Retailers are slashing prices and bumping online sales — and it could spell their own demise

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  • Retailers are slashing prices and boosting online sales, Keith Jelinek of the Berkeley Research Group said.
  • A majority of retailers expect promotions to play a key factor in driving sales this year.
  • Free delivery is putting added pressure on profits.

Retailers, struggling with souring sales and the looming threat of Amazon, are trying to copy the ecommerce giant by offering steep discounts and focusing on online sales.

That may just spell their own demise, said Keith Jelinek the managing director of Berkeley Research Group’s retail and consumer practice unit.

While it may seem intuitive for retailers to offer promotions and go where the consumer is going, which is online, it will also hurt their profits in the long run, Jelinek said.

“Anytime you increase your promotions, you’re going to hit your operating margins,” Jelinek told Markets Insider. “It’s not going to taste good.”

He has observed retailers offering steeper-than-usual discounts this year in order to sell products and get rid of inventory. Yet retailers are losing money anyway because they are sometimes selling items at a cheaper price than it costs to make.

This is especially troubling for retailers that are trying to entice consumers online, often by offering promotions, Jelinek said. Around 64% of retailers said they expect promotions to play a larger factor in sales compared to last year, a BRG survey found.

Jelinek has also seen the threshold for the amount of money needed to be spent to get free shipping come down even lower this year. Particularly for brick-and-mortar retailer who are not set up to handle the increased demand from online sales as efficiently as an ecommerce giant like Amazon, Jelinek said. Retailers will pay more for shipping, delivery and other associated costs.

There is hope for retailers though.

“The retail opportunity for retailers to be successful is to get a double bump,” Jelinek said. Retailers should offer incentives to drive sales online, but have customers pick up in-store.

“If you can get them to come into the store, retailers will have a higher probability of buying one more thing,” he said.

To read about how retail stocks aren’t doing as bad as you thought, click here.