From URL to IRL: How Urbanization Will Shape the Future of Retail
By Katrin Zimmermann
The past years have been rough on the retail sector, to say the least. Still struggling to adjust to the rise of e-Commerce, retailers realize that a much bigger challenge is still ahead of them — urbanization.
To understand how connected urban development and retail are, look no further than the bankrupt retailer, Sears.
Sears first rose to fame in the 1920s, when Americans living in cities outnumbered those living in rural areas for the first time. Sears catered to this new target group by building department stores in urban working-class neighborhoods across the country. The 1960s however saw yet another shift in urbanization. Governmental mortgage programs and affordable cars gave rise to a new phenomenon: suburbs. The suburban home and the lifestyle associated with it quickly became a cornerstone of the American dream.
Sears reacted by building shopping malls in the outskirts of cities. These malls were easily accessible by car, and mainly catered to families on their weekly shopping spree. At the height of its success, the company built the Sears Tower in Chicago — at the time, the tallest building in the world. Unfortunately, Sears has become less proficient in adapting to the zeitgeist, but its rise — and fall — are still illustrative of just how important urban developments are for retail strategy.
The social, economic and technological shifts accompanying rapid urbanization impact all areas of retail
As time evolves, cities will see urban landscapes change at an unprecedented speed and scale. By 2050, 60% of the world’s population will live in cities. The social, economic and technological shifts accompanying this rapid urbanization impact all areas of retail. However, they are particularly disruptive to customer experiences, store formats and logistics.
Injecting $20 trillion per year into the world economy by 2025 alone, urban consumers’ purchasing power will make them the prime target group for retailers. Yet, catering to them will not be easy: diverse, fast-paced and digitally savvy, urban consumers are used to having the city at their fingertips on their smartphones.
This competitive landscape requires retailers to fundamentally rethink how they engage with their customers. We have already witnessed shifts in this direction with the omnipresence of pop-up stores and immersive brand experiences. Yet in the long run, this will not be enough. There are only so many Instagram photos you can take before you become tired of what is essentially an empty experience.
Instead, retailers need to focus on creating real value for busy city dwellers. Rather than competing with e-Commerce and other offers in the city, retailers need to complement them. Nordstrom shows what this could potentially look like: instead of carrying inventory, “Nordstrom Local” stores offer tailoring and alteration services, online order pickups and personal stylist consultations.
Few retailers will be able to afford the luxury of using hundreds of square feet purely for the display of goods
This brings us to store formats. We don’t know what the future of urbanization will look like, but one thing is certain: it will be crowded. Anybody who has been to mega-cities such as Shanghai or Mexico City will tell you that competition for space is fierce. Few retailers will be able to afford the luxury of using hundreds of square feet purely for the display of goods. Vacant stores can be re-purposed as co-working spaces or low-income housing. But retailers also need innovative ideas to fully leverage the potential of their space, likely resulting in new business models. Yoga brand Alo’s Manhattan presence already doubles as a yoga studio, and in mattress company Casper’s flagship store, customers can pay $25 to take a nap. We will likely see more of such hybrid concepts in the future.
Needless to say, these developments have a big impact on logistics. Urbanization creates a dilemma for retailers: on the one hand, customers expect a high turnover of inventory and fast delivery of goods. On the other hand, the storage space necessary to fulfill these requests becomes increasingly expensive.
This dilemma can be an advantage for brick-and-mortar stores, which already have a dense network of stores in convenient locations. Zara and Walmart, for example, are using existing stores as online fulfillment centers. China’s online giant Alibaba takes the integration between online and offline even further. Ahead of Singles Day 2017, it recruited 600,000 Chinese “mom and pop shops” to install its store management system, which allowed shop owners to stock popular online items. Analysts consider this system as playing an important role in boosting sales by 40% that year.
The future success of retailers will depend on how well they integrate themselves into a city’s ecosystem
Whether it’s customer experiences, store formats or logistics, one thing is certain — the future success of retailers will depend on how well they integrate themselves into a city’s ecosystem. Today’s top 50 global cities account for 21% of GDP, and mega-cities such as Delhi already have more inhabitants than entire countries.
Given the size and economic power of many urban areas, retail strategies need to be tailored to cities rather than countries. If they succeed, brick-and-mortar stores cannot just re-emerge as centers of retail, but as centers of urban communities across the world.
Katrin Zimmermann is Managing Director for the Americas at TLGG Consulting.
This article was first published in Retail Touchpoints.
