Is it profitable for retailers to expand their online presence?
It’s a question that businesses in the retail industry often ask themselves in this digital age when online shopping has become the rage and giants like Amazon are making a killing.
But Dr. Barrie R. Nault, PhD, distinguished research professor and director of the Informatics Research Centre at the Haskayne School of Business at the University of Calgary, who was involved in recent research on the topic, said online business isn’t necessarily a can’t miss opportunity for all retailers.
“We wondered what happens when a brick and mortar also goes online. In the last decade we had seen evidence of this. There’s evidence of pretty well more than one major retailer in every sector that has brick and mortar roots that is also online,” said Nault. “Why are they doing this?
“We asked ourselves: If a retailer is deciding to go online, do they think they’re given some kind of an advantage over a pure e-tailer like Amazon.”
He said physical locations engender trust in consumers. Research found that the closer the consumer is to a physical store the less they are concerned about buying online from that retailer.
“It turns out that expanding to online channels is rarely profitable for a brick and mortar retailer. We see it a lot but it seems like it’s rarely profitable and what it does is it essentially intensifies competition online that goes over into brick and mortar prices. There’s a couple of issues with this. It’s a question of whether they want to be sensitive to competition online and decide to price the goods in the store at the same price as online which some firms have chosen to do or whether they want them to vary. But regardless, it’s a problem for them,” said Nault.
“For example, if you have a Rona and a Home Depot somewhere else typically if there’s nothing online you maybe look at which one is closer if you assume they have the same stock and you go to the one that’s closer and then you deal with the prices there. Now if you have an online store from each one they’re now competing for your attention because you can purchase something and it will be delivered. Regardless of whether they tie their in-store prices to their online prices it’s still going to put downward pressure on prices.”
The research study was published in the Journal Production and Operations Management. It was co-authored by Nault and by ex-Haskayne associate professor Mohammad Rahman, PhD, of the Krannert School of Management at Purdue University. The research stemmed from previous research conducted by Nault.
“Somewhere 10 years ago or so I wrote an article with another co-author that looked at e-tailers – so for example a firm that’s only an online retailer like Amazon – and their decision to have brick and mortar stores to try and compete with other brick and mortar stores. That was motivated by my walking around probably eight or nine years before that and I saw all of sudden in a mall a Gateway store. You might remember that Gateway had these personal computers in a box. Prior to that Gateway had simply been an online distributor of computers.
“I was wondering why did they do this. We decided to study that and what we found was that when an e-tailer goes into the brick and mortar world it can often lead to higher prices and higher profits and its worse for consumers which was all a surprise because you typically think that it’s going to be more competitive and better for consumers.
“But usually what happens is when an e-tailer goes and has a physical store they’re now worried about the competition that their physical store is creating for their online store. They basically want to protect their channels. As it turns out the way they protected their channels it made everybody better off, which was kind of a surprising result.”
Nault said it’s not necessarily going to be profitable for retailers to expand into the online marketplace.
“I think the message for retailers is be very careful about going online because you could end up losing money not only because there are some costs to actually having to do that, but you’re going to intensify competition and that competition is going to spill over to your brick and mortar stores one way or the other,” explained Nault.
“The only reason you would go online while facing that kind of situation is that you need a presence online to increase your market. So for example, if you had consumers who will basically search for a store to buy something by typing it into their search engines and only the dot coms will show up then your store by not having a dot com wouldn’t show up. You might lose a customer that way.
“Typically for consumers, the threat is horizontal integration. For example, let’s say there’s a Home Depot every kilometre. Then you’re basically going to be a monopoly. Or you can also think of horizontal integration in terms of products. You have big retailers that have an awful lot of products and we see this with Walmart where they’re driving a lot of other people out of business because it’s kind of a one-stop shop. To me, this is a threat to consumers.”
Nault said he believes the future of large malls is fairly secure because they’re taking a social gathering place approach but the future of smaller strip malls is probably threatened.