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This is a controversial thing to say, but e-commerce hasn’t been a great experience so far for most major retailers.

Despite significant investment, many are left with businesses that generate no more than 5% of their total sales – and somewhat less than their fair share of profit.

This investment was necessary though, to counter the real threat from online-only retailers who, with significantly lower fixed-costs (no stores of course) were able to survive on lower net margins.

This meant that, even though they had to bear the high variable costs per order that are a feature of distance selling, they were still able to offer lower prices and thus take market-share.

Arguably though, by introducing online channels, established offline retailers created the worst of both worlds.

They still had a high fixed-cost base (those stores) and ranged essentially the same products, but now sold some of them online at lower margins, incurring higher variable costs than they would have, had they sold them in-store.

Some quickly realised that their future didn’t lie in e-commerce alone, but in multi-channel retailing.

This doesn’t mean selling products across different channels, but using the structural advantages inherent in one channel, to offset the structural disadvantages inherent in another, to deliver better customer service, higher market share and more profit.

Allowing customers to return goods purchased online to offline stores, to order from in-store catalogues or kiosks for home delivery and using stores as a collection point for online orders are all good examples that have been around for a while now. Not particularly radical, but effective.

But a more radical form of multi-channel retailing is now gaining pace. Retailers are beginning to connect their online and offline systems and allow customers to reserve products online and pick them up and pay for them in-store.

It’s simple, yet has the potential to change the way retailers run their businesses and the way consumers shop.

So what are the benefits and why is it so significant?

Customers love it. Years ago, cinemas eliminated the need for people to turn up early and queue, before finding out whether they could get tickets for the film they came to see, by letting them reserve seats in advance – we now have the retail equivalent.

Customers don’t need to traipse to a store and scour the shelves to establish whether they can buy what they knew they wanted in the first place – they can do this before they even set off.

For one retailer, the value of goods they sell in-store, that have been reserved online in advance, now dwarfs their long-established e-commerce business by a factor of more than 10 to 1 – and it’s still growing. That’s how popular it is.

Consider for a moment the impact this has had on their business:

  • Some customers who would have previously ordered goods online for home delivery are now coming into store. Here, they complete cardholder-present transactions, eliminating credit-card chargebacks and, because the goods are already in-store and offline returns rates are lower, distribution, contact centre and reverse logistics costs are minimal. What’s more, there is an opportunity to sell additional items to these customers, building more margin into these transactions.
  • Some customers, who would previously have come into store somewhat speculatively, are now reserving goods, or even a basket of goods, before they get there. They clearly find this convenient and attractive – so they will come back and do it again, building loyalty. Once in-store they are still prepared to buy additional items, so it’s possible to anticipate the cross-sell by having related items to hand, Blockbuster-style.

There are downsides of course. Additional effort is required to collate orders before customers arrive, but this can be minimised once the patterns of demand are understood and efficient picking processes are in place.

It means a rethink of store layouts and stock management, but the latter isn’t too complicated because uncollected goods haven’t been paid for and therefore need never leave the stock file.

So if it’s such a good idea, why are only a handful of major UK retailers offering this service?

Well, there are a couple of significant barriers to overcome before it can be done...

  1. Connecting online and offline systems to allow customers to, in effect, access real-time store stock availability information from an e-commerce website is a complex business. Even when the technical hurdles are overcome, not every retailer has great in-store stock integrity; some even use different SKU codes in each channel.
  2. It requires changes to the way retailers manage their online and offline businesses. The ranges offered in each channel must be aligned, as must the marketing and promotional activity. Even more significant is the need to bring online and offline pricing in-line whilst staying competitive. These are major challenges for retailers who are used to managing these worlds separately.

Despite these difficulties, several major retailers will be launching similar propositions within the next few months - so these hurdles can be overcome.

This is true multi-channel integration. It makes the old practice of measuring an ecommerce channel as a stand-alone business, with its own sales and P&L, irrelevant.

To which channel do you attribute sales when goods have been reserved online and purchased in-store? When additional items are sold in-store, where do these get reported? How do you measure the effectiveness of your online marketing in these circumstances?

This proposition changes the rules of the game. When it becomes widespread, which it will, the way retailers present their proposition online will have a material impact on their offline business performance.

Yes, customers will still shop online for home delivery where this is more convenient and the rapid growth of e-commerce will continue, but customers will also use retailers’ websites to assess their range and pricing and will pre-select, not all, but many purchases.

True multi-channel retailing has finally arrived.

Steve Borges is the founder of online retail consultancy Biglight.net .


Published 20 February, 2007 by Contributor

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