The Effect of Multi-Channel and Omni-Channel Retailing on Physical Stores

Abstract

Most retailers today sell products through an online channel in addition to traditional physical stores. We investigate how such 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. 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 that involve changes of the physical stores' functions: i) \emph{showrooms} only display products for customers to inspect before they purchase online, removing fulfillment from physical stores; ii) \emph{return flexibility} expands functionality of physical stores by allowing customers to return online orders at them; and iii) \emph{fulfillment flexibility} expands functionality by allowing customers to pick up products purchased online at them. We show that, contrary to expectations, when the physical stores are given fewer (more) functions as with the showroom (return or fulfillment flexibility) strategy, the omni-channel retailer may find it optimal to increase (reduce) the number and/or size of the physical stores.

Keywords: retail operations, omnichannel, strategic consumer behavior, product valuation uncertainty