Opportunity In Store for Online Sellers



  • Investors place a higher value on dual-channel retailers than those that only sell online
  • Big-box retailers are matching prices and offering perks similar to those of their online competitors
  • Amazon is considering brick-and-mortar storefronts in big cities, similar to Apple’s

Prabhudev Konana has seen the future of retail stores, and it’s a racket — a tennis racket.

At a big-box sporting goods store, the chair of the Department of Information, Risk, and Operations Management at the McCombs School of Business recently found a racket he wanted. On his smartphone, he found the same item on Amazon.com for $20 less. He showed the listing to a store manager, who agreed to match the price.

This holiday shopping season, as the retail wars heat up between storefront sellers and online ones, Konana and Assistant Professor Ashish Agarwal  have a message: Don’t count out bricks and mortar. Retailers like Best Buy, Target, Walmart and Fry’s Electronics are fighting back by meeting online prices and offering free or same-day shipping, both for products out of stock and those ordered from their websites.

“Once you say you’re going to match the Internet price, there’s no incentive for the buyer to wait three days [and] pay shipping costs,” says Agarwal. “They have the instant gratification of buying offline.”

Konana notes that 90 percent of all retail sales still happen offline, according to Forrester Research. “We often hear about Amazon and eBay, how the whole world is going online,” he says. “That perception is quite different from the practice.”

The two professors have more than anecdotes to demonstrate that physical stores can still beat virtual ones by going virtual themselves. The researchers analyzed six years of stock prices for 64 dual-channel retailers – those that sell in both the real and the online worlds – and 11 that sell purely online.

By comparing a retailer’s market value to its book value, they measured the premium that investors were placing on a firm’s intangibles – qualities like sales growth, research spending and marketing intensity. Then, they adjusted those measurements to remove the effects of all intangibles but one: dual-channel versus online-only.

“Once you control for everything else, there should be no benefit coming from being dual channel,” says Agarwal. Instead, the two found a premium for dual-channel retailers over online-only. The more physical stores a retailer had, the greater the premium.

“The market tends to value the dual channels higher,” says Konana. He suspects that customer satisfaction could be a factor: A shopper is more likely to be happy with a product he’s seen and felt before buying it. 

To check that hypothesis, he and Agarwal took two more measures: rates of repeat customers and intent to purchase (a shopper’s plans to buy in the future). In both cases, two-channel retailers came out on top. 

To leverage their advantages, physical stores should add digital displays with the kind of in-depth product specs and reviews found on the Internet, the researchers suggest. Another addition might be automated kiosks for ordering products that are out of stock or that a store can’t fit on its shelves. 

“It’s about not letting people get away,” says Agarwal. “They can shop online while they’re at the store.”

Big-box retailers, he says, are still experimenting with how to mesh the two channels. Walmart lets customers order online and pick up at a local store. Target allows them to return online orders to a store, but not to pick them up.

Online vendors are also trying out new models. Amazon offers same-day delivery and lets some customers pick up shipments from lockers at convenience stores. It’s even considering brick-and-mortar storefronts in big cities, akin to Apple’s.

Over time, Agarwal predicts, “You’re going to see Internet and physical stores converge.” Prices, too, should converge. Online prices will rise, as states stop exempting them from sales taxes. Meanwhile, behemoths like Walmart might exploit their economies of scale and distribution networks to underprice the Amazons.

Ultimately, he adds, many physical stores might turn into display stores for online sales. “But if they’re selling more mass merchandise, it doesn’t really matter. Almost all stores will have an online and offline presence. There’s no option.”

This article is the first in a two-part Texas Enterprise series about the intersection of traditional retail and e-commerce. The second installment covers the future of personalized mobile advertising.


Faculty in this Article

Ashish Agarwal

Assistant Professor McCombs School of Business

Ashish Agarwal teaches in the Department of Information, Risk, and Operations Management. He received his bachelor's degree from Indian...

Prabhudev C. Konana

Professor, IROM

Prabhudev Konana is the Chairman of the Department of Information, Risk, and Operations Management and is a University Distinguished Teaching...

Prabhudev C. Konana teaches in the Texas Executive Education program, featuring open enrollment, custom and certificate classes for executives and organization teams.

About The Author

Steve Brooks

In a quarter-century as a journalist, Steve Brooks has won two Neal awards for excellence in trade reporting and a Press Club of New Orleans award...

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