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Cramer: Here is why Target's shortfall is so frightening for retail

Getty Images. Target reported first-quarter earnings and sales Wednesday that topped the Street's expectations.

Looking back at the dismal retail holiday numbers, Jim Cramer boiled it all down to the erosion of Target (NYSE: TGT).

The problem wasn't Macy's (NYSE: M), it wasn't Kohl's (NYSE: KSS) or even J.C. Penney (NYSE: JCP). It was Target.

"It is doing the best online of all the brick-and-mortar retailers. And this ugly quarter is what ultimately happens. That is a pretty grim fate for the group," the " Mad Money " host said.

Target found itself in one of the worst possible situations, Cramer said. Its online offerings were so good it was stealing traffic from its own bricks-and-mortar stores. The self-cannibalization of Target was the sorriest event of the entire retail debacle this holiday season.

The company's digital business grew 40 percent in the last two months of 2016, but bricks-and-mortar fell 3 percent. CEO Brian Cornell cited the costs of the accelerated shift to digital as a major cause of the disappointment.

For several years Cornell has been under pressure to grow the company's digital business. Cramer now wonders if he did it too well.

In the end, Target represents a fundamental problem with the retail transition to omnichannel. Customers used to walk into a store for one thing and end up buying many things. These days' customers walk in and don't see anything that is particularly proprietary or less expensive than the competition.

And if customers aren't going into the stores, that means Target may not be able to sell electronics or entertainment goods. These items used to be impulse purchases, but now people don't make impulse purchases online.

"Amazon (NASDAQ: AMZN) has simply taken that business away from anyone because it is a total price business," Cramer said.

At this point, Cramer does not know how negative high single digit same-store sales can be reversed in a category that is set up for price and web competition.

Target's holiday season proved to Cramer that the dotcom expansion could only mean diminishing returns moving forward.

"The more your e-commerce business is, the worse your numbers might end up, because in the end it only results in an unprofitable cannibalization," Cramer said.

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