Retail Locations Help Online Businesses in the Long Run
The relatively new question of how brick-and-mortar stores interact with online and catalog retailers has been a point of confusion for many businesses. A new working paper* by the Harvard Business School suggests that the relationship between these types of retail operations is situational in the short term — beneficial for some, harmful for others.
In the long run, however, the presence of a physical store in the market will generally help online and catalog-based retailers, the paper suggests.
For catalog operations, the opening of a new store will cost the catolog an average of 12% in the short term.
However, over the longer term, a retail store is complementary to both catalog and online channels and allows them to grow sales, new customer household acquisition, and repeat customer household purchasing frequency at a greater than expected rate which more than makes up for the short term sales cannibalization.
While the results of the study show “catalog and online sales exhibit similar patterns of complementary effects,” online operations do not experience the same type of cannibilization by new retail branches that catalog businesses fall victim to in the short term.
Similarly, the effects of brick-and-morter branches are greater on online retailers, who show a 34% increase in sales from the presence of retail branches, compared to the relatively minor 0.4% that catalogs experience.
“This asymmetry is due to an important difference between catalog and online sales channels which offers insight into the origins of demand for online and catalog retailing”
The paper sounded one note of caution: “In the early days of the Internet as studied here, online sales were not cannibalized by the opening of a retail store; however, as online penetration grows and as shopping via the online becomes more predominant, the opening of retail stores may begin to cannibalize online sales.”
*Adding Bricks to Clicks: The Effects of Store Openings on Sales Through Direct Channels (Jill Avery, Simmons School of Management; Thomas J. Steenburgh and John Deighton, Harvard Business School; Mary Caravella, University of Connecticut).
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