In-store, pre-warehouse, or store-and-warehouse integration: Strategic analysis for neighborhood fresh product retail modes

Neighborhood retail has become increasingly popular among fresh product retailers. Retailers commonly adopt three modes to sell the fresh product: in-store (S), pre-warehouse (W), and store-and-warehouse integration (SW). However, different modes have their strengths and weaknesses, and which mode would help retailers effectively win the market is still unclear in both practice and literature. In this paper, we develop an analytical model to examine the efficiencies of the three fresh product retail modes and identify the retailer's optimal mode choice. We find that the SW mode always generates the highest freshness-keeping service level, whereas the S mode invariably generates the lowest retail price. Importantly, consumers' channel preference heterogeneity and retailer's delivery cost for online order fulfillment jointly determine the retailer's mode choice. More specifically, when the delivery cost is high, the retailer prefers the S mode. By contrast, when the delivery cost is low, the retailer's preferred mode will be the W mode or the SW mode depending on the degree of consumers' channel preference heterogeneity. Furthermore, we examine the consumer surplus across the S, W, and SW modes, and find that all three modes can generate the highest consumer surplus under certain conditions. Our study can complement extant theoretical beliefs on the fresh product retail mode choices and provide new managerial insights for neighborhood fresh product retailers.