A new way to think about Brick and Mortar Stores
Physical Retail as an ecommerce customer acquisition channel
Yesterday’s retail chains and catalogue retailers are all either out of business or have reinvented themselves as omnichannel retailers. They have steadily increased the proportion of their sales coming online and through mobile. At the same time, ecommerce pure play startups, led by Amazon, have taken more share from incumbents. It seems like ecommerce is the better model.
Not so fast.
We’re now seeing digitally native vertical brands (DNVB) open stores. Bonobos* was one of the pioneers in this and now has 48 Guideshops across the US. But they are not alone. In the past year, Allbirds, Away, ModCloth, and Glossier have all opened brick and mortar stores. And in China, ecommerce pioneer Inman has opened 450 stores in the last 3 years.
Omnichannel is clearly the dominant strategy. All retailers need to be whereever their customers are. And for all retailers, their best customers are in every channel. This is just as true for DNVBs. For Bonobos for example, customers who buy first in store spend 2x more and have half the return rate. But more importantly, they spend 30% more online over the next 12 months.
But these DNVBs think about physical retail in a very different way than incumbent retailers. They are not measured purely on “four wall profitability” or $/sq foot, some of the traditional metrics in retail. Many of the stores are showrooms, they don’t carry full inventory. Most support iPads or other ways to browse the online catalogue.
These brands understand the importance of experiential marketing, and they see their physical spaces as a platform to engage deeply with their customers. In short, they see physical retail as customer acquisition channels for their online business. In some cases, a contribution positive customer acquisition channel. In others, a customer acquisition channel whose costs you can compare to Facebook, Instagram, Google or other customer acquisition channels. But always the online business grows.
Owned and operated stores isn’t a one-size-fits-all strategy for online retailers. The companies that benefit the most from this approach are those who expect subsequent purchases (e.g. fashion — Bonobos* and ModCloth) or who benefit from experiencing the product (fashion again, mattresses — Casper). Companies that can benefit from a similar approach but through wholesale rather than owned and operated stores are ones where you can expect subsequent or replenishment purchases but the first purchase is a comparative one (e.g. CPG- The Honest Company* or beauty — Winky Lux) vs an absolute one. Both approaches can work well.
Online is still a great way to launch a brand. It allows a speed of iteration and experimentation unmatched by any other channel. Startups can quickly test their way to product-market fit.
But once they have product-market fit, the next challenge is growth. And as Facebook and Instagram get more fully priced as acquisition channels, we’re seeing more DNVBs turn to physical retail as a scalable, repeatable customer acquisition channel.
* A Lightspeed portfolio company
