Debunking a Myth: Will Online Product Expansion Shrink In-Store Sales?

Product cannibalization is a common topic amongst our retail partners when we discuss assortment expansion via drop-ship and marketplace. There’s a misconception that by surfacing more items online from supplier brand partners it will potentially impact sales of owned inventory in a negative way. In our experience, this is rarely a concern as long as there's thoughtful approach given to adding products and in strategic alignment with drop-ship and marketplace partners. In fact, expanding product assortments or adding new categories generally lifts sales on all products, no matter the channel, due to:

• increased site traffic via more positive search results from surfacing a broader assortment;
• offering more products that shoppers want, which tends to increase cart sizes; and
• providing more resilience against out-of-stock situations by having access to suppliers’ stock (i.e., saving a sale when a shopper may have gone elsewhere due to an out-of-stock).

Below, we take a closer look at how well-executed and strategic marketplace and drop-ship programs can complement — not cannibalize — store assortment.

Increased Traffic

There's a significant online traffic benefit to broadening your product assortment. Marketplace and drop-ship products tend to sell at a lower velocity than owned SKUs, but they're likely to increase overall traffic and conversion as the shopper can find everything they need in a single cart.

Merchant Strategy Alignment and Item Selection

Retailers have varying approaches to marketplace/drop-ship item approval, and how they structure their store and online merchandising teams. Regardless of the team structure, the retailer’s online merchants should ensure that the assortment expansion strategy is aligned and consistent between store, online, owned and marketplace/drop-ship e-commerce. If this process is working, and online merchants are aligned with store merchant assortment and item selection strategies, drop-ship and marketplace can complement the store assortment.

Site Search and Placement

Retailers will commonly prioritize their owned inventory in search results over drop-ship and marketplace items to ensure key items continue to get premium placement. It’s important to ensure the site search experience keeps up with assortment expansion. On the long-tail side, item attribution and product content quality need to be sufficient enough to ensure open, easily accessible browsing paths to niche parts of the assortment.

Test and Learn Enables Channel Flexibility

If customers are picking a marketplace/drop-ship item over a stocked item, even with preferential site placement for stocked key items, this helps inform future stocking decisions and can be a valuable lens into consumer preference. If the marketplace/drop-ship program is operating well, items can be promoted into owned inventory fulfillment due to strong performance. Conversely, there could be opportunities to move less productive stocked items to drop-ship or marketplace.

Profitability is Far More of a Challenge Than Cannibalization

Having the right approval and curation process as well as strategy alignment to ensure the marketplace/drop-ship assortment can be profitable given returns, shipping and other operational expenses is critical to success. If the retailer has clear margin objectives for the online assortment, whether the consumer orders an owned product or a drop-ship/marketplace product, it should be a win either way. The focus should be on maximizing profitability while giving customers the best selection and convenience.

Pro tip: Keep in mind that profitability is hard to compare apples-to-apples with store items. There's no inventory investment or risk with drop-ship or marketplace, there's no shrink, and there's no need for markdowns/liquidations with the possible exception of returns. Damage and transportation cost factor more heavily into drop-ship/marketplace economics than store economics.

Customers Expect a Consistent Store and Digital Experience

To create a true omnichannel experience and maximize the benefits of a marketplace/drop-ship program, both store and online experiences need to complement each other. The importance of the online browsing experience is amplified as the assortment expands. Cannibalization or channel conflict is a symptom of poor omnichannel execution, and an outcome that can be avoided with a cohesive store and online strategy.

Consider this myth busted.

Matt Mallouk is vice president, client partnerships at CommerceHub, a provider of cloud-based e-commerce fulfillment and marketing solutions for large retailers, marketplaces, consumer brands and their suppliers.