The Effect of Multi-Channel and Omni-Channel Retailing on Physical Stores
68 Pages Posted: 31 Jul 2018 Last revised: 5 Jun 2019
Date Written: June 1, 2018
Most retailers today sell products through an online channel in addition to traditional physical stores. Customers may find online shopping attractive because it helps them avoid traveling to a store, but they have to incur an online hassle cost due to the inconvenience from having to wait, delivery costs, etc. However, purchasing a product online without being able to inspect it may lead to more returns for the retailer. In contrast, visiting a physical store allows customers to inspect the product before purchasing it, but they also have to incur an offline hassle cost. Given the complex trade-offs associated with customers' purchasing decisions, a natural question is how the online channel influences a retailer's decisions regarding the physical stores. In this paper, we study how a multi-channel or omni-channel retailer should decide the number and size of physical stores. We show that a higher return rate for online purchases can incentivize the retailer to have fewer physical stores that are larger in size. Interestingly, as online shopping becomes more convenient, a retailer may prefer to have more physical stores that are smaller in size. We also study the effect of three popular omni-channel strategies, viz., showroom stores, return flexibility, and fulfillment flexibility. We show that, contrary to expectations, when physical stores are given more (fewer) functions due to adoption of omni-channel strategies, the retailer may find it optimal to reduce (increase) their number and/or size.
Keywords: retail operations, omnichannel, strategic consumer behavior, product valuation uncertainty
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