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Bricks versus Clicks: Which Retail Channel is most efficient?

Bill Wheaton | February 2019 

There is no end to questions and debate about the movement of sales from traditional stores over to the Internet. The internet seems to offer greater product choice than traditional shopping, while the latter still provides “experience” and the personal inspection of goods. In the end it may boil down to who can get the good into consumer’s hand the most cheaply. Recently, we have been engaged in research to examine the cost structure of traditional retailers versus “Etailers” to try and answer this question. Let me try to summarize what we learned

We began with the publicly available 10K data base for 2017 and obtained information for 122 firms – all of whom are in the various “retail” NAIC industrial categories. These ranged from pure-play internet companies (Land’s End) to purely traditional store retailers (Coach). We restricted ourselves to US operations only and pulled data on total sales revenue and the share of those sales obtained from internet operations. We were surprised to find many companies now using both venues.In fact 40% of the surveyed retailers were getting more than 10% of their sales from the internet, but less than 60%.  We also extracted the total number of workers employed and square feet owned or rented of both store and distribution space. Finally the 10k data report cost of goods and EBITA.

Making some reasonable assumptions we were able to estimate the share of firm revenue that went to: Cost of Goods, labor, space, other expenses and EBITA. This is detailed in the footnotes accompanying the Table below. Our questions were very straight forward: how do firms selling through the internet differ in their costs and profitability from firms selling mainly through the traditional store venue. More generally, as firms migrate sales from stores over to an internet platform what happens to their cost structure. Of course we engaged in lots of statistical modeling, but here we simply divide the sample into firms getting less than 10% of their revenue from internet sales (63) and firms now getting more than 60% of their revenue from this new venue (11). The cost components are all reported as a % of revenue so each row adds across columns to approximately one.


Internet % ^5 COG¹ Labor costs² Space costs³ Other costs ^4 EBITA # firms
<10%  .62  .11       .12 .11  .05   63/122
>60%  .67   .05    .04 .23 .02  11/122
  1. Cost of Goods. All items expressed as a share of firm revenue
2. Based on sample average wage of $18,500 x firm workers/sales
3. Based on annual rent of $10 x distribution space/sales + $20 x store space/sales
4. Estimated as a residual from other columns
5. Internet based sales as a share of total revenue


As any retailer knows, generally 2/3 of each sales dollar goes to acquiring the good from a wide range of global producers. Interestingly, both traditional retailers and Etailers spend the same share of revenue getting goods (the difference is not statistically significant). At the other end of the accounting ledger is EBITA, and here also both types of firms are equally profitable. With a lot of firm variance in EBITA, the difference between 2% and 5% in one year is again not statistically significant. What is different is what happens in between. Traditional retailers spend 23% of sales revenue on labor and bricks while Etailers spend only 9%. This is a huge difference in costs and very significant statistically. On the other hand Etailers spend a whopping 23% on “other’ costs (derived as a residual), while traditional store-based firms spend only 11. This difference again is both economically meaningful and statistically significant. After some digging in other data sources it looks like most of the difference in this “other” category is due to shipping costs (which are not separately reported in 10k data). Regardless of whether the consumer pays an additional fee for shipping or not, it is billed through the Etailer and embedded into the cost (and revenue) of their business. So the additional shipping expenses for Etailers appear to offset their much greater cost efficiency in terms of workers and space.  

In the end, while traditional retailers and Etailers have quite different cost components, the combined costs of getting goods on shelves is about the same as getting the good to the consumer’s doorstep. But of course getting goods onto shelves is NOT the same at getting them into consumer hands. The “last mile” delivery cost for Etailers is part of their reported revenue and expenses, but the time and money of consumer trips to the store are not part of traditional retail accounting!

To get a better handle on consumer-incurred last mile costs, we turn to the NHTS data in which individuals keep detailed records of their monthly travel. To estimate the average of such shopping trip costs we can rely on the most recent 2017 survey. This shows that the average household spends 20% of its total Vehicle Miles Traveled making 450 trips whose purpose is “shopping/errands”. The average (round trip) distance of these trips is 7.2 miles. This travel covers both local food store trips as well as longer excursions to say regional malls. The NHTS also estimates the full money and time costs of travel at $.80 per mile – suggesting that an average shopping trip cost of $5.70 should be added to the price of goods purchased on that trip. How large is that purchase? In 2016 the BLS reports average household expenditure on all goods, as approximately $11,500 annually. When spread out over the average 450 shopping trips this creates an average purchase value of about $25.00 per trip. In other words we need to add 22% to store purchases to get those goods into consumer hands, while the Etailer already includes that.   

The internet is still relatively young and firms using it are evolving every day. As of 2017, the costs to an Etailer of getting a good to your doorstep seem quite similar to the cost for a traditional retailer of putting that same good on a shelf. Getting that good from the shelf into consumer hands however, costs an extra 22%.

READ Bill Wheaton’s related working paper: Bricks or Clicks? The Efficiency of Alternative Retail Channels