Why Bricks Need Clicks, And Vice Versa

Kris Gorrepati

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 omnichannel capabilities for traditional retailers cannot be overstated.

For traditional brick and mortar (B&M) retailers and brand-owning consumer products companies, omnichannel commerce is one of the bright spots in an otherwise slow growth slog of retail. Omnichannel may be the one defining advantage that B&M retailers and retail-oriented consumer products companies have over e-commerce specialists and online-only brand owners. This advantage is realizable until e-commerce companies develop their own omnichannel 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 omnichannel shed light on aspects of its introduction, impact on complementary channels (brick, click, and catalog), and implementation:

Adding clicks to bricks

The following are some observations from the first paper, which focuses on the impact of introducing omnichannel to an existing B&M channel:

Integration (omnichannel) 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; placing online orders from the store and having the products shipped to the customer address; buying items online and picking 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; and buying an item online and picking it up at the store once it has been delivered to the store.

The authors’ findings are very instructive as companies implement omnichannel initiatives.

Conventional wisdom within the industry suggests that offering the “buy online and pick up at store” (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 omnichannel 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 omnichannel is introduced and implemented.

BOPS is one of the key omnichannel capabilities that offers Brick and Mortar 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 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 the results of implementing omnichannel with BOPS with the following:

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: an increase in store visits to stores that share credible inventory information, relative to those that do not; an increase in store sales in stores that share credible inventory information, relative to those that do not; and a decrease in online sales in DMAs that are within the area of influence of the stores, relative to those DMAs that are not.

Finally, the paper also observes that online-offline integration is challenging for many organizations. Cost-effective omnichannel 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, competitive variables, and marketing activity).

The following image summarizes the effect:

bricks-clicks-1

The authors conclude with the following:

[panel]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 B&M store location and should highlight cross-channel benefits, such as the ability to pick up or return items ordered online at the store.

Omnichannel is critical to your survival

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 products companies to remain relevant for the digital-native consumer. Establishing an integrated and cost-effective omnichannel won’t be easy. On the other hand, not mastering omnichannel poses the most serious risk to retail and consumer products companies – becoming extinct.

For more on the importance of omnichannel strategies in today’s consumer landscape, see Omnichannel Leaders Widen The Gap Through Customer-Centricity.


About Kris Gorrepati

Kris Gorrepati is part of the Solution Management team for Extended Supply Chain Solutions. He works with SAP's ecosystem to support customer success and to promote excellence is Supply Chain Management, Manufacturing and Product Lifecycle Management. Kris has extensive experience in Supply Chain, Manufacturing and Product Development as a practitioner, designer and engineer.