How Realistic is an Online Store as an Add-On to a Retail Store?

In the struggle between "Pure-Play" Web-only e-tailers and the established Brick-and-Mortar retailers (sometimes called "Click-and-Mortar" stores) are now going online in earnest and seem to be gaining.

Advantages of Click-and-Mortar Retailers

National retail chains now seem to be taking to the Web, but for the longest time they were biding their time. National retailers have several advantages:

• A recognizable national brand. They don't have to build their brand from scratch like Web-only companies. They already possess built-in trust and customer loyalty.
• An established company. For national retailers, the Web is not a make-it-or-break-it proposition. They have the capital to continue until it becomes profitable.
• Excellent customer service. If national retailers can deliver customer service to online customers in their retail stores, they can offer a level of service that Web-only e-tailers are unable to reproduce.

But national retailers have some struggles, too.

• Learning curve. Retail is a lot different from e-tailing, which is essentially a mail order catalog business. National retailers have to master an entirely new kind of business in order to succeed.
• Logistics are different. Most retail chains are set up to distribute products from warehouses to stores in pallet size loads. E-tailing requires distributing products to end-users in package-size containers. Very different!
• Expensive servers and software. National retailers don't have the luxury of starting small with outsourced e-commerce hosting. They are working on such a large scale that they need to go to the expense of building a system that will take a lot of traffic without failure.
• Integration. Integrating Internet customer, inventory, and product databases with existing company databases is complex and expensive. But without integration, much of the power the system is capable of can't be realized.
• Investment costs. Many national retailers have found they must form separate companies for their online incarnations for two reasons. First, the personnel need different skills and a different mindset than traditional retailers. Second, investment in a separate company can be treated for accounting purposes as a capital investment rather than an operating loss.

Advantages of Pure-Play E-Tailers

Pure-play, Web-only e-tailers have some advantages, too, such as:

• Flexibility. They are small enough to learn quickly and make necessary changes.
• Understanding. They live and breathe the Internet, working in their own medium.
• Costs. Pure-play e-tailers aren't burdened with huge capital investments in prime location real estate and buildings. If they can keep costs down, they can compete successfully with their established competitors.

But it is becoming clear that there are many disadvantages. To name a couple:

• Branding. Pure-plays must spend a great deal of money paying for brand recognition that click-and-mortar businesses already possess.
• Funding. Many pure-play e-tailers have gone through their first and second rounds of funding, and still aren't profitable, so further funding is drying up.

Advantages of Mom and Pop Click-and-Mortar Businesses

I think that Mom and Pop retailers have an excellent chance of profiting from adding an e-commerce department to their existing retail operation. Advantages are:

• Start-up costs. Initial costs are relatively low. E-commerce hosting can be outsourced. The main expense is creating a product database with full product information and product photos to be uploaded to the online store.
• Inventory. Since the Mom and Pop store already carries the products in stock, it can sell from the same inventory it manages for its retail business.
• Customer Service. Since inventory and shipping are done in-house, customer service can be quick, efficient, and personal. A telephone can be installed to reach an employee that is assigned part-time, and later full-time, to the e-commerce department.
• Shipping. Shipping will be a new operation for a retailer, but a relatively small shipping operation can be conducted with part-time help from the back room of a retail shop.

I believe that a Mom-and-Pop retailer can add 10% to 30% to annual revenue from an online store rather easily so that profits show up quickly. The biggest challenge I see is growth. If the online department flourishes, it will outgrow the existing brick-and-mortar location, along with most of the built-in advantages that come with it. A new location, new employees, new accounting and inventory programs, etc. must be set up, cutting into profitability. So long as the online department is relatively small, it can be a rather easy, low risk, and profitable addition to the overall business.