Brick and Mortar in the Age of Online Shopping
It’s no secret that traditional brick and mortar retail has been caught in a tail-spin for at least the last decade. Not only have we seen bankruptcy filings from iconic retailers like Sears, Barney’s New York, Forever 21, and Toys ‘R’ Us, but we’ve also seen store closures by square-foot reach new highs in each of the last three years. However, to say brick and mortar is dead, is missing a crucial development in the future of retail.
Even as shoppers flock to online platforms, retailers are not wholly abandoning brick and mortar stores. In fact, in-person shopping is becoming a cornerstone of modern retailers’ mission to integrate online and physical channels to help their brands better resonate with customers and drive revenue.
The Brick and Mortar Advantage
For modern retailers, it is becoming vital to understand the relationship between their online and physical channels. While 86% of purchases in the US are still made in-store, 53% of those purchases are “digitally influenced”. The availability of the dual-channel experience creates what’s known as a “halo effect”, which increases performance for both the physical and online platforms. Recent ICSC reports suggest that opening a brick and mortar store both increases the brand’s web traffic by an average of 37% in markets where a new store is available and increases customers’ total spending between both channels. Modern consumers love the speed and convenience of online shopping but they still crave a tangible, in-person experience. Even Gen Z consumers, who have been using iPads and iPhones since before they could walk, still have a soft spot for brick and mortar. A recent AT Kearny survey found that 81% of Gen Z shoppers prefer to shop in stores, and 73% like to discover new products in person. Interacting with these consumers face-to-face also helps retailers get crucially important data from their customers and their buying behavior.
In 2013, Warby parker led the charge for digitally native retailers opening physical locations, and we’ve seen a slew of other companies follow in their footsteps. Digitally native retailers including Casper, Bonobos, Away, Allbirds, and Dollar Shave Club have all opted into the multi-channel model. The commercial real estate firm JLL suggests this trend is just getting started. They expect the top 100 online brands to open 850 physical stores in the next five years.
Adding Clicks to Bricks
The obvious question here is: how can we reconcile the apocalyptic retail data and plummeting public retail company share prices with the growing popularity of the omni-channel retail model? The answer seems to be that old-fashioned retail really is dying, but companies are searching out new and disruptive ways create a refreshed, in-person shopping experience.
Companies are reinventing the way stores are managed in order to reduce costs relating to inventory and staff along with integrating a digital component to their in-person shopping experience. Bonobos, for instance, keeps just enough inventory on hand for customers to try on clothes, but all purchases are shipped from a warehouse as if purchased online. We’ve also seen retailing giants like Amazon and China’s Alibaba open grocery stores where customers can either purchase items on their phones or, in the case of Amazon Go, just walk out while being charged automatically. This practice is becoming more and more main-stream as integrated retail technology becomes more accessible. Today, companies like Apple, Macy’s, and 7-eleven all offer some version of scan-and-go mobile technology.
We have also seen a whole new industry grow up around this transition called Retail-as-a-Service (RaaS). RaaS companies help emerging brands gain a desirable retail presence without having to deal with all of the costs and commitments of running a physical store. Neighborhood Goods, for example, acts as a miniature department store that has carried over 100 traditionally online brands including Tonal, Hims, Me Undies, and Dollar Shave Club. LEAP Inc., on the other hand, allows companies to acquire their own branded store fronts by running the store operations on behalf of the brand. Traditional commercial real estate companies have also started to offer more flexible lease agreements and creative revenue sharing deals that have made it easier for emerging brands to afford retail space.
The Bleeker Street Renaissance
The revitalization of Bleeker Street is a great case study on how the future of brick and mortar is taking shape in New York City. In 2017, the storefronts lining the once bustling West Village thoroughfare, known for hip, avant-garde retail, reached a vacancy rate of nearly 40%. Rising rents and burdensome lease agreements made it almost impossible to survive on Bleeker, but real estate PE frim, Brookfield, and the RaaS startup, LEAP, saw an opportunity.
Brookfield bought four retail properties with seven storefronts and filled the street with young, online-focused brands including Lingua Franca, Bonberi, Slightly Alabama and Prabal Gurung. Although individual agreements are not public, Brookfield reportedly offered flexible short-term leases and revenue-share agreements, which helped these newcomers thrive. Several problems, however, still remained. Many of today’s newest and most desirable brands are digitally native, and their leaders have very little physical retail expertise. Founders of these companies also often don’t have the time to manage these small storefronts, while simultaneously running multi-million dollar online businesses. Luckily, Leap Inc. was able to help solve some of these problems. The one year-old start up negotiates and secures leases, employs and manages staff, designs and builds the space, and provides data analytics to drive store performance. Their customers on Bleeker Street now include Naadam, Thakoon, Goodlife, Public Rec, and Ledbury. With a more pervasive understanding of the benefits of dual channel retailing and the help from innovation in the brick and mortar industry, Bleeker Street is now flourishing once again.
Implications for the Future of Retail:
The traditional battle between online and in-person channels is no longer a winner take all struggle. The latest trends in retail are becoming more and more about how well brands can connect their channels in a seamless and strategic way. For example, if a brand can integrate a shoppers profile (style preference, online cart activity, returns, etc.) to include both online and in-person habits, the brand can create a much more customized and effective experience. A Recent McKinsey & Company study shows that personalized communications based on a holistic view of a shopper’s habits creates loyalty that leads to revenue growth of 10% to 30% per customer. It’s also important not to forget social media as an increasingly important retail channel. A recent study by Bigcommerce suggests that Gen Z shoppers are actually spending the majority of their retail dollars on products they find on Instagram and Snapchat.
The brands that will be most successful in the coming years will be adaptable companies that can reach their shoppers wherever they are most comfortable communicating and that can create a customized and convenient experience no matter what channel they choose to do their shopping. This creates a lot of opportunity for startups developing innovative ways to drive this increasingly important integration.
Startups Driving Innovation: LEAP, Neighborhood Goods, Fourpost, b8ta, Brandbox
LEAP: Retail-as-a-Service platform for consumer brands
Description: Leap is accelerating the transformation of retail into something new – the core of a seamless, omnichannel brand experience informed by what customers truly want and enabled by technology. By addressing all aspects of store development and operations, the Leap platform makes brick & mortar retail stores an exciting and scalable channel for the next generation of high growth consumer brands. To deliver the best customers and stores for the best brands in the world, we’re building the platform of choice for “retail-as-a-service.”
- HQ: Chicago
- Founded: 8/2018
- Founders: Amish Tolia (Co-CEO), Jared Golden (CO-CEO)
- Funding: $3M (Costanoa venture – seed)
- Website https://leapinc.com
Neighborhood Goods: Department stores that features global brands, products and concepts
Description: Neighborhood Goods is a department store that features the landscape of the world’s brands, products, and concepts. More than that, Neighborhood Goods is a community, bringing thoughtful people together to shop, eat, and learn in our vibrant physical spaces, through their immersive editorial content, and more.
- HQ: Dallas, TX
- Founded: 2017
- Founders: Mark Masinter, Matt alexander
- Total Funding: $25.6M ( $5.8M – L: Forerunner Ventures – Seed), ($8.8M – L: Global founders Capital – Seed), ($11M – L: Global Founder Capital – Series A)
- Website: neighborhoodgoods.com/
Fourpost: Customizable retail space within Fourpost locations
Description: Offer at-the-ready retail spaces called Studio Shops and provide signage, lighting, WiFi, POS, staff,foot traffic monitors, and a data analytics dashboard.
- HQ: New York, NY
- Founded: 2018
- Founders: Mark Ghermezian
- Total Funding: $5M (11 investors including TS capital and Susa Ventures)
- Website: www.fourpost.com
B8ta: B8ta is a software-powered retailer designed to make physical retail accessible for all.
Description: B8ta is a new kind of retail store designed to improve the customer and maker experience. b8ta helps people discover, try, and learn about new tech and innovative products while empowering makers with a simple retail-as-a-service model that puts them in control.
- HQ: San Francisco, CA
- Founded: 2015
- Founders: Nicholas Mann, Phillip Raub, Vibhu Norby, William Mintun
- Total Funding: $88.5M ($50M – L: Peak State Ventures – Series C)
- Website: www.b8ta.com
Brandbox: BrandBox is a solution for brands & agencies to manage interactive content
Description: BrandBox makes it simple to run ongoing engagement programs for brands and agencies alike, and contains many interactive content formats, straight out of the box. These formats include fun quizzes, games, surveys, product reviews & many more. With BrandBox’s advanced profiling feature, brands get to know their fans and can segment them into different groups based on their interaction or advocacy level.
- HQ: Amsterdam, Netherlands
- Founded: 2015
- Founders: Macerich (Mall company)
- Total Funding: Created by Macerich
- Website: www.brandbox.io