There's at least one reason retailers Sears and Kmart took the unusual step of starting Christmas sales on the Web in July this year: Online retailer Amazon.com is eating their lunches, and they need to fight back.

Amazon has long since moved past books. Besides music and DVDs, the online retailer sells products as varied as clothing, power tools, home appliances, musical instruments and sex toys.

In short, Amazon is competing with retailers on all fronts, including Sears and Kmart, by offering great prices on all kinds of goods, a great Web site and cheap shipping. And now third-party merchants can also sell stuff on Amazon's platform, making it a threat even to eBay.

The love its shoppers have for Amazon shows in the numbers. Despite the recession, Amazon sales advanced 25% during the 12 months through the end of May, according to Reuters, compared with 3.5% for the retail industry overall, 3.4% at Internet rival eBay and an 8.5% decline at Sears Holdings, which operates Sears and Kmart. Amazon had an operating margin of 4.5%, compared with 1% for the retail industry overall. And its online platform helps it produce more than three times as much revenue per employee.

There are risks, mostly on the Internet. Digital downloads of compact discs, DVDs and books have helped create tough competitors such as iTunes, from Apple. Taken to extremes, this trend could diminish much of the value in Amazon's vast real-world network for distributing products. But Amazon is fighting back by offering its own digital downloads and a digital book reader, the Kindle.

Besides, no matter how much the Internet advances, you'll never be able to download power tools, wide-screen TVs and so many other products Amazon sells. And as the recession forces traditional retailers to close stores, Amazon's position in those products just gets stronger. When consumer spending picks up, Amazon wins.

Continued: What do you think?