Growth and Change

Vol. 34 No. 4 (Fall 2003), pp. 415-432

E-commerce, Transportation,
and Economic Geography
WILLIAM P. ANDERSON, LATA CHATTERJEE,
AND T.R. LAKSHMANAN

ABSTRACT This paper explores possible ways in which growth in Internet retailing (e-
retailing) may affect the spatial distribution of economic activities. After a brief overview of e-
retailing, a categorization of possible spatial impacts is introduced. These include impacts on the
retail industry, such as substitution of e-retail for brick-and-mortar retail, impacts on transporta-
tion, such as substitution of freight transportation for personal transportation in goods delivery,
and pervasive impacts that affect the whole economy. The latter category includes uniform deliv-
ered pricing, spatial leveling of accessibility, and marketing strategies that target individuals rather
than regions. The question of whether e-retailing and brick-and-mortar retailing are truly substi-
tutes is taken up in the next section, along with potential implications of multi-channel retailing.
The final section of the paper defines some critical research directions.

Introduction

E -commerce, even under the most radical scenarios, will not make geography irrele-
vant. So long as goods must be delivered and complementary face-to-face interac-
tions are stimulated by online interactions, distance will still matter. E-commerce may,
however, have a significant effect on the spatial distribution of economic activities. Broadly
speaking, the locational choices of firms and households depend on spatial patterns of
accessibility. To the extent that e-commerce alters patterns of accessibility it will affect
location choices. The questions are how and by how much.
The goal of this paper is to suggest a number of ways in which growth in e-commerce
may affect the spatial pattern of economic activities. The focus will be on the business-to-
consumer (B2C) segment of e-commerce, with particular emphasis on e-retailing. There
are two reasons for this focus. The first is that e-retailing has the potential to affect the
spatial choices of both firms and households. The second is that with the exception of
goods such as airline tickets, musical recordings, and publications, which can be

William P. Anderson and Lata Chatterjee are both professors of geography at Boston
University and members of the Boston University Center for Transportation Studies. Dr.
Andersons email address is bander@bu.edu. T.R. Lakshmanan is a professor of geogra-
phy and director of the Boston University Center for Transportation Studies.

Submitted Nov. 2002, revised June 2003.

2003 Gatton College of Business and Economics, University of Kentucky.
Published by Blackwell Publishing, 350 Main Street, Malden MA 02148 US
and 9600 Garsington Road, Oxford OX4, 2DQ, UK.
416 GROWTH AND CHANGE, FALL 2003

exchanged in a digital form, retailing requires the exchange of physical goods. Therefore,
some form of transportation is required to complete the transaction. However, the type of
transportation required is very different from conventional retail. Given the role that trans-
portation plays in interconnecting the locational choices of firms and households, the
difference may have profound implications for economic geography.
The remainder of the paper is organized as follows: The next section provides an
overview of e-commerce, with particular emphasis on retail. This is followed by a section
that discusses potential changes in transportation and the location of firms and households
that may arise with increasing penetration of electronic retailing. These include changes
to the retail and transportation industries as well as more pervasive impacts that spread
throughout the economy. The next section addresses an important question that arises in
this discussion: Are electronic retailing and brick-and-mortar (B&M) retailing truly sub-
stitutes? It is argued here that multi-channel retail strategies integrating B2C and B&M
are likely to be increasingly important and that these strategies will have their own spatial
implications. Finally, some important directions for further research are outlined.

E-retailing
In conventional goods retailing, a household member travels to a store (usually in a
car) looking for a particular item. The choice of the store may be based on personal expe-
rience, advertising, or interpersonal communication with other shoppers. At the store, the
shopper can browse through goods on display and will probably interact with one or more
store employees to gain information needed to make a final choice and to complete the
transaction. In most cases the shopper then transports the goods home. If the goods are
large, the store may deliver them to the shoppers home, although some stores will not
deliver outside a certain geographical area or they may charge a premium for longer deliv-
eries. Whether the goods are carried home or delivered, the shopper can generally reduce
transportation costs by shopping at a nearby store.
In the case of electronic retail (hereafter e-retail), the shopper goes to a Web site and
browses through goods displayed via text and graphic information. After making a selec-
tion he pays electronically using a credit card or other form of electronic payment. The
goods are shipped to his home. He may pay a shipping charge or the charge may be bundled
into the price of the goods. It is almost always the case, however, that within broad geo-
graphical rangessuch as the continental United Statesthe price of shipping is not
dependent upon the location of the shoppers home.1 Thus the shopper has no interest in
and in most cases no knowledge ofthe location from which the goods will be shipped.
One can think of any service as a joint production activity involving inputs of capital
and labor by both the producer and the consumer (Lakshmanan 1989). In the case of a
supermarket, the producer provides the transportation required to assemble the goods at
the store and the capital and labor required to display, maintain, and restock the goods and
to execute transactions. The consumer provides the labor involved in selecting an order of
goods and the capital and labor to transport the goods home. Thus a shift from conven-
tional retail to e-retail entails a significant reduction in the consumers time and capital
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 417

Manufacturer

Distribution
Manufacturer Center

Manufacturer

Store Store

customers

freight transportation

personal transportation

FIGURE 1A. BRICK-AND-MORTAR RETAILING.

inputs. Figures 1a and 1b depict the change in the structure of transportation and com-
munications between B&M retail and e-retail. Note that in Figure 1b, personal trans-
portation has been eliminated entirely.
To achieve this reduction in effort, the consumer has to make some sacrifices. First,
she may have to pay a shipping and handling charge. Also, the consumer may have a nar-
rower base of information upon which to make selections. Goods for which a rich base of
information can be provided in a digital format are most adaptive to e-commerce. For
goods such as books and music CDs, the information that can be provided on a Web site
(customer reviews, sample pages, sound clips) may be richer than what can be obtained
in most stores. For others, such as a head of lettuce or a cashmere sweater, the quality of
the good cannot be fully appreciated via digital channels. Not surprisingly then, market
penetration of retailing has been higher in books and music than in groceries and cloth-
ing (Ellis-Chadwick et al. 2002). Finally, the consumer may be forgoing some utility that
is derived from the act of shopping itself.
At first blush, a system whereby goods are delivered directly to the consumers door
(Figure 1b) may seem an expensive proposition. In many cases, however, total distribution
418 GROWTH AND CHANGE, FALL 2003

Manufacturer

Distribution
Manufacturer Center

Manufacturer

customers

freight transportation

electronic communication

FIGURE 1B. E-RETAILING.

costs are lower under an e-commerce model. Transport costs are balanced by the savings
in labor costs associated with sales and maintenance in a B&M retail environment, reduc-
tion in theft (up to 3 percent in some stores), and savings in rent arising both because
goods can be stored at higher densities and because distribution centers can be in low-rent,
peripheral locations (Borenstein and Saloner 2001). Furthermore, e-commerce retailers are
generally able to achieve much higher rates of turnovers, and thereby lower inventory car-
rying costs, than B&M retailers. When the reduction in the cost of consumer transporta-
tion is considered, the relative efficiency of e-retailing looks even better. Despite this, most
categories of e-retailing including books and music have not been profitable, or have only
become profitable after several years of operation (Silverstien, Stranger, and Abdelmissih
2001).
Another mechanism for cost reduction through e-retailing is the process of disinter-
mediation, whereby intermediaries such as regional distributors and B&M retailers are
eliminated from the chain of exchange between producers and consumers (Bakos 2001).
The extreme case is the direct-to-customer model, whereby all intermediaries between
manufacturer and seller are eliminated (Weill and Vitale 2001). This model is attractive to
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 419

manufacturers in part because of their shifting power relationships with B&M retailers.
Concentration in the retail sector has allowed chains like Wal-Mart to practice power
buying, which effectively reduces manufacturers margins (Gunasekaran et al. 2002). Fur-
thermore, direct-to-customer sales facilitate adoption of a demand-driven production
system whereby production of individual units is postponed until the customer defines the
specific product configuration. This approach, known as mass customization, saves both
inventory costs and the cost of disposing of unwanted configurations at reduced prices.
The most notable practitioner of the direct-to-customer model is Dell, Inc., but it can also
be practiced at the other end of the size spectrum by small producers of hand-crafted
goods.2
In order to expose Web sites to more eyes, however, a process of reintermediation,
whereby e-retailers pay content aggregators like Yahoo.com to steer customers to their Web
sites, may be needed (Bakos 2001). Massive content aggregators like eBay.com and
Half.com who match very large numbers of vendors directly with potential customers elim-
inate the need for small-scale e-retail businesses to maintain their own Web sites.
There are striking similarities between e-retailing and mail-order catalogue retailing,
which is actually an older form of retailing in the U.S. than department stores or discount
stores. Like mail order, e-retail has the ability to provide a very large variety of goods to
a national rather than regional market. Also, both forms of retailing involve a complex
process of order fulfillment involving timely package delivery.3 However, there are also a
couple of important differences. The first is that the Web site is a much more efficient
means of conveying information. The volume of information in a Web site such as
Amazon.com would fill a number of thick paper volumes. More importantly, search func-
tions and other capabilities make it much easier for the shopper to find the goods he is
interested in and the kind of information he needs to help him make a decision, including
customer reviews, recent sales information, and structured comparisons with similar
goods. Reduction in search costs allows consumers to find what they want and compare
prices more effectively.4
A second difference is that e-retailers are able to capture a great deal of information
to be used in the construction of user profiles. Since all elements of an exchange transac-
tion are recorded in a digital format they may be easily and cheaply stored for later use.
The e-retailer builds up a profile of preferences for each consumer based on prior pur-
chases. Even search behavior by the consumer can be used to enhance this profile. In con-
ventional retail where such information is conveyed face-to-face, or in mail order where
it is conveyed on written forms or over the phone, the information is for the most part lost
after the transaction occurs. By maintaining databases of such information, the e-retailer
is able to generate a custom marketing program specific to each customer. In much of the
business literature, this ability to capture information about specific consumers and use it
for effective marketingreferred to as owning the customer relationshipis seen as
one of the most critical elements of successful business-to-business (B2B) and B2C e-
commerce (Weill and Vitale 2001).
420 GROWTH AND CHANGE, FALL 2003

Geographical Implications of Increased Penetration of E-Retailing

The question to be addressed in this section is whether increased penetration of e-retail
is likely to have important effects on the spatial configuration of the economy. This includes
the spatial distribution of firms facilities and households residences and the patterns of
spatial interaction, especially those that are manifested by transportation flows. For the
moment the (perhaps naive) assumption will be made that B&M retailing and e-retailing
are always substitutes, so that growth in one leads to relative decline in the other. (The
possibility that there are complementarities between the two will be discussed in a later
section.)
Possible impacts may occur at three different scales: impacts that are limited to the
retail industry, impacts to the entire range of freight and personal transportation activities,
and pervasive impacts that affect nearly all aspects of the spatial economy. Table 1 pres-
ents potential effects on markets and possible spatial implications (discussed below) for
each category of impact.
Industrial impacts. The term industrial impacts refers to changes in the location
of facilities directly involved in the shift from B&M retailing to e-retailing. In this simple
scenario, the level of activity in B&M retailing declines. This has significant implications
since retail is one of the largest categories of employment, especially in metropolitan areas.
The spatial distribution of this employment decline will depend on two things: first, which
segments of the consumer market experience the highest rate of e-retailing penetration,

TABLE 1. POTENTIAL IMPACTS OF A SHIFT TO E-RETAILING.

Category of Potential market effect Possible spatial/regional

impact implication

Retail Decline of B&M Loss of retail employment

Disintermediation
Content aggregation
Transportation Shift from personal to
freight transportation
Scale economies in
freight industries
Ambiguous
environmental
implications
Pervasive Uniform delivered prices
Spatial leveling of
access to variety
Non-spatial marketing
strategies
Concentrated Internet activities
Dispersed fulfillment activities
Large intermodal hub
operations
Impact on infrastructure
and congestion
Exurban residential
location
Rural development (?)
Homogenization in
retail landscape
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 421

and second, which segments of the retail industry will suffer the most direct competition
from e-retail.
One can make two plausible hypotheses. First, that urban populations are most likely
to adopt e-retail because they are better educated and more likely to use the Internet
actively for other purposes, and second, that people in non-metropolitan counties will adopt
most rapidly because they have the most to gain from access to the wide variety of goods
provided on the Internet. If the first hypothesis is correct, B&M retailers in urban areas
will suffer the greatest decline, while if the second is true, the greatest decline will occur
in rural areas or in towns with rural service areas. Perhaps the first hypothesis will prove
true in the short run while the second will prove true in the long run.
The retail segments that compete most directly with e-retailing are likely to experience
the greatest losses. At the moment, that appears to be those segments such as books, music
CDs, computer hardware, and consumer electronics, for which information can be most
efficiently conveyed in digital formats. Ten years ago it might have been said that this
implies that losses will be concentrated in small shops in town centers. However, these
retail sectors have undergone a transformation to very large stores frequently located in
suburban malls or big box centers that would probably have occurred in absence of pen-
etration by e-retailers. The existence of e-retailers may place competitive pressures on
B&M retailers in these lines to stock very large varieties of goods, thus reinforcing this
trend.
On the positive side, as e-retailing and other e-commerce firms grow there will natu-
rally be employment gains in some places. The question is where will these places be?
There has been some useful research on this, much of it published in a recent book edited
by Leinbach and Brunn (2001). Malecki and Gorman (2001) address this question by
looking at the network infrastructure that underlies the Internet. Using conventional
network models borrowed from transportation studies to analyze the system of high
and low bandwidth connections and network access points, they identify a number
of citiesincluding San Francisco, Chicago, Washington, and Dallasthat enjoy superior
connectivity over the Internet. While this is an intriguing analog to the role of transporta-
tion infrastructure, their contention that City nodes that are positioned to take advantage
of increased routing alternatives will continue to enjoy the greatest economic and
network growth associated with the Internet (p. 103) is still in need of empirical
verification.
Network connectivity is not the only, nor is it necessarily the most important, location
factor. Other authors, while recognizing the importance of high bandwidth connections,
stress the importance of human capital associated with Web site development and man-
agement (Moss 1998). This may explain why Boston ranks high in terms of the number
of Internet hosts despite a middling position on the network. For countries or regions
hoping to experience economic growth through e-commerce, some combination of
adequate bandwidth, human capital, innovative culture, and supportive financial, logisti-
cal, and government institutions is needed. (See Coe and Yeung 2001 for the case of
Singapore.)
422 GROWTH AND CHANGE, FALL 2003

A related question is how much scope is there for new centers to attract concentrations
of e-commerce firms? A couple of points suggest that this scope may be limited. First, at
least in the U.S. market there is a high level of industry concentration, with five sites
(Amazon, eBay, Yahoo, AOL, and Buy.com) recently accounting for 75 percent of the B2C
business (Button and Taylor 2001).5 Second, there is evidence that large sites keep their
Internet operations highly concentrated in space. For example, even though Amazon.com
has initiated new sites geared to the UK and German markets, the sites themselves are
hosted from servers located at the Seattle headquarters (Dodge 2001). Thus both industry
concentration and the spatial concentration of Internet activities within firms point to a
large volume of Internet activities in only a few locations. Furthermore, the highly spe-
cific forms of expertise required for these activities suggest the importance of localization
economies leading to first mover advantages.
But Internet activities are not the whole story. Most literature on the location patterns
of e-commerce focuses on high-tech aspects of Web site development and maintenance.
In the case of e-retailing the more mundane functions of order fulfillment may be of com-
parable or greater importance from an employment perspective. While drop-shipping,
whereby goods ordered through an e-retailer are delivered directly from the manufacturer
to the consumer, plays an important and growing role,6 a huge volume of orders are
serviced through massive fulfillment centers. For example, Lands End operates a distri-
bution center in Dodgeville, Wisconsin, which they describe as the size of sixteen
American football fields. Functions may be separated with relative ease in e-commerce,
so fulfillment centers need not be in the same place as Web servers. Given that they are
space intensive and congestion sensitive, exurban locations in the vicinity of interstate
highways may actually be preferred. The most significant attractors for fulfillment centers
may be major hubs of the relatively small number of parcel delivery firms that carry
most of the e-retail shipments, including the UPS hub in St. Louis and the FedEx hub
in Memphis (Chatterjee 2000). And of course these hubs are themselves very large
employers.
Furthermore, fulfillment facilities may be structured as a hub-and-spoke network, with
deliveries from manufacturers coming to a central facility where orders are picked up and
sent in large trucks to regional satellite facilities for shipment to final destinations in
smaller trucks (Ody 2003). This approach, which is being used by a new e-commerce
grocery firm in the UK, reduces shipping costs and also provides a framework for incre-
mental entry into new spatial markets.
The case of mass customization raises a further set of locational issues. When a manu-
facturer bypasses retail intermediaries it has to take on the fulfillment function. It may
serve this function from its production location or it may establish different facilities
specifically for fulfillment. Under a third strategy called just-on-route manufacturing, the
final production stage, where components are assembled according to configurations spec-
ified by individual customers, is shifted from the main manufacturing facility to the
distribution center (Ghiassi and Spera 2003). This may have the effect of dispersing
manufacturing employment.
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 423

Transportation impacts. Outside the retail sector itself, the most obvious impacts of
growth in e-retailing will be on transportation. Put simply, substitution of e-retail for B&M
retail entails a substitution of personal transportation (almost exclusively by car) for freight
transportation of the package delivery variety. A relatively small number of delivery firms
with prior experience in this type of service (in the U.S., UPS, U.S. Postal Service, and
FedEx are the dominant players) have benefited from the rapid growth in both B2C and
B2B e-commerce. Not only has the volume of goods they handle increased, but the range
of services they provide to the e-retailer has expanded as well (Chatterjee 2000). Many
failures in e-retail over the last few years have been in large part the outcome of the fact
that e-retail site developers have placed too much emphasis on site design and marketing
and not enough on the more mundane order fulfillment process (Silverstien, Stranger, and
Abdelmissih 2001). This is one reason why firms with mail-order experience have fared
best of all major groups of e-retail entrants (see below).
Firms such as UPS have taken this problem as an opportunity to add a full range of
logistical services to their package delivery business. The UPS e-logistic Web site begins
with the banner, You take the orders, well take it from there. They offer to completely
manage the fulfillment process including inventory management, delivery, returns, and
even customer service. An important implication is that by outsourcing all order fulfill-
ment functions, new entrants to e-retailing are able to bypass a very significant initial fixed
cost. This may to some extent offset first mover advantages that have led to a high degree
of concentration in the industry.
Most Web sites offer at least two shipping options: a relatively low-cost ground ship-
ping option and a more expensive air freight option. Freight service firms have established
large intermodal hub operations, generally at airports that are not subject to high degrees
of congestion. For example, FedEx established its hub in Memphis, and UPS established
its hub in St. Louis. These hubs represent a high degree of spatial centralization in the
intermodal freight network and are major sources of employment growth in the cities where
they locate.
While it may seem that shipping goods in small quantities to individual consumers
should be more expensive than shipping large quantities to stores, a couple of things
should be kept in mind. First, the main advantage of firms such as UPS and FedEx is that
they operate at sufficiently high volumes to be able to combine shipments between origins
and destinations. Thus, while there are extra costs involved in transferring goods
from small trucks to large trucks on either end, the cost of intercity transportation is rel-
atively low. Second, by shipping in small orders the seller is able to reduce inventory
carrying cost. Companies like Dell, for example, are able to keep inventories very low
through a process of demand-driven production whereby a computer is not assembled until
it is ordered. Any increase in transportation cost is in part offset by savings in inventory
costs.
These changes in the transportation industry have a number of implications. In partic-
ular, the shift from personal transportation delivery of retail goods to freight delivery may
have implications for infrastructure. Frequent movement of relatively heavy vehicles over
424 GROWTH AND CHANGE, FALL 2003

residential streets may lead to increased repair and repaving costs since road wear gener-
ally increases more than proportionately with the weight of the vehicle.
The environmental implications are unclear. In general, transfer of goods delivery from
single occupant vehicles to delivery trucks should yield efficiencies in terms of energy and
emissions (Romm 1999). This is especially true since it is generally easier to integrate
innovations such as natural gas or electric power into vehicle fleets than into individual
cars. But this presupposes that there will be an absolute decline in personal transportation
arising from the substitution of e-retailing for B&M retailing. An equally plausible argu-
ment is that e-retailing leaves the consumer with more time to engage in other activities
that are also transportation intensive.
Pervasive impacts. So far the impacts of increased penetration of e-retailing have
been considered on a limited range of economic activities: e-retailing itself, B&M retail-
ing, freight transportation, and personal transportation for shopping. It is argued that e-
retailing will also have a number of pervasive impacts that will be felt more broadly in the
economy. The focus here is on three, which are not necessarily mutually exclusive and are
almost certainly not exhaustive. Widespread adoption of e-retailing implies:

a regime of uniform delivered pricing in the consumer goods sector

a spatial leveling in the access to variety in goods and services
an approach to marketing that exploits variations across individuals rather than
variations over space.

In conventional retailing, the consumer who comes to the store to purchase goods incurs
a cost in terms of time, fuel, and capital depreciation which is dependent upon the loca-
tion of her home relative to the location of the store. Thus goods are effectively sold on a
mill-price basis. Since e-retailers generally charge geographically invariant shipping costs
within broad economic regions (such as the contiguous United States), the delivered prices
of goods are spatially uniform. This has implications for nearly all location decisions in
the economy.
From the customers perspective, this reduces the attraction that some locations have
over others based on accessibility to B&M shopping facilities. This is not an inconse-
quential point since 12 percent of the average U.S. households budget is spent on trans-
portation7 and 8 percent of the vehicle miles traveled is for shopping purposes. Since this
is roughly comparable to the 10 percent of miles traveled for journey-to-work,8 e-
commerce in principle has a potential to affect residential decisions roughly equivalent to
that of telecommuting. Note that despite the pricing regimes, it will still be more expen-
sive to deliver goods to households who opt for more remote residential locations. There-
fore those consumers will enjoy a cross-subsidy from more centrally located consumers.
From a general equilibrium theoretical perspective, uniform delivered pricing can be
shown to have an important impact on the spatial distribution of the production of differ-
entiated goods. The two-region model of the New Economic Geography posits an economy
with two sectors, an agricultural sector with geographically fixed land and labor inputs and
a differentiated goods sector that is mobile between the two regions. The results of the
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 425

model are that under most circumstances the differentiated goods sector will tend to con-
centrate in one region, leading to a clear urban-rural dichotomy (Fujita et al. 1999).
Kilkenny (1998a) has shown that this result may be softenedthat is substantial differ-
entiated goods production may occur in the rural regionif some measure of urban scale
diseconomies is included and uniform delivered pricing is assumed. Uniform delivered
pricing lowers the cost of living in rural areas and thereby lowers the equilibrium rural
nominal wage relative to the urban nominal wage. This makes it profitable for some pro-
ducers to locate in the rural region.
The second pervasive impact above refers to the fact that e-retail can generally provide
greater varieties of goods to choose from than even the largest B&M stores. Variety plays
an increasingly important role in economic theory these days.9 Especially in affluent soci-
eties it is supposed that a consumers utility can be boosted more effectively by offering
her more variety than by offering her lower prices. The reasoning that utility is increasing
in variety can be presented in either of two ways. First, if utility is marginally diminish-
ing for any individual good then consuming a little of many goods yields more utility that
consuming a lot of a few goods. Second, if there is significant variation in preferences
among customers, offering more variety ensures that each customer will find a good that
is closer to his own preference.
Until recently, one of the factors most often mentioned as favoring urban lifestyles is
the access to enormous variety. E-commerce essentially levels access to variety in con-
sumer goods, although urban areas will almost certainly maintain their advantage in terms
of the variety of services. Thus, e-retailing has the potential to diminish the relative advan-
tage of urban living and could therefore lead to greater residential dispersion. Kilkenny
(1998b) argues that increasing the diversity of amenities available to rural populations is
the best general strategy for stimulating rural development. Access to e-retail and other
amenities over the Internet may therefore promote shifts of population and employment
to exurban areas. The strength of this effect remains an empirical question.
The third pervasive impact mentioned above refers to the critical importance of data
capture and construction of user profiles so that the e-retailer can automatically generate
a marketing program tailored to each individual. Retailers have always relied on experi-
ence to know their customers and therefore purchase goods that will appeal to them and
to market in a way that will capture their attention. For the most part, this was done by
keeping track of what goods sold and what goods didnt in a given location. Multi-store
chains could observe geographical variations in sales of different types of goods to deter-
mine how preferences vary over regions. Even a single store retailer had market knowl-
edge that was geographically based because it applied only to customers in its service area.
E-retailers need not depend on geographical aggregation of market data because they
maintain databases at an individual level. That is not to say that they might not identify
variations in preferences over space, but their marketing strategy is essentially individu-
ally based rather than place based. This may have a couple of implications that are as much
social as economic. First, it suggests a negation of one of the remaining advantages that
local or regional retailers have over national firms: superior knowledge of their own market.
426 GROWTH AND CHANGE, FALL 2003

Second, to the extent that preferences are formed by marketing efforts, a non-
geographically based marketing strategy may contribute to further spatial homogenization
in preferences.

E-retailing and Brick and Mortar: Are They Substitutes?

It was suggested above that the assumption that B&M retailing and e-retailing are
always substitutes might be naive. A lesson can be taken here from the literature on the
relationship between communications and transportation infrastructures and technologies.
Early literature, based on assumptions of a pure substitution relationship between the two,
predicted a massive transition to telecommuting, reduced business travel, and a decline in
some forms of freight. Later, more thoughtful analysis observed that in many cases trans-
portation and communication may be more complements than substitutes (Mokhtarian
1990). A massive shift to telecommuting has been retarded by institutional factors and the
need for face-to-face interaction for more complex functions. Ease of communications has
contributed to increased trade over long distances, which if anything has led to more rather
than less business travel.
E-retail and B&M are at best imperfect substitutes, with the degree of substitution
depending on the quality of information that can be conveyed digitally about the good in
question. Even in book sales, it is likely that there will be some B&M for the foreseeable
future because some high quality books are better appreciated in person and because some
people still derive greater utility from visiting a book store than a Web site. Furthermore,
it is possible that in the future e-retail and B&M retail will serve complementary roles in
multi-channel mass-merchandising strategies.
The firms that have launched serious e-retailing initiatives so far fall into four cate-
gories: pure play start-ups, mail order firms, direct-to-business manufacturers, and brick-
and-mortar retailers. Following the model of Amazon.com, the pure play start-ups have
been the most glamorous and innovative group, although not the most profitable. Mail-
order houses such as Lands End, L.L. Bean, J. Crew, and Columbia House (records) were
for the most part quick to make the transition, taking advantage of an existing customer
base and their expertise in order fulfillment. For manufacturers, growth in e-retailing has
been concentrated in the computer hardware industry where three sitesDell.com,
Apple.com, and Gateway.comaccount for over 50 percent of online revenues, with other
major players (Compaq) as late entrants. With a few exceptions, such as JCpenney.com
and Victoriassecret.com in clothing and Barnesandnoble.com in books, B&M retailers
have not been major players.10
There are a few reasons for the poor performance of B&M retailers, not the least of
which is the conservatism of the established chains. Channel conflict is also an impor-
tant problem both for manufacturers and traditional retailers. In the case of manufactur-
ers, channel conflict arises when retail intermediaries (B&M or e-commerce) are hurt by
a direct-to-customer strategy. Even if a firm believes it can successfully direct-market one
line of goods, it may need to stay in the favor of intermediaries needed to market other
goods. In the case of B&M retail, channel conflict means that the firm may be competing
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 427

against itself by launching an Internet initiative, and such an initiative may set off con-
siderable tensions within the firm.11 Finally, the Internet market has not been highly recep-
tive to B&M firms, which are viewed as stodgy and out-of-touch. For this reason, B&M
retailers such as CompUSA have launched e-commerce initiatives under different names,
and even Barnesandnoble.com makes almost no connection to its B&M side, other than
to provide store locations.
Table 2 shows that of pure plays, catalogue firms, and traditional stores, the pure plays
have been the least profitable (or most unprofitable) while the catalogues are the only group
whose revenues exceed costs. Stores have actually fared better than the pure plays. In the
aftermath of the dot-com stock meltdown, Internet analysts are looking for more conven-
tional business models to exploit the enormous potential of e-retail. A number of these
analysts believe that B&M retail incumbents may have the best chance of achieving prof-
itable growth over the next decade based on integrated retail strategies wherein e-retail and
B&M stores serve complementary roles (Silverstien, Stranger, and Abdelmissih 2001;
Weill and Vitale 2001).12
There are a number of reasons why incumbents may be well placed to make serious
incursions in e-retail. For one thing, they have instant name recognition which is impor-
tant because e-retail requires a measure of trust. Also, given the bitter experience of many
investors with pure play firms, B&M firms may find it easier to raise capitaland the high
level of concentration in e-retail thus far suggests that only substantial investments will
succeed.
What is perhaps more important, however, is that there may be strong complementar-
ities between e-retail operations and existing B&M operations. Despite the fact that cloth-
ing and groceries are more difficult to market digitally than some other lines of goods,
some consultants see them as the retail segments with the largest e-commerce growth
potentials.13 Incumbents may have great advantages in these segments. For example, Tesco,
a nationwide grocery chain in the UK, launched the most successful (in terms of both
market penetration and profitability) online grocery business to date. Among the advan-

TABLE 2. CONTRIBUTION MARGINS (EXCLUDING DEPRECIATION AND OVERHEAD).

All Companies Pure plays Catalogues Stores

Direct cost as percent

of Revenue
*cost of goods sold 76 85 70 82
*fulfillment 10 29 5 22
*customer service 12 8 1 8
*marketing costs 24 119 6 36
Contribution Margin -12% -141% 18% -48%

Source: Silverstien, Stranger, and Abdelmissih 2001.

428 GROWTH AND CHANGE, FALL 2003

tages of incumbency are a high level of trust, which is necessary for any consumer who
is going to allow the grocer to select his produce. Also, by using stores as distribution
centers they were able to keep fulfillment costs lower than start-ups, who would need to
invest in warehouses. (Once Tesco.com reached a sufficient volume of business, dedicated
warehouses were built.) The channel conflict inherent in the possible cannibalization of
conventional customers was outweighed by the opportunity to expand into other lines such
as CDs, books, and videos which could be delivered along with the groceries, giving
Tesco.com a further advantage in fulfillment costs.
A recent event that may tell us something about potential complementarity in the cloth-
ing business is the purchase by Sears (once the largest B&M retailer in the U.S.) of mail-
order and e-retailer Lands End, which until now has not sold its goods through stores. For
Lands End, this gives the customer the opportunity to see, touch, and try on garments in
the store and then with greater confidence purchase the same or similar items either for
herself or as gifts for others through a Web site. For Sears, beside the opportunity of updat-
ing its fashion image, the merger with Lands End will make it possible to make use of
order fulfillment facilities and expertise.
There are other forms of integrated retail strategies now coming to the fore.14 Circuit
City, a large U.S. consumer electronics retailer with both B&M and e-retail channels, gives
consumers purchasing from its Web site the choice to have the goods delivered or to pick
them up at a nearby B&M retail outlet. By choosing the latter option, the consumer saves
shipping costs and will probably be able to get the goods sooner. This option may be prefer-
able to just going to the store, however, because the consumer knows that the goods are
in stock and will not be sold to anyone else before he picks them up. Thus, some of the
uncertainty of conventional shopping is eliminated.
If multi-channel strategies are the wave of the future then the demise of B&M retail
predicted by some will not come to pass, although the total volume of goods sold through
the traditional channel may decline (Burt and Sparks in press). The total floor space of
B&M retail may decline, or at least grow more slowly, but this will not be in direct pro-
portion to the decline in the share of the B&M channel. This is because stores will provide
a service to both channels, therefore the in-store revenue necessary to justify a certain
number of square feet of retail space may become smaller.
Locational shifts may depend on the function the store serves in the multi-channel strat-
egy. For example, in the case of Sears and Lands End, if the store functions principally
as a place to see and try on, urban locations (abandoned by Sears decades ago) may be
favorable because they provide an opportunity for a quick visit combined with a journey-
to-work trip. This may in fact expand the scope for serving shopping trips with public
transportation, since the difficulty of carrying packages is currently a major impediment.
On the other hand, if the store is to serve a second function as an order fulfillment center
as in the Circuit City case, locations with high automobile accessibility will be preferred.

Some Critical Research Issues

This paper has suggested a number of ways in which large scale adoption of e-
retailing may affect the spatial distribution of economic activities. In all cases the relative
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 429

magnitude of the effect is unclear, and in some cases even the direction of the effect (con-
centration versus dispersion) is unclear. But it is believed that the impacts have sufficient
potential to warrant further research.
First and foremost, research is needed into the broader effects that use of e-retailing
has on the spatial behavior and activity patterns of individuals and households. Conven-
tional shopping is one of the most important non-work activities in any affluent
society, in terms of both expenditure of money and time. If a household switches
substantially from conventional shopping to e-shopping, a number of questions need to be
addressed:

To what other activities will the saved time be transferred?

Will it affect decisions concerning car ownership or transportation mode of other
activities?
Will total person kilometers traveled decline?
Will it affect residential location choice?

Conventional travel demand analysis will not be adequate to answer these questions
because it concentrates on the demand for trips and does not address in-home, non-
transportation activities. The growing field of activity analysis, however, is concerned with
how household members distribute their time across different activities (including trans-
portation or communication) and complementarity or substitution among activities. As
Golob and Regan (2001) point out, Hagerstrands (1970) space-time prismone of the
central concepts of activity analysismust be updated to include the Internet and other
forms of telecommunications as an alternative to transportation for overcoming distance
in the scheduling of daily activities.
While activity surveys are more difficult to conduct than conventional travel surveys,
the information they provide about how Internet shopping affects the distribution of time
across other activities is vital to answering the questions posed above. Furthermore, activ-
ity surveys must adopt a longitudinal design in order to see how the adoption of Internet
shopping, or any other household technology, changes the choice of activities.
A second area of research is the new forms of industrial complexes that are likely to
arise due to increased integration between e-retailers and logistics providers. The order ful-
fillment end of e-retailing has been identified as the area where many start-ups have failed
in the past. Increasingly, fulfillment functions from inventory management to delivery will
be absorbed by experienced incumbents in the package delivery business. As e-retailing
grows, what will be the spatial pattern of fulfillment activities? Will it concentrate around
hubs, leading to major economic growth in places like Memphis and St. Louis? Will it
follow a hub-and-spoke pattern? Will manufacturing and fulfillment functions be com-
bined in the same facilities?
While there is considerable interest in these questions expressed in the business liter-
ature (Ghiassi and Spera 2003), there is not as yet a body of econometric studies or even
case studies to address these questions. Given the complexity of the issues involved, case
studies are probably the best place to start.
430 GROWTH AND CHANGE, FALL 2003

A third area is how adoption of a multi-channel strategy by incumbent retailers will

alter their location patterns. A related issue is how consumers will use multi-channel retail-
erswhat proportion of purchases will be in stores and what proportion will be online?
If, as Burt and Sparks (2003) suggest, fixed stores remain necessary to support e-retail
sales by providing physical contact with the goods and human contact for advice and
encouragement, new store formats will be needed and a new class of shopping center may
emerge. The ability to anticipate these trends would be great value to urban planners. Since
it will take a long time for these new retail formats to emerge (if they are to emerge at
all), the most productive research strategy may be intensive studies of early multi-channel
ventures such as Sears/Lands End.
Finally, over the longer run a very significant shift to e-retail will raise questions of a
general equilibrium nature. For example, if a massive shift to e-shopping contributes to
dispersion in residential population, average delivery costs and the degree of cross-
subsidization will increase over time. This may constitute a negative feedback loop for e-
retail growth and a gap in the proportion of online purchasing between consumers in
central locations and consumers in peripheral locations. The availability of e-retailing may
also have a significant impact on trends in agglomeration and dispersion if italong with
telecommuting, wireless communication, and other friction reducing technologies
increases the attraction of exurban living. Surveys targeted at recent movers should help
determine whether the availability or e-retail has a significant impact on households
location decisions.

NOTES
1. A quick review of well-known Web sites including Amazon.com, Landsend.com,
LLbean.com, and Cabelas.com found that they all charge rates that are scaled accord-
ing to the size or value of the order but that they do not vary by destination within
the continental U.S. Some also have fixed rates within Europe, Asia, and other world
regions.
2. Another interesting example is Ducati Motorcycles, which sells certain models exclu-
sively over the Internet but still involves its B&M distribution channels in delivery
and after-purchase service. See Jelassi and Leenan (2003).
3. Perhaps because of these commonalities, incumbent mail-order retailers have been
prominent among those firms that have made profitable transitions to e-commerce
(Silverstien, Stranger, and Abdelmissih 2001).
4. In addition to effective search engines on individual Web sites, third party search
engines allow shoppers to search a number of Web sites simultaneously, which leads
to intense price competition. For more discussion of the structure of competition
among e-retailers see Bakos 2001.
5. This statement may exaggerate the level of concentration, however, since three of the
five sites are content aggregators.
6. There are limitations on the use of drop shipping. If an order includes items from
several manufacturers it will be fragmented, which results in higher costs and
 E-COMMERCE, TRANSPORTATION, AND GEOGRAPHY 431

customer annoyance. Also, since manufacturers are not usually geared for timely deliv-
ery of small orders, drop shipping generally increases delivery time. E-retailers gen-
erally adopt some combination of drop shipping and shipping from in-house inventory
(Khouja 2001).
7. U.S. Department Commerce, National Income and Product Accounts, figure based on
1996.
8. U.S. Department of Transportation, 1995 NPTS Data Book, chapter 2.
9. The New Economic Geography for example employs a love of variety utility func-
tion whereby spreading expenditures over a large number of goods always produces
more utility than concentrating expenditures on a few goods (Fujita et al. 1999).
10. Silverstien, Stranger, and Abdelmissih (2001), Exhibit 2. Note that J.C. Penney and
Victorias Secret both have substantial mail order experience.
11. Channel conflict is an even greater problem for B2B e-commerce. According to Webb
(2002, p. 95), Channel conflict is perhaps the most serious concern for companies as
they add e-commerce.
12. These sources should perhaps be taken with a grain of salt as they are in the business
of helping conventional firms make the transition to the Internet.
13. According to Silverstien, Stranger, and Abdelmissih (2001), even though clothing and
groceries will continue to have much lower levels of e-commerce penetration than
other sectors, they will expereince the most growth simply because they are so large.
14. Retail formats that integrate e-commerce and B&M components have been called
cybrid retailing (Golob and Regan 2001).

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