Are hotels the new frontier in experiential retail?
Retailers are eager to get into the hospitality business. Will they falter in an unfamiliar endeavor — or can they create experiential retail properties that replace the traditional flagship store?
Editor's Note: This is the first in a two-part series about how retailers are extending brand propositions into the hospitality industry.
As brands look toward the future of experiential retail, there's a new "experience" on the rise. One that promises not just a way to connect with shoppers and grow loyalty, but could also create an entirely new type of retail flagship.
Retail has been going through something of an identity crisis and it's not hard to see why. Malls are in trouble, America's over storing problem is coming to a head, and even shopping stalwarts like New York City's Fifth Avenue are seeing troubling changes as flagships such as Ralph Lauren and H&M close shop and move elsewhere.
Brands are trying to connect with millennials in a way that feels authentic and the buzzword of the day is experiential retail.
So it's perhaps not surprising that some are taking personalization to heart and creating entirely new experiences in the form of hospitality. Parachute, Shinola, Muji and Williams-Sonoma's West Elm are among those opening branded hotels. Amazon, too, has begun exploring a hospitality offering.
There's a growing group of mid-tier retailers eager to capitalize on the travel and tourism industry, which is responsible globally for $2.3 trillion and 109 million jobs worldwide, according to a study by the World Travel and Tourism Council Global Economic and Issues study (WTTO).
And brands are interested in getting a piece of that pie. "In many cases, you have retailers looking for ways to expand the influence of their brand," Greg Portell, lead partner in the retail practice of A.T. Kearney, a global strategy and management consulting firm, told Retail Dive. "It's very easy to connect the dots between hospitality and retail."
Hotels have been partnering with brands to sell goods — furniture, mattresses, bedding — for years, but retail and home goods brands are now entering the hospitality industry with a whole new kind of brand extension.
"A lot of brands consider themselves 'lifestyle brands' — they want to envelop their customers and have multiple touch points. They want to serve the customer while fulfilling their mission," Jan Freitag, senior vice president of global hotel research, data and benchmark company STR, told Retail Dive. "So these brands say, 'We sell watches or furniture or shoes, but customers [have] come to see our brands as an extension of themselves. So wouldn't it make sense to try to get closer to the customers in other venues? If customers like our furniture or watches for themselves or their homes, wouldn't they like an environment that's curated by us?'
The hospitality industry is also ripe for disruption. "Hotels are looking for reinvention," Portell said. "The W Hotel properties tried to do that, but that's worn now and there is a gap in the hotel industry between ultra high-end properties and the Sheratons and the Marriotts and the Hiltons. So there's an opportunity here."
Branding the stay
It's not entirely novel for brands to enter the hotel space, but until recently, those efforts were largely limited to high-end fashion designers such as Versace, Fendi and Christian Lacroix. Karl Lagerfeld is launching a branded hotel chain, while Ferragamo's hotels recently celebrated 20 years in business. A few mid-range designers have also dipped their toe into the hotel pool including Diane von Furstenberg, who designed 20 rooms at Claridge's in London; Todd Oldham, who designed the Hotel of South Beach in Miami; and Tommy Hilfiger, whose membership-based hotel is still in the planning stages.
"In 2006 and 2007, we saw an uptick in fashion designers with hotel brands, mostly in the super high-end," Freitag said. "The idea was that there was a cross-pollination with the high-end fashion customer and the high-end hotel customer."
Today's newcomers are different, and they're not necessarily looking to disrupt the hospitality model so much as capitalize on the brand and lifestyle dynamic. At the same time, hotels are looking for ways to engage more completely with lodgers. The confluence is well-timed as noted in Deloitte's Travel and Hospitality Industry Outlook 2017: "The rapid growth of industry disrupters is encouraging companies to capitalize on products outside of their traditional offerings."
From home goods to home stay
Retailers becoming hoteliers isn't just an exercise in disruption or branding, but rather a natural extension of their identity.
"Parachute launched as an online business, but my intention was always to bring the brand offline, too," Ariel Kaye, founder and ceo of the bedding and bath brand, told Retail Dive. Opening a brick-and-mortar store for the brand in Venice, California in May 2016 was the first step toward creating The Parachute Hotel, a 2,200-square foot one-bedroom space above the Venice Beach Parachute store.
"We quickly noticed that our customers wanted to shop not only our home essentials, but also the furnishings and décor," Kaye said. "So we made the Parachute Hotel completely shoppable. It's filled with custom home furnishings, locally sourced amenities and inspired art."
Parachute's single bedroom lodging stretches the concept of what it means to be a hotel, but then again, the brands themselves are changing the rules.
West Elm is poised to make a bigger impact on the hospitality industry with a larger footprint and a more developed hotel strategy. The Williams-Sonoma owned brand initially announced plans for six locations: Charlotte, North Carolina; Detroit, Michigan; Indianapolis, Indiana; Oakland, California; Minneapolis, Minnesota; and Savannah, Georgia. A seventh location, in Portland, Maine, has since been added.
"Two years ago, a conversation with a group of hoteliers sparked the idea of West Elm's ability to expand beyond a home retailer through our existing connection with customers," Peter Fowler, vice president of hospitality and workspace at West Elm, told Retail Dive. "West Elm has seen considerable growth in the retail space, and entry into hotels is an opportunity to continue building the brand in a way that doesn't oversaturate the retail market, while maintaining our goal to increase our impact."
A new kind of customer connection
West Elm and other brands are looking to engage in community-building, not just as a vague concept, but in real-world, concrete terms.
"I think we're a little different than the other retailers," Tom Lewand, CEO of Detroit-based Shinola, told Retail Dive. "For us, it was about identifying an opportunity in Detroit."
As brands look to transform retail stores into retail experiences, branded hotels could well supplant the traditional flagship located in high-rent, high-traffic shopping areas.
Restoration Hardware has been teasing a possible Chicago-based hotel concept since 2015, but nothing has been announced and a spokesperson declined to comment for this story. But a 2016 story in Elle Décor hinted that a new hotel space is being built in New York City's Meatpacking district. Ikea, which also declined to comment, already has a 254-room hotel in Småland, Sweden.
Japanese retailer Muji will soon be a hotelier. Céline Vaaler, a spokesperson for Muji told Retail Dive that its concept began with a pre-fabricated living space called Muji House and includes Muji travel shops. After installing furniture in a terminal at Tokyo's Narita International Airport in 2015, the brand began thinking about hotels. The effort will bring Muji's brand philosophy to the hospitality space with basics such as towels, "intuitive" outlet placement and even menu and restaurant design.
Already, it's getting competitive
For Parachute's Kaye, the growing number of brands opening hotels is a sign that her brand is moving in the right direction.
"We're aware that other brands are pursuing similar initiatives, and we're excited to see what West Elm, Restoration Hardware, Equinox, Shinola, etc. will bring to the hospitality space," she said. "We don't view them as competition, but rather a testament that we are addressing customers' needs and wants. Brands need to expand their offerings beyond products — and experiences [resonate] with people. Consumers will now have even more options to meet their travel needs, and we always celebrate innovation amongst our peers."
West Elm's Fowler is confident that his brand's message will resonate, regardless. "We honestly believe that the experience West Elm Hotels will provide customers is totally unique and different from what any other hotel or retail brand is doing in the hospitality space currently," he said. "West Elm Hotels will offer a differentiated experience from the major hotel chains and the geographically limited specialty players."
For Shinola's Lewand, it's about more than branding. "[For] the West Elm folks, it's a showcase space for their brand," said Lewand. "Everybody has their own motivations and we're pleased with our little slice of the universe. The Shinola will have 130 rooms, and you can come 20 times and stay in 20 different room types, and every room will be unique. So we focus on how to make a diverse experience, and creating experiences in Detroit that are world class, but also uniquely Detroit."
But is there a ROI?
As brands look to transform retail stores into retail experiences, branded hotels could well supplant the traditional flagship located in high-rent, high-traffic shopping areas. Often those stores are operated at a loss, serving as little more than expensive showrooms. The hotels might eventually negate the need for separate flagship stores in key neighborhoods, but there are challenges that could keep profits at bay.
"With West Elm, a hotel becomes an active showroom," Bill Lally, president of hospitality integration firm Mode:Green, which helps hotels integrate technology into the experience, told Retail Dive. "Everything will be for sale, like a living catalog. But I don’t know how they're doing market tracking and market promotions. For example, how do guests tell the hotel, 'I want that couch, I want to take it home?'"
Many brands may also need to engage with partners to make these spaces work. "When Bulgari went into hotels, they found a partner," Freitag said. "Missoni and Lagerfeld, the same. Armani, the same. They find people who have expertise in hospitality. The hotel industry is driven by three different entities: the brand promise, the owner of the physical real estate and the management company. And these may be different. You have no idea who owns the Marriott you're staying in, or who manages it. So a consumer brand entering the space has to decide which one they want to be."
There's also the risk that even in the multi-billion dollar hospitality market, the venture won't make money. "Don't confuse revenue with profit," Freitag said. "For a full-service hotel, the profit margin is 30%. For a limited service hotels, it's more like 45%."
None of the brands interviewed would discuss cost liabilities and there is always a risk associated with expanding beyond the retail comfort zone. Even if a brand is able to give itself excellent wholesale prices on hotel furnishings, or close bloated retail locations in exchange for a more holistic hotel-style retailing environment, the risks associated with hospitality are substantial.
"If you're going to talk about a situation where it's one or two hotels, then it's an interesting hobby," Portell said. "But if they start talking about building out 30 or 40 or 50 hotels, then they're a hotel operator. And then there's the tension point between the refresh rate of the properties versus the refresh rate of the brand. In the hotel environment, that's an expensive proposition."
"If you're going to talk about a situation where it's one or two hotels, then it's an interesting hobby. But if they start talking about building out 30 or 40 or 50 hotels, then they're a hotel operator."
Lead Partner, A.T. Kearney
Some brands may be better suited to expanding their reach into hotels than others, Portell said. "With Shinola, you're not so much dealing with a retailer, as with a lifestyle brand," he said. "You could very easily see a company like REI, which is much more experiential, doing this. If you're a lifestyle brand, then living across multiple categories becomes part of your identity. But while West Elm and Pottery Barn have multiple categories, their brand identity is tied to one specific category of retail."
Establishing, and delivering on service will also be a challenge for retailers, according Portell and others.
"We developed a vocabulary for our brand, and that is very much a part of the Shinola hotel," Lewand said, and creating a service identity is part of the strategy. "Our creative director is intimately involved in the design of the hotel space, and integrating our operating standards. And we're still 18 months away from opening," he added.
He has a vision for the space based on the way customers are currently interacting with his retail locations. "We see our consumers wanting to have a relationship with our brand that goes beyond wanting to put a watch on your wrist," he said. "They want to spend time at the coffee shops in our stores, listening to our turntables. So for us, this is more than the products we create. It's the environment that you're in. A brand is a lot more than just a set of products, it's an experience."
Kaye has a similar expectation for Parachute's space. "Personally, I value the comfort of my home and prefer a smaller, more curated place to stay while traveling, and I see this trend emerging among today's travelers," said Kaye. If there's any doubt as to the legitimacy of this trend, Airbnb claims to have 3 million listings worldwide with more than 200 million guests.
"In the end, we aren't looking to open a hotel with 100-plus rooms," Kaye said. "Instead, we want to share our point of view and lifestyle with guests, all the while showcasing the elements of design and comfort that have become synonymous with Parachute."
The West Elm hospitality experience is much more expansive, according to Fowler. "Over the past two years, we've expanded our scope from home furnishings to design that impacts everyday life at home, work and away," Fowler said. "In 2015, we entered the $25 billion commercial furnishings market with West Elm Workspace. Our entry into the hotel industry is a natural next step as we evolve from home furnishings to a purpose-driven brand."
Fowler also expects the hotels to serve as a branding device. "We expect that West Elm Hotels will broaden our brand reach and create a unique opportunity for our brand to grow beyond just adding new retail stores," he said. "We will measure [that] success based on our ability to create exceptional customer experiences and loyalty to West Elm."
Location, location, location
Hotels offer retailers an opportunity to reach new markets and demographics, and many companies are looking to enter what they see as underserved markets, where they have both an expertise and an established presence. "When we develop brand extensions, we always consider how Parachute can add value to our Venice Beach community," she said. "Our neighborhood lacked a great hotel as well as a great hosting space. The Parachute Hotel fulfills both needs, providing comfortable accommodations to guests and a location to host gatherings, workshops and classes."
Lewand saw a similar opportunity for Shinola in Detroit. "We're a retail brand," he said. "We're not a real estate developer, and we're not a hotel operator, so we had to work with someone we felt strongly about working with. Then in Detroit, we felt like there was an opportunity to do something that was unique and world class, and to add an element of a boutique hotel in the heart of downtown that fits in with the Shinola experience."
Shinola is working with Dan Gilbert, whose real estate arm is Bedrock Detroit, and the Gachot Design Group, which worked on the Smyth Hotel in New York City, and Lewand has operating partners who have worked with Ian Schrager. The result, he hopes, will be a vision that's cohesive both visually and in terms of service.
West Elm has been strategic in its choice of cities. "We intentionally targeted mid-size cities with rich histories and vibrant communities that complement the West Elm brand promise," Fowler said. "Similar to our retail expansion, we are focused on opening hotels in cities where the boutique hotel experience currently is underrepresented."
The brand is also targeting locations with high or emerging millennial populations. Indianapolis was recently ranked as a top millennial city by Apartment Therapy and Forbes for 2017, and that same Forbes list also included Minneapolis and Charlotte. Detroit, which is about to be home to both the West Elm and the Shinola hotel, has been attracting millennials for some time, and the other cities on the list are equally primed.
The principals at West Elm come back to the concept of community again and again, and that's especially telling in light of its millennial-facing approach.
"The West Elm team and I first started discussing what a joint venture between our two brands could look like, and the importance of community was a constant theme," David Bowd, principal of West Elm Hotels, told Retail Dive about how the West Elm brand would interact with West Elm Hotels.
"How do we create thoughtfully and beautifully designed spaces that celebrate the heritage and energy of each property's local community? We are building on our combined expertise in creating exceptional retail experiences for customers and superior hospitality stays for guests to curate unique destinations that reflect the local community of each property in design, programming and experience," he added. "If we can do that well, our vision for what West Elm Hotels stands for will be fulfilled."
And quite possibly, a new type of retail flagship will be created.