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
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
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
5 factors to consider when planning for the future of retail
Retail isn't dead, or even dying. This year, U.S. retail sales could increase as much as 8.2%, to more than $4.33 trillion—the fastest growth in more than two decades, according to the NRF. But with growth must come change, particularly in retail. What happens when the renewed novelty of brick-and-mortar subsides and in-store feels commonplace again? In this pivotal time, brands must fulfill the current needs of their customers in order to lay the groundwork for long-term loyalty and success. Here are a few important factors to consider.
Safety is a given
Consumers need to feel confident you are taking the necessary steps to protect them and your employees. Digital signage and overhead messaging are engaging mediums for doing so, complementing capabilities like shopping by appointment and curbside pickup. According to a September 2020 study, 80% of shoppers expected to increase BOPIS and curbside pickup over the next six months. BOPIS and hand sanitizer may be here to stay, but safety isn’t a brand differentiator—it is a given. In addition to making guests feel secure and cared for, brands must create exceptional experiences that stand out and elicit emotion.
Mastering the intangibles
Shopping is about more than acquiring an item. Retailers must understand why consumers leave the house in the first place and create environments that are exceptionally welcoming, fun and rejuvenating. These atmospheres should also reflect the brand or retailer's identity. Every aspect of the in-store experience should be purposeful, from the music you play to your messaging, signage, lighting and even scents. It is also worth considering what makes each of your stores unique. You need a clear brand identity, but updating each store to reflect the nuances of the region, as Aldo did with its Toronto flagship, can be an effective way to boost loyalty.
Play to your intrinsic advantages
Shopping in-person has obvious advantages. Consumers can see the items they are considering, try on clothes, find inspiration, connect with people, and much more. They can experience memorable moments—something shopping online doesn't usually offer. So, how will your stores play up the advantages of brick-and-mortar? Late last year cosmetic brand Beautycounter played to their advantages by opening a hybrid store featuring an in-store studio; combining dynamic content, digital signage, and live stream shopping capabilities.
Weaving in digital elements, from QR codes to digital signage, kiosks, and augmented reality, helps marry online and offline elements and create those unique, immersive moments that get customers excited about brick-and-mortar. Nike partnered with a retail experience agency to create a virtual outdoor expedition using mobile tech. Now guests of its NYC location can virtually feel what it's like to visit Smith Rock State Park in Oregon. Such creative concepts can draw guests even after COVID-19 is long behind us.
Brands are also driving foot traffic with "Instagrammable" settings. Selfie-friendly moments not only give people a reason to come to your store, but they also create free advertising for your brand as people share their videos and photos on social media.
The customer is the channel
Consumers crave physical experiences, but they aren't about to give up the convenience and ease of eCommerce. According to McKinsey research, all retail categories saw an increase in online penetration, and consumers intend to continue many of the digital behaviors they adopted during COVID-19. Retailers and brands must strive to create seamless shopping experiences, regardless of the channel, by integrating online and offline data and considering every element of their brick-and-mortar experience, as well as their digital storefront.
Sephora is another great example of a brand that creates a reason for people to come to the store while understanding the importance of digital media. Consumers visit Sephora to try out products and learn from beauty experts whose goal is to simplify beauty and offer customized recommendations. But the brand looks at the customer journey holistically, with an "omnitude mindset," meaning a commitment to delighting the customer no matter what channel they are on. Its mobile app enables consumers to try on products digitally using facial recognition technology, choose their perfect shade and take makeup tutorials. Its loyalty program encourages customers to create profiles, so beauty reps can pull up past purchases, regardless of where they were made.
To meet customer expectations in the short-term and moving forward, retailers must deliver more engaging in-store experiences that create emotional connections, in safe environments. They must also bridge online and offline experiences to achieve personalization and cohesiveness.
That is just a glimpse at how stores are changing. To discuss trends, predictions, and best practices, reach out to the experts at Mood Media.
Article top image credit:
Shutterstock / fiphoto & Zapp2Photo
Dollar General ramps up expansion of Popshelf concept
By: Ben Unglesbee
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
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
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."
Dick's debuts experiential House of Sport store concept
By: Cara Salpini
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
The inconvenient truth about drugstores
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
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
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
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
Please don't touch: The future of experiential retail in the era of coronavirus
In the short term, brands moved online to engage consumers, but with stores reopened, retailers will have to shift away from or reimagine high-touch services.
By: Cara Salpini
What's the purpose of a store? Technically, it's to offer up products to customers and, more importantly, get them to buy those products. But in recent years, the purpose of a store has been brought into question as startups and traditional retailers alike explore what has become the pinnacle of physical retail: experiential retail.
Or, to specify: successful experiential retail.
The idea of fostering a closer relationship with customers, one that's not just focused on the transactional act of shopping, has led to all kinds of experimentation within stores, with varying degrees of usefulness. Some examples, like basketball courts and soccer fields in athletics shops, are geared toward giving customers a better way to test out the products they might want to buy, while others, like Lululemon's newest concept, are intended to build community around the brand through activities like workout classes, group meditations and scheduled events.
It's led to some store features that now seem inseparable from a given category, like product testing stations and in-store services at beauty retailers, but it's also created a glut of companies all trying to figure out how to create something meaningful, and not always successfully. The shiny object syndrome threatens retailers with large upfront costs for, say, a chain-wide touchscreen system customers don't end up using.
Yet all the same, this transition in how retailers think about the store has led to some distinctive concepts: the Canada Goose cold room, Casper's miniature house displays and Glossier's Instagrammable everything. For many, it's seen as the savior of brick-and-mortar retail, but the coronavirus outbreak has changed a lot about shopping in the short term, and it's unclear how much will stay changed in the long term.
When will customers get excited about laying down on a mattress again? What will be the reason to keep hanging out in beauty stores when product testers aren't accessible?
According to a Coresight Research report, only one in five consumers expected to buy apparel in the first month after lockdown, and of those who changed their purchase levels during the pandemic, one-third said they expected it to be more than six months before their spending returns to normal. Health and sanitation concerns will also color the way customers see stores, and occupancy limits will dampen the ambitions of many, including any retailer thinking of launching a pop-up in the near future.
"You can forget pop-up stores for a while," Brendan Witcher, Forrester vice president and principal analyst, said in an interview. "The idea of a pop-up store is going to be a 2021 initiative."
In the meantime, how will existing experiential retail respond? And what are the threats to brick-and-mortar retail's knight in shining armor in the long term?
Making experiences virtual
Over the month of March, as retailers grasped the severity of the pandemic in the U.S., they shuttered stores on a large scale, temporarily blocking customers from their most valuable assets. Many immediate plans were put on hold — capital expenditures cut back, growth plans extended further into the future — but retailers weren't entirely sitting still.
For most, e-commerce was still up and running, and retailers jumped into getting solutions like buy online, pick up in-store ready to roll out, and finding ways to engage with customers online rather than through their store associates. But how do you translate the idea of "experience" to a digital format?
"It's about giving the shopper the choice of how they want to engage with your brand, and this is only going to help brands give consumers more of a choice."
Head of Retail Consulting at RetailNext
American Eagle threw a virtual prom, and according to Andrea Szasz, a principal in the Consumer practice at Kearney, beauty brand Kiehl's has been hosting hour-long conversations with their beauty advisers on social media.
"Most of them are kind of feeding into the idea that you want to really create a community of your loyal consumers and that these consumers have to exchange with each other," Szasz said in a conversation about how beauty retail will be impacted by the coronavirus. "So the community of the consumers is on one side, but the community of the experts is on the other side."
While these virtual events have been a bandage solution for now, they might become a staple of how retailers think about experiential retail in the future. At the moment, over a quarter of respondents to a Coresight Research report expect to switch shopping from stores to e-commerce, and two-thirds are spending more online than they used to.
Being forced to focus more on the online channel has given retailers the necessary infrastructure to offer up virtual solutions for their events in the future, even when U.S. retail has returned to normal, said Lauren Bitar, head of retail consulting at RetailNext.
"It's about giving the shopper the choice of how they want to engage with your brand, and this is only going to help brands give consumers more of a choice," Bitar said.
Bitar also sees potential for some companies to get creative with bridging the gap between physical and virtual experiences, for example by mailing necessary items to customers before a virtual event like a wine tasting or a cooking class.
Working around the human touch
In the move to reopen stores, experiential retail wasn't the first item on retailers' minds. Setting up basic protocols like social distancing, hand sanitizer stations and one-way aisles took precedence. Many retailers are also either requiring or encouraging shoppers to wear masks, if they choose to come to stores at all.
A study by First Insight found that 78% of women would not feel safe testing beauty products, 65% would not feel safe trying on clothes in a dressing room and 66% would not feel safe working with a sales associate — significant numbers considering women are the target of many categories of retail. Hand sanitizer and limited occupancy were measures most people (80%) said would make them feel safest, though masks (79%) also ranked high.
But even with those measures in place, consumers also need to be willing to go to a physical store, and while some street-facing locations may fare better, many consumers have put malls on their temporary list of places to avoid. According to Coresight Research, 48% of respondentsexpect to avoid shopping centers or malls after lockdown, the highest measured, and 32% of respondents expect to avoid "shops in general" as of May 13.
"The big question is: If you need to put in all these safety measures to protect people, then why would people come in, in the first place when they could just order online?" Witcher said. "The minute that it goes away, and they don't need to order online anymore, then you don't need the safety protection, right? It's almost like we're creating a scenario that doesn't make any sense."
But some customers will, no doubt, head back to physical stores. And when they do, retailers with highly experiential spaces will have to have a strategy for that space, and a way to limit touch engagements. For something like beauty product testers, maybe it means giving out small samples instead, Bitar suggested, though that raises waste concerns if used on a broad scale.
"Experiential retail was not a slam dunk before all this."
Vice President and Principal Analyst at Forrester
It may mean no touchscreens for the time being, or dedicating an employee to cleaning off touchscreens after every use, or maybe just being more creative with how stores use existing technology. Witcher pointed to beauty apps as an example where maybe customers and associates can pull up the same experience on their individual phones that would normally be displayed on a touchscreen in the store, and still be able to walk through the experience together.
Michael Brown, a partner in Kearney's Consumer Products and Retail Practice, also noted that while consumers may be reticent to engage in high-touch elements of experiential retail for the moment, those aren't the only elements that factor into the in-store experience.
"Although the touching and feeling is going to stop for a while, still other senses of sight and smell and sound can be engaged in a retail environment," he said in an interview.
In short: Retailers will have to be creative with how they tackle experiential retail in the near term, but it shouldn't be packed away entirely. For some retailers, it may be a higher priority than for others, depending on how important or valuable the experience was to the store.
"Experiential retail was not a slam dunk before all this," Witcher said, noting that in-store experiences need to add value, like Sephora's makeup testing or Kohler's testable shower spaces.
"There's a lot to turning a physical environment into something more than a place to shop, but it has to be approached strategically," he added.
Christmas without crowded stores?
While retailers have an idea of temporary changes that will have to be enacted, much of the long term is still unknown — largely because much about the coronavirus outbreak is still unknown. But as stores reopen, retailers will have to reevaluate the short-term fixes they put in place, and whether or not they're still relevant, and still financially viable.
The widening of fulfillment options, including curbside pickup and free same-day delivery as a courtesy to the shopper, will likely have to be rolled back, or retailers will have to begin charging for them, Witcher said. For some, the services are maintainable, but others don't have a good financial reason to continue offering them, especially as services like curbside pickup take away from the impulse purchases retailers would usually get if a customer entered the store.
"You can't just afford to keep customers happy and go out of business," Witcher added.
Much of the expenses allocated toward experiential retail for the year will likely be redistributed to areas that are more pressing. Retailers were already skipping on much more important expenses at the beginning of the crisis, including rent. Many retailers also cut back on marketing expenses for similar reasons, though marketing will need to pick up again now that stores are reopening.
"Coming out of this pandemic, retailers will be in fairly dire straits. Many of them, if not all, will be missing at least on top-line revenue, if not also on bottom-line margin come Dec. 31," Witcher said, noting money will likely be spent on investing in supply chain or marketing. "It's not a reflection of experiential retail, it's just expensive. It's an expression of a shifting priority for the right now, but it's certainly not the new normal."
Lingering in the background is also the threat of a resurgence of the coronavirus in the fall, which would hit retail at its most important time of the year. That would be devastating in any year — a bad holiday season can make the difference between bankruptcy or not for distressed retailers — but it would be especially so when retailers are still actively trying to recover from the roughly two months of store closures.
"It will be impossible to deliver traditional volumes of business in the Thanksgiving to Christmas period."
Partner in Kearney's Consumer Products and Retail Practice
The holiday season is also traditionally the time when retailers pull out all the stops, with engaging window displays and mall Santas helping to bring in hordes of extra shoppers. Retailers will have to spend some money ahead of time to ensure the holiday season doesn't go to waste, according to Brown, and instead works to recoup some of the losses from the first half of the year.
"Retailers are going to have to invest to bring the consumers to stores, so I think they're going to be very aggressive when they get through the slow days of summer," Brown said, predicting a "slow ramp up" through summer to the fall. "Retailers are also going to have to create special events to launch the holiday season early because based on occupancy restrictions, the potential for a close down again in the fall — it will be impossible to deliver traditional volumes of business in the Thanksgiving to Christmas period."
Brown noted that retailers are going to have to start bringing in holiday traffic "as early as the beginning of October."
Assuming occupancy restrictions of one form or another are still in place during the holidays, Bitar suggested stores may start passing out tickets or appointment times for customers to shop — some already have for the time being — and could even run more experiential events or pop-ups this way, as long as there's enough consumer interest. (There will likely be enough empty space in malls to fill, at the rate with which retailers are filing for bankruptcy.)
Malls will also have to be extra aware of how many shoppers are in stores at the same time.
"When we think about occupancy, a lot of the time we're thinking of stores," Bitar said. "But in a mall, even if you've got an occupancy rate, you need to be very conscious of where in the mall a consumer is because if your occupancy is 1,000 and you've only got 500 in your mall but they're all in the same spot — you've got an occupancy problem."
As the industry looks to the future, whether it's the upcoming holiday season or even into 2021, some of the biggest lingering questions for retailers are: When does this end, and will consumers ever be enthusiastic about touch-and-feel shopping experiences again?
For the moment, visiting physical stores is still unsettling for some customers. A Gartner report tracking consumer concerns found that the "Safety of going to businesses' physical locations" was a top concern the week of May 7 to May 12. But that doesn't mean it will remain so forever.
"Society, at least here in the U.S., we tend to forget things pretty quickly. I mean, it wasn't too long after 9/11 that we were back on airplanes," Witcher said, noting that consumer interest in physical shopping will likely snap back pretty quickly once the coronavirus outbreak is behind them. Yet it's still fairly unclear when retail will be able to discuss the pandemic fully in the past tense.
"As much as I want to subscribe to the 'We're coming out of this' story arc, I just don't think we are yet," Witcher said. "I think there's residual effects that we haven't yet felt."
Article top image credit: Cara Salpini for Retail Dive
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