O2O lifts profits, even offline sales

Online-to-offline (O2O) channels offer innovative ways to order daily products and services online (via apps) and have them delivered fast offline. Enjoying rising popularity among consumers, the global pandemic saw their growth accelerating. Delivery Hero, the world’s largest food delivery app, saw orders double, while Instacart added 300,000 workers in eight weeks. In BrandZ’ 2020 global brand rankings, Meituan is a top ten raiser, increasing its brand value by 27% to $24B, having evolved into ‘a one-stop O2O super app that people use to navigate everyday life tasks’.  The rise of delivery services like Meituan and Alibaba’s Ele.me (‘Are you hungry?’, shown below with video at https://www.alizila.com/video/what-is-ele-me/) also drove the boom in O2O retail, expected to grow 57 % in China during 2020, according to Kantar.  https://www.kantar.com/campaigns/brandz/global/

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But do service providers benefit from joining such O2O platforms? That’s the question in my 2020 Journal of Interactive Marketing paper with Zhang and Peng, freely available at http://marketingandmetrics.com/the-impact-of-adding-online-to-offline-channels-on-firms-offline-and-total-revenues/. Because O2O represents an independent sales channel, its introduction could cannibalize offline by giving customers an appealing alternative to purchase from physical stores. However, the offline channel may also benefit from spillover effects, due to a geographically larger customer base and enhanced brand equity. Likewise, profits could increase or decrease, reflecting scale and cost efficiencies versus increased competition and margin cannibalization. To investigate the net effect, we collected time series data from a Chinese restaurant chain with 35 physical stores that joins four food delivery O2O channels: Baidu, Ele.me, Meituan and Tencent. We find that adding O2O channels hurts offline and total profits in the short run but improves offline and total sales and profits in the long run. Specifically, long run offline and total sales increase by 23% and 33%, respectively. However, we do observe a negative interaction from joining multiple O2O channels: being available on both Ele.me and Meituan yields less profits than the sum of their separate effects.

TLDR; the O2O channel can serve as a complement, rather than a substitute, for the offline channel. Our results challenge common wisdom on the cannibalization of sales from adding (pure) online or offline channels and highlight the attractiveness of O2O channels for improving sales and profits. However, be careful when adding several O2O channels, as they cannibalize from each other in your sales and profit lift. Thus, it is important you ‘measure what matters’ as covered in my metrics posts , e.g. https://analyticdashboards.wordpress.com/2018/07/14/do-you-measure-what-matters/ Depending on your sources of offline and O2O sales (see below), your results may vary.

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Looking forward, we agree with Kantar that ‘the O2O transition is not completed, because Covid-19 is changing shopping habits’. Over a quarter of households shopped online for groceries for the first time during the pandemic. Among people selecting home delivery, 60% percent were first-timers, shopping at Amazon, Costco, Target and Walmart. Beyond groceries, Home Depot changed its tagline from “More saving. More doing” to “How doers get more done.” to highlight O2O improvements, including an app that includes augmented reality capability and in-store product-locator maps. Hence, we predict O2O adoption to become even broader and affect more industries in the future. How about yours?

2 thoughts on “O2O lifts profits, even offline sales

  1. Thanks! No time to read the full paper yet, but will get to it in the weekend. Curious about the COVID19 changes: does the ‘tide lift all boats’ or do some competitors benefit more than others?

  2. Pingback: O2O lifts profits, even offline sales – Marketing And Metrics

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