A brick and mortar trend analysis.
Store closures dominated headlines in 2019. During last year alone, more than 9000 stores closed across North America (up 60% since 2018), a by-product of the deep rooted issues faced by the apparel industry. In fact, a high number of retailers filed for chapter 11 bankruptcy last year alone (Forever 21, Barneys New York, Payless…) and more are on the brink of recapitalization (Ascena,, J Crew, Tailored Brands…).
On the one side, legacy players are locked into their pre-existing real estate deals in unfavorable locations, and have developed consumer experiences that are designed to maximize the purchase intent of a consumer over the quality of the experience. For instance, most supermarkets place fresh fruits at the end of the store to force consumers to go through all the aisles before getting to what they want. The modern consumer wants frictionless, tailored experiences.
On the other side, DTC brands with a physical storefront have placed a strong emphasis on the in-store experience. They have created brand ecosystems designed to promote the company’s mission as much as the product itself. A perfect example to illustrate this is Casper’s Dreamery and the nap pods. At Burrow’s store, users are invited to lay on the company’s couches while watching Netflix. Those brand experiences are built with the consumer’s lifestyle in mind.
The trigger point for both sides will be the constant need to 1) continue optimizing for lower CAC and lower distribution costs and 2) The need to better understand your customer’s purchase path in-store in order to tailor the experience. In other words, DTC need to learn from the cost-cutting strategies implemented by legacy retailers, and legacy retailers need to translate the frictionless e-commerce digital pipeline into new consumer experiences in store.
Here is my take on the underlying forces shaping the consumer retail physical imprint in 2020.
- Stores are becoming micro-fulfillment centers.
It has now been 15 years since the introduction of 2-day shipping by Amazon in 2005 and consumers now expect free fast shipping as a key part of a frictionless user experience. The burden of shipping on unit economics is extremely high (Amazon e-commerce runs on razor thin profit margins) and it adds further complexities to the supply chain.
A solution to mitigate high shipping costs is to bring inventory closer to the customer. This can be done by increasing the density of warehouses in order to focus on last-mile-delivery, but the costs associated with warehousing in urban centers remain extremely high. The warehouse-on-demand model has emerged as a flexible solution to address that need but the costs are still very high.
Warehouse-on-demand startups: Flowspace, Flexe
Despite steadily increasing since 2011, the growth in storage space supply in urban centers has been outpaced by demand. Thus, stores are ideally positioned to become the micro-fulfillment centers needed to fill that gap. In Deloitte’s 2020 industry outlook, the firm highlights the critical role that brick-and-mortar will play in the supply chain structure. According to an article by Supply Chain Dive, old malls and chain stores are now being turned into industrial warehouses.
The “order online/pick-up in store” or BOPIS model has become a solution to maintain low costs while improving convenience, and 32% of retailers with a physical presence already offer this service. According to Target’s CEO Brian Cornell, the company’s cost of shipping drops by 90% when customers pick this shipping option.
By incentivizing consumers to pick this option over delivery, DTC brands can potentially decrease their overall shipping cost. At Cargo Systems, my previous company, we switched from a delivery model to get our goods to the drivers to a BOPIS model where drivers would come and pick up their products at a central hub. Our margins were significantly better under the new model. However, a challenge for retailers will be to redesign the existing space while navigating the constraints of their pre-existing landlord’s agreement.
2. Brands will bring the human back into the purchase experience through brick-and-mortar.
While innovations in the digital space (Think A/R powering virtual try-ons like Warby Parker’s) are augmenting the limited nature of e-commerce product interactions, brands are still placing an increased emphasis on building physical experiences. According to a Blackhawk network survey, 92% of surveyed users rank in-store shopping as the most satisfying purchase experience.
Indeed, some DTC brands like Casper have already launched unique experiential environments in key urban markets. Rather than optimizing for transaction volume by cramming products into their retail space, DTC brands are focusing instead on creating instagram-worthy spaces. Casper introduced nap pods at its Soho flagship, which you can book for a $25.00 fee (PJ’s are included!). Why nap pod, you might ask? It reinforces the company’s broader mission of making sleep better.
Brand experiences are built with the consumer’s lifestyle in mind, and product displays will be more and more designed to replicate the user’s at-home experience as accurately as possible. For instance, DTC company Burrow introduced its Burrow House Concept to accomplish just that. They created a theater where customers can lounge on their couches while Netflix shows are playing. Sounds familiar?
Interesting experiential stores: Casper Dreamery, Burrow House, Nordstrom “shoe bar”, Naadam, Nike House of Innovation, Rebecca Minkoff Soho flagship (digital fitting rooms!).
In today’s multimodal shopping experience, stores also play the central role of being the product curator. Indeed, while pages and pages of results are displayed on Google Shopping, the modern physical store will focus on providing a limited set of products that users actually want, using online purchase data. Take Amazon’s 4-star stores for example: The company optimizes its in-store inventory by aggregating high-rated local best sellers.
Similarly, Showfields launched in 2017 to bring top DTC company’s under one physical roof. The company combines the shopping experience with art exhibitions, food & beverage hospitality and community oriented events. Will this be the department store of tomorrow? They already define themselves as “the most interesting store in the world”.
It is interesting to note that a lot of brick and mortar innovations have happened in Soho. Here is a good map to explore where DTC brands have launched their physical stores.
3. New innovations in IOT and data analytics will allow physical retailers to better understand in-store purchase paths.
Innovative startups like B8ta are bringing the accuracy of the online sale pipeline into the store. By capturing each consumer action through the use of cameras and sensors, B8ta is able to map out the in-store customer journey and delivering hyper-actionable insights to optimize conversion rates. This resembles the processes adopted by online retailers to improve their landing pages and refine their SEO.
The company recently partnered with Tru Kids Brand to relaunch Toys ‘R’ Us in the US after the firm’s demise in 2018, with an added focus on creating stores-within-stores for each toy brand it features. Again, the video showcases how the brand focuses on the product display and the sensory aspect of the experience.
In-store retail analytics startups have been out for a few years now, but the focus has shifted beyond analyzing POS data in recent years only. A startup called Smartshelf uses LED screens on the shelves to play content whenever its proximity sensors detect movement. But it doesn’t do just that: They use age, gender and other psycho-demographic factors to play customized content for each customer.
Startups to watch: Smartshelf, B8ta
4. The store associate’s role will refocus on providing the best customer experience.
The introduction of new innovations on the sales floor will allow store associates to spend more time with their customers than ever before.
Indeed, their primary role is to deliver on 3 core missions:
- Accompany the customer throughout his interactions with the product(s).
- Maintain proper inventory.
- Process transactions.
The key to a great customer experience will be to alleviate the human’s workload, not replace him entirely. Coffee brand Cafe X introduced the first robot barista, but it failed to understand that its the actual warmth and uniqueness of the interaction with the human barista that truly creates a great customer experience, one of the keys to retention. They recently announced that they were shutting down their three SF locations. When I tried Cafe X last summer, there was spilled drink everywhere around the robotic arm, and consumers were visibly confused by the experience. It also took longer than a human barista would have taken to prepare my coffee.
Innovations will come to the back-office to help declutter the associates bandwidth, thus allowing them to spend >90% of their time on the floor with the customer. To reduce the time spent on check-out, companies are relying more and more on the use of mobile POS and concierge apps.
According to McKinsey, the introduction of automated checkout solutions like Amazon Go’s will help reduce cashier staff requirements by up to 75%, ultimately saving retails between $150 billion and$380 billion a year by 2025.
5. Physical locations will provide a valuable user acquisition alternative to paid social advertising.
The large funding round raised by DTC brands have placed an increased focus on scaling revenue as fast as possible in order to lock-in their respective markets. To deliver on this, brands turned to paid social advertising and search ads as their core user acquisition tool.
But the return on online acquisition spend tends to follow an S-curve and hyper-growth has recently showed its limits, as highlighted by Casper’s difficult IPO. Eventually, the marketing ROI flattens, due to market saturation and ad fatigue. With more and more players in the ad space, CPC pricing and cost-per-impression have surged, pushing brands to explore new customer acquisition pipelines.
Here comes the physical store. Store are becoming a more central part of the top-of-funnel stack, as they allow brands to increase 1) awareness in urban markets, through their physical presence 2) customer engagement and retention 3) top-of-mind presence. Warby Parker led this transition with the launch of 100+ stores across the US.
Some DTC brands are still too cash-poor to maintain a permanent store presence, so they are increasingly turning to pop-up experiences and distribution partnerships. For instance, couch retailer Burrow partnered with co-working spaces to expose its product in a natural user setting and also showcases its couches in the Lululemon flagship near Flatiron.
On the other end of the equation, retailers can benefit from the increase in traffic that those brands can generate. The focus is placed on serving a similar customer with comparable values, but it also creates a risk of losing control of the experience.
The temporary retail industry is expected to generate $80B in revenue on an annual basis. Pop-ups allow brands to experiment with their own storefronts at a lower cost, while driving more top-of-mind presence by creating highly-sharable UXs and leveraging scarcity. More and more startups are emerging to help small brands launch their physical presence, like Leap in New York, which helped DTC Naadam create its own custom stores in Soho. These startups take on the creative part of the job, provide more data analytics on store traffic and help alleviate the operational burden of managing the retail location.
About the author:
My name is Julien, I am French and I write from NYC. I have a passion for great brand stories and amazing consumer experiences. I was previously at Cargo, where I led the company’s growth strategy. I mainly write for myself, and I hope that this can be useful.
You can reach out on Linkedin if you have any questions or if you would like to connect.
