warehouses.
The onslaught comes as Amazon's price advantage over physical retailers is being whittled down. The company began collecting more sales taxes this year, in Texas, Pennsylvania and California, probably raising prices unless Amazon swallows the increase.
"These drivers are definitely placing added pressure on Amazon this year, more so than in the past," said Eric Best, chief executive of Mercent, which helps merchants sell online.
The final quarter of each year, encompassing Thanksgiving and Christmas, is vital for retailers because that's when they generate the most revenue and a big chunk of their profits. Amazon, through lower overhead, efficient inventory management, and better product selection and search, has dominated online purchases during the season.
Now Amazon itself appears to acknowledge the threat to its holiday crown, or at least the uncertainty engendered by resurgent competition.
During a recent conference call with analysts, it forecast fourth-quarter operating results ranging from a loss of $490 million to a profit of $310 million - far wider than last year, when it predicted a result that ranged from a loss of $200 million to a profit of $250 million. Amazon ended up making $260 million in the fourth quarter of 2011.
"There's increased competition from mass merchants and big-box retailers embedded in that guidance," said RJ Hottovy of Morningstar. "You could see margins somewhat challenged this season. I'm not expecting blow-out numbers from Amazon in the fourth quarter." An Amazon spokesman did not respond to a request for comment.
To be sure, these rival efforts may only dent Amazon's online holiday preeminence. The company has cost advantages over physical stores and it sells off inventory quicker. This is a crucial edge in the retail business, because unsold inventory is effectively stagnant money that could be used to generate more revenue and profit elsewhere.
Amazon's Prime shipping service is a magnet that will draw in holiday shoppers again this year. The company is spending heavily on new fulfillment centers nearer to big urban centers, speeding up delivery times to make the service more attractive.
But 2012 could turn out to be the year when retailers slow Amazon down.
"The competitive headwinds are certainly blowing," said Colin Sebastian, an analyst at R.W. Baird. "We expect Amazon's top-line growth rate to moderate a bit."
Matt Nemer, an analyst at Wells Fargo, said big retailers have made lots of small improvements such as better product search, faster website speeds and slicker mobile sites.
"The big retailers are in a much better space than they were last year," Nemer said.
Wal-Mart, the world's largest retailer, has probably made the most progress online, the analyst added.
It launched a new search engine for Walmart.com this year that has led to shoppers being 10 to 15 percent more likely to purchase after searching for products on the site, according to Wal-Mart.
Wal-Mart also recently started same-day delivery tests in San Francisco, San Jose, Northern Virginia, Philadelphia and Minneapolis, using some of its 4,000 stores as distribution centers for quicker shipping of online orders.
In the spring the retailer started a Pay with Cash program that lets shoppers without credit cards order online and pick up in stores.
"The biggest impact on Amazon is going to be retailers that have truly figured out how to combine the best of digital and physical worlds," said Darrell Rigby, head of Bain & Company's Global Retail Practice.
Price wars online
Hottovy said programs from companies such as Target, Best Buy Co and eBay Inc's PayPal to match online pricing could squeeze industry profit margins, including those of Amazon.
Most analysts see these programs more as a marketing strategy to attract shoppers into stores and stop them going to Amazon.com. But behind the marketing blitz, retailers are arming themselves to compete better against Amazon on price.
Wal-Mart developed technology this year that lets the company regularly monitor competitors' online prices for every product it sells.
Other retailers are using similar technology, known as dynamic pricing, offered by third-party companies including Mercent, which lets them change online prices many times a day.
Mercent's Best estimates industry adoption of dynamic pricing is growing at about 75 percent a year. He declined to say which retailers are using the service.
Retailers used to change prices once every one or two weeks, but during the 2010 holiday season prices began changing daily for the first time, according to Best. By 2011's holiday season, hourly price changes became more common.
"We are seeing pressure from customers to change prices more frequently than an hour. There is so much riding on this holiday season," Best said during a recent conference call with analysts.
Online pricing tools like this are "the basic building blocks to being competitive," Nemer said.
Meanwhile, Amazon's collection of sales tax in some big states brings its price advantage over physical stores down to roughly 3 percent to 5 percent from 5 to 10 percent, according to Hottovy.
Amazon was pushed into collecting more sales tax as cash-strapped state governments seek additional revenue. But in return it can now build new fulfillment centers in those states, speeding up deliveries and reducing shipping costs.
A recent online survey of more than 400 Amazon shoppers in California, conducted by SurveyMonkey, found that 36 percent said they would shop there less because the retailer started collecting sales tax.
Most of those shoppers said they would shop at other online retailers that do not collect California sales tax. More than a quarter said they would shop at retail stores instead, according to the survey.
Stores and warehouses
Retailers are also competing more with Amazon Prime, which offers free two-day shipping in the United States as part of a $79 a year, or $7.99 a month, subscription.
Prime customers often go to Amazon.com first to buy gifts for the holidays to make sure they are getting the most out of their subscription.
In Wal-Mart's same-day delivery test this holiday, shoppers pay a $10 flat fee to have online purchases of televisions, toys and other general merchandise sent to them from nearby stores.
EBay is testing same-day delivery of online orders from stores of retailers including Target, Best Buy and Toys "R" Us in San Francisco this holiday.
Most Toys "R" Us stores are also part of the company's "Ship from Store" program, which taps in-store inventory to fulfill online orders.
Retailers may get a profit margin boost if they can route online orders to stores that have a lot of a particular product in stock. This could help them avoid costly mark-downs by re-balancing store inventory, Nemer explained.
"Fulfilling online orders from the store is the most important thing that will change physical retailers over the next five years," Nemer said.
Copyright Thomson Reuters 2012