Retail Dogma

Brick & Mortar Retail vs. Online Retail

Cost Comparison

Brick & Mortar Retail Vs. Online Retail

CHAPTERS

01.

Trends

02.

Costs

03.

Customers

04.

Verdict

CHAPTER 01

Trends

Here we will talk about brick & mortar retail vs. online retail sales trends in the past few years.

We will be covering in details :

  • E-commerce Contribution
  • Demographic Preferences
  • Retailers Adaptation

RETAIL TRENDS

BRICK & MORTAR RETAIL VS. ONLINE SALES CONTRIBUTION

According to retail statistics from the U.S Census Bureau e-commerce sales accounted for 14.3% of total retail sales in the third quarter of 2020, with a total of 209.5 billion $ and a growth of 36.7% on the third quarter of 2019. During the same period, total retail sales have increased by 7%.

This growing trend in contribution has been going on for more than a decade now, with e-commerce contribution in 2010 being at 4% of total retail sales.

Ecommerce Contribution to Total Retail Statistic

BRICK & MORTAR RETAIL VS. ONLINE RETAIL DEMOGRAPHIC PREFERENCES

A survey that has been conducted by BigCommerce in 2017 has shown that younger demographics have higher preference for buying online vs. retail stores, where 67% of surveyed millennials preferred shopping online vs. only 41% of surveyed baby boomers.

Statistic: Online shopping preference in the United States as of 2017, by age group | Statista

RETAILERS' ADAPTATION TO E-COMMERCE

There is no doubt that the growth of e-commerce sales and contribution has been initially driven by pure-play e-commerce players like Amazon. 

However; big part of the trend has recently been driven by brick & mortar retailers opening online stores and introducing e-commerce as an additional channel in their portfolio.

Retailers like Walmart have shown strong adaptation to the trend, to the extent that they are now competing strongly with Amazon and other e-tailers.

Furthermore, all major lifestyle brands have opened e-commerce fronts and integrated it into the shopping experience of their customers, with some having a click & collect program that allows customers to order online and pick-up in stores.

IS BRICK & MORTAR RETAIL DEAD?

The quick rise in e-commerce and the adaptation that happened from brick & mortar retailers has prompted many people to assume that brick & mortar retail is dead. 

Some even called it Retail Apocalypse.

Looking at the retail landscape, however, suggests otherwise !

Many pure play e-commerce retailers started opening brick & mortar locations, including Amazon with its acquisition of Whole Foods. This shift in trend served as a proof, that customers still need physical stores after all.

This has lead to the emergence of the term Omni-channel, which is a concept that allows the customers to interact with a company through different channels and touch points. These include physical stores, mobile, online or social media.

Omni-channel has quickly become the new normal for retailers, to have online & offline presence to be able to serve customers better and at the same time protect marketshare.

In this article we will examine the main differences between brick & mortar retail vs. online retail, in order to help small retailers who are wishing to make the shift to omni-channel and open an online store for their brick & mortar business understand all the pros & cons of doing this.

CHAPTER 02

Costs

In this chapter we will cover the main differences in costs associated with each business format

We will be covering in details :

  • Initial Costs
  • Marketing
  • Warehousing
  • Inventory
  • Exchange & Chargebacks

RETAIL VS. E-COMMERCE COSTS

The first thing we want to examine is the cost of both, starting and running brick & mortar retail vs. online retail businesses.

This is because costs play a big role in the end profitability of any business and need to be considered and factored in advance before venturing in.

INITIAL SETUP COSTS

The initial costs of setting up an online business is much lower than opening a brick & mortar retail store. 

The business owner simply needs to buy a domain name at around 20$ and either set up the e-commerce system themselves on their hosting account for as low as 5-6$ dollars per month or subscribe to the different ready-to-use e-commerce platforms at around 30$ per month and they are good to go.

This is of course apart from the cost of merchandise.

On the other hand, opening a brick & mortar space will require much higher initial investment.

These costs can be summarized as below:

  • Rent
  • Site Approvals & License fees
  • Insurance
  • Manpower
  • Fixtures
  • Interior design & construction
  • POS System
  • POS Hardware

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MARKETING COSTS: BRICK & MORTAR RETAIL VS. ONLINE RETAIL

A brick & mortar store mainly depends on the organic traffic that it gets from its location (and possibly also mall marketing), so it doesn’t need to spend much on marketing – at least initially.

On the other hand, in order to be able to sell anything online, you will need to spend much more on online marketing & advertising. That’s because without any kind of online marketing, there is no way customers will find your store.

Also with the low entry barrier for initially setting up an online retail business, the competition online is very fierce. All this means you really need to shout about your business to have any chance.

These marketing costs can include:

  • Graphic Design & Artwork Creation
  • Facbook & Instagram Ads
  • Google Ads
  • Influencer Marketing & Sponsorship
  • Content Creation (Blog posts, social media posts,..etc)
  • E-mail Marketing Service

WAREHOUSING & FULFILLMENT

When you have your own store as a single location, chances are you don’t need a warehouse. You can receive orders directly to the store if you have big enough stock room.

If you are operating online and carrying enough merchandise to run a profitable business, you will probably need a space to store your inventory, and a team to fulfill the orders going out to the customers.

This inventory then needs to be put on a WMS (warehouse management system) that is linked to your online store, so that every time an item sells, it gets updated in your stock on hand data, so that you don’t face a problem of customers ordering something that you are sold out of and can’t fulfill.

At brick & mortar this is done in-store, where you scan the items when you receive them and they get updated on your back-office system and every time you sell an item at the POS it will get deducted from this system.

EXCHANGE, REFUNDS & CHARGEBACKS

This is where e-commerce starts to get costly!

Payment processing in general is a very critical process in e-commerce and with a lot of online fraud, chances are you will be faced with some chargebacks or refund requests.

In a brick & mortar store customers bring the item and come back to the store to return it. You give them their money and re-stock the item and sell it to someone else. In online business you will have to arrange for this item to be shipped back to you, and shipping is not cheap!

Another problem is with the chargebacks that result from using stolen cards to buy from your store. The customer will get the item and you will still have to refund the amount to the person who owns the card… you also paid for shipping.

COST OF INVENTORY

When you operate multiple brick & mortar stores, you have to stock them all with merchandise. You will be carrying more stocks vs. if you operated an online store with a single warehouse location.

This will affect your final margin as a retailer, since you will sell certain amount at full price and then have to clear a bigger amount of stock at lower margins. 

Read more on that in our Gross Margin article.

When you operate online, however, you don’t need to carry that much product as you will be selling to different customers across the country from a single inventory pool. This will reduce the portion of stock that you need to clear at the end of the season.

EMPLOYEE COSTS

There is no doubt that brick & mortar retail is a labour intensive business. From manpower needed for cashiering, to customer service, to visual merchandising, to managers and the fact that you need to have enough of those people to cover two shifts.

An employee doesn’t just cost you the amount equivalent to their salary. In fact we usually multiply that number by around 1.4 to account for allowances & benefits (indemnity, medical, pension,..etc)

Online retail on the other hand doesn’t need all this. In fact you can initially run the show on your own out of your garage and no one would even notice it, since the sales process is done automatically online and customer service is only needed occasionally. It’s a lot of work, but still doable. 

Further Reading

CHAPTER 03

Customers

In this chapter we will discuss customers preferences for online shopping vs brick & mortar retail and customer acquisition costs

We will be covering in details :

  • Customer Preferences
  • Customer Acquisition

CUSTOMER ACQUISITION

WHY DO CUSTOMERS SHOP ONLINE ?

  • Lower Prices: Customers can easily shop around and find the lowest price and order from there.
  • Convenience: Shop online and receive it at your home.. especially if free shipping is offered
  • Availability: Actually a lot of the items bought online are because they are not available at a near local store.
  • Time Constraints: Not everyone has time in their day to go shopping, especially if they can wait for the item to arrive.

WHY DO CUSTOMERS SHOP AT BRICK & MORTAR ?

  • Shopping Experience: People still like to actually SHOP. They enjoy the process of browsing stores and trying items on and spending some time at a cafe in the mall.
  • Fitting: A lot of items are still better shopped only after they have been tried on. Not everyone will be confident buying without trying.
  •  More Info Needed: For some purchases customers still need assistance from store staff to get more info on the product and its features.
  • Returns: Just as much as returns can be a hassle for online retailers it is also for customers. They don’t want to go through the lengthy process of shipping the item back and not knowing when they will get their money back. Some retailers also impose a re-stocking fee for returns or customer has to pay for shipping it back (for international orders for e.g).
  • Instant Availability: Not everyone is willing to wait for a 3-5 business days shipping.

COST OF CUSTOMER ACQUISITION

Since marketing costs for online retail businesses is typically higher than brick & mortars, the cost of customer acquisition (CAC) is higher.

To calculate CAC for a campaign, you simply divide the total cost of this campaign by the number of new customers you have acquired from this campaign. This is easy to track online vs. at brick & mortar stores because there are a lot of tools that let you track the online ad all the way to the checkout page.

Example

 

You spent 300$ on a Facebook or Google Ad and it resulted in 150 clicks to your website. Out of these 150 visitors 6% have converted and bought. That’s 9 customers.

Out of the 9 customers 7 were first-time buyers and 2 were people who bought from you before.

CAC = 300 ÷ 7 = 42.85$ 

This means you have spent 42.85$ to acquire each of those new customers.

This is important to understand, because on the long term the health of your business, and also its ROI, will depend on how much you can get out of each customer throughout their lifetime (aka Customer LTV). 

Read More: Customer Lifetime Value

The initial high costs of acquisition can be justifiable if you are expecting your customers to be returning customers that come to you over & over again to buy your products. 

If on the other hand your business has a high churning rate, due to product issues or even due to the product itself being a fad, this could be detrimental for your business on the long run. It means you pay huge amount to get customers to your website and they only buy once or twice and never return again. 

The economics of such a business might actually never work.

In fact this has been the case for many drop-shipping online sellers, where they pay huge amount on Facebook ads and after paying all the expenses to their suppliers they turn out to be actually losing money on every product they sell. 

The fact that these products were not their own products and are being sold by many different sellers online using the same model and without any differentiation, meant that the probability of the same customer coming back was also very low.

Many online companies don’t mind losing money initially on the first sale, but that’s because they know (from calculations) that they will retrieve this money over the next 3-5 years from customer purchases or subscriptions.

All this should be taken into consideration before venturing online by calculating the costs and future expected returns and seeing if the numbers work.

CHAPTER 04

Verdict

We come to the conclusion of our guide and want to help you reach a verdict

We will be answering:

  • Why should I open a brick & mortar?
  • Why should I open an online store?

BRICK & MORTAR RETAIL VS. ONLINE

SHOULD I OPEN A BRICK AND MORTAR STORE?

If you open a brick & mortar store you can benefit from the below

  • More organic traffic
  • More trust & less friction
  • Less marketing costs
  • Higher sales volume
  • Reaching certain demographics that prefer buying in store
  • Can still easily expand online and fulfill from the store

SHOULD I OPEN AN ONLINE STORE?

If you open an online store you can benefit from the below

  • Lower initial setup costs & faster startup
  • Lower operating costs
  • Reaching customers out of your geographic location
  • Reaching certain demographics that prefer buying online
  • Requiring less inventory

FINAL THOUGHTS

Shopping at brick & mortar retail vs. online retail stores is not an either/or process. We all utilize both options for fulfilling our shopping needs and alternate between them based on some of the factors we mentioned here.

Maybe this is why pure brick & mortar players started getting online, while pure e-commerce players started getting physical locations. Basically because they realized they need both.

Recently when our stores were closed due to Covid-19 lockdown, e-commerce served as a rescue for us to get some revenue. However; the interesting fact was that, even with no other options being available to order other than online, sales through our e-commerce stores were no way close to our brick & mortar numbers. 

The real reason brick & mortar has been suffering lately is because it has over-expanded over the years, opening more and more locations every year and getting thinner profit margins due to cannibalization.

Then when e-commerce started attracting more customers and eating at the market share of brick & mortar retail, the decline in revenue started making a lot of those barely profitable locations drift deeply into losses.

The need has come for those businesses to consolidate and serve customers from fewer locations, especially that those same businesses can now have online presence as well and serve more customers through omni-channel.

Read our step-by-step guide on how to take your brick and mortar business online and sell through both channels, using the same inventory, at no additional costs.

FROM OUR PARTNERS

Square POS Software

Square Point of Sale

Disclaimer: This is an affiliate link

Bottom
Line

As we have seen here, moving your business online can be beneficial for your brick & mortar business in terms of capturing more market share and delivering a better experience for your customers.

However; before making the move online you need to assess all the costs associated with such a move and whether or not the additional channel revenue will cover these costs.