Business

Forget Indiana Jones: Online shopping is not the Holy Grail

     
June 17, 2015

From: Magazine

Photo by Paramount Pictures, Lucasfilm.

In Indiana Jones and the Last Crusade, Dr. Elsa Schneider, played by Alison Doody, cries out, “I can reach it . . . I can reach it,” as she tries to grab the Holy Grail before she falls to her death. Similarly, the success of companies such as Amazon had convinced other online retailers that they too could indeed “reach it.” The idea was that distance was dead in the age of the internet—that a customer in Des Moines looking for a product would access the vast catalog that is the web and place the order from an online merchant who would ship the product from Delhi. With this, the age of “disintermediation” would be upon us.

Certainly there are sectors where distance has died. No longer does one need to pull out a volume of the Encyclopædia Britannica, dust it off, and flip through the pages to find information about, say, a country or an arachnid. Rather, one goes to Wikipedia and places trust in the vast populace of unknown individuals feeding us information on said country or arachnid. Gone are the Britannica salespeople tasked with convincing us to splurge on the Connoisseur binding (in red or blue morocco leather) rather than settle for the lower-level Classic Brown or Full Leather bindings.

However, as an October 2014 Schumpeter column in the Economist points out, the declaration of the death of distance appears premature.

The article makes two important yet distinct points. The first is that even within the online world, distance matters—that is, consumers prefer to order products from closer locations rather than faraway ones. (The article even mentions that Americans prefer porn from Canada over porn from the United Kingdom.) The second is that brick-and-mortar stores continue to flourish even in the presence of online competition. Indeed, stores that started off purely with an online presence have been migrating offline, albeit in a limited fashion, for a while now. Eyeglass retailer Warby Parker and clothier Bonobos, both originally online, now boast brick-and-mortar presences. Even Amazon has announced the possibility of a store in New York. Here I will focus on the first point.

What really caught my eye in the same issue of the Economist was an article on grocery retailing in India that depicted how little mom-and-pop stores (also called kirana stores in India) continue to survive even with the emergence of larger supermarkets.

So while several large industrial houses have made a retail push—including the Ambanis, the Biyanis, the Birlas, and the Tatas, among others—most households seem content to procure their dry groceries as well as their fresh produce from their friendly neighborhood shop wallah.

Both of these articles point fundamentally to the functions that we expect our distribution channels to perform, and to how well we believe that these various alternatives help us with those service requirements. One typically thinks of supermarkets (and convenience stores and most retail stores, for that matter) as essentially competing along the dimensions of price, distance, and assortment. The usual argument for why one might prefer to travel a longer distance to a supermarket (which is less convenient) is that one could access a wider assortment at a lower price there than at the neighborhood store.

As the Economist points out, this is not necessarily true in India: the assortment is not always wider at a supermarket. More importantly, a local shop is better able to match the needs of neighborhood consumers than a supermarket that caters to several neighborhoods. So even if the assortment at a local shop is smaller, it is better matched to the needs of the target population near the kirana. Also, India has long been a country where the maximum retail price (MRP) has been religiously adhered to, so the amount of price variation across stores has not been that large. (This is, of course, changing.) So the article puts the price reduction from visiting a supermarket at about 3–4 percent. Weigh this against the costs of traveling to a supermarket on the congested roads of India, and one might very well decide that the trip is not worth it.

But these factors are not the only ones that distinguish a local shop from a supermarket. There are two critical channel functions that local stores provide, the first being free delivery. Regardless of a customer’s order size, local shops usually have an employee at their beck and call who moves goods and payment between the store and the customer’s residence. This function is particularly valuable late at night and during inclement weather, and especially for categories such as pharmaceutical products, as someone who is feeling ill wouldn’t have to leave the house. Occasionally the shop may even be willing to procure out-of-stock items from another retailer for a valuable customer.

A second critical function is that of credit provision. Kirana customers routinely accumulate purchases during the month and pay the shop-owner when salaries are received at the end of the month. Clearly, this is not an issue at supermarkets if customers use credit cards. However, when the vast majority of transactions are in cash, the credit facility provides a tangible benefit to the customer. Of course all these service functions would not amount to a whole lot if the customer did not trust the store to provide quality merchandise.

One can see how many (although certainly not all) of the benefits provided by the local store would also apply to traditional brick-and-mortar stores compared to online ones in a debate between the two. The concept of facilitating a match with the perfect pair of trousers is the logic behind Bonobos’s Guideshops and expert guides, available by appointment or walk-in at 16 locations. It’s also the logic behind Warby Parker’s decision to set up offline stores. (Watch “How can brick-and-mortar stores fight back?” for more on that.)

But importantly, all this brings me back to the first point made in the Schumpeter column, that distance seems to matter online. Customers worldwide deem products from a certain location to be a better match, and hence prefer those products over others. And then there is the issue of trust—according to the column, sellers in certain locations are viewed as being more trustworthy than those in other locations.

Online retailers worried about the role of distance will be well served to keep in mind the inspirational song lyrics from the animated movie Hercules (not to be confused with the more-recent live-action movie with the same name): “I am on my way, I can go the distance. I don’t care how far, somehow I’ll be strong. I know every mile will be worth my while. I will go most anywhere to find where I belong.”

Pradeep K. Chintagunta is Joseph T. and Bernice S. Lewis Distinguished Service Professor of Marketing at Chicago Booth and blogs at kiltscenter.tumblr.com.

Works cited
“A long way from the supermarket,” Economist, October 18, 2014.
“Pointers to the future,” Schumpeter, Economist, October 18, 2014.

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