Adding Clicks to Bricks, and Vice Versa

The omnipresence and influence of Amazon is felt everywhere by the retail industry, even though actual e-commerce volume is currently less than 10% of the overall retail volume. With e-commerce expected to grow at a healthy clip the next several years, the urgency to develop cost-effective omni-channel capabilities for traditional retailers cannot be overstated.

For traditional brick and mortar (B&M) retailers and brand owning Consumer Product companies, omni-channel commerce is one of bright spots in an otherwise slow growth slog of Retail. Omni-channel may be the one defining advantage that B&M retailers and retail oriented Consumer Product companies have over e-commerce specialists and online only brand owners. This advantage is realizable until e-commerce companies develop their own Omni-channel capabilities. Even Amazon feels the need for physical stores as they expand into various product categories. We should not be surprised if it moves decisively once it figures out how stores play a role in the logistics network.

A couple of timely research papers on Omni-channel throw light on aspects of its introduction, impact on complementary channels (brick, click and catalog) and implementation.

Adding Clicks to Bricks

Following are some observations from the first paper, which focuses on the impact of introducing Omni-channel to existing B&M channel

Integration (Omni-channel) is driven by the need to offer a homogenous and more rewarding online-offline customer experience. Examples include 

> Offering customers the possibility to return to a store items that were bought online
> Place online orders from the store and have the products shipped to the customer address
> Buy items online and pick them up later at the store in which they are stocked (also known as Buy online and pick up at store (BOPS) in this paper)
> Buy an item online and pick it up at the store once it has been delivered to the store.

The authors’ findings are very instructive as companies implement Omni-channel initiatives.

Conventional wisdom within the industry suggests that offering the BOPS functionality will improve online channel revenue (since BOPS transactions are considered online revenue), and that the traditional B&M stores will carry the burden of having the item ready for the customers to pick up, without receiving any significant benefit in their sales.

Clearly a more integrative measure of Omni-channel success is necessary. It may even make sense for organizations to measure performance at a regional level as opposed to evaluating performance of individual channels as Omni-channel is introduced and implemented.

Buy online and pickup from store (BOPS) is one of the key Omni-channel capabilities that offers B&M retailers an advantage over e-commerce only channels. The paper highlights the following regarding BOPS.

Implementing BOPS functionality can be seen as a shock to the verifiability of inventory information online. To implement BOPS functionality, the online system must have access to accurate real-time information about availability of in-store inventory. If the retailer offers the option to pick up an online order at a particular store, the customer knows with very high certainty that the item ordered is available at that store. Therefore, inventory availability information is perceived as very reliable.
We find that increased reliability of in-store availability information increases the probability that customers will visit the store.
Offering an online customer the option to pick up her online purchase at a nearby store can be beneficial to the customer for several reasons. For example, she can get the item in a couple of hours (not a couple of days) or avoid the payment of shipping costs. However, there is an additional benefit to the customer that might not be evident right away: She now knows that the item she wants is available in a nearby store. Hence, the customer can decide to check the availability online and drive to the store to pick up the item without closing the transaction online. This behavior will allow her the benefit of getting the item fast with no shipping cost, and additionally, let her evaluate the item at the store before actually paying for it (while avoiding the risk of making a trip to the store and not finding the item she is looking for).

The paper summarizes results of implementing Omni-channel with BOPS with the following

Hence, our results can be explained by the following behavior: After implementing BOPS, some customers (more than before) visit the online store to browse the catalog, find the item they want to buy, check its availability and travel to their local store to close the sale knowing the item is there. The customers, after observing reliable availability information, decide to visit the store without closing the sale online. We predict that a shock to the credibility of inventory information would reduce the cost of visiting the stores and would result in:

Increase in store visits to stores that share credible inventory information, relative to those that do not.

Increase in store sales in stores that share credible inventory information, relative to those that do not.

Decrease in online sales in DMAs that are within the area of influence of the stores, relative to those DMAs that not.

Finally, the paper also observes that online-offline integration is challenging for many organizations. Cost-effective omni-channel supply chain can be substantially different and more complicated than pure e-commerce or retail channels.

Online-offline integration efforts are challenging for companies. The retailer must integrate inventory systems, warehouses, marketing campaigns, pricing strategies, etc. Even before these integration attempts are made, retailers often struggle to discern what is really available at their stores or warehouses, as has been studied in previous empirical research documenting substantial inventory record inaccuracy (DeHoratius and Raman 2008). Another challenge faced in the implementation of some of these integration efforts is an increased complexity in store execution (Fisher et al. 2006). Store processes are designed to sell and not necessarily to support the quick delivery or shipment of goods, activities that these integration strategies allocate to physical stores.

Adding Bricks to Clicks

The second paper reviews the impact of adding physical stores to primarily an online (and catalog) channel. The highlights from the paper follow

The study documents how sales in all channels reacted to the opening of the new stores by comparing them with a control sample that matches each group on several relevant criteria (geographic, demographic, behavioral, sales and competitive variables as well as marketing activity).

The following picture summarizes the effect

adding-bricks-to-clicks-effects-01 The authors conclude with the following

An integrated approach to customer acquisition and relationship management benefits all parties. Tracking the dynamics of store openings helps to implement the desired effects for the company and its customers. In the case under review, the opening of a retail store had a small impact on the rate at which first-time customers used the direct channels in the short run. Therefore, managers of direct channels should continue to invest in customer acquisition programs during the months surrounding a new store opening if the retailer finds it more profitable to serve customers in the direct channels than in stationary stores. In the long term, retail stores increase the rate at which first-time direct channel customers are acquired. Thus, prospecting materials for new direct channel customers should include a retailer’s brick-and-mortar store location and should highlight cross-channel benefits, such as the ability to pick up or return items ordered online at the store.

Summary

Retail and Consumer Products companies are  seeing a profound change in the competitive landscape and consumer behavior with the increasing infiltration of powerful online channels, including Amazon, Alibaba and others. Integrating physical stores and online channels offers the last best opportunity for traditional retailers and consumer product companies to remain relevant for the digital-native consumer. Establishing an integrated and cost-effective Omni-channel won’t be easy, on the other hand not mastering Omni-channel poses the most serious risk to retail and consumer product companies – becoming extinct.

Kris Gorrepati

My 2 cents on Supply Chain Management, Manufacturing, Design, New Product Development, Software Engineering, and related topics.

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