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The Renaissance of Physical Retail

How technology and new strategies are saving stores from the “retail apocalypse”

Photo by Heidi Sandstrom. on Unsplash

By now, you have probably read a headline or two about the “retail apocalypse,” an understandable yet sensationalized moniker denoting the closing of a swath of U.S. retail stores, especially those of large chains, in recent years. Notable casualties include Radioshack, American Apparel, and Toys R Us. Many are quick to point to the booming ecommerce as the culprit, but that is not the whole picture.

By all accounts, physical retail is not dying, but it is certainly changing. One could even say that it is going through a renaissance of sorts, as the newcomers look to reinvent the in-store experience by honing in on strategic differentiation and leveraging digital technologies to fulfill the ultimate promise of convenience. Recent retail earnings reports from Walmart, Target, and the like have all been beating Wall Street expectations and showing strong improvements year over year.

For retailers and brands with their own stores, this is an exciting time full of opportunities for reinventing their customer experiences through innovation coupled with the right strategies.

Source: CBInsights

The Greatly Exaggerated Reports of Retail’s Death

While it is true that ecommerce is growing at an accelerating rate and contributing to the decline of physical retail by shifting consumer expectations across categories, that is not the only thing to blame here. Rather, the root cause for this round of retail collapse is that many of these long-standing chains are overloaded with debt, mostly from leveraged buyouts led by private equity firms, and things may get even worse this year for the debt-laden U.S. retailers. They accumulated such overwhelming debts primarily due to over-expansion of physical retail in the past few decades, — the U.S. has more retail square footage per capita than any other nation. In addition, rising rents, stagnant wages, and delayed effects of the 2008 recession are all contributing factors to the proclaimed end time for physical stores.

The root cause for this round of retail collapse is that many long-standing chains are overloaded with debt.

Yet, curiously enough, brick-and-mortar retail seems to be doing just fine overall. They still command about 90% of total U.S. retail sales, and physical store openings actually grew by 50% year over year in 2017. While much of this is driven by the huge growth of discount retailers like Dollar Tree and Dollar General, there is also significant growth in upscale specialty stores and previously online-only brands like Warby Parker and Bonobos ambitiously expanding into brick and mortar to capture more market share. Yes, a ton of the stores closed their doors, but that just seems to be the result of natural selection.

As the boring, debt-ridden chains close their doors and declare bankruptcy, a new crop of stores pops up to recapture the shoppers. And such is the lifecycle of physical retail — malls and department stores centralized stores and replaced catalog-and-phone retailers in the latter half of the 20th century, and now the experience-oriented specialty stores are here to unbundle the retail landscape once again.

Differentiation: Unique Experiences That Add True Value

Casper’s recent announcement to open 200 stores across the country this year is a good testimony to that last trend. The digital-native, mattress-in-a-box retailer already has 19 “experience centers” where interested buyers can try out their products in person, and it just opened its first permanent store in NYC this February. The new stores will be modeled after the NYC flagship store, which allows customers to sample Casper products in six miniature homes that double as Instagram-friendly art installations, and aims to build a community around sleep by hosting sleep- and wellness-related events throughout the year.

As if that is not experience-driven enough, earlier this summer Casper also debuted a more experimental store concept called “The Dreamery”. Visitors can pay $25 for a 45-minute nap on a Casper mattress and bedding set, complete with nice pajamas, hip face-wash, and meditative soundtracks, for a fully immersive brand experience. The fact that it is located on the same block as its NYC flagship store is certainly going to make it easy to convert customers who enjoyed their naps.

Casper is but one latest example in how direct-to-consumer brands are rewriting the rules of brick-and-mortar retail as they expand into the physical world. Within a one-mile radius in the SoHo neighborhood in NYC, you can now find a dozen stores from brands that prided themselves on being digital-only — Bonobos, Outdoor Voices, Everlane, Away, Allbirds, M.Gemi, Warby Parker, and so on. The digital native brands can’t just rely on targeting the same pool of customers through digital channels forever, so physical retail is the natural step in their evolution to reach a wider set of consumers. Even Casper struck a partnership with Target to sell their product in select Target stores before deciding to open their own stores.

Digital native brands are rewriting the rules of brick-and-mortar retail as they expand into the physical world.

Target, for their part, is also experimenting with a leaner store concept to expand its retail footprint in dense urban centers. The national retail chain has opened four new small-format stores on Manhattan in the past two years, and has announced three more NYC locations to come. The experiments with new store concepts allow Target to keep testing and revamping its in-store experience to keep up with the changing consumer expectations.

Besides Target, other legacy department stores are experimenting with new store concepts to revitalize its business. Nordstrom, Macy’s, and Bloomingdale’s have all launched initiatives to test new small-format stores. Among them, Nordstrom’s inventory-free store concept exemplifies the kind of pivot from a sale-oriented model to experience-driven one that is focused on building customer relationship and trust, which many retailers will need to learn to transition gracefully.

Many brands are refitting their stores with new technologies to create new in-store experiences to varying degree of success. A robot usher is cool and unique, but it simply replaces a human staff and therefore does not actually add much value to the shopping experience. On the other hand, the way Zara incorporated mobile AR into their window displays adds real value by enabling shoppers to check out the curated looks on moving models and purchase directly from its AR app.

Personalization is a good way to create a unique retail experience, and every retailer seems to know that by now. Customization is quickly becoming table stakes, and differentiated experience will have to aim higher. A good recent example is the “Nike by Melrose” concept store Nike recently opened in L.A that takes personalization to a new level. Powered by digital commerce data and smartphone technology, Nike is curating the store based on consumer buying patterns, app engagement data, and local city insights. NikePlus members can reserve products on the app and retrieve them from a locker in store to try on. The store also features “Nike Express Sessions” for members, allowing them to book 30-minute appointments with a Nike product expert. All these additional services are there to enhance the retail experience and make visiting the store a leisure activity to enjoy rather than a chore.

Source: eMarketer

Customization is quickly becoming table stakes, and differentiated experience will have to aim higher.

Interestingly, this Nike store is also designed to serve the 100 million-plus NikePlus members, who spend nearly three times as much as regular Nike.com shoppers. This kind of community-alignment angle is a tech-free strategy that some smart retailers are using to create a unique experience to build affinity with their targeted audience. For example, The Phluid Project, the first gender-free apparel store, aims to become a gathering place for the LGBTQ+ community and has designated spaces in its store for hosting relevant events and bringing the community together. And it does not always have to be for serious causes. Museum of Candy, created by confectionery retailer/restaurant Sugar Factory, gives candy lovers a million reasons to make Instagram posts about their sweet tooth, and it is a serious business that heralds the future of experiential retail.

Another tech-free strategy for differentiation that some retailers are pursuing is collaborating with niche brands with cult following to borrow equity and boost their “cool” factor. Macy’s recently acquired buzzy, rotational concept store Story, which curates merchandise like a magazine, while Nordstrom is hosting pop-ins with upstart direct-to-consumer brands like Everlane and All Birds to attract shoppers. The recent Supreme x New York Post collaboration serves an extreme, non-retail example of the power of those cult brands, and it is something that retailers can no longer ignore if they wish to stay relevant.

But let’s circle back to Target for a minute. Last winter, Target started testing a dual-store concept in Texas to offer two distinct kinds of shopping experiences — leisurely browsing and in-and-out efficiency — under one roof. WIth the dual-store format, Target is attempting to cater to two different types of shoppers, each utilizing different digital tools and services to either eliminate frictions for maximal convenience or offer a better in-store experience via personalization. The divide between goal-oriented shopping that prioritizes convenience (grocery shopping, for instance) and experience-oriented shopping (shopping a leisure activity; shopping for luxury goods, for example) is growing wider than ever, and it is fascinating to see how retailers try to reconcile that.

Convenience: The Ultimate Expression Of Omnichannel Retail

Ecommerce has always claimed superiority over physical retail in terms of convenience. No more driving to and from the stores and loading things into a shopping cart! Two-day delivery and one-click purchases popularized by Amazon seem so much easier by comparison. The gap in convenience is glaring, which means that legacy retailers have an imperative to rise up to the new standard of convenience set by ecommerce or risk losing consumers.

The real solution here is for retailers to fully embrace the omnichannel approach and grant consumers convenient access to all products and services that they need.

Shopping starts with discovery, and it is becoming increasingly clear that our channel of discovery is becoming fragmented into various social and search channels. Consumers today may discover a product in an Instagram Story and be able to directly purchase it, or they could ask Alexa to order something for them without even lifting a finger. The growing adoption of visual search and voice assistants, in particular, is set to dramatically change product discovery.

For example, Target and Walmart partnered with Google Assistant on voice shopping in direct response to Amazon. Although a recent study claims that voice shopping has yet to take off among Alexa users, it seems premature to proclaim that voice shopping is not happening. Consumer adoption takes time, and there is still lots for Amazon and Google to do before all the pieces can align to meet consumer demand. Both Google and Pinterest have rolled out their visual search tools, and Target, once again, beat other retailers to the punch and integrated Pinterest Lens into its own app to aid product discovery in the real world.

Beyond visual search that speeds up the product discovery process, mobile AR is also being employed to help preview products. Since launching on iOS devices in September 2017, the IKEA Place app, which enables furniture shoppers to virtually drop a 3D replica of the IKEA items into their room for measurement, has been downloaded over two million times, and around one million people have used it repeatedly, according to an IKEA executive.

Convenience can also manifest in a high-touch manner. Walmart recently launched Jetblack, a concierge-style personal shopping service that operates over text messages. Shoppers pay a monthly subscription fee of $50 to access the service, and receives same-day delivery on the items they requested over text. If they are not sure what exact product they want, the human staff will offer product recommendations culled from not only Walmart and Jet.com but also specialty retailers locally. Depending on whether Walmart will be able to successfully scale this operation, this may just be what Walmart needs to enter a higher-end retail market.

The fact that Jetblack is positioned as a premium, convenience-oriented shopping service owned by Walmart should not be surprising if you’ve been paying attention to the retail space. As Amazon continues to conquer consumer mindshare and earn consumer trust with its dependable and convenient shopping experience, many brick-and-mortar retailers are starting to embrace ecommerce channels and digital tools to expand the shopping experience they offer. In the past year alone, Walmart has been rolling out self-serve pickup towers, looking to expand its grocery delivery service, and exploring voice shopping with Google, all in the service of embracing omnichannel retail and making it easier for consumers to shop. After all, a lot of this round of retail reinvention is about keeping up with the consumer expectations raised by ecommerce brands, especially Amazon.

A lot of this retail reinvention is about simply keeping up with the consumer expectations raised by Amazon

The expediency of delivery is also a big part of the convenience puzzle for retailers looking to compete with Amazon. Last December, Target acquired Instacart competitor Shipt and has since expanded its same-day delivery and Drive Up pickup services across the Midwest and Southeast US. Grocery chain Kroger recently launched a delivery service for non-perishable food and household goods and Walmart now offers same-day grocery delivery from Sam’s Club through Instacart.

True convenience in retail means giving consumers complete control over where, when, and how to buy. Cross-channel, always-on access is quickly becoming the norm and anything less could alienate your customers and prompt them to check out your competitors. Domino’s Anyware initiative enables pizza lovers to place orders via any channel conceivable — mobile, voice, IoT, you name it — and get the pizza delivered to public parks and landmark locations. This gives us a glimpse into a future where on-demand delivery may become even more flexible.

True convenience in retail means giving consumers complete control over where, when, and how to buy.

To that end, the current pinnacle of convenience in physical retail would be Amazon Go, with its grab-and-go style that seeks to fully reinvent the convenience store experience. In China, Alibaba’s Hema Grocery stores are operating along similar routes to automate the checkout experience and bring convenience to shoppers with services like on-site cooking and 30-min fast delivery for online orders. We already laid out the implications and potential impact that Amazon Go will have on the retail and CPG industries in an in-depth analysis piece back in January when the first Go store opened in Seattle. The main point we made was that Amazon Go points to a future where physical stores will adopt an AI-powered automation software layer to drive the entire in-store operation and power new experiences that are frictionless and truly convenient for consumers. That point still stands today as the tech giants strive to rewrite the rules of how physical retail works.

Brand Takeaways

All things considered, physical retail is undergoing an exciting transformation that responds to the changing tides of consumer behavior. The entry of digital newcomers sounded the alarm for some legacy retailers, who are now actively looking to step up their game through various experimentations and acquisitions. And the timing seems right for brick and mortar to get out of the “apocalypse” narrative. Commercial rents are starting to fall and malls are renting out spaces to create unique mixed-use experiences, just as rising ad rates and shipping costs are starting to make ecommerce less profitable.

In a way, the burgeoning renaissance of brick and mortar is a testament to the resilience of shopping as a leisure activity that people of all demographics can enjoy. As convenient and efficient as ecommerce can be, physical retail provides the kind of tangible, social interactions and experiences — be it stumbling upon the perfect gift for a loved one when window shopping or receiving great fashion advice from a friendly shop assistant — that can spark so much delight in our daily life. For retailers, it is important to create those moments of delight, either through unique differentiation points or services that provide true value and convenience to your customers and become an essential part in the fabric of their life.

To that end, the right application of technology can certainly help retailers achieve that goal, as the numerous aforementioned examples show. But retail innovation is never about getting the latest technologies into stores. Rather, it’s about how you integrate them into the in-store experience and how you align it with your overall strategy and positioning. The best retail innovations should require little in forcing changes in existing consumer behavior but instead work inconspicuously to cater to the shifting habits and preferences of consumers.

Retail innovation is never about getting the latest technologies into stores; it’s about how you integrate them into the in-store experience.

The physical store is quickly becoming one of the most crucial touchpoints that brands can still own to fully connect and engage with their customers. For one, more and more eyeballs are shifting to ad-free subscription-based content services and away from the influence of traditional advertising. Plus, more and more direct-to-consumer brands are popping up every day that bypass the traditional retail channels and thus their real-world competitors. Therefore, It is imperative that brands do recognize that importance of owning a physical space that is digitally enhanced and strategically positioned to serve today’s hyper-connected consumers.



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