The Effect of Multichannel and Omnichannel Retailing on Physical Stores

TLDR

Retailers increasingly combine online and physical channels. The study examines how multichannel retailers determine optimal store count and size. The authors analyze three omnichannel strategies—showrooms, return flexibility, and fulfillment flexibility—that alter store functions. The results show that higher online return rates favor fewer, larger stores, whereas increased convenience drives more, smaller stores, and that limiting store functions (showrooms) encourages more stores while expanding functions (returns or pickups) leads to fewer or smaller stores. Accepted by Vishal Gaur, operations management.

Abstract

Most retailers today sell products through an online channel in addition to traditional physical stores. We investigate how such a multichannel or omnichannel 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 omnichannel strategies that involve changes of the physical stores’ functions: (i) showrooms only display products for customers to inspect before they purchase online, removing fulfillment from physical stores; (ii) return flexibility expands the functionality of physical stores by allowing customers to return online orders at them; and (iii) fulfillment flexibility expands functionality by allowing customers to pick up products purchased online at physical stores. We show that when the physical stores are given fewer (more) functions, as with the showroom (return or fulfillment flexibility) strategy, the omnichannel retailer may find it optimal to increase (reduce) the number and/or size of the physical stores. This paper was accepted by Vishal Gaur, operations management.