Direct-to-consumer firms’ competitive strategy against a dominant retailer: Opening an experiential physical store vs. specializing in an online store

In response to traditional brick-and-mortar retailers’ multi-channel strategies, direct-to-consumer (DTC) firms have recently attempted to adopt novel business modes for their further growth: While several firms open their “experiential” physical stores, which can provide consumers comfortable experiences beyond evaluating and purchasing products, others specialize in and enhance their online stores. This study develops a game-theoretic model to determine a DTC firm’s optimal competitive strategy in a market where a single dominant retailer adopts its multi-channel strategy. We show that the full elimination of a consumer’s disutility for purchasing from the store of the DTC firm, regardless of being through its physical or online store, is not necessarily optimal. Specifically, when opening an experiential store, setting the attractiveness for visiting that store at an intermediate level is optimal, unless the level of disutility for the rival firm’s online store is intermediate. Conversely, when enhancing an online store, setting at the maximum level is necessarily optimal. However, the DTC firm’s profit is then never superior to that under the mode of opening the experiential store unless the costs for store enhancement are significant. We discuss our results’ robustness to several realistic scenarios.