Omnichannel Strategy Proves Costly for Many Retailers

High distribution costs have turned out to be a drag on the profits of retailers who tried to add online retailing features to their physical stores.

February 2, 2016

Brick-and-mortars shops are increasingly embracing omnichannel strategy to avoid being pushed out of business, but a recent report from the Wall Street Journal says the business strategy is pushing some of them deeper into a financial quagmire and killing their profits.

Omnichannel retailing — a business model that offers consumers with options to purchase goods both online and in physical stores — is certainly a powerful tool to lure consumers, but it also raises technology and labor costs for the retailer.

Over the years, many retailers have put in place expensive online platforms, redesigned warehouses, and trained a large workforce to ship goods to consumers’ doorstep. Some retailers are on an endless hunt for more agile software and better-designed warehouses.

According to a survey by JDA Software Inc, more than half of retailers are finding ominichannel retailing expensive. Last month, athletic clothing and sneaker seller Finish Line Inc, which installed new infrastructure in September to fill online orders, announced plans to shut down about a quarter of its 600 stores.

Similarly, Stage Stores Inc., a Texas-based retailer, is in the process of closing 90 of its 850 stores.  The stories of Finish Line and Stage Storage are just a few examples of how highdistribution costs have turned out to be a drag on the profits of retailers that tried to add online retailing features to their physical stores.

“The problem is that most retailers are struggling to make the transition to omnichannel operations and very few are doing it profitably,” wrote Wayne Usie of JDA Software, in a recent book on omnichannel strategy.

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In the meantime, deep-pocketed online retailers like Amazon are offering speedy shipping options like same-day and two-day delivery, forcing the bricks-and-mortar shops to invest more heavily in supply chain infrastructure.

As always, consumers are proving that they are the king, with retailers finding some shoppers checking out merchandise in physical stores and later placing an order for it online.

For some retailers, investing in e-commerce is inevitable and the only option to avoid being pushed out of race. Therefore, a large number of brick-and-mortar stores are increasingly spending on e-commerce. A survey conducted by Retail Systems Researchfound a large majority of retailers talking of growing e-commerce sales.

“We saw the ecosystem take a deep breath as it absorbed the depth of change required to achieve these omnichannel goals” said Nikki Baird, managing partner at Retail Systems Research.