February 28, 2017 | Paul Thompson
The Omnichannel Cannibalization Myth – Why Physical Stores and E-commerce Sales are Not a Zero Sum Game
A recent article in Retail Wire entitled “Is omnichannel cannibalization retail’s biggest challenge?”, quotes a report by eMarketer, where they conclude: “Despite efforts to increase their online sales and beef up their omnichannel strategy to meet the needs of smartphone-toting and social-media addicted consumers, these retailers are burdened by their physical stores, which still represent a majority of their sales.”
The phrase “burdened by physical stores” is really an unrealistic and uninformed way to view the world of retail. There are many profitable stores and shopping centers around the world where people are brought together to interact and, yes, shop. That said, there is no question that the ways in which people purchase are changing. E-commerce share of total retail sales in the U.S. was 8.1% for 2016 representing a significant increase from just over five years ago. So, the successful retailer will evolve to best service their customers.
How to make Omnichannel Work.
A successful approach to omnichannel is really a matter of structure and approach. If you set your business up in such a way that each silo is incented to compete against the other channel, then ‘the burden of physical stores’ will become a reality. However, if you look to structure your omnichannel strategies so that each channel complements each other, then you have a better chance of success. Put a different way, the buyer’s journey needs to flow seamlessly across channels.
The economics of business and buying is always changing. Retailers that are experts in logistics and supply chain have better leverage to compete on price, or maintain price but reap larger margins. So, retailers that invest in e-commerce also need to understand the economics around this business decision. Looking at macro numbers across each channel often masks what is happening around the store or to specific consumer segments within the store trade area.
Our customers have called upon us to study the interaction of the e-commerce channel in relation to the bricks and mortar channel.
The conclusion of most of those studies is that the days where a retailer could look at expanding their customer base with a siloed view of each channel are long gone. This strategy, if you want to call it that, will miss very important customer interactions that are initiated and hopefully supported by each channel.
It is bad business practice to isolate the real estate proforma from the incremental sales that are generated through the e-commerce channel. Why, you ask? Simply put, our research shows that when new stores open in markets with insignificant brand presence, there is a massive increase in e-commerce sales. In some cases, within the trade area of a new store, they saw an increase of over 200% against the control group totals.
What is also interesting is that with some retailers, the massive boost in e-commerce sales that is driven by the addition of a physical store to a market is sticky. The benefits are realized very quickly, and should that store close, the residual effect of that store on e-commerce sales is maintained or drops off slowly. So, the retailer experiences a steep increase when a store is added, followed by little to no decline when the store closes.
The location type of the physical store is also very important. The relationship outlined above is more prevalent in a mall setting than it is in outlets, for example. What is happening here is a result of exposure – the physical store is creating brand recognition that helps build e-commerce sales for folks walking down the hallowed halls of our malls.
Therefore, you can’t look at a store proforma and not take into account the impact on e-commerce sales. While channel cannibalization must be quantified and understood in detail, it’s important to realize that cannibalization is not the same across all consumer segments. We see some consumer segments decreasing their use of the e-commerce channel when a new store opens and others increasing it. So, it’s important to know the facts, make informed decisions and avoid assumptions.
When investigating your omnichannel strategy, make sure you:
- Understand how the channels interact with each other in as detailed a fashion as possible.
- Where possible, leverage the e-commerce channel to broaden your reach beyond the store trade areas.
- Determine which consumer segments will increase/decrease their online buying behaviour in each channel.
And most importantly, act soon! Don’t wait too long before quantifying the interactions, since they directly impact the setting of individual physical store strategies (open, close, relocate, remodel) as well as online e-commerce consumer targeting strategies.
Interested in learning more about the interrelationship between your brick and mortar and E-commerce sales channels?