Do In-Store Sales Just Move Online? It's Never That Simple

Is online-versus-in-store a zero-sum game? Retailers with E-Commerce experience know the answer, but financial analysts have a different view. In a report this month on online retailing, Citi hits the points you'd expect: Showrooming is bad; "omnichannel" is good. But one of the report's "questions that remain" will likely raise your blood pressure: If, say, 12 percent of your sales are now online, "does that mean that bricks and mortar retailers need 12 percent fewer stores?"

It's a question that makes perfect sense to stock watchers—but it completely misunderstands how merged-channel retail works.

The report, which was assembled by a team headed up by veteran Citi retail analyst Deborah Weinswig, isn't naïve about what happens when business moves to online from in-store: The cost of each sale is lower (except in cases such as unlimited free returns). To the investor mind, the right thing to do is obvious: Move all sales online and close those expensive stores.

But an interesting detail from the report cuts the legs out from under that mindset: After JCPenney killed its paper catalog business early in 2011, online sales dropped. Why? The catalog business "was a major traffic driver for," according to Weinswig.

Think that through. The paper catalog—which everyone agreed was dead meat, unsalvageable, useless—was actually delivering customers. It was just delivering them to the E-Commerce site, not the mail-order operation. In effect, it was the type of showrooming you want: customers using one channel to shop and a different channel to buy, but all from your channels.

Back to sites-versus-stores. Another useful bit of evidence from the Citi report is that retailers who jump hard into in-store/online integration get better same-store sales. Nordstrom, for example, got a 200-basis-point improvement in same-store sales the year after the chain went live with its single view of inventory for the site and the stores. That's not sales moving online. That's more sales in-store due to integration with online. (Online sales went up, too, of course.)

What's increasingly clear is that this is no zero-sum game. (That's what we always thought; it's just nice to get some hard evidence of it.) Customers use catalogs to cut through the clutter online. They use online and mobile to compare product features and prices, and then buy in-store. They browse in-store, and then buy online, sometimes while standing in the store. They buy online, and then pick up in-store, where they buy impulse items they wouldn't have thought of online.

Disentangling this process is impossible, but more than that, it's not what you want.Disentangling this process is impossible, but more than that, it's not what you want. Every-channel-everywhere seems to get customers spending more. You want them more entangled, not less.

That means the idea of closing stores to match a sales shift to online is all wrong. Sure, if a store's foot traffic is demonstrably dropping, that's one thing—empty aisles probably mean it's time to close or at least radically rethink that store. But a rise in online sales doesn't mean customers are abandoning stores, or even that they've stopped shopping there. They've just stopped buying there.

That's a problem for big chains—almost all are bricks-and-clicks retailers, but most haven't figured out how to match up sales with costs when bricks and clicks are entangled. If the store is a crucial part of the online selling process, how do you account for the costs? Online will always look lower cost. But if cutting an apparently low-producing catalog business hurts a highly productive online business, your selling model isn't complicated enough.

And showrooming? Here are another few details from the report: Amazon, that deadly chain-crushing juggernaut that steals store sales by getting customers to shop in-store and buy at Amazon online, had only 10 percent of U.S. online sales in 2010 (the most recent numbers for that in this report), and online is still just 5 percent of total U.S. retail in 2012, according to Citi's estimates. Even if you leave out food, health and personal care, online is still only 11 percent. That puts Amazon's total share in the very low single digits (around 1.1 percent), and its share of sales via showrooming from brick-and-mortar retailers is tiny compared to the threat from other store-bound retailers.

That doesn't mean showrooming isn't a problem. But the big problem isn't showrooming—it's when those showroom-shopping customers walk out of your store and buy from someone else. When they're actually drifting away from your brand, that's a major problem. But if you've got them sufficiently entangled in your merged-channel brand that they buy from your chain in some other way—in other words, the right type of showrooming—that's just an accounting problem.

That's a good problem to have—except now you have to explain it to your CFO, who has to explain it to analysts, so they can explain it to investors. Good luck with that one.