Distance matters ... or not

In Indiana Jones and the Last Crusade, Dr. Elsa Schneider, played by Alison Doody, cries out, "I can reach it…I can reach it," as she tries to grab the Holy Grail before she falls to her death. Similarly, the success of companies such as Amazon had convinced pundits and other online retailers that they could indeed "reach it," and that it was distance that was dead in the age of the internet. The hope was that a customer looking for a product in Des Moines could access the vast catalogue that was the Internet and then place the order from an online merchant who shipped the product from Delhi; the age of "disintermediation" was to be upon us. Certainly there have been sectors where this has been true. No longer does one need to pull out a heavy volume of the Encyclopedia Britannica, dust it off and flip through the pages to find information on a country or an arachnid. Rather, one goes to Wikipedia and places one's trust in the vast populace of unknown individuals feeding us information on said country or arachnid. Gone are the Britannica salespeople tasked with convincing us to buy the Connoisseur binding (in red or blue morocco leather) rather than the lower-level classic brown or full-leather bindings.

As a recent article by Schumpeter (Adrian Wooldridge, the management editor) in The Economist points out, however, the declaration of the death of distance appears premature. The article makes two important yet distinct points. The first is that even within the online world distance matters - i.e., consumers prefer to order products from closer locations than far away ones. The second is that brick-and-mortar stores continue to flourish even in the presence of online competition.

What really caught my eye in the same issue of The Economist was an article on grocery retailing in India, entitled "A Long way from the Supermarket." The essential idea behind this story was that the little mom and pop stores in India continue to survive even with the emergence of larger supermarkets. So while several large industrial houses have made the retail push, including the Ambanis, the Biyanis, the Birlas and the Tatas, among others, most households seem content to procure their dry groceries as well as fresh produce from their friendly neighbourhood shopwallah.

Both the above articles point to the functions that we expect our distribution channels to perform and how well we believe that these various alternatives help us with those service requirements. One typically thinks of supermarkets as essentially competing along the dimensions of price, distance and assortment. The usual argument for why one might prefer travelling a longer distance to a supermarket is that one can get access to a wider assortment at a lower price than at the neighbourhood store. As The Economist correctly points out, this is not necessarily true in India. First, the assortment is not always wider at the supermarket. The local shop is better able to match the needs of the neighbourhood consumers than is a supermarket that caters to several such neighbourhoods. Second, India has long been a country where the MRP (maximum retail price) has been religiously adhered to so the amount of variation in price across stores has not been that large (this is, of course, changing now). So the article puts the reduction in price at about 3-4 per cent from visiting the supermarket. Trade this off against the "costs" of travelling to a supermarket and one might very well decide that the trip is not worth it.

There are two critical channel functions that the local stores provide - the first is free delivery. Regardless of the basket size, local shops usually have an employee at their beck and call who moves goods and payment between the store and the customer's residence. A second critical function is that of credit provision. Customers routinely accumulate purchases during the month and pay the shop at the time when salaries are received at the end of the month. However, when the vast majority of transactions are in cash, the credit facility provides a tangible benefit to the customer.

The author is Pradeep Chintagunta, Joseph T and Bernice S Lewis Distinguished Service Professor of Marketing, University of Chicago Booth School of Business.
Re-printed with permission.
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