Physical Stores as Warehouses for Online Channels: Implications for Channel Choices Under Competition

The Internet and online channels have immensely transformed retailing, which has traditionally relied on brick-and-mortar and physical channels. In recent years, a hybrid and special omnichannel structure referred to as New Retail promising to tightly integrate online and physical channels has emerged within the industry; some industry experts tout New Retail as the future of retailing. For instance, in the New Retail model, retailers use physical stores not only as front ends for physical channel consumers but also as small local warehouses to serve online consumers. In this paper, we provide insights into competing firms’ retail channel choices among online channel, physical channel, and omnichannel under the New Retail model. The online and physical channels could differ in terms of geographical market coverage, consumer shopping cost, and consumer valuation: An online channel can serve both city and remote (suburban) consumers, whereas a physical channel may only be able to serve city consumers, and consumers could have a lower shopping cost in the online channel than in the physical channel but a lower valuation for the online channel than for the physical channel. We find that an equilibrium in which at least one firm operates the omnichannel emerges only when consumers have a higher valuation for the physical channel. Moreover, neither firm would operate only the online channel in this case. In contrast, when consumers have a higher valuation for the online channel than the physical channel, neither firm is likely to operate the omnichannel. The market and channel characteristics have nonuniform and counterintuitive impacts on firms’ profits under different equilibria. For instance, firms might not benefit from either increasing the differentiation between the channels within a firm or increasing the differentiation between channels across firms. Furthermore, an increase in the number of city consumers relative to suburban consumers can hurt the firm that serves only city consumers. The tradeoffs among interfirm competition, market expansion, consumer segmentation, and intrafirm cannibalization effects of firms’ channel choices drive our findings.