Betting the store on online customers isn't sure thing for retailers

If Jeff Bezos could start Amazon by selling books online out of his garage and go on to become one of the richest people in the world, why can’t other retailers cash in on the Internet gold rush?

“What we find is that it isn’t necessarily going to be profitable for retailers to expand their online presence, even though it might seem logical for them to do so,” says Dr. Barrie R. Nault, PhD, distinguished research professor and director of the Informatics Research Centre at the Haskayne School of Business. “It isn’t always clear whether they should just stay with their physical, brick-and-mortar store.”

Some of the complexities facing retailers in the current digital age were outlined in a recent study published in the journal Production and Operations Management. Besides Nault, it was co-authored by ex-Haskayne associate professor Dr. Mohammad Rahman, PhD, of the Krannert School of Management at Purdue University.

Will shopping malls be next?

Until people could download music online, record stores could be found in nearly every shopping mall in North America; now, only a relative handful of brick-and-mortar niche retailers remain. Not only is this true for information goods such as music, books and movies, but many physical goods such as electronics, kitchen items and clothing can also now be purchased online via electronic retailers, or e-tailers.

As the reach and power of online shopping continues to grow, will even entire brick-and-mortar shopping malls such as Chinook Centre eventually go out of business, a victim of consumers’ ability to buy anything they want at the convenient click of a button?

While Nault’s study examines only some aspects of such broader questions, he says the current retail situation is best outlined by the trade-off between distance and online disutility costs. The latter describes the consequences of buying online that causes someone dissatisfaction, uncertainty or discomfort, he says.

“The discomfort people feel about buying things online has gone down over time, but there are still many products you need to touch or feel in person, and if you buy online, you might not be able to go to someone for support about any questions or concerns you might have,” he says. “You might have more trouble with returns, too.”

Nault’s study used a mathematical model to examine how online disutility costs might be affected when a retailer also has a brick-and-mortar store. On the one hand, it means the retailer can better satisfy its online customers, who can bring in any concerns as well as sample merchandise in person, he says.

Such retailers tend to do better online when their physical store is within close proximity to online customers, he says, pointing to examples such as the Chapters chain of book stores that are within easy driving distance of most Calgarians. But going online can also intensify competition with other businesses, says Nault.

'Cannibalizing' own market

Besides dealing with other brick-and-mortar stores in their area, they will now face e-tailers anywhere in the world, “and they will be cannibalizing some of their own market of customers,” he says. “For example, if Walmart goes head to head with Amazon, it may actually have to reduce the online price of most of the products it sells, and that will also force it to lower the prices inside its physical stores, so it will not only create competition with Amazon, it will cannibalize its own profits.”

Circumstances have changed since 1994, when Amazon started in Bezos’s garage. An important factor is Amazon, itself, which went from being a simple e-tailer to capturing the online marketplace as one of the world’s pre-eminent platforms for consumers, much like Twitter and Facebook are now the go-to platforms for many social media users, he says.

The result is that retailers need to do some careful thinking about their strategy, says Nault, adding that large shopping malls such as Chinook Centre are likely safe from the ravages of online retailing for the foreseeable future — if for nothing else due to their role as important social hubs. “I think it makes small strip malls less viable, but larger malls more viable.”