Physical Stores Help Grow E-Commerce Sales Through Halo Effect

As more sales migrate to digital channels, store closures will inevitably continue, particularly in the more mature economies.  But many brick-and-mortar retailers are are underestimating the contribution their stores make to an omnichannel retailing strategy.

That’s the conclusion of McKinsey & Company researchers, who say that many store closure decisions are simply based on the financial performance of the store in isolation. They only take into account the sales and profits that the store generates within its four walls, without considering its impact on other channels.

But consumers today shop across channels. So, they might visit stores to look at products and then eventually buy them online, or they might research a product on the website of the retailer and then buy it in a store.

Inditex bets on integrated inventory

More and more brick-and-mortar retailers are integrating their fulfillment systems and processes to reflect this new reality. Inditex, the Spanish retail group best known for its Zara stores, has unveiled ambitious plans to link its offline and online inventory.

By 2020, Inditex wants to have an integrated inventory management system that will allow it to fulfill online orders from stores in all the countries where it has a physical presence.  It currently has stores in 96 markets but only operates online in 49 markets.

To be sure, brick-and-mortar retailing is not going to disappear. McKinsey estimates that in-store sales will still make up 75 to 85 percent of retail sales by 2025.

But the role of the store is metamorphosing and is no longer a place just to buy products.  A store now plays several possible roles: as an experiential showroom, as a fulfillment center for picking up or returning goods ordered online, or as place for browsing through products those seeking ideas and inspiration. The Mckinsey researchers say:

“It’s entirely possible for a store to have weak sales and profits within its four walls while being a strong contributor to the retailer’s overall performance.”

Retailers have known for a long time of the existence of marketing “halo effect” associated with a physical store: a store located in a prominent location can raise awareness of the retailer’s brand.

McKinsey argues that in today’s omnichannel era, physical stores can also have a significant e-Commerce halo effect, which can account for 20 to 40 percent of the store’s value.

Advances in data and analytics allow a retailer to measure both a store’s halo effect and its cannibalization effect, meaning how the existence of a store negatively impacts other channels.

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