It may seem obvious to say that stores have had to evolve in the past two decades as e-commerce infiltrated the industry. Then again, stores have always evolved in order to compete as times, technology and tastes change. And, most of all, to please customers.
In the internet era, a shopper is likely to have made a series of decisions based on information gathered on their phone, well before they get to the store. Which by the way is what most shoppers still do, for practical reasons, and, at least some of the time, because it’s fun.
Yet in important ways, what’s old is new again. Many of the innovations fueling today's successful retailers, for example — like private label differentiation, localization, personalization and convenience — were classic amenities offered by department stores a hundred years ago. These days, Nordstrom is working to update that old-school customer focus for the 21st century, although mass merchants like Target have also paved the way. With convenience conquered by e-retailers, stores must be enticing and experiential, although it’s not always clear what that means. It can help to have captive customers, as at the airport. Meanwhile, some brick-and-mortar experiments have met with mixed results.
Taking stock of physical retail, which in the U.S. is in retreat after over-building for a few decades, means evaluating the future not just of stores but also of shopping centers, which are bifurcating into winners that will thrive and losers that will be increasingly abandoned.
Retail stores may need to evolve, and the stories we’ve gathered here show how many are adapting in a tough market — one made even tougher for operators by a pandemic. But make no mistake, as demonstrated not least by the desire of e-commerce pure-plays to meet their customers in physical spaces, they are definitely sticking around.
Big boxes, specialty stores and discounters have stolen share from department stores for years. Now some, most notably Target, are stealing their merchandising playbook too.
By: Daphne Howland• Published March 15, 2021
There was a rumor in Chicago that Target was thinking of taking over space being vacated by Macy's on the Magnificent Mile shopping district, at the Water Tower Place shopping center, according to a March 2021 report in the Chicago Tribune.
This location has been the scene of controversy in the past. Before it was a Macy's, that store was a Marshall Field's, one of the mall's first anchors when it opened in the 1970s. Some Chicagoans have never forgiven Macy's for its takeover of perhaps their most beloved retailer early this century.
Now, the notion of replacing Macy's with a Target is creating a buzz. In an interview with WGN radio, Cook County Treasurer Maria Pappas called the prospect "embarrassing," "disgusting," and "desperate" on the part of mall owner Brookfield.
"I'm trying to figure out what is magnificent on the Magnificent Mile about Target," Pappas said.
Others defended the idea, including author Micheline Maynard, who said in an email that she once lived three blocks from Water Tower Place. "Urban Targets meet the needs of today's city dwellers, the way the original wave of Chicago department stores, like Marshall Field, Carson Pirie Scott and Goldbatt's did in the 20th century," she wrote in Crain's Chicago Business.
She may be on to something.
Target declined to comment on whether it's signing a Water Tower lease, and Brookfield didn't immediately return a request for more information. But if it is, it would be a neat illustration of how, as Maynard points out, Target has usurped the traditional department store, as some retail analysts see it.
"Target has become a place where consumers go to discover new things," GlobalData Managing Director Neil Saunders said by email. "This used to be at the heart of what department stores were – going right back to the very early days of the concept. They were merchants which brought a world of interesting products within easy reach of consumers. Most traditional department stores – with some exceptions such as Harrods and Selfridges – do this no longer. Indeed, they are more like museums where boring products go to gather dust!"
What department stores gave up
In their heyday, department stores were true emporiums, with merchandise as varied as sewing notions, housewares, tools, art, wine, candy, toys, electronics, jewelry, beauty, pet supplies and even more, plus, of course, apparel and footwear.
Their lovely buildings, high-touch services and helpful store employees, along with amenities like tea rooms and child care in many cases, made a trip to a department store an enjoyable day of discovery. These various departments gave them their name, which has steadily eroded as big-box stores and specialty retailers, and later e-commerce players, enticed their customers with lower prices and in-and-out convenience.
As department stores gave up sales in many categories, those departments shrank or emptied and usually filled up with more apparel (a once highly lucrative market that now has its own problems). At many stores, (several of them, like Marshall Field's, eventually taken over by Macy's), there are now fewer services and fewer helpful store employees.
Sounds like local officials are out of touch with retail realities. I'd take a Target over a Macy's any day of the week! And I don't think I'm alone! https://t.co/RIutUdfhci
As department store consolidation continued through the late 20th century and into the 21st, many local and regional department stores' private labels also disappeared, replaced with those of their owners (again, often Macy's) and more third-party brands.
"They nuked the private label that did well in each one of the markets, which was one of the first really stupid things that they did," Sanford Stein, founder of Retail Speak, said of Macy's predecessor Federated when it bought up and centralized a slew of local and regional department stores. "These home brands really met the taste of the marketplace. They did it for the sake of numbers, and efficiency."
How Target (and others) stepped in
As more shoppers buy online, stores need a reason to exist beyond presenting goods warehouse-style. Now many of the players that have taken share from department stores are adopting tactics perfected by those old retailers.
While big-box and discount retailers have traditionally had vast interiors with utilitarian displays, for example, some have begun to carve up their brick-and-mortar spaces to facilitate browsing. As part of a $7 billion overhaul of its stores and private labels launched in 2017, Target has noticeably disrupted its aisles to exhibit home goods and apparel so that shopping is easy and pleasant.
The retailer in March of 2021 said it's dedicating $4 billion more in capital expenditures, part of which will go toward remodeling more stores.
"Those Target stores very much recognize the value of those visual cues, where they took down partitions and they made the visual cues much more engaging, and the subconscious messaging that the store was making, their strike points, their introduction of the vignettes, the well-placed little breaks, the intersections between one walkway," Stein said. "This is all adding in the vocabulary of the department store. This is all part and parcel of what was basically the rulebook for good merchandising design in most department stores."
Shop-in-shops and pop-ups from third-party brands have also appeared not just back into department stores like Macy's, Nordstrom, Kohl's and J.C. Penney, but also at specialty big-boxes like Best Buy and mass merchants like Target.
"Those Target stores very much recognize the value of those visual cues... This is all adding in the vocabulary of the department store."
Founder, Retail Speak
Target, in particular, has announced dedicated spaces for Apple, Ulta, and an exclusive collection of apparel, home goods and pet supplies from Levi's. Disney has announced the closure of 60 stores in North America but has ramped up its shop-in-shop locations, including at Target. The discount retailer has partnered with direct-to-consumer brands like Casper and Harry's. And for decades now, it has fostered a "cheap chic" image through limited partnerships with high-end designers. Saunders expects yet more brands to seek out Target.
"Target has become a department store in the traditional sense of the term," said Saunders. "It already has very clearly delineated sections for different categories, with each having a distinct merchandising style and feel. This is very different from a traditional variety retailer or discount general merchandiser, like say Walmart, where most departments do not feel particularly different but tend to have a warehouse type feel. This really allows Target to add value in categories like home as it can display products more effectively and entice consumers into buying."
Finally, mass merchants have also discovered the power of private brands, which differentiate their merchandise from names that might be found anywhere and provide fatter margins. The king of private labels is probably Costco's Kirkland, whose sales outpace Macy's entire enterprise, but various introductions and revamps in a range of categories have come from Amazon, Walmart, Kohl's and Macy's, among others.
But once again, Target has excelled at this, after its concerted effort to sweep away many old store brands and design new ones. Steady introductions since 2016 have appeared throughout its assortment, from commodities like food and consumer products to more discretionary items like home goods, luggage and apparel. They've been lucrative: The company's new activewear line notched $1 billion in sales in its first year and is the 10th billion-dollar private brand in its portfolio.
When Macy's announced its Polaris turnaround in early 2020, an effort that was interrupted by the pandemic, executives said its own private labels were similarly due for an overhaul. But analysts at the time warned that the department store's focus on cutting costs could interfere with that. That shows that, whether at a department store or elsewhere, employing specific merchandising methods can only go so far.
"We saw this with J.C. Penney which, despite having the phenomenally successful Sephora shop-in-shop concept, failed to reignite its core business," Saunders said. "Sephora certainly drove traffic to JCP stores, but very few of those consumers were big spenders at J.C. Penney itself. In contrast, Target has a very strong underlying business so its partnerships are really icing on the cake. It is all very well having other brands and concepts come in, but retailers should also be innovating themselves. Target does, but many others do not."
Article top image credit: Daphne Howland/Retail Dive
How Nike is using DTC and data to expand its empire
Since 2011, the sportswear giant has grown direct-to-consumer sales from 16% of its namesake brand revenues to 35%, all while continuing to take share.
By: Cara Salpini• Published March 23, 2021
In 2011, nearly ten years before Nike would announce its Consumer Direct Acceleration strategy to speed up the prioritization of DTC, the company was already focused on growth in that channel. In its annual report that year, Nike wrote that while wholesale made up the largest share of Nike brand revenues, "we continue to see growth in revenue through our Direct to Consumer channels."
At the time, DTC sales made up 16% of Nike brand revenues, or $2.9 billion of the total $18.1 billion the sportswear giant's namesake brand brought in that year (total company revenues, including Converse and other businesses, hit $20.1 billion). By the end of Nike's fiscal 2020, which came May 31, that number had grown to 35%, or $12.4 billion. Of course, Nike's revenues have also grown over that 10-year period, to $35.6 billion (or $37.4 billion company-wide).
The dominance of Nike was not always a sure thing. The numbers used to look closer than they do now (and they still are in countries outside of the U.S.), but the brand's journey to $35.6 billion, and generating more in DTC sales alone than some of its competitors make annually, has been through a path of persistent growth.
"Back in the mid-'80s, Reebok actually took No. 1 market share in the U.S. for about 18 months," Matt Powell, senior industry adviser for sports with the NPD Group, said. He noted that Nike had neglected the women's business, allowing Reebok to break in. "And then this guy named Jordan came along and Nike took No. 1 position back again. It's really been a multi-year strategy of them continuing to take share: Most years in the United States, Nike has taken share."
It's been about having the right product, definitely. But it's also been about knowing how to make tough decisions. In the '90s, that meant opening outlet stores when trends shifted to khakis and away from sneakers, according to Powell, and in the past few years, it's meant doubling and tripling down on shifting spend to its DTC channels.
"There's few brands that I can think of that should be pursuing the amount of economic upside from this kind of transformation more than Nike should," Michael Binetti, managing director at CreditSuisse, said. "It's such a big brand, with so many advantages to doing this."
Chief among those is that DTC sales are more profitable. Hence, the number of startups that have cropped up as DTCs. Nike has a strong brand, so it's able to command a sizable business through its own channels, but the more sales Nike can get that way, the better. Another advantage to the method is that Nike has more control over how its brand is presented through DTC channels, something which analysts speculated was the reason it stepped away from Amazon.
A report from McKinsey and the World Federation Sporting Goods Industry estimated that the shift to DTC has been accelerated by two years because of the pandemic, and researchers recommend that in the medium- to long-term, brands that want to thrive will need to aim for a 20% DTC business, or higher. It's at that point that brands begin to see a virtuous cycle from DTC sales and higher margins, rather than the "vicious cycle" that comes with less scale of the channel.
"They're all doing what Nike's doing," Joe Feldman, senior managing director and assistant director of research at Telsey Advisory Group, said. "They're all trying to segment more. They're all trying to clean up their vendor partners."
Of course, retailers' partners are the other half of this equation. Even though the Nike brand still does 65% of its business through wholesale, Nike's DTC rise has consequences for the wholesale opportunities it's leaving behind.
"I think, frankly, any retailer who loses Nike is going to be affected in a major way," Powell said. "Some of the mall-based retailers do as much as 70% to 75% of their business with Nike. And even the ones who don't have that kind of dominant space, it's in the 30s. So it would be a significant loss to any retailer, to lose that brand."
Nike's acceleration of selling directly to consumers doesn't mean overnight changes, necessarily. The retailer has been steadily shifting to more DTC sales over the past several years. But with the pandemic accelerating e-commerce growth by years, the next phase in Nike's strategy might turn out to be incredibly well-timed.
"I've covered these guys for 13 years and I've never seen them really embracing change and moving as fast as they are today," Binetti said. "And if you'd have asked me if I would have seen the biggest company in my coverage moving at this kind of pace… it's quite an impressive thing."
The Nike ecosystem
As Nike's been pushing toward a greater percentage of DTC sales, the retailer has also been carefully constructing an ecosystem to support that shift. In reality, it's just Nike delivering on what every retailer aims for when they talk about omnichannel, but where others have struggled, Nike seems to be succeeding.
As explained by CEO John Donahoe in June 2020, the company's DTC strategy starts with digital and Nike's owned stores. Most retailers have an e-commerce presence in addition to a fleet of stores — that's not unique, per se. But how Nike is using its stores is. After years of experimenting with digitally connected store concepts like Nike Live and House of Innovation, Nike is planning 200 small-format stores in the same model as Nike Live.
While most retailers understand the benefit of having physical stores, and how it increases online purchases in a given area as well, few retailers operate stores that are as digitally enabled as some of Nike's recent concepts. The retailer has managed to make its app so useful to the in-store experience that consumers without it are at a disadvantage. Customers can scan QR codes to pull up products on their phone, they can start dressing rooms through the app, and signs throughout the stores show customers what else they can do with their phones.
"It's this really smart acknowledgement that a purchase journey is sort of fragmented, and there are multiple touch points that go into a customer's consideration process," Sarah Marzano, a retail analyst at Gartner, said of the stores. "You might visit the Nike website while you're considering a shoe. You might then want to pop into your local Nike store to evaluate that product in person. They keep being really thoughtful about, 'How do we collect the first-party data that's necessary to knit that journey together and drive conversion?'"
In addition to creating an interconnected experience, Nike also has a strong sense of the purpose that each of its channels serve, Marzano said. For its stores, there are multiple objectives. Nike's new locations, notably off the mall and in more local communities, will not only help compensate for the closing of wholesale doors by providing a place for shoppers to see products, but they will also help build community with loyal customers, in the same way many DTC brands view their stores as marketing channels more than just revenue opportunities.
"They're in front of the curve, where they're saying, 'Look, we're making a bet that the consumer is going to either shop digitally or closer to home and the way that a lot of retail is built on high streets and in malls across the country, those are going to continue to diminish,'" Binetti said. "They're making the right bets. And we hear similar overtones of the neighborhood store strategy or the smaller store strategy all over the place."
Of course, e-commerce as a channel in and of itself has also accelerated over the years, and even more dramatically during the past few months. Nike has said before that it plans to become a 50% digital business (that includes both its own digital channels and those of retail partners like Foot Locker) and analysts believe that is a medium-term milestone rather than an end-goal.
NPD's Powell noted that the "targets are moving" on e-commerce as a whole thanks to the pandemic, with the firm originally projecting athletic footwear would be 50% e-commerce in five to 10 years, and instead it grew from 29% to 40% in 2020 alone. What that means for the future share e-commerce could make up is less certain.
"Is 50 a ceiling or does this go beyond that?" Powell said. "My gut tells me it goes beyond that."
Erinn Murphy, senior research analyst at Piper Sandler, said Nike's direct digital channels are on track to make up 21.5% of the total business by the end of fiscal 2021, up from 15.5% in the last fiscal year. That would amount to $9 billion. Reaching 50% with its retail partners, then, seems "very achievable," Murphy said. In fact, in an August 2019 report on Nike, Piper Sandler noted that over time it expected digital DTC "to become [Nike's] largest selling channel."
Nike execs added on a conference call in March 2021 that its digital business had grown over 70% year to date, and total digital (both owned and partnered) had grown to 35% of the company's business.
Fueling that digital growth are Nike's apps. The SNKRS app alone is now a $1 billion business, according to Murphy, and made up 18% of Nike's total online sales in fiscal year 2020, Piper Sandler wrote in an October 2020 report. The percentage of both male and female sneakerheads that use the SNKRS app has increased year over year, according to Piper Sandler, while the Nike app saw almost 200% growth in Q1 last year.
"It becomes a sticky ecosystem because, say that you've downloaded the Nike app on your phone, and you have the Nike running app or the fitness app that they have or even just their shopping app — you'll get targeted emails and they start to know what you do athletically. Or they might know your style," Telsey's Feldman said. "They'll start to send you direct emails when there's either a new product that might be of interest to you or they'll give you a first crack sometimes at a new product that just came out."
The importance of digital to Nike — and all of retail, really — has also led to shifts in how companies think about manufacturing and shipping, something Nike will have to think through as well. According to a joint report between McKinsey and the World Federation Sporting Goods Industry, digital trends have forced athletics retailers to "become nimbler, and produce smaller, more frequent product runs. Perhaps because of this shift, lead times have shortened, with Asian suppliers of large sporting goods companies moving initially from 120 days to 90, then 60, and often eventually down to 30 days."
Nearshoring, the process of moving operations closer to where the products are sold, has also been explored by some, according to the report. With Nike, Binetti doesn't believe the majority of the retailer's manufacturing volume will move to North America, but the new small-format fleet will likely be built to hold a certain amount of high-conversion inventory, and could be used to ship local orders when it's more cost-effective to do so.
"In very simple terms, there's a boat ride across the ocean that can't be changed," Binetti said. "It's just far away. But this, however, has caused them to look at all the other parts of the business and say, 'Look, we need to get a lot better at the digital side of it.'"
And in 2020, they brought in a digital CEO to do just that. Donahoe came in as the former CEO of eBay and Nike praised him for his "expertise in digital commerce, technology, global strategy and leadership" when his appointment was announced.
"He's the right man for the job," Binetti said. "And you see him doing it very, very quickly."
Nike, but make it personalized
At its heart, Nike's strategy for its various channels emphasizes uniqueness. Its Nike Live stores are focused on housing a localized assortment to best suit those geographies, and its wholesale partners receive different product depending on what type of consumer they serve. Nordstrom, for example, is a different consumer than Dick's Sporting Goods or Foot Locker.
"Nike probably does the best job of any of the sporting goods manufacturers in terms of segmenting the market," Feldman said, explaining how the retailer is careful to avoid too much overlap at its wholesale partners, even with flagship products like its Nike Pegasus running shoe. "There might be different colorways, there may be slight differences within them, so that will help segment the market. And then they may even offer some that you can only get that certain color on their own website. So for direct to consumer, it helps to drive business that way."
With the Nike Live stores, the retailer personalizes in a different way, changing its assortment to reflect consumer trends in the region, as well as local teams and cultural touchpoints in that area. Matching assortment to what's popular in a given geography also means the retailer can benefit from using those stores as potential shipping or pickup points for online orders by customers that live nearby.
Being able to personalize effectively, of course, comes back to data. Nike's "robust data ecosystem," as Marzano refers to it, is what's behind the retailer's efforts to create a completely seamless online and offline experience. It informs the retailer's merchandising strategy, and also how the retailer markets to specific consumers. The company's made acquisitions along the way (four in the data and analytics space over the past few years, Donahoe said in a recent earnings call) to help it achieve those goals, including Celect, a predictive analytics and demand sensing firm Nike acquired in August 2019, and Datalogue, which Nike acquired in February.
In Nike's third quarter earnings report, which came out in March 2021, Donahoe hit on both acquisitions, saying Celect has helped with "getting the right product in the right place at the right time" and Datalogue will help improve personalization on both search and product recommendations, including anticipating when customers might be due for new product. In terms of a personalized experience for consumers, Nike is "just scratching the surface," Donahoe said.
"If you're really trying to control how your brand is presented at retail, how it's priced, how it's merchandised and so forth, having thousands of wholesale partners is really antithetical to getting that done."
Senior Industry Adviser for Sports with the NPD Group
But the retailer doesn't want to lose sight of product in all that data.
"The science of what we're doing: It's been done, it's doable," Donahoe said, according to a Motley Fool transcript. "But the thing that makes this company remarkable is the art. It's the creativity of our apparel designers, of our footwear designers, it's the creativity of our brand teams and the storytelling they do. And so, data doesn't displace art, it's both."
The result of Nike's data-heavy focus is that not only is merchandise personalized to certain stores, but the online experience of individual consumers is unique as well.
"When you open up the Nike app on your phone, it's not just, 'Here's a bunch of Nike stuff that we're excited to sell today.' It's literally a vending machine of the product that is most likely to sell to you," Binetti said.
With such an emphasis on differentiation, Nike's DTC strategy is understandably focused on pulling out of partnerships that aren't as unique or useful to the Nike brand. When it comes to wholesale, retail partners have to add something to Nike: a different customer base, a geography Nike isn't as saturated in, or representation that is advantageous from a branding perspective. Wholesale partners that just want "the hot Air Force One of the day" won't be attractive to the brand, according to Binetti.
Execs reaffirmed that strategy on Nike's recent earnings call, saying consolidation would continue, and that the retailer has been prioritizing inventory for its "strategic partners" and its direct channel over undifferentiated retail.
Analysts pointed to strong partnerships the brand has with certain wholesale partners like Dick's and Foot Locker as examples of areas where Nike is getting it right.
"Wholesale gets painted as kind of a bad thing these days ... but Nike's really, really good at it. They're really good at it," Binetti said. "There are still some places where they really should be doing it and can make a really good amount of money, leveraging other people's real estate, other people's customer bases, things like that. But there's always going to be that temptation to try to encourage those sales to happen in your own channels, in your own distribution, either your own stores or digital."
Off-price, on the other hand, is one of the channels that could suffer as Nike, and its peers, move away from certain wholesale partners. Multiple analysts referred to the channel as an area athletics retailers are trying to step back from as they look to avoid cheapening their brand. Rather than using discounting to drive incremental sales, Nike has relied on newness and exclusive product drops, according to Marzano, which keeps the focus on full-price products.
Analysts also highlighted that the U.S. is an incredibly retailer-diverse country, which means brands are selling through a large variety of different players. That complicates how companies can control their brand messaging, which is a key tenet of the DTC playbook.
"If you're really trying to control how your brand is presented at retail, how it's priced, how it's merchandised and so forth, having thousands of wholesale partners is really antithetical to getting that done," Powell said.
Innovating when you make $40B in revenue
As with any ambitious strategy, investments must be made, risks must be taken and occasionally, unpopular decisions must be made. Nike's particularly good at that last one, which has helped it weather crises in the past, according to analysts.
This time, it's Nike's undifferentiated wholesale partners that will pay the price.
"It's much more aggressive than, you know, 'I know some of my retail partners are going to go away, so I'm going to ramp up my DTC to offset it,'" Powell said. "This is actually forcing some of your retail partners to close in order to ramp up your DTC."
There have been other casualties as well. After the retailer announced the acceleration of its DTC strategy in June 2020, layoffs were close behind, with execs noting that the new strategy would allow it to "significantly simplify" its organization. Layoff costs were estimated at between $200 million and $250 million, as the retailer shuffled its management to better align with the new plan. The company has made additional cuts since then.
"The leadership changes, combined with a strategic alignment of NIKE's operating model against the CDA, will create even greater focus and agility that will be enabled by a nimbler, flatter organization in service of consumers," a press release at the time read. "To drive this focus, NIKE will streamline its organization, including its Corporate Leadership Team (CLT)."
Nike's undaunted attitude is also matched by a willingness to make heavy investments, and a large amount of revenue to take the sting out of those investments. Since 2015, Nike has made upwards of $30 billion a year, peaking at $39.1 billion in fiscal 2019. Even during a pandemic, Nike made it out with $37.4 billion. That's $13.6 billion more than Adidas made last year.
Being a bigger company comes with both pros and cons, though.
"Nike has to transform $40 billion worth of revenues every year, so for them, they just have to invest bigger dollar amounts because they have a bigger business to transform," Binetti said, noting that during the pandemic they had problems just like everyone else, but with "10 times" the complexity because of their scale.
"Middle-sized companies, they're always having to make a decision between, 'OK, are we a big enough business to make an investment in this technology and have it really generate a return for us?'"
Managing Director at CreditSuisse
Researchers from McKinsey and the World Federation Sporting Goods Industry also highlighted that a shift to DTC could pose problems for larger companies because it may be difficult to move as quickly as a smaller company, but that mostly applies to brands that aren't pursuing change the way Nike is.
"We think there are two types of brands who are particularly at risk," Alexander Thiel, partner and leader of the Sporting Goods Practice EMEA for McKinsey, said in a briefing on the report at the beginning of the year. "They are smaller brands lacking the capital and liquidity to make the investments that are required to succeed in these plans. But the second group we think [that] will also have issues are bigger, lagging brands who lack a culture of agility and change, and who will therefore be slow to adapt."
For brands that are already aware of what shifts need to be made, scale is a benefit over smaller competitors.
"Middle-sized companies, they're always having to make a decision between, 'OK, are we a big enough business to make an investment in this technology and have it really generate a return for us?' And in a lot of those things, Nike's size — just being four or five, six times bigger than anybody — they don't have to think about that," Binetti said. "They know that if they make a bet, then it costs a couple dollars. Even if it's a little bit of an expensive acquisition, if they can use that across their $40 billion of revenues around the world, it's going to pay for itself."
Looking at Nike's small-format stores is a good example. The stores are practically built on effective uses of data, which has come through acquisitions. While the majority of retailers have known data is important for years, Nike is one of the few who's made big strides in using it well, according to Binetti, and part of that is that the company has the "biggest budget of anyone" to pursue it. The basis of the retailer's Nike Live stores, which rely on changing assortment frequently and using data to understand local preferences, wasn't possible a few years ago, Binetti said.
The retailer started small with the concept, testing Nike Live locations in a handful of places, but it rapidly accelerated to a fairly large-scale expansion of similar stores — around 150 to 200. Not only do analysts see no problem with Nike opening that number of stores, some think the rollout is actually conservative, and that even if they don't work, it won't be a real problem for Nike.
Nike's competitors aren't sitting still. Adidas is also investing boldly. The retailer rolled out a four-year strategy in March 2020 that emphasizes the same things that Nike is focused on: having a DTC-led business model, sticking with only strategic wholesale partners and investing heavily in digital. It includes funneling 1 billion euros ($1.2 billion) into a digital transformation between now and 2025.
Executives also said during an investor presentation on the strategy that Adidas had a plan for the basketball segment, an area where Nike is the "dominant brand" in the U.S., according to Feldman. The difference between Nike and its competitors, at least for the moment, might just be that it's moving faster.
"It is interesting to see that most of these guys have realized that data was the future and they knew they had to talk about their data initiatives, but they're still on the cusp of really getting smart," Binetti said of other players in the space. "I think it's interesting to see the biggest one of them, Nike — with the biggest mountain of a business to move — really moving, in my opinion, fastest on a lot of these things."
Article top image credit: Permission granted by Nike
From Walmart and Meijer to Domino's and Stitch Fix, innovative retailers and disruptive startups are using AI to streamline logistics and store operations, prevent shrinkage and deliver better shopping experiences both in stores and online. Deep learning and machine learning algorithms can help cut operational expenses, increase revenue and improve decision making. Just look at the numbers: an Accenture report estimates that AI has the potential to create $2.2 trillion worth of value in retail and wholesale by 2035 by boosting growth and profitability.
NVIDIA is working with over 170 retail startups that are using NVIDIA GPUs and software libraries to develop disruptive AI technologies. They're building AI applications that perform real-time compute in stores for loss prevention, stockout notification and optimizing product placement. Four types of AI use cases have demonstrated the greatest business value to retailers so far.
1. Smart Stores
Retail shrinkage is a hundred-billion-dollar challenge that affects retailers globally. On average, a typical retailer is losing 1.4-2% of its sales to shrinkage. For mass merchants, that can add up to billions of dollars. Theft can happen in the blink of an eye, so it requires quick detection. Point-of-sale asset protection applications from startups such as Everseen, Graymatics, Malong, Signatrix and Third Eye Labs accurately detect ticket switching and mis-scans in real time using GPU-powered intelligent video analytics. They can detect shrinkage with up to 99% accuracy and immediately notify sales associates for intervention.
Data analytics can help retailers gather intelligence regarding popular store aisles, customer dwell time, the number of unique visitors and customer demographics. SkyREC, a retail data consulting company, uses NVIDIA Jetson systems to power its AI-based shopper analytics offering. Using it, retailers can understand shopper behavior with demographics, hot spots, cold zones and dwell points. SkyREC customer Timberland reported 30% higher sales revenue due to precision marketing and better store merchandising.
The convenience of grab-and-go stores, where customers can use their mobile phones for cashier-less checkout, is jumping in popularity. Tracxpoint makes grab-and-go shopping carts. Malong and AiFi offer grab-and-go nano-stores. Standard Cognition and VAAK power fully autonomous stores. These autonomous shopping stores reduce costs while delivering a much better and faster shopping experience.
2. Streamline Operations
Store operations management is a fast-paced and complex process. Employees must balance multiple priorities, from accurate demand forecasting and inventory replenishment to faster check-out services, while providing the best customer experience. Yet, one study shows that Americans still wait a cumulative 300 million hours per year in checkout lines. Software and robotics vendors like Bosa Nova, Fellow Robots and Standard Cognition notify associates of stock out. Companies like Anyvision notify associates when lines are getting long at checkout stands. The retail giant Kroger is partnering with Nuro for autonomous parcel delivery, which could save people time while delivering goods on demand, safely and affordably. The Nuro R1 driverless delivery vehicle, powered by NVIDIA DRIVE for autonomous vehicle operations, is the focus of a pilot program by Kroger's Fry's Food Store in Arizona.
3. Logistics and Supply Chain Optimization
Logistics and supply chain optimization is another complex process. It includes such things as accurate and fast forecasting, warehouse logistics using computer vision and robots, and truck routing optimization for last-mile delivery. The stakes are high. According to an Accenture report, for the average Fortune 100 company, a supply chain shortened by just one day frees up anywhere from $50 million to $100 million in cash flow. The Walmart Labs data science team predicts demand for 500 million item-by-store combinations every week. By performing forecasting with the open-source RAPIDS data processing and machine learning libraries built on CUDA-X AI on NVIDIA GPUs, Walmart speeds up feature engineering 100x and trains machine learning algorithms 20x faster.
4. 360-Degree View of the Customer
Understanding customer behavior has never been more critical for retailers looking to drive growth. The consulting firm McKinsey & Company assessed that AI has the potential to create over $600 billion in value, offering unprecedented profitability opportunities in labor-intensive sectors, such as retail. Combining in-store analytics with online customer behavior enables retailers to better understand customers and their buying preferences and to offer promotions that can drive revenue and deliver better shopping experiences. Criteo is piloting GPU-powered AI for data analytics to better understand buying habits and predictive search to enable retailers to propose the best products at the best time. Retailers investing in and using AI can increase their competitiveness and profit margins. See how NVIDIA can help your journey to become a smart retailer using AI on our retail industry web page.
Article top image credit:
Dollar General ramps up expansion of Popshelf concept
By: Ben Unglesbee• Published March 19, 2021
Dollar General is accelerating the rollout of its suburban-focused concept Popshelf. The dollar retailer plans to open up to 50 Popshelf stores by the end of 2021, exceeding past targets of 30 stores, Chief Operating Officer Jeff Owen told analysts in March 2020.
In addition, Dollar General aims to add the Popshelf concept as a store-within-a-store to 25 existing locations in 2021, Owen added, according to a Seeking Alpha transcript. In all, Dollar General estimates it could add up to 3,000 additional Popshelf stores in the continental U.S.
Dollar General announced the launch of Popshelf in 2020 to target women shoppers in "diverse suburban communities" with income ranging from $50,000 to $125,000. As such, it allows Dollar General to capture sales from a customer outside its traditional core.
Its merchandising approach includes "a combination of continually-refreshed merchandise, seasonal specials and limited-time items." With most items priced below $5, it spans seasonal, home decor and beauty products, as well as cleaning supplies and party goods.
CEO Todd Vasos told analysts that the early results from Popshelf stores "far exceeded our initial expectations for both sales and gross margin." That performance prompted the retailer's accelerated expansion of Popshelf "as we look to capitalize on the significant growth opportunity we see for this differentiated concept," Vasos said.
That is part of a broader expansion of Dollar General, which plans to open 1,050 stores in all in 2021. Along with Popshelf, the discounter has two newer concepts that it is expanding that cover around 8,500 square feet of sales space, with more cooler capacity, extended queue lines, produce in select stores, and larger health and beauty section, according to Owen.
All of this expansion follows a year of massive gains for Dollar General, which was among the retailers that expanded sales and customer bases during the pandemic, with shoppers consolidating trips and nonessential retailers temporarily closing their doors.
For the full fiscal year in 2020, Dollar General's sales increased 21.6% year over year to $33.7 billion while net income hit nearly $2.7 billion. In the fourth quarter, sales jumped 17.6%.
Looking ahead, Dollar General executives expect a slowdown in sales as the vaccine rollout reshapes shopping. In its 2021 guidance, Dollar General management forecasted sales to remain flat or decline by as much as 2% and for same-store sales to decline 4% to 6%. But on a two-year stack, that would represent an increase of 10% to 12%.
"At headline level this will look bad for a company with a strong track record of delivering consistent uplifts," GlobalData Managing Director Neil Saunders said in emailed comments. "However, in the first and second quarters DollarGeneral will be lapping a period in which there was unprecedented disruption in consumer behavior which brought it enormous benefits."
The more accurate comparison, in Saunders' view, is with 2019, "and on this basis, we expect very strong underlying growth which will indicate the company has held on to some, although not all, of the gains made during the pandemic."
Saunders attributed much of Dollar General's success, both before and during the pandemic, to its expansive footprint that places stores in convenient areas for rural and other shoppers.
Article top image credit: Retrieved from Dollar General on October 08, 2020
30 minutes with For Now's co-founders
As the limitations of selling exclusively online become apparent, the company's mission is to not only give emerging brands a physical presence but an opportunity to grow.
By: Caroline Jansen• Published April 27, 2021• Updated April 29, 2021
The following article is part of the "30 minutes" series, where Retail Dive talks to top executives about some of retail's hottest topics. For more, check out our landing page.
Co-founder of For Now
Cimo co-founded For Now in 2017. Prior to this, she was the director of marketing at activewear startup Crane & Lion from 2013 to 2017.
Co-founder of For Now
ReQua co-founded For Now in 2017 and serves as the company's director of operations. She's held a number of operations-related roles, including the director of operations at Crane & Lion.
Kaity Cimo and Katharine ReQua started For Now, a regional brand incubator, with one goal in mind: to help brands grow.
The company, which has two retail storefronts in Boston's Seaport district and Nantucket, will typically work with around 20 emerging brands for three to four months at a time. Brands are given access to physical retail through For Now's stores, receive product feedback from customers and exposure to a new set of customers.
Cimo and ReQua believe that in order for brands to be successful, they need to have strong operational and marketing foundations. That's where their prior experience comes into play.
Before launching For Now, the founders were working together at a women's activewear company where Cimo was the director of marketing and ReQua was the director of operations.
"We found that ops and marketing just sit at the same table, not only literally but figuratively," ReQua said. "So many of the decisions that we were making really drove the success of that business, and we wanted to take our skill set and our expertise and help other brands grow."
From a brand's standpoint, particularly a digitally native one, partnering with For Now allows customers to touch and feel a product before making a purchase while at the same time creating greater potential to acquire customers in different markets. Over the years, as the limitations of exclusively selling goods online have become ever more apparent, direct-to-consumer brands have entered brick and mortar through a variety of ways, whether through stand-alone stores, temporary pop-up shops or partnerships with traditional retailers, like Target and Walmart.
And while opening a storefront wasn't part of For Now's initial strategy, it's really become a part of its overall mission.
"We really believe in the physical storefront, and not all brands can do it on their own. It's extremely capitally and human-capitally intensive," ReQua said. "So, if you can find a partner who can tell your story on your behalf, generate sales on your behalf and collect feedback on your behalf, it's a win-win."
The small-shop atmosphere may play to brands' advantage as well. Brands not only reach a new audience but through For Now, they also gain direct feedback and customer insights from shoppers, so they're able to take those learnings and make necessary adjustments as they grow.
"Exposure is really, really important," ReQua said. "We're telling that story in a way that sometimes the founder can't always articulate, and I think some brands struggle with their true value prop. By seeing that product with customers, and often hearing the same thing over and over again, we're able to take that back to the brands and be like, 'Have you ever thought about positioning it this way? Or packaging it that way? Because that's how customers are seeing it.' So it really is a holistic view."
Building these relationships and gaining insights by communicating directly with customers in stores not only benefits brands by helping them better align product launches but also allows For Now — as curators — to know what brands and products to seek out in the future.
From a brand's perspective, something that may be particularly appealing is the fact that the concept not only provides exposure to their brands and products but actually creates loyal customers, who will eventually shop directly from the brand's website in the future.
"What's interesting and amazing to me is that we have been able to convert customers for brands, not only within our store but on their own website, which is really valuable to them obviously because then they acquire the customer information themselves," Cimo said.
Something a few brands that have worked with For Now have expressed is that when they've partnered with similar concepts, they've gotten sales, but haven't necessarily acquired customers in the long run, Cimo said. "The difference in working with us is that on social and on email, we really do make an effort to tell the brand's story." For Now will not only share product information from a brand with its followers but also go into who the founder is and tag those individuals so that customers can learn more about them, she added. "People are like, 'OK, I'll check that at For Now.' But then after [the brands] rotate out, they'll actually follow the brand and perhaps purchase in the future."
The For Now experience
But what does it take for a brand to be housed in For Now's concept?
"Kaity and I are big gut people," ReQua said. "We're also the type of people who don't mind walking down the street, whether it's our hometown or we're traveling, and we see someone wearing a pair of shoes or a bag we like. We're the people who are like, 'Oh my god, I love her bag, where did you get it?' And if it's a small company or a brand from another country, we'll reach out to them and inquire about working together."
For Now also receives a lot of brand referrals from other companies it has previously worked with, but ReQua said regardless of how a brand connects with For Now, "for us what's really important is understanding the brand and the brand story. So, is there an interesting story for us to tell? And will it resonate with our customers?"
When For Now was first getting started, the strategy was to have "high churn," constantly rotating out brands and presenting customers with ever-changing products. However, as customers came to expect certain brands to be available, the company adjusted its model. Now, about 20% to 30% of brands offered are part of what ReQua calls its "core collection." ChappyWrap, for example, has been working with For Now for about two years.
"We have kept them and a few other brands that just sell well, and our customer would be really disappointed if we didn't carry them," Cimo said. For Now has "this balance of making sure that there's still a great discovery aspect in our store to our shoppers, but also having some reliability."
Handing control over to another company to make sure your brand is accurately portrayed can be concerning for some founders. But For Now aims to address that through extensive staff training and allowing the founders to be involved throughout the process.
"Really, what it comes down to is our ability to story tell," ReQua said. "We put a huge emphasis on our training process when we onboard a brand. Our entire team has a call with the founder or the representative of the brand to hear the brand story really fluently. So anyone who comes in, we can speak really authentically not only about the product features but the founders."
While founders may initially be drawn to For Now for the exposure and growth opportunities for their brand, they're also welcomed into a community of other founders and business owners who may have faced similar challenges.
"We found ourselves naturally connecting founders to one another," Cimo said. "If someone would say, 'I've had an issue with my factory for XYZ. I'm looking for a solution,' responses would be like 'Oh, we know someone that we can connect you with.'"
Building on this sense of community, For Now would host events in-store before the pandemic. The company would bring in five or six founders or experts to participate in panels or discussions on a variety of topics, ranging from female entrepreneurship and sustainability to influencer marketing strategies.
The success of the events is what drove Cimo and ReQua to broaden this concept into something larger: the Female Founders Summit. The event initially was going to be in person and include about 90 people, including speakers and participants.
But like most other events across industries, the summit, which was supposed to be held in March 2020, was upended by the pandemic. For Now pivoted to a virtual event that was held last February and featured speakers like Faherty co-founder Kerry Docherty, designer Mara Hoffman and M.Gemi president Cheryl Kaplan.
"I think something really important about being a small self-funded concept is that we were actually able to pivot in a way that a lot of larger companies weren't able to at that time, and we were able to move really quickly."
Co-founder of For Now
But the event wasn't the only thing For Now had to shift online. Before the pandemic, the company didn't have much of an e-commerce presence at all.
"We actually didn't have a website before the pandemic. Our focus and our expertise was in the storefront and really telling the story there and being physical space for online brands," Cimo said. "All of a sudden, we didn't have a choice."
For Now attributes advantages like being able to get an e-commerce website up and running in a matter of days to the fact that its team is small.
The website has "taken on a life of its own in a really, really exciting way for us," ReQua said. "We're so fortunate to have been able to be a super small team, who didn't have to answer to investors, who could make a really quick decision without any red tape. I think something really important about being a small self-funded concept is that we were actually able to pivot in a way that a lot of larger companies weren't able to at that time, and we were able to move really quickly."
Having an online presence is something, in hindsight, For Now wishes it would have done sooner and sees a lot of potential in going forward, according to Cimo and ReQua. The company is now able to reach customers all over the U.S., rather than just in areas where its physical stores are located. For instance, one of its biggest customers is someone in Washington, D.C., who the founders have never met in person.
"We see online now as a big part of our growth," Cimo said.
Something 'For Later'
The founders have expanded their sights beyond just their storefront and e-commerce business and are looking at other ways to support growth among the brands they work with.
"We obviously opened a storefront as a vehicle to help brands accelerate their growth," ReQua said. "It was through that, that we realized the next step for their growth is often related to financing and funding."
And thus, the idea of "For Later" was born. The concept consists of four partners who offer financial analytics, operations, marketing and commercial real estate expertise to the brands they invest in. So far, For Later has invested in three companies: Sh*t That I Knit, Jibs and Qatch.
The goal is to make three to five investments every year "assuming we're finding high potential brands that we think are really going to accelerate in the marketplace," ReQua said, adding that the company isn't "going to invest in every brand. And we'll probably turn down some great brands at some point," she added.
And even as the company continues to evolve its business and expand into new territories, For Now's mission of helping brands grow remains true.
"For Now started as a customer discovery lab, and now it's a customer discovery lab that informs our ability to make strategic investments," ReQua said. "Our sole focus is to help emerging brands accelerate their growth. Whether that's through the storefront, through our e-commerce channel, through a Female Founder Summit, or through For Later. It's sort of a multi-prong approach of helping this acceleration."
Article top image credit: Adeline Kon/Retail Dive
Dick's debuts experiential House of Sport store concept
By: Cara Salpini• Published April 5, 2021
Dick's Sporting Goods opened its first House of Sport store concept in Victor, New York, in April 2021 — the latest in a number of new ventures. The company also opened two more Warehouse Sale locations, and put upgraded Soccer Shops into 34 of its existing stores in April.
House of Sport, a new concept for Dick's, is focused on "multi-sport experiences," more engagement with the community and more customer service, according to a release. A second location will open in Knoxville, Tennessee, later in 2021.
The experiential store elements include a 17,000-square-foot turf field and track, a 32-foot rock-climbing wall, golf pro shops that include simulator-equipped golf hitting bays, a putting green, a batting cage, wellness services like yoga, and equipment services like baseball glove steaming, racquet stringing, tune-ups and others.
The House of Sport concept is different from those in a couple of big ways, though. The concept is not focused on selling products at a discount, like Overtime and Warehouse, and it also includes several experiential features meant to deepen its relationship with customers and offer services beyond just shopping.
The outdoor field, for example, is open year-round for customers to practice on, with their teams or by themselves, and will feature an ice rink in the winter, according to a company spokesperson. The company will offer food, including juices and PowerBars, and customers can also schedule appointments to talk with local wellness experts.
The concept promises to engage more with consumers while still staying in its lane of sports-focused retail. And the retailer is also improving its offerings at core Dick's stores with similar features. In April 2021, Dick's debuted nine redesigned Golf Galaxy stores and added more technology to 62 others, with more remodels planned. The redesigned stores offer tech-enabled golf simulators and putting greens, just like House of Sport, as well as custom fittings and golf lessons.
Soccer is another area where the retailer is doubling down. Soccer shops in existing Dick's stores will feature specially trained soccer experts, an improved cleat shop and soccer trial cages in some places.
CEO Lauren Hobart said in March 2021 that the concept will serve as a test-and-learn space, and the company will roll out the "most successful elements" into its core Dick's Sporting Goods stores, according to a Seeking Alpha transcript of the company's Q4 earnings. It's a strategy that others in the space have used as well, including Nike, which has a slew of experiential stores, including House of Innovation and its Nike Live concept, which have influenced future brick-and-mortar openings and become a core part of Nike's strategy.
In addition to launching concepts off its namesake brand, Dick's Sporting Goods, the company is also planning an outdoor concept for 2021, dubbed Public Lands.
Article top image credit: Permission granted by Dick's Sporting Goods
A closer look at RH's Aspen 'ecosystem'
The brand in 2021 made an investment into a major Colorado real estate development, which includes stores, restaurants, residences and a spa.
By: Caroline Jansen• Published Jan. 14, 2021
RH is heading for the mountains to offer consumers a new way to experience its brand.
The home goods retailer in early 2021 announced it made a $105 million equity investment into Aspen, Colorado, real estate to build out a first-of-its-kind ecosystem of properties. The project will feature retail locations, hospitality concepts, restaurants, residential developments and workforce housing projects, according to the company.
It will open its Guesthouse concept in Aspen's Crystal Palace, which will also host the company's first bath house and spa. RH is also building out its Residences, which will include up to five four-bedroom homes at the Boomerang Lodge in addition to a six-bedroom home on Red Mountain. And Aspen, according to Telsey Advisory Group Senior Managing Director Joseph Feldman, serves as "an ideal location" to showcase the brand's products and services to its "affluent" customer base.
"We believe Aspen represents a singular opportunity to elevate the RH brand by exposing the world of RH to the world's most affluent and discerning customers in a single, walkable market," CEO Gary Friedman said in a statement. "Additionally, we believe the education RH will gain from a real estate development and ownership perspective will be immeasurable as the brand builds its global ecosystem of products, places, services, and spaces."
The Aspen announcement, which Wedbush analyst Seth Basham said serves as a "good first test," is part of RH's long-term vision of expanding beyond its Galleries and developing an "ecosystem" out of its brand. "If it's successful, it will give RH confidence to invest in these areas in other geographies — guest houses, turnkey residences, etc.," Basham said in an email.
The brand previously announced plans to open its first Guesthouse in New York City's Meatpacking District. The 14-room, 25,000-square-foot space was originally supposed to open in the fall of 2019, but was delayed to sometime in 2021.
But RH has made a play in the hospitality space before. The brand has restaurants, wine bars and cafes in cities across the country, like New York; Yountville, California; West Palm Beach, Florida; Columbus, Ohio; and Minneapolis.
The trend of retailers expanding beyond commerce and into other categories, like by opening branded restaurants, is nothing new. Department stores have long housed restaurants and tea rooms. ABC Carpet & Home in 2010 launched ABC Kitchen through a tie up between chef Jean-Georges Vongerichten and the retailer's creative director Paulette Cole. Crate and Barrel in 2019 launched The Table at Crate, a full-service restaurant within its stores. And Pirch, which specializes in kitchen, bath and outdoor products, allows customers to take a shower or cook a meal right in its stores to fully test out the products.
"Experiential retail is critical to success in a world where consumers can easily shop and make purchases online when the goal is simply convenient purchasing," Basham said, adding that RH's restaurant has proven successful to the retailer by helping to draw traffic and further elevate its brand.
Other brands like West Elm, Shinola and Muji have also put their names on hotels in recent years, but RH is approaching this venture differently, according to Friedman.
"Our guesthouse model is going to be unlike some of the other people that are doing branded hotels," Friedman said on a call with analysts discussing first quarter 2020 results, pointing to how several brands have previously partnered with hotel companies. "We're going to control the whole thing."
"You don't have a lot of risk, but you don't have a lot of upside either. You don't really control the experience," he added of others' efforts.
While an investment of this nature and scale may seem unusual, it's not entirely unheard of. Walmart in 2018 announced plans to lease underutilized land and parking space to restaurants, gyms and other businesses to create community spaces dubbed "Town Centers." The concepts — initially rolled out in Washington, Missouri, California, Texas and Arkansas stores — also featured green spaces and skateparks, among other things. However, similar to the deals Shinola and West Elm inked for their hotels, Walmart turned to partners to help build out its centers.
"It doesn't matter if it's a Guesthouse. It doesn't matter if it's a restaurant. It doesn't matter if it's a residence deal. We might have a partner from a development point of view, but we will control it. We want to own it. We want it to be ours. We want to be great at it. And it's hard to be great when you're kind of licensing out parts of your business. No one's going to care as much as you. No one's going to love it as much as you," Friedman said.
The significant financial investment also came amid the coronavirus pandemic, which has created problems for some retailers so dire they've been pushed into distressed territory. RH, however, has benefited from the pandemic-induced trend of consumers investing more heavily in their homes. The retailer in its second quarter of 2020 reported a 24.6% increase in net revenue to $844 million, while itsoperating profit grew to $111.2 million.
An experience-driven development like this may play in RH's favor as consumers hold onto pent-up demand for experiences as a result of being forced to spend much of the past year in their homes.
"This is a sizable, ambitious investment," Basham said. "Whether it is successful will be very important to evaluating the value of the company."
By filling up stores with junk food, tobacco and other high-margin goods, these retailers may be risking loyalty and market share in other key categories.
By: Daphne Howland• Published Feb. 10, 2021
Cigarettes, tobacco alternatives, salty snacks, candy, packaged beverages and beer.
These are familiar items found at convenience stores, and among the top drivers of sales for those retailers, according to Nielsen. They are easy to grab during quick stops, after filling the gas tank.
They must be good for drugstore sales, too, because these are also the products that crowd the front of the stores run by the top drugstore retailers in the U.S. (CVS stopped selling tobacco products in 2014 in order to square its merchandising with its healthcare ambitions; rivals Walgreens and Rite Aid so far have resisted taking that step despite their own moves to offer more clinical services.)
"A lot of words are being spoken about drugstores becoming wellness destinations," GlobalData Managing Director Neil Saunders said by email. "However, there isn't much action on the ground. Most drugstores are still badly lit boxes with grey carpet tiles that lock away razor blades and feel completely dispiriting. They are places to go and feel depressed, not to go and feel well. There is much work to do."
Health and beauty, and snacks and toys
The convenience store-like atmosphere of most U.S. drugstores has little in common with what is found in Europe and elsewhere overseas at analogous retailers.
Most such shops abroad tend to have an organized, sometimes clinical feel, with beauty products positioned as wellness items. L'Oréal France took that up a notch a couple of years ago with a co-branded urban store concept that added services like light therapy, along with a convenience play that featured dry cleaning, parcel pickup points and one-hour delivery for certain items.
"I have seen firsthand the stark contrast between European drugstores and U.S. pharmacies," Marcel Hollerbach, chief marketing officer at Productsup, an e-commerce data integration company based in Berlin, said. "While U.S. pharmacies such as Walgreens and CVS can take the shape of toy stores, the snack aisle and a place for prescription medicine all at once, European drugstores tend to emphasize beauty and wellness, sans the impressive variety of chocolate bars and candy at checkout."
The U.S. retailers are probably giving junk food and other sundries pride of place because they ring up higher margins than the consumer products found in the health and beauty aisles, according to Sanford Stein, founder of Retail Speak. Decades ago, Stein's father and uncle ran a small local Milwaukee chain of discount health and beauty stores dubbed "Pill & Puff." The stores were clean and well-lit, with depth and breadth of assortment, but only within those categories, like a wide variety of sizes and SKUs of hair spray, Stein said.
After an investment firm bought the business with plans to expand it, that focus was lost.
"The very first thing they did was bring in the candy and all of the other crap," he said. "And within five years the whole thing was down the toilet. My father used to say, 'If a retailer thinks they're one thing on Tuesday, and something else on Friday, how is their customer going to know what they are?' Drugstores do have an identity crisis because if you're going to be taken seriously as a partner in 'well-being,' you don't want to be selling Doritos, or you don't want to be also having aisles of half-broken toys and leftover Halloween candy. All of that stuff that makes a lot of money for them, it's just a contradiction."
What it costs
Drugstores' merchandising approach — party in the front, medicine in the back — comes at a price.
As already discussed, it muddies the healthcare message that all the major players emphasize these days, including operating as major distributors of COVID-19 vaccines. CVS a few years ago rebranded to "CVS Health," acquired a health insurance company and is running healthcare clinics across the country; Walgreens also plans to run more clinics and Rite Aid is testing a store concept that moves the pharmacy to the front.
"Not only has this approach meant that drugstores have missed out on lucrative opportunities, such as the growth in premium beauty, it also means that they are ill-equipped to deal with present-day realities," Saunders said, noting that Amazon has entered the pharmacy business, while competitors like dollar stores and Target's small-format stores are challenging them in other categories. "It has also, to some extent, tarnished their brands."
Another challenge comes from retailers like Bed Bath & Beyond's Harmon Health and Beauty stores, with 55 locations mostly in the New York tri-state area, one of the holdings that retailer hasn't sold off. The value-focused operation, which resembles the Steins' Pill & Puff discount and merchandising approach, in January 2021 hired a Macy's veteran to help drive growth.
Moreover, convenience may boost traffic and margins, but it fails to drive loyalty because it doesn't foster an emotional attachment to the brand, according to Saunders.
"This is exactly what happened with the drugstores," Saunders said. "The problem is that they now desperately need to reinvent themselves. But after years of underinvestment this is difficult. It is hard to create a new brand image and it is hard to make consumers think about them differently. Given that most drugstore chains have thousands of shops, doing things like format refreshes is also difficult."
Still, it's imperative that they pick a lane for the long run, probably the more meaningful health and wellness path in which they've invested so much, with online and offline touchpoints that work together, according to Hollerbach. The soda fountain of old, which Stein notes was once a fixture of local drugstores that provided a gathering place and fostered loyalty, could morph into the kind of healthy smoothie bar touted at wellness centers.
"As health and wellness become increasingly associated with these brands, it's imperative this is reflected both online and offline, especially as consumers start to view a trip to the local CVS as out-of-home entertainment," Hollerbach said. "Walgreens, CVS and Rite Aid may want to have it all by promoting health and hosting aisles of junk food, but it's more likely consumers will resonate with consistent communications that fit with beauty, wellness and health."
It's not clear how many people are leaving cities due to the pandemic. Or how much it helps the once-popular shopping destination if they do.
By: Daphne Howland• Published April 9, 2021
The COVID-19 pandemic has been an extreme event. The disease outbreak devastated human health and upended the global economy, and remained a threat even after a year despite the rapid development of vaccines. When it comes to business in general and retail in particular, it altered or sped up several trends, including the decline of malls, once the favorite shopping destination of much of America.
That slide was already underway before 2020. But several analysts, including Green Street, have noted that the closures that might have taken place in the next five years to a decade are now more likely to happen in two, with the countdown already ticking.
With foot traffic to malls disappearing even before the pandemic, several retailers, including all-important department store anchors, have fled, either by shrinking their footprints or shifting to other locations. In the first quarter of 2021, the vacancy rate at enclosed malls reached an all-time high of 11.4%, a 90-basis-point jump from the previous quarter, according to Moody's Analytics REIS. Given the structural decline, that's not likely the bottom, according to Moody's Analytics Senior Economist Thomas LaSalvia.
But the pandemic could be providing a softer landing for these shopping centers, in the form of a flight to suburbia from cities. At least, mall executives hope so. Earlier this year, Simon Property Group CEO David Simon predicted that "the suburbs are going to be hot" and "where the action is in the future" and told analysts that will "spell a good opportunity for us."
Living for the suburbs?
The trouble with this theory is that it's a little shaky.
It does appear that in 2020, with the usual urban amenities like theater, dining and shopping reined in by the pandemic's restrictions, some people, especially those in wealthier households, headed to second homes or their parents' houses in the suburbs, according to a report from PwC and the Urban Land Institute. Many of them will or already have returned to their city apartments. But some of this swing toward suburbia could last three to five years, according to that report.
"But, like many of the changes that have occurred due to the pandemic, the ultimate impact on the desirability of large cities will be on the margin," according to the report. "Some companies and residents will choose smaller cities or the suburbs, but, in response, cities will likely creatively adapt, perhaps adding more green space and outdoor activities, and continue to improve livability to retaining and attracting residents who continue to value an urban lifestyle."
Any suburban boom will be partly fueled by people who continue working from home even after the pandemic, some experts say. Green Street analysts, for example, earlier this year said they expect higher income consumers to move to "the suburbs and low-cost markets, potentially upending the long-running megatrend toward urbanization," though they also noted that some of their analysis involves "guesswork." Like Simon Property Group's Simon, researchers at footfall analytics firm Placer.ai see these trends as "a powerful opportunity for suburban retail and malls as they look to address the needs of this new population – one which likely has more spending capacity than they did before."
"Millennials hate the mall more than anybody."
Many demographics researchers see the move toward suburbia as mostly unrelated to the pandemic, if perhaps sped up by it, with an increasing number of millennials starting families and taking a predictable step away from urban life in favor of backyards and good schools.
That's not emptying cities utterly. It looks like older members of Generation Z are stepping up to take their city apartments thanks to falling rents, according to research cited by Placer.ai, which called the movement away from cities "less about an exodus than a revival."
There's also evidence that to some extent millennials are importing the vibe of urban life to the suburbs. Malls aren't necessarily a big part of that.
"Millennials hate the mall more than anybody," Nick Egelanian, president of retail real estate firm SiteWorks, said by phone. "They're going to shop at Costco, they're going to shop at Trader Joe's, they're going to shop at Whole Foods, they're going to shop at all the TJX concepts. And if they have a professional job, they'll go to Nordstrom to get nicer clothes and maybe some will go to Saks once in a while."
Most of those retailers, including the big-box stores that have been siphoning market share from department stores for decades, are also found in the suburbs. They present formidable competition that was growing fiercer well before the pandemic, Egelanian also said.
"Almost all of the malls that are left are in the suburbs. They were in the suburbs before the pandemic, they're in the suburbs now," he said. "So, if we think some moment in time, shifting where people are staying, is going to change 40 years of secular trends change, think again. A momentary change in human behavior does not change a 40-year trend in how retail works, and what people's preferences are. And to the extent that any other retailer, like the T.J. Maxxes of the world, think that there's going to be a population boom in the suburbs, they're going to build all the more."
As Moody's economist LaSalvia also said in his report, that doesn't mean that every enclosed mall is doomed. Unlike Egelanian and others, Jan Rogers Kniffen, CEO of J.Rogers Kniffen WorldWide, does see a dramatic, possibly decades-long shift away from cities.
But fewer than 300 malls may benefit by what he calls "the great de-densification that actually began before the pandemic and was dramatically accelerated by COVID."
"There are 278 great malls in America. They are virtually all suburban. They did not and do not need saving," he said by email. "They were always going to be fine. They will have high occupancy, rising rents, and increasing foot traffic as soon as the pandemic fades. They will also get the best stores from the best retailers. Will the great de-densification of America save the remaining 650, or so, enclosed malls? No, it will not."
Regardless of how many U.S. consumers change their address or stay put, or for how long, most malls need to get moving, experts including Egelanian, Kniffen and others say. Some need a complete transformation, from retail-heavy behemoths flanked by department store anchors into mixed use campuses, residential developments or distribution centers. Others have to shrink dramatically, and sell much less apparel and footwear, according to Kniffen.
"Some, unfortunately, will get bulldozed,"he also said. "Some will become hydroponic farms. Some will be supported by economic redevelopment by the nearby community that does not want to see the mall go away. What will really benefit from the great de-densification? Casey's General Store and Tractor Supply and Boot Barn and convenience strip centers."
The strategy behind turning department stores into warehouses
Rumors are circulating about Amazon converting vacant mall space into fulfillment centers — a move experts say would round out its omnichannel approach.
By: Jen A. Miller• Published Aug. 19, 2020
Fulfillment for e-commerce requires three times the warehousing space of traditional brick-and-mortar store inventory, given the greater variety of SKUs and space-intensive shipping and parcel operations. With e-commerce growing in the pandemic, supply chain players are scooping up space where they can find it, especially if it's close to areas with high population density.
In August, reports surfaced that Amazon was reportedly in talks with Simon Property Group to take over mall spaces left vacant by closed department stores, namely those that once belonged to J.C. Penney and Sears. An anonymous source told The Wall Street Journal that Amazon would turn these spaces into online fulfillment centers.
Amazon and Simon were tight lipped about if it’s really happening, and why. "Amazon has a policy of not commenting on rumors or speculation," an Amazon spokesperson said in an email at the time the story broke, and Simon didn't respond to a request for comment.
But experts see multiple reasons for e-tailers such as Amazon to make this move, from cost savings to an enhancement of the omnichannel experience for consumers.
"You’ve got this deeply discounted floor space in urban areas with huge parking facilities and customer density all around," said John Impellizzeri, professor of professional practice in supply chain management at Rutgers Business School. "It could turn out to be a really brilliant play here, if they can get it at the right price."
Plentiful, cheap and easy-ish to convert
One reason to convert retail space to fulfillment is cost.
Malls are figuring out what they’re going to be next, as shopping has shifted online and anchor department stores go out of business. In 2019, 9,548 stores closed, and Coresight estimates as many as 15,000 could shutter this year.
Mall space is cheap, as low as $4 per square foot, said Impellizzeri. Department store space typically costs closer to $20 per square foot, Alexander Goldfarb, real estate investment trust analyst at Sandler O’Neill + Partners, told CNBC. Warehousing space averaged $6.50 per square foot in a 2017 survey.
"You’ve got this deeply discounted floor space in urban areas with huge parking facilities and customer density all around ... It could turn out to be a really brilliant play."
Professor at Rutgers Business School
Transitioning department stores to fulfillment centers wouldn’t be that difficult, Impellizzeri said. "Copying and pasting fulfillment centers into floor space is their core competency."
These spaces aren’t perfectly set up for warehousing, though. Fulfillment and distribution facilities typically have inbound and outbound bays, but retail stores usually have just one set, he said.
Department stores with multiple floors may present a challenge, too, said Michael Brown, partner at Kearney. They "are not that easily accessible through the automation that Amazon uses for their facilities," he said.
Amazon may also run into zoning laws. "That is reality in many of the suburban malls, where trucks might not be able to enter during certain hours of the night or times of the day," Brown said, which isn’t typically an issue for warehouses or industrial locations.
Shifting logistics to the consumers
Putting fulfillment centers in more places can help make delivery even faster, said Brown. "Getting closer to the consumer, to be able to expedite delivery from two days to one day to same day is critical in the evolution of [Amazon's] business model," he said. "Bankrupt department stores are in that close proximity to the customer that they can easily get to them."
Because this move potentially puts fulfillment centers in so many locations near consumers, it could also push delivery and reverse logistics onto consumers. If customers are willing to drive to a fulfillment center to pick up an item because it’s faster than delivery, or drop off a return because it’s easier than re-boxing an item and taking it to a UPS store or a post office, that saves the retailer money.
Amazon is saying "let’s get the consumer involved in returns, let them do those last couple miles of driving rather than outsourcing it to someone that we pay," said Impellizzeri. "That’s the play, and we think it’s brilliant."
Physical locations round out omnichannel strategy
One thing e-tailers are missing is a physical presence, said Brown.
Creating fulfillment centers all over the U.S. gives Amazon a way to compete with Target and Walmart, both of which have used stores during the pandemic to execute omnichannel strategies, such as ship from store and curbside pickup. Amazon can’t offer curbside pickup if there’s no curb to pick up from.
"Trucks might not be able to enter during certain hours of the night or times of the day."
Partner at Kearney
Dan Neiweem, principal and co-founder of Avionos, said this is a natural progression from Amazon buying Whole Foods. With grocery, "there’s a lot of repeat ordering and you have a captive market," he said.
The same is true for regular online shoppers, and Amazon’s only weak spot in offering a complete omnichannel experience has been with physical shopping. "I think what they’re really looking at is not just shells. I see them actually wanting to use those locations so you can come in, buy, shop and actually take items off the shelf," Neiweem said.
In a way, this move could turn department store spaces back towards their original functions.
The J.C. Penney and Sears catalog model "allowed consumers to purchase goods over the phone and then pick them up at the local retail of their choice, which in most rural communities was essentially just a front counter and a back room storing the products," Johnathan Foster, principal consultant at Proxima Group wrote in an email. "If these box-retailers are consumed by Amazon ... the e-commerce giant is refreshing the model created by J.C. Penney and Sears 30 or 40 years ago."
Article top image credit: Simon Property Group
Inside the evolution of stores
As physical stores re-open nationwide, what was old in retail is new again. With convenience conquered by e-retailers, stores are redesigning locations to be enticing and experiential, experimenting with brick-and-mortar to attract shoppers who have been dormant too long.
included in this trendline
The department store of the 21st century isn't Macy's
Please don't touch: The future of experiential retail in the era of coronavirus
The strategy behind turning department stores into warehouses
Our Trendlines go deep on the biggest trends. These special reports, produced by our team of award-winning journalists, help business leaders understand how their industries are changing.
Davide SavenijeEditor-in-Chief at Industry Dive.