One of the most significant trends in retailing over the past 10 years has been the steady growth of e-commerce. The contribution of e-commerce to overall retail sales has tripled over that period – from 2.5% in 2005 to 7.3% in 2015. Some sectors (such as books and music) have been completely transformed since 2005, while the impact on others (such as groceries and home improvement) has been less pronounced.
Retailers working to incorporate e-commerce as part of their operations face many challenges. Some of the most pronounced include reconciliation of inventory and pricing between stores and websites and working through the challenges associated with including stores as part of a logistics network. As an example, do retailers paying $50 per square foot or more in high-rent mall locations really want to have their store associates function as mini-distribution center staff members?
In addition to these challenges, there are several ways in which a retailer’s e-commerce business can impact their brick and mortar deployment strategy:
- Physical Presence in State – Most states impose a sales tax on e-commerce purchases only if the company has a physical presence in the state. For retailers with a significant e-commerce or catalog business, the construction of the first store in a state will result in sales taxes being imposed on all e-commerce transactions shipped to that state, which can result in reduced e-commerce sales (and profits). The impact of any such “first store” deployment will be impacted by the scale of current e-commerce shipments to that state, and the state’s sales tax. (Note that this is not an issue in states which do not impose a sales tax, such as Delaware, New Hampshire, and Oregon). In the event that the Marketplace Fairness Act is enacted, this will no longer be an issue.
- Local Impact – Building a new store will frequently impact e-commerce business within that store’s trade area. The impact varies by the retailer – some experience a decline in e-commerce sales (since consumers now have a convenient, local alternative), while others experience an increase in e-commerce sales (since the presence of a store can increase top-of-mind awareness of the brand and in particular, its e-commerce division). Furthermore, the impact of a store opening on e-commerce sales often evolves over time. Depending on the retailer, Intalytics has observed that the development of a new store can be complementary, cannibalistic, or neutral to e-commerce sales and as such, it is important for retailers to quantify these trends, so that the profitability implications of a store deployment on e-commerce sales can be accounted for in a pro forma analysis.
- Marketing Efforts – The demographic and psychographic profile of a retailer’s customer base can vary between brick & mortar vs. e-commerce customers. Targeted marketing efforts that account for any such differences can be significantly more effective in driving sales.