Bricks versus Clicks: Which Retail Channel is most efficient?

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Prof. Bill Wheaton

CAMBRIDGE, MA—If you are wondering about the future of traditional retail stores and malls, you are not alone.

Prof. Bill Wheaton of MIT Center for Real Estate says there is no end to questions and debate about the movement of sales from traditional stores over to the Internet.

“The internet seems to offer greater product choice than traditional shopping, while the latter still provides “experience” and the personal inspection of goods,” Prof. Wheaton recently wrote in his blog. “In the end it may boil down to who can get the good into consumer’s hand the most cheaply.”

As any retailer knows, he adds, generally two-thirds of each sales dollar goes to acquiring the good from a wide range of global producers.

“Interestingly, both traditional retailers and Etailers spend the same share of revenue getting goods (the difference is not statistically significant). At the other end of the accounting ledger is EBITA, and here also both types of firms are equally profitable,” says Prof. Wheaton. “With a lot of firm variance in EBITA, the difference between 2% and 5% in one year is again not statistically significant.”

What is different is what happens in between, says Prof. Wheaton. Here are some other facts from Prof. Wheaton’s blog:

  • Traditional retailers spend 23% of sales revenue on labor and bricks while Etailers spend only 9%. This is a huge difference in costs and very significant statistically.
  • On the other hand, Etailers spend a whopping 23% on “other’ costs (derived as a residual), while traditional store-based firms spend only 11.

“In the end, while traditional retailers and Etailers have quite different cost components, the combined costs of getting goods on shelves is about the same as getting the good to the consumer’s doorstep. But of course getting goods onto shelves is NOT the same at getting them into consumer hands,” says Prof. Wheaton. “The “last mile” delivery cost for Etailers is part of their reported revenue and expenses, but the time and money of consumer trips to the store are not part of traditional retail accounting!”

He adds: “The internet is still relatively young and firms using it are evolving every day. As of 2017, the costs to an Etailer of getting a good to your doorstep seem quite similar to the cost for a traditional retailer of putting that same good on a shelf. Getting that good from the shelf into consumer hands however, costs an extra 22%.”