Both models have their own set of pros and cons, but I am interested to know which one is more suitable and why.
Good Morning Hunny: Your question is especially relevant in light of the change in the business model for Walmart. It was just reported that their e-business is growing faster than their inventory based model for the stores. I am not very familiar with their business model, but obviously the shift in the populations shopping preferences, has not gone unnoticed by Walmart. The demographics for Walmart tend to indicate the consumers are price conscious and looking for quality at the same time. Consumer preferences are changing in this country, which can have a ripple effect throughout the global marketplace. I have not seen any statistics on the growth of e-commerce as a a function of GDP. Most of the literature on e-commerce indicates a growing market, but the high return rates of products sold through e-commerce, would tend to indicate there still remains a preference by consumers to 'touch and feel' certain types of products- especially clothing. More durable products such as electronics and mechanical products indicate a much lower return rate. Another factor in the differences between the inventory and e-commerce models is the financial and accounting impact on the two models. E-commerce products can have a return rate as high as 30-35% as opposed to 7-10% for brick-and-mortar stores, but the brick-and-mortar stores have higher operating cost, i.e.; inventory carrying cost, facility costs, etc., therefore a higher product cost. To try and answer your question, of which is more suitable, it all depends on the strategy implemented for sustainment and growth for the organization. For certain types of products, the brick-and-mortar store-front will continue to be an important element in the organizations business model, but e-commerce is a growing consumer preferred way to save money on come types of products due to the lower prices due to lower operating cost of those products. I hope this helps a little.
Yes it definitely add a new perspective to my thinking. But it give rise to another question....
I have read that in some cases online retailers buys products and hold inventories since in this case it commands margins of 25 -30% on sales but in case it just holds third party product information it commands margin of only 8-10% on sales.... so are the existing retailers like walmart are better placed in terms of generating higher profits from online business than the pure play online retailers.
Whats your thought on the above.
Hunny: My apologoes for no responding sooner, but have been putting the finishing touches on my dissertation and getting it through the SMR and the IRB. That has been accomplished. Now to your question regarding e-retailers buying products and having inventories of high margin products. While not always true, many high margin products fall into the perishable type products such as fashion products. These type products can have a very short life cycle which can account for the high margins these products have. Electronics is another product category that may have a high margin initially due to the "Gee Whiz" factor such as the new Apple iPhone 6. Over 12 million were sold in the first week and customers were willing to pay full retail cost just to get one. There are other phones that provide a means of communicating at a much lower cost, but they don't have the functionality and the 'bells and whistles' that the 'techno-geeks' demand. Electronics generally have a shorter product life cycle that do durable goods such as household appliances. In the case of e-retailers, they do not have the operating cost that a brick-and-mortar retailer will have, so they can contract with the manufacturer for much lower unit pricing. Now if the e-retailer is holding inventory, that increases their cost which has to be passed on to the customer. Walmart has such bargaining power with manufacturers, that manufacturers cut their profit margins to get the volume that Walmart offers. Walmart in turn sets a lower margin and lets the volume of products sold provide the profit levels that have been set. Walmart is very aggressive with manufacturers and their pricing. I do not have intimate knowledge of Walmart's business model, but I have done a lot of research on the company. Consumer products such as food, health, and beauty products normally have lower margins and depend on sales volume for profitability. There are other product lines that Walmart carries that command higher margins due to higher procurement cost such as high end electronics. You might also consider that Walmart has just announced that their new online shopping network, is experiencing very high volume. US customers are shifting more and more to online shopping and Walmart is satisfying that need. There are many factors that must be considered when product margins are set. You might want to find some case studies that have been conducted on Walmart then compare them with Amazon.com and see how these two giants operate and are at the top of their game. Good luck.
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