I've had the opportunity to meet with retailers across Europe the past three weeks. It is always refreshing to get a perspective from outside of your own country. One of the most asked questions in Europe was: "Should prices in store match those online?" This is a critical question in countries like the U.K., where online now accounts for as much as 40 percent of sales in some categories.
Can a retailer support the same prices in store as online? From an omnichannel perspective, can retailers afford not to match their online prices in store?
Why this is important: Online retail was founded with a distinctly different business model. With omnichannel transformation strategies like "click and collect," customers can simply bypass store prices by ordering online but collecting their item in store.
Ecommerce vs stores: Different business and operational models
In the beginning, there were stores. Retailers have continued to refine operational efficiency to get goods at the lowest cost on the shelf. Bricks and mortar stores also had to factor in advertising, marketing, promotions and mark downs in order to entice enough customers through the doors to purchase the stock that was shipped to stores. There is also the labor cost of staff in stores. Stocking enough inventory for immediate purchase from the shelf is another substantial store operating cost.
Ecommerce was founded on an entirely different business model. Inventory is held at central distribution points, not shipped to stores. There are no expensive store leases or operating costs. It is very inexpensive to add "long tail" SKUs to a website to grow revenue.
However, ecommerce is not without its own unique costs for massive distribution centers, infrastructure and systems. And, the delivery of purchases, "the last mile," to consumers is significantly more expensive than to ship in bulk to retail stores.
So, which is cheaper to sell through — online or stores?
One metric of "cost to sell through" is a composite index of all the costs related to merchandise, marketing, operational, general and administrative costs. In Europe it is typically called "OPEX" (operational expenses). On their annual reports that must be filed by U.S. retailers, there is a line item for SG&A (sales, general and administrative) costs. Both are metrics of operating costs as a percent of revenue, excluding capital costs.
Comparative financials of U.S. retailers indicate a pure etailer, like Amazon, has a SG&A very similar to a large national retail chain like Best Buy. Based just on SG&A, prices could be theoretically the same for stores and online.
Operational costs are only part of the retail pricing story. Despite having millions more SKUs, Amazon turns inventory significantly faster than retail store chains, generating more Gross Margin Return on Inventory Investment (GMROII).
So, on the basis of GMROII, pure ecommerce can afford to have cheaper prices by virtue of not needing to generate as much gross margin per individual SKU, since there is much less inventory and holding costs to achieve the same sales volume.
If a retailer's website can approach long tail efficiency of ecommerce similar to that of Amazon, it should be possible to sell at a lower price through ecommerce. Said another way, prices would need to be higher instore to generate the same gross profit via GMROII.
The slippery slope of "click and collect" creates a price bypass in store
Many retailers are still trying to justify a higher store shelf price versus an online price. There is a business rationale — if you want that specific product from our shelf, it will cost a bit more because we had to ship it here, and we have to support our people in store. In order to not lose a sale, some stores even make the defensive offer: "We would be happy to give you the online price if you order it online and ship it to the store".
But wait a minute. Today's consumers expect to shop AND purchase anytime and everywhere. They are responding and using "click and collect" — they buy it online from the retailer and collect in the store. So, guess what … if the store price is higher, consumers can simply whip out their smartphone in the aisle, order it at the cheaper online price, and simply go over to collect the goods at the "click and collect" counter! Game Over. Consumers expect and can get the same online price in store, and take the item home in minutes.
Omnichannel store profit now depends much more on basket than price
Historically, bricks and mortar stores' POS (point of sale) systems measured sales transactions at a place called the "store," at a price point. Today's "store" has become where the consumer decides to order, purchase and take delivery. Price is much less important to consumers, and actually less of an overall factor for retail profitability.
Omnichannel research resoundingly shows consumers who are "omnichannel" (shop more than one channel with a retailer) do the following:
- Shop with the retailer more often (more trips to store and more clicks online)
- Purchase significantly more in their shopping carts
- Are 40 – 60 percent more profitable versus customers that just shop one channel
Consumers now decide how closely store prices must match a retailer's online price. If the store price is perceived as "too high," the consumer will use "click and collect," or worse yet, abandon that retailer for another. The enlightened omnichannel retailers are adopting a strategy of matching even competitor's online prices in store. They realize that a slightly lower product price is insignificant when compared to the highly profitable market basket of add on sales and services, which are much higher in store than online.
The new omnichannel frontiers of "click in store" and 2-hour delivery
The boundaries of omnichannel are rapidly evolving, creating even greater consumer expectations. A number of retailers in Europe have now enabled customers to:
- "Click in Store" for products in stock and have them delivered at home that day
- "Fast Track": Click online for at home delivery that night for store products
- Speed delivery: Special delivery of in stock store items in two hours or less
The financial model for these latest omnichannel models now includes a minimum shipping fee for the convenience of speed. Consumers who have the need for speed seem more than willing to pay to have the product delivered the same day.
Same product prices in store and online is no longer the issue … the consumers have already decided that one. Key differentiators are now speed and service, not price.
With price parity between online stores, the retail store has become an omnichannel distribution point as much as a point of sale.
/ Chris H. Petersen, PhD, CEO of Integrated Marketing Solutions is a strategic consultant who specializes in retail, leadership, marketing, and measurement. He has built a legacy through working with Fortune 500 companies to achieve measurable results in improving their performance and partnerships. Chris is the founder of IMS Retail University, a series of strategic workshops focusing on the critical elements of competing profitably in the increasingly complex retail marketplace.