Stores in an omnichannel world: Understanding their role and improving their performance

Online-first retailers are increasingly establishing physical stores to better serve their existing and new customers along the customer journey and increase customer engagement. This strategic expansion is driven by several key benefits. First, physical stores offer customers the invaluable opportunity to touch, feel, and try products before buying, significantly enriching the customer experience and reducing hesitation in purchase decisions—especially crucial for products where sensory experiences influence buying behavior. Furthermore, offline stores can enhance brand perception or act as a billboard for the brand's existence, thus enhancing visibility and credibility in a competitive marketplace. Additionally, these stores improve customer service by providing immediate, face-to-face assistance, which can swiftly resolve issues and facilitate returns and exchanges, thereby boosting customer satisfaction and loyalty. By allowing customers to verify product quality and fit before purchase, physical stores can also substantially lower return rates, reducing the logistical and financial burdens associated with handling returns. Besides serving existing customers better, physical stores can also capture additional sales opportunities by attracting different customer segments, including those who prefer in-store shopping or who engage in impulse buying when physically present in a store. Lastly, the synergy between online and offline channels enhances the overall shopping experience, enabling features like buy online, pick up in-store, which provides consumers with convenient, flexible shopping options. This omnichannel approach not only meets the diverse preferences of modern consumers but also drives greater brand loyalty and market reach. Building on these insights, this thesis explores the strategic benefits and challenges of stores in an omnichannel business model across three comprehensive chapters. The first chapter, "The Value of Experience-centric Stores in Omnichannel Retail," investigates the operational and financial implications of opening physical stores. It specifically analyzes three omnichannel store openings of an online-first reseller of consumer electronics - two large experience-centric stores and one small city-center format. Contrary to prior research, our results reveal that physical retail expansion, either by experience-centric or small stores, does not yield a significant positive effect toward online sales. Rather, we find patterns of cannibalization—quite significant for one of the two large stores. Revenues generated by the small store failed to offset sales lost in the online channel. For the large experience-centric stores, however, we reveal increases in total net revenues in the range of 21% - 23% after opening, rising further long term. Utilizing a diverse range of product categories and data from an online consumer survey, we explore category-specific insights on the value of experience-centric stores in omnichannel retail. The survey assesses the perceived utility of stores across three phases of the customer journey: information search, fulfillment, and product returns. Our results show that our utility-based framework effectively captures the short-term and, to a lesser degree, long-term value that stores offer to both retailers and consumers, particularly in destination categories. Store openings lead to greater overall revenue increases in product categories where consumers find higher utility in the physical store experience. However, the framework is less effective for accessory categories, suggesting a need for additional investigation in this area. These findings provide retailers with crucial insights into which product categories benefit most from experience-centric stores and enhance the understanding of the interaction between online and offline channels in an omnichannel retail environment. The second chapter, "The Effect of Omnichannel Store Openings on Return Rates," investigates how physical stores impact return behavior a significant concern for online-first retailers. As product returns escalate, online retailers have tightened their policies to curb losses, whereas their physical counterparts generally experience lower return rates due to customers' ability to inspect products and consult with staff. This contrast forms the backdrop for online-first retailers expanding into brick-and-mortar under an omnichannel model, aiming to reduce return rates by leveraging the tactile benefits of physical stores. However, this expansion could increase returns as physical locations might also increase the convenience of returning. This chapter introduces a conceptual framework to examine how physical store openings affect net revenue uplift by analyzing the interplay between increased sales and returned revenues. The findings reveal that while physical stores can enhance customer experiences and satisfaction, they may inadvertently lead to higher item return rates, which rose by 28.0% for Large Store 1 and 21.7% for Large Store 2. This highlights that the effectiveness of omnichannel strategies relies not just on the presence of physical stores but on their seamless integration with online operations to influence consumer behavior and manage returns effectively. The analysis shows that the higher average price of returned items compared to sold items amplifies the effect of increased return rates, leading to a more significant uplift in the return fraction. Consequently, net revenue grows less than gross revenue, illustrating the delicate balance between increasing revenue and controlling return rates. Given the retailer's low return rate before the store openings, the store-level return rates and return fractions increased by only about 0.5 percentage points. This can be considered the 'cost of doing business,' yet it remains a crucial aspect to monitor and mitigate. The third chapter, "Rightsizing Store Labor," focuses on ways to improve store productivity by evaluating adaptive staffing strategies in omnichannel retail. Given the labor-intensive nature of omnichannel stores—where activities such as click-and-collect, returns, in-store advice, purchases, and fulfillment are integral—efficient labor management is critical. This chapter particularly examines the potential for retailers to dynamically adjust labor hours in real-time based on actual customer traffic, with adjustments made voluntarily by employees. This analysis covers both scenarios where retailers can enhance labor productivity during low traffic periods by reducing hours without sacrificing sales, and where they can capitalize on unexpected customer traffic spikes by increasing hours to potentially boost sales. A field experiment was conducted to assess the impact of these labor adjustments on store productivity. We examined how the autonomy to scale hours impacts productivity and investigated the specifics of how the retailer utilizes this flexibility, the types of adjustments made, and the resulting effects on overall productivity. The intent-to-treat results indicated a significant 6.24% increase in productivity, with negligible impacts on labor hours and sales. More strikingly, the average treatment effect on the treated revealed significant enhancements: a 17.6% increase in productivity and a 10.3% reduction in labor hours when staffing was scaled up. These findings highlight the importance of real-time staffing flexibility in correcting planning imperfections and boosting overall performance. Upscaling labor hours during peak periods led to significant productivity gains (effectiveness route), while downscaling during low traffic periods had an insignificant effect (efficiency route). The 10.3% reduction in labor hours when staffing was scaled up suggests more efficient labor use, illustrating how on-the-day scaling can be used to (partially) correct for imperfect labor allocations made well in advance when store traffic estimates are full of uncertainty. This indicates that stores were initially planned with fewer labor hours to match actual traffic, and despite the upscaling, they did not fully close the labor hour gap, implying more efficient labor utilization. These insights are crucial for omnichannel retailers facing high inflation and rising labor costs. Dynamic labor management enables retailers to respond effectively to fluctuating customer traffic, ensuring optimal staffing levels that enhance customer satisfaction and operational efficiency. This study provides actionable strategies for maintaining operational efficiency, offering a vital approach for retailers to manage labor resources effectively amidst economic pressures. By integrating these dynamic staffing strategies, retailers can better balance operational efficiency and labor management, navigating today's retail landscape and improving the synergy between online and offline channels. Together, these chapters provide a holistic view of the strategic, financial, and operational outcomes of integrating online and offline retail channels, offering crucial insights for retailers navigating the challenges of today's retail landscape.