The Evolutionary Growth of Physical Retail
Retail Apocalypse Not Now
Despite a ten-year stream of brick-and-mortar “retail apocalypse” stories, and the recent devastating impact of Covid-19, it doesn’t take much investigation to see that, under the shadows of dying retail dinosaurs (both big and small), physical retail is inexorably evolving into a new breed of showroom-type stores that better unite the experiential pleasures of in-store shopping with the efficiencies of e-commerce.
The enhanced efficiencies brought about by e-commerce, both in regards to shopper convenience (wider selections, social proof (e.g. ratings), home delivery, etc.) and the retailers’ own logistics, has meant that offline retail has lost a considerable amount of market share. Prior to the viral pandemic, however, in-store shopping still accounted for the bulk of global sales; for example, the State of Fashion 2020 report states that:
In the fashion category, more than 70 percent of purchases are still made offline and online channels account for just 13 percent of luxury brand sales.
In addition, the top ten US retailers (Walmart, Kroger, Costco, Home Depot, CVS, Walgreens, Amazon.com, Target, Lowe’s and Albertsons) are predominately brick-and-mortar operations.
The Covid-19 extended lockdowns, however, will accelerate an even bigger shift towards e-commerce. So why should retail managers still be planning offline retail strategies and investments?
From shops to showrooms
Already in the days of VHS video rental, there was talk of the demise of public cinemas. It didn’t happen. Then came home DVD film delivery, but cinema boomed. Surely streaming and high-definition TVs would kill cinema; as who would prefer to buy expensive tickets and leave home to be in a room full of strangers? But the cinema industry kept on expanding. So what happened? and how does this relate to physical retail?
The film business realized early on that having films visibly showing in cinemas boosted their prestige, and thereby subsequent sales in other channels. In addition, by investing in ever more pleasant and remarkable experiences, they continued to make good money selling tickets.
Similar trends have been happening within the music industry; where again there was a fear that internet broadcasting of live events would hurt ticket sales, but the opposite happened — music events have never been more popular.
Cinemas and music events haven’t disappeared because people crave engaging and social experiences, and the same applies to physical retail. Young people still hangout and shop together, and many people still appreciated physically evaluating products, beautifully designed retail experiences, and engaging with talented shop staff. Surveys show that millennials, somewhat counterintuitively given their love of all things digital, report enjoying physical retail experiences more than baby boomers.
Many shoppers, however, have also got used to the convenience of e-commerce and get frustrated with many aspects of the traditional shopping experience, e.g. lack of selection, lack of item info, queuing to pay, etc. According to an EE survey, two-thirds of UK shoppers will abandon purchases in-store if they have to queue for more than five minutes.
The result is that some people are starting to give up on physical shopping almost entirely. So it’s clear that retail needs to find ways to combine the best of both offline and online, i.e. the experiential pleasure of in-store shopping with the convenience of e-commerce.
This combined need is the genesis for the birth of new showroom-type stores: stores that enable people to try on and instantly order items to home; stores that facilitated e-commerce by providing pickup and return options; stores that can be considerably more efficient because they don’t have to manage on-premise inventory; stores that still enable shoppers to pick up, feel, and participate in the brand story.
The halo effect
In addition to building and engaging communities, brands that have a physical store also benefit from a “halo effect” that boosts online traffic by 37% or more. And through providing an authentic experience they will always attract many people who still value physically engaging with products (particularly with mid to higher-tier items) and brands directly.
But in order to reap the benefits of an offline store halo effect, retailers need to reinvent their stores to become more convenient and truly omnichannel. And they need to stop using the moribund and creativity destroying ‘sales per square foot’ metric, and instead, start seeing the costs of running a store as a media channel investment — a physical channel that provides an immersive brand experience 250+ days of the year.
While old-school retail chains have been closing stores by the hundreds, a new breed of born-digital, direct-to-consumer (D2C) brands have been opening hundreds more.
For example, Warby Parker, the highly successful D2C eyeglasses brand, started opening stores due to demand from customers to try on their glasses. They now have over a hundred stores, and they learned step by deliberate step, how to optimize them to provide a brand authentic, cost-effective experience.
Other D2C brands who have also been investing in a similar vane include: Everlane for apparel and accessories, Bonobos for menswear, Casper for mattresses, Allbirds for shoes, and many other vertically-integrated D2C brands are growing their physical footprints.
Another motive to open stores is that fighting for new customers online is now no longer so cost-effective due to fiercer competition within the mainstream digital channels (e.g. Facebook, Instagram, etc.); while at the same time, many malls and shops have been closing and reducing rental terms and thereby making the costs of attracting new customers through visible stores a viable alternative.
What reasons could there be to think that, as soon as isolation measures are lifted, born-digital brands will not continue this strategy of integrating offline spaces into their channel mix —and if anything, the isolation will accelerate these trends by killing off less adaptive brands that have left it too late to face up to the new realities and lay the groundwork for the titanic shifts already underway.
Doomsday for department stores?
For large wholesale department stores, the challenge is particularly hard, since there is no upside from “fitting theft” (i.e. when shoppers try on items but buy from competitors online), whereas, for the vertically integrated brands, it doesn’t matter so much where items are bought.
To compound the challenges for department stores, many brand vendors are becoming frustrated with the low margins from selling at discounted prices to wholesalers, and also losing control of the overall brand experience and customer relationship. To irk them further, vendors with their own retail outlets often end up competing against department stores that tend to use heavy discounting earlier in an effort to keep attracting customers.
Given that many brand vendors have to take extra risks investing in more upfront inventory to meet wholesaler demands, and then need to sell 2–3 times more items via department stores in order to make the same profit as a single direct sale, it is hardly surprising that many brands are looking to cut down wholesale relationships, and will only wish to retain those that can add significant value to their brand image/exposure.
Ideally, wholesalers should also enter into a logistical and co-creative relationship. Selfridges is a rare example of a department store that has succeeded in finding ways out of old uncomfortable paradigms by committing to shop-in-shop partnerships and ensuring plenty of delightful experiences. Subsequently, it has had record sales in recent years, so much so that it could afford to invest a record-breaking £300 million investment in renovating its London flagship store.
Meanwhile, many department store brands around the world have been collapsing: from Sears, Barneys, and JCPenney in the US, to BHS in the UK, and here in Finland Stockmann has been verging on bankruptcy. The current value of both Macy’s and Stockmann is mostly down to the market value of their prime real estate properties.
Some of the more fleet-footed of the older behemoths, like Nordstroms (and to some extent Macy’s), have been experimenting with smaller, more conveniently located stores that also provide services to facilitate online shopping, e.g. pickup and returns options, fitting and repair services, etc.
Since 2017 Nordstrom has been striving for greater relevance via its Local stores that hold minimal or no inventory and focus on providing a selection of the sizes for people to try on and then order online for home delivery.
One interesting side note for why Nordstrom is investing in smaller showroom stores is that they believe younger generations are less willing (or able due to a reduction in car ownership) to visit city centers or out of town stores and prefer to have more convenient localized experiences.
The future is already here
William Gibson is quoted as saying; “The future is already here, it’s just not evenly distributed yet.” And this very much applies to the evolution of retail. While there are prominent forerunners like Warby Parkers pushing new boundaries, many retail brands are already halfway to having showroom stores even if they don’t fully acknowledge them as such.
A Finnish fashion brand, for example, with a modest shop on a Helsinki high street can expect to pay around 4K-6K euros rent per month, and, after factoring in staffing and other logistical costs, many of these shops can barely, or not at all, justify their existence purely from a sales-per-square-foot perspective. But to some extent, most managers already instinctively know that their shops already support customer growth and online sales in a way that helps to make up for their direct “poor” performance.
The challenge that many brands born outside the D2C paradigm is that their customers may not be used to ordering online, and therefore expect to be able to buy all the items from the shops directly. This forces many to maintain separate in-store and online inventories, which is inefficient and can even lead to a conflict of interest for store managers whose primary concern is to sell the store's inventory. Only a few retailers, like John Lewis, have actively put in measures to reward store staff in relation to surrounding online sales.
Direct-to-consumer brands better positioned
Whether born-digital or swiftly trying to adapt to a D2C model, retailers who sell their own branded products are in a much better position to thrive in the changing retail landscape than wholesale stores; since ultimately it doesn’t matter if people buy in-store or online as the money comes home to roost either way.
In addition, D2C brands usually sell online using popular e-commerce platforms (e.g. Shopify, Magento, WooCommerce, etc) with vibrant third-party app stores that enable them to choose services that extent their omnichannel potential; whereas more established retailers often have highly customized web stores that are expensive to modify.
An example of an easily integrated service that can be added to provide simple omnichannel options is Pricetap – the startup I founded. Pricetap lets shoppers add items to a wish list either by browsing online or by scanning the in-store price tags. This then enables the retailers to reward their customers more directly, dynamically and personally based on the customers’ wish list data. In addition, it enables in-store shoppers to have all the same online item info instantly in their smartphones, e.g. available sizes, ratings, sustainability info, product story, etc.
The practice of taking high-risk bets on pre-ordering large amounts of inventory stock 6–12 months ahead of time will gradually reduce— both on the side of the vendors and wholesalers. This is because it is both economically inefficient and massively unethical given that around 20% of unsold global inventory is burned or buried as landfill.
Somewhat ironically, the just-in-time / order-on-demand supply chain that has made Zara a global fast-fashion powerhouse could become a core part of making the fashion industry more sustainable; since it means more timely, relevant stock rather than unsold overstock. The challenge is helping brands that make “enduring” items, i.e. products that are long-lasting, both in terms of build quality and aesthetic appeal, take advantage of similar practices.
One method that brands are now experimenting with is pre-selling based on prototypes that people can either see online or experience in-store. One Swedish fast-fashion brand even puts items online straight away as Sold Out but with a ‘Notify when back in stock’ option as a way to collect intelligence on the demand potential before ordering small production runs.
A pre-sales model would work smoothly with inventory-less showroom stores, as the ordering experience and process is the same just with longer delivery times.
Retail on the move
A spinoff benefit of a showroom-type store is that their technical and logistical infrastructure enables pop-up experiences to be set up rapidly in any location — since there is no need for extensive inventory or cashier systems. Items could also be sold directly from shop windows or even on displays in contextually relevant places, for example, gyms for sporting gear.
At Pricetap we see the benefits of building a multi-brand platform, as it means people will only need one app with which to build up their wish lists, be rewarded directly, and engage with the brands that they love. And, as and when they encounter pop-up situations they will already have the app on hand and be able to smoothly engage.
While scan and pay is not a common habit in Western countries, in many Asian countries, particularly in China with WeChat and AliPay, millions of scan and pay actions are happening every day. So by what rationale would you bet against such behavior not spreading across the rest of the globe?
The rise of resale and sustainability
Resale as a sector has been growing twenty-one times faster than the fashion market as a whole. And it’s current 24 billion USD valuation and is expected to be 64 billion by 2028— becoming bigger than fast fashion. Reflecting this trend just three prominent resale startups TheRealReal, Threadup, and Rebag have raised over 500 million in investment in recent times.
The reason this is relevant to retail as a whole is that it is symptomatic of sustainability trends generally, and the desire of customers to engage with brands and retailers that are actively concerned about sustainability. Given its ability to innovate in other business areas, it is therefore not surprising that Selfridges was named Best Retailer 2020 at the Positive Luxury Awards (the organization behind the sustainability Butterfly Mark).
While retailers will be expected to make more efforts to be transparent about the ethicality and sustainability of their products, they will also be expected to make more efforts to facilitate their own resale markets. This is because resale is the most immediate impactful action that can be taken, since all the damaging externality costs have already been sunk: labor, energy and natural resources.
Many retailer brands have made steps towards facilitating their own resale by providing discounts in exchange for secondhand brand items; and some have entered into resale service collaborations, for example, Stella McCartney × TheRealReal, which gives $100 dollar vouchers for reselling Stell McCartney clothes.
Resale is also an area of high interest to Pricetap, since our shoppers have digital wardrobes of the items they buy, not only providing an easy future reference to the items’ care instructions but also a means to resell items with a couple of clicks. This is made possible because all the item data is stored: image, description, price, etc. and the Pricetap system could then match people of similar sizes and tastes—both within our own network and external resale services. In addition to this, a number of brands have expressed their enthusiasm to make their stores available as exchange places for their customers to leave and try on the resale items—both those that have been gathered in recycle programs and items being exchanged by private customers.
Story is becoming ever more important
Brands maybe become successful with some initial innovations but the only thing that keeps them alive over the longterm is their story: where did the brand come from, what’s it doing now, where is it heading. When a brand’s story starts to ring hollow that is the silent death knell of its demise. The reason for this is that the story contains the values that drive every part of a brand's development, even down to innovation investments.
One of the challenges of retail tech is that many brands have had their fingers burned trying out various technological innovations, such as virtual reality, magic mirrors, etc. with little or no sales benefits. This can be due to the utility being too clumsy but it can also be due to a clash of story values.
Pricetap’s first pilot customer Samuji has strong aesthetic values related to warmth and kindness and as a result, they try to minimize the visibility of “cold” technology, even eschewing a POS barcode scanner in preference of minimalistic iPad. The reason they were willing to try Pricetap, however, is that the technology is invisible and the engagement done via the customers' own phones.
The stores of the future will utilize a multitude of discreet technologies to capture shopper data in order to customize the experience in ways that are already common online.
Outside of becoming property managers, the department stores that will survive are those that provide services for brands to cooperate in delivering delightful, story-driven experiences—like physical magazines. Brands will pay for help developing shopping experiences, and for the shared real-time customer data gathered via an array of discrete technologies. Macy’s move in this direction with The Market @ Macy’s and by Macy’s and its acquisition of Story seems to be helping to significantly improve confidence it is future and thereby stock market value.
New technologies will also be used to make it easier to share inventory data between brands and stockists; and the financial value generated between this more hybrid wholesaler/vendor cooperative models will be shared via a mix of consignment, sales commissions, a service fee and increasingly via dropshipping.
It is important to emphasize that investments and innovations around warehouse management, inventory control, and trade planning software are also key to providing more value for money products. And that no-frills offline budget retailing has also been a growing sector of retail. The difference between sectors being whether efficiency savings are better spent providing more delightful products/experiences or in keeping down costs. Even though grocery retail has not been the focus of this article, many of the same fundamentals apply, e.g. the Whole Foods (Amazon) focus on superior customer experience.
From loyalty programs to clienteling services
Hand in hand with brands moving increasingly towards the D2C model, they are also increasingly growing their own audiences and universe using direct communication and sales channels. The idea of what constitutes a channel needs to be viewed broadly from e-commerce platforms, social media (both public and private, e.g. Instagram or a brand-owned Mini WeChat Progam), through to both online and physical events.
So in an increasingly omnichannel, buy-anywhere world, the idea of what a loyalty program constitutes also needs to be viewed more broadly in such a way that interconnects with shoppers both digitally and physically.
To this extent, the concept of clienteling becomes more relevant than simply having a loyalty points system. Clienteling is about using data and feedback from all touchpoints to enhance the customer experience and in return improve sales performance.
With its integrated online and physical wish listing, offer alerts, and owned-items digital wardrobe, Pricetap is, in essence, a clienteling service, and later we will enhance this capability with preference settings that help with areas such as ratings and size guidance (most likely in partnership with dedicated related services).
The idea of thinking in terms of offline and online retail as being separate things will gradually erode as the boundaries blur and the relative benefits combined. The heydays of department stores may be passed but the ones that have prominent locations and make the most of providing shopping experiences will remain significant market players. And there will always be niche multi-brand stores that provide a valued collating experience. Meanwhile, D2C vertically integrated retail brands will continue to expand their physical retail activities via showroom-type stores.
The store is dead, long live the store!