The rising popularity of secondhand retail is hardly news. In fact, in the U.S., the secondhand apparel market will more than double by 2026, reaching $82 billion, according to ThredUp’s most recent report.

U.S. consumers have embraced resale far more than most retailers realize, according to research from WD Partners. A huge 92% said they shop, buy, sell or trade secondhand items at least once each year, according to the firm’s report, “Can Resale Save the Store?”

Consumers would shop for used goods of all kinds across venues, with nearly half saying they’d be “more likely” to go to a big box store and more than 40% a department store if they sold used items. Numbers were similar for electronics, specialty retail and sporting goods stores, per the report.

Nearly a quarter (23%) said that half their purchases are already used, resale or vintage, WD found. Brick-and-mortar retailers have an advantage in the space because online resale is proving to be unprofitable so far, according to the report.

Still, WD Partners was taken aback by the depth and breadth of consumers’ enthusiasm for resale, according to Lee Peterson, executive vice president of thought leadership and marketing.

Secondhand sales have evolved from a niche aspect of retail into the mainstream, with a diverse and growing set of retail chains like Walmart, Ikea, REI, Amazon, Home Depot and a slew of specialty apparel players offering or at least experimenting with resale. That also includes many “sophisticated online retailers like The RealReal and Kaiyo,” WD researchers said in the report.

Resale e-commerce is likely to continue to grow and attract investors, though online sales remain unprofitable, they said. That gives physical stores an operational advantage.

“Everything is multi-channel now, so I could see some form of resale or even donations done online in order to be authentic about circular commerce, but clearly, the best results are going to be taking the hard road and doing it in stores,” Peterson said. “Which means training and programs and new ‘shops’. But according to this study, and I’m sure more to come, it’ll be worth it, just like BOPIS is now for retailers who resisted it.”

More, physical stores enable the treasure hunt valued by secondhand shoppers. Buying used items has become normalized — a way to save money and the planet — and is likely to drive traffic and bring new customers into most any store, according to the report.

“What’s evident from these stats is the fact that both department stores and specialty retail rank high, meaning that the mall itself would increase traffic by having used,” Peterson said. “Not only in existing stores, but by attracting tenants into their properties.”

For the first time in its nearly 50 year history, The Vitamin Shoppe is launching a franchise strategy.

The company on Monday announced the opening of its first franchise location in Valparaiso, Indiana. The Vitamin Shoppe currently has signed 58 franchise territories to 15 franchise partners and plans to open a dozen or more locations this year as it breaks into new markets around the U.S. It had an existing store in Greensboro, North Carolina, that was converted into a franchise unit in January 2022.

“This store is the first of many to open in the coming months and years, as franchising becomes a significant retail growth engine for The Vitamin Shoppe, building upon our industry-leading position in the flourishing health and wellness space,” CFO Laura Coffey said in a statement.  

The Valparaiso location also touts services including same-day Instacart delivery, BOPIS, curbside pickup, mobile checkout and virtual one-on-one appointments with a nutritionist.

The Vitamin Shoppe requires potential franchisees to have a minimum net worth of $750,000 and $200,000 of that in liquidity.

The retailer currently has over 700 company-operated retail stores under its namesake and Super Supplements banners.

Parent company Franchise Group also owns Pet Supplies Plus, American Freight, Buddy’s Home Furnishings, Sylvan Learning, Badcock Home Furniture & More and Wag N Wash — all companies that also have franchise options. The investment firm was considering going private, according to reporting earlier this year by The Wall Street Journal.

Franchise Group was in negotiations to acquire Kohl’s last year in a deal that ultimately fell through.

Clarification: Information regarding a converted Vitamin Shoppe was added to this article.

Sponsored content

By NVIDIA

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

Asset Protection

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.

Store Analytics

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.

Autonomous Shopping

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.

Direct-to-consumer brands have faced a number of challenges in the first several weeks of 2023 alone.

After being faced with early pandemic disruptions, including store closures, staff cuts and supply chain turbulence, brands are now met with new challenges, including the impacts of inflation and the higher costs of doing business.

Over the past several months, brands including Everlane, Wayfair and Warby Parker have announced new rounds of layoffs in an effort to cut costs.

Other brands — like Glossier, The Ordinary, Dr. Dennis Gross and Nugget — have raised prices as a result of increased production and shipping costs.

For some companies, the difficulties over the past several years have proved to be too much for their businesses. Already in 2023, Forma Brands, the parent company of beauty brand Morphe, filed for Chapter 11 citing liquidity and operational issues as a result of the pandemic, changing consumer beauty habits and terminated influencer partnerships. And it likely isn’t alone.

Experts are predicting many brands won’t make it through this new round of challenges.

So, as competition heats up — and funding becomes harder to come by — what does it take for a DTC brand to be successful in today’s retail environment?

‘You can't just roll out the DTC playbook’

Over the past decade, “DTC” has grown from a buzzword in retail to a widely used business model. The space has become increasingly crowded from both startups and traditional retailers adopting the model.

Levi’s, Adidas, Nike and Under Armour have all outlined plans to lean more into their direct-to-consumer businesses.

“There's a lot more competition. They're no longer the rebels. They're becoming a bit more mainstream,” said Jonah Ellin, chief product officer at 1010data, adding that the term DTC is “becoming more jumbled and confusing. There are so many brands and because so many of the national brands are now establishing their own DTC, it is certainly becoming a much more crowded space.”

And what consumers are interested in is becoming more focused. Today’s consumers, particularly those in younger generations, are increasingly seeking out brands that tout social or environmental good, according to Ellin.

“Buy a pair of socks for you, we’ll give a pair of socks to charity. Purchase these products and you're also helping to save the environment. I think that's really something that's building loyalty with those customers and establishing the relationship,” Ellin said.

To succeed, brands not only need to have a mission that’s attractive to customers, but also meet consumers where they’re shopping. 

As a result, many digitally native brands have taken their business offline and moved into brick and mortar through pop-up stores or permanent locations. Allbirds has opened several locations over the years — including in New York, Colorado and California — and now operates around 60 stores. Glossier and ThirdLove have also pushed into physical retail recently. And Warby Parker as of November operates just under 200 stores.

“The difference between a store and a website is a store is on the street,” Emmett Shine, co-founder of former brand agency Gin Lane and multi-brand DTC company Pattern Brands, said. He added that brick-and-mortar locations can serve as an additional marketing channel for brands looking to acquire and retain customers.

Other brands have inked wholesale deals as a way to get their products in front of customers. Skincare brand Loops earlier this month announced a nationwide expansion into Target after already forming partnerships with Nordstrom and Ulta Beauty. Casper has entered retailers like Costco, Nordstrom and Bed Bath & Beyond. And Allbirds has hit the shelves of REI, Zalando, Dick’s Sporting Good’s Public Lands banner and Nordstrom.

“There's a lot of value from it,” Shine said. “You can effectively meet high attention customers where they're at, while getting very good brand awareness at a price point ratio for what you send and what you get back that is ensured and understood and relatively stable.”

Pushing into wholesale has become necessary for many brands looking to scale their businesses because it introduces a brand to a broader set of consumers and helps to legitimize it. However, it does come with some risks.

When a brand enters wholesale, it loses some control over its messaging that it otherwise would be able to manage within its own stores.

“Once you decide to open up to other channels, it can be a great route to expansion, but you will lose some of that relationship. You will lose a lot of that control,” Ellin said. “That needs to be a careful consideration if you're going to go that pathway.”

Physical retail is also becoming an increasingly important marketing channel for brands as they continue to grapple with the effects of the iOS14.5 update, which made tracking online activity through apps like Facebook much more difficult.

“It's a lot noisier, it's harder to cut through. You can't just roll out the DTC playbook, like Warby Parker did, and use Facebook to really generate the first initial audience and target the consumer base as efficiently as you once could,” Alex Song, founder and CEO of Proxima, said.

So as the DTC space becomes more crowded, it’s becoming increasingly more important for brands to prove they have a real value proposition.

According to Song, while it’s “meaningfully easier” now to launch a brand than ever before because finding manufacturers to work with — which was once a challenge for DTC brands — has become easier, successfully executing on their business objectives is where challenges begin to arise. 

“It's easy to market anything but the fulfillment side of it and becoming that trusted partnership between the customer and your brand is really critical,” Ellin said.

And while the early days of DTC included a lot of disruption to traditional retailers, given today’s competition, brands will need to lean on those aspects that distinguished them from the start to set themselves apart: effectively connecting with their customers.

Part of this will mean offering consumers an experience that can only be encountered directly through their channels. For example, Converse can be bought through several traditional retailers, including DSW, Kohl’s and Finish Line. But by shopping directly from Converse’s website, consumers are given the ability to create custom shoes, giving them control over the material, print and other aspects of the product’s design.

“I could buy a pair of high tops in a store, but I can go directly to the website and buy custom high tops that have the designs on them that are going to be more reflective of who I am,” Ellin said.

The new era of DTC

While early DTC darlings helped pave the way for brand launches over the years, the strategies necessary for success have changed.

“I think DTC as we knew it — from the Warby Parker and Dollar Shave Club days — is dead. The playbook has changed,” Song said. “We’re probably already past DTC 2.0, and are working on what does 3.0 now look like?”

As far as what’s important in this new DTC era, Song said brands need to be committed to ensuring they can deliver on promises to consumers, seek out new customer acquisition opportunities — like partnering with a celebrity or personality — to grow their audiences, and providing value to consumers.

To the latter point, proving their value is becoming more important in getting consumers to ultimately make a purchase, especially in today’s economic environment where shoppers are more mindful of their buying behavior. They are seeking to get the best value and quality out of the products they do buy, Song says.

“Many people are going to be more economically conscious,” Song said, adding that customers are concerned about “getting as much value as I can out of purchasing from this brand. That's where the quality of a product becomes more important than ever.”

Brands can no longer just focus on launching with an appealing aesthetic, but must ensure that they have a clear product market fit in order to be successful.

“There's a lot of really great founders with a lot of really great ideas — great branding, great typography, cool marketing, great photography. They're digitally savvy, they're good on social media. Those are kind of table stakes now,” Shine said. “What's so hard today is to actually make a product that has good unit economics on it. It's really hard to make a product that is high quality, that people want, that you're going to break even by the time you actually sell to market, and pay for your overhead and do everything. That's what so many people fall into.”

One of the biggest challenges many brands are still trying to overcome today is figuring out how to scale a business profitably.

“You've heard many stories where people were writing checks for businesses that were losing a lot of money. The previous sentiment was: Well, if you grow your top line enough and you have a big enough brand presence, you can figure out the profitability and operational disciplines later,” Song said. “The environment today where capital is much more expensive ... every investor out there is asking, ‘What are your unit economics?’ This matters more than ever because that is a big sign of what the value proposition is in terms of your business and your product.”

But trying to grow a business through multiple funding rounds while operating unprofitably isn’t sustainable, Song added, especially as investors pivot away from the “growth-at-all-costs” mindset and funding becomes more scarce.

“I kind of think of Series B as a line in the sand where if you got to a Series B at this point — you have enough scale, you have enough capital — that you have to actually figure out how to run a profitable business,” Song said. “If you are able to run a profitable business, you have a much more increased likelihood to be able to navigate these challenging and choppy waters ahead. But if you didn't get there, and you didn't raise enough money that you're going to have enough runway to last, and you didn't get to this more profitable version of your business where you're not just growing at all costs, you're going to have a hard time.”

This has become a pinnacle moment for DTC brands that are still struggling to reach profitability, which may result in a narrowing of competition. 

“My bet is you're going to have a lot of brands fold. Just basically say, ‘We're not doing this anymore. Doesn't work. Can't get money,’ unfortunately,” Song said. “I think there will be a big cleansing of the DTC landscape if you will. You'll see the people that made it are going to be benefiting from a less noisy environment.”

If you haven't heard of Roblox, ask your 10-year-old to explain it. 

Because while most of the adult population may still be struggling with the concept of the metaverse, chances are the tween in your life is already in it. 

Launched in 2004, founders David Baszucki and Erik Cassel wanted Roblox to usher in "a new category of human interaction." 

The company built out three major arms: Roblox Client, the application that allows users to explore 3D worlds, Roblox Studio, which allows developers and creators to build, publish and operate those 3D experiences, and Roblox Cloud, which includes the services and infrastructure that powers the platform. Users create a unique avatar that is able to go across experiences, like games and events. 

The result is a digital space where people can play, learn and communicate in a world that is user-generated. 

And it is gaining steam. 

In 2018, there were 12 million daily active users on the platform. By the time the company filed paperwork with the securities and exchange commission in the fall of 2020 to go public, 31.1 million people were on the platform every day — and 54% of those users were under the age of 13. In February 2022, when the company reported earnings, that number hit a record of 45.5 million average daily users for fiscal 2021, an increase of 40% year over year.

That's a lot of young people in one space, and a number of brands like Gucci, Nike and Forever 21 are on it, creating experiences for a plugged-in audience. 

But, should other retailers follow suit and be on the platform? And is it a meaningful way to build brand loyalty? 

The case for Roblox as a marketing tool

Take Forever 21, which joined the platform in December 2021. The retailer, which is owned by Authentic Brands Group, created "Forever 21 Shop City," where users can manage a digital store and compete to become the top shop. Participants customize the look of their store and complete tasks like stocking inventory, operating the cash register, hiring employees and assisting customers. 

The fast fashion retailer's objective is to gamify fashion and encourage players to express their individuality by running, and customizing, their digital spaces. Products can be purchased for users' avatars with monthly "metamerch" drops — namely, apparel, makeup and accessories.

But some products can be purchased in real life. A page on the retailer's website dedicated to the partnership in February included a quilted zip-up puffer vest, a colorblock shoulder bag, a cable knit sweater dress, and high-rise jeans, among other items. 

The ability to purchase both digital and physical clothing creates different touchpoints for customers, and has the potential to be an additional revenue stream as well as a means to build brand recognition. 

Retailers joining Roblox is a "sound strategy" to increase brand awareness and sales, according to Jenn Szekely, managing partner at Coley Porter Bell. "As a person with two children under the age of 13, I can tell you firsthand the amount of requests I get from them to purchase things from their visibility to brands and products in their online entertainment usage." 

Szekely said that brands entering into the world of Roblox is a great long-term strategy that should be considered. "By getting to these younger audiences early, they are building affinity to brands they most likely would not be aware of yet," she said in emailed comments, adding that a presence on the platform demonstrates to existing audiences that a brand is "on the pulse of immersive technologies." 

Retail is evolving, and as the metaverse moves forward, omnichannel is not only about physical retail and e-commerce. 

"This is the ultimate omnichannel, because we're not just talking about stores and DTC and web 2.0," Keith Niedermeier, clinical professor of marketing at the Kelley School of Business at Indiana University, said in an interview. "Now we are talking about web 3.0, and a persistent digital world where millions upon millions of customers are spending significant time. So if that's where they're spending their time, and their engagement, that's where brands and retailers have to be." 

And when it comes to interacting with the larger metaverse, the level of engagement is expected to grow. A recent report by Gartner forecast that 25% of people will spend at least one hour a day in the metaverse by 2026. 

Companies are taking note. In December 2021, Walmart filed multiple trademark applications regarding virtual products. Meta, owner of Facebook, is investing $50 million to create a "responsible" metaverse where users can communicate in a virtual environment. Microsoft announced it will acquire Activision Blizzard to grow gaming operations and build infrastructure for the metaverse.

"Vendors are already building ways for users to replicate their lives in digital worlds," Marty Resnick, research vice president at Gartner, said in a statement regarding the research firm's report. "From attending virtual classrooms to buying digital land and constructing virtual homes, these activities are currently being conducted in separate environments. Eventually, they will take place in a single environment — the metaverse — with multiple destinations across technologies and experiences."

Roblox in particular is a means for companies to engage with the metaverse and get their brand identities in front of a younger audience. Because, as Niedermeier points out, tweens for the most part are not hanging around malls to discover products. 

"Thirteen-year-olds aren't cruising the mall everyday after school," he said. "Stores in malls were the major brand builder where you could interact with the brands, the designs, the offerings, the employees. That's not where kids are spending their time now. Kids are spending their time online, and increasingly, in this digital space." 

Instead, retailers need to go to where their audiences are gathering, according to experts. 

"If you are targeting that age group, you absolutely should consider that as a major opportunity for you," Hana Ben-Shabat, founder of Gen Z Planet and author of the book "Gen Z 360," said. "Because it is marketing 101. You have got to be where your customers are. And here millions of them are hanging out on Roblox. Why would you not go there?" 

Avatars and spending 

An advantage of being on the platform is the ability to create virtual items that can be worn or used by an avatar. Each user creates a digital identity, and has the ability to keep the same avatar across Roblox. When users sign up, they personalize their avatars by selecting a body type, clothing and "gear" which may include weapons, musical instruments or skateboards. 

While signing up for Roblox is free, along with most of the platform's experiences, users can also use real-world currency to purchase Robux, the platform's digital currency. Robux is the way people within the universe can purchase experiences and items for their avatar. 

That means if a retailer sells a digital hat with a logo, let's say, the user will be able to wear the hat while visiting different experiences on the platform, and thereby show off the brand. Just like in real life where people can sport labels and perhaps be influencers, avatars can show up wearing items that are valuable within the digital world. 

"You're becoming an ambassador for a brand," Ben-Shabat said. "Your avatar can go between different games, and show up as a representative of Gucci, for example," she said, noting that, "right now everyone wants to be an influencer." 

Avatars wearing brands from space to space has big potential, according to Niedermeier. Because, if the metaverse evolves in ways that are being forecast, avatars don't have to stay within one world — they can potentially jump from platform to platform. "That's one of the huge values to brands," he said. 

Additionally, virtual items can translate to real-world money. In May 2021, Gucci offered a limited-time, digital version of its Dionysus Bag with Bee through its Gucci Garden exhibition. The bag sold for around $6, but when people started flipping the product its price went up. One user paid around $4,115 for the digital purse, while the actual, real-life version of the bag sold for $3,400, according to reports. 

Which would you rather have?

A real-life $3,400 Gucci Dionysus Bag with Bee

OR

A virtual $4,100 Gucci Dionysus Bag with Bee in Roblox pic.twitter.com/Xz4T4QVLoj

— Morning Brew ☕️ (@MorningBrew) May 25, 2021

So while brands are creating hype and brand awareness on the platform they could potentially be accelerating sales. And those digital purchases come with high margins because, as Niedermeier states, there's "no holding costs. There's no manufacturing costs. There's no distribution costs." 

Creating and consuming, simultaneously

While companies with name recognition are building out Roblox as a channel, everyday users are also generating income from selling digital items. The developer community earned $538.3 million in 2021, exceeding the company's goal of $500 million.

Roblox was launched as a way for people of all ages to generate their own worlds, as a "co-experience platform." 

There are reports as to how some young creators have experienced wild financial success through Roblox, and others on how it eludes them.

The thing to note, though, is that users are both creating and consuming content through Roblox. Brands should understand that co-creation is foundational to how a generation of young people are approaching a digital experience. And that may set the tone for future marketing. 

"This is tapping into something that is so fundamental for Generation Z, which is their creativity," said Ben-Shabat. "This is a very creative generation. They grew up with access to digital tools that no generation has before them." 

Having an audience co-create digitally may give retailers a deeper understanding to how products may operate in reality, and inform real-world product design, according to Niedermeier. "They can crowdsource products without having to actually produce them. It just exists in this virtual world, which then could translate into — at some point — into real-world products." 

The potential challenges

While creating an experience that is tailored to a young audience may appeal to brands, it does come with some potential drawbacks. Namely, what's the best way to navigate a space that is primarily used by kids? 

Roblox is aware of the potential complications, and enclosed language in its S-1 filing to address it. Namely that the Children's Online Privacy Protection Act applies to its operations, as it imposes requirements on operators of websites that are directed to children under the age of 13. 

Retailers need to keep in mind that, while Roblox is predominantly a platform for kids, it also is a multi-generational social community, according to Mark Geden, head of strategic planning at Tribal Worldwide London. It "contains all the peer pressures, low levels of moderation and risks of predatory activity that can be found elsewhere," he said in emailed comments, noting that it presents a degree of inherent brand safety risks. 

Other experts agree about moving forward, but with care. 

"I think retailers should be moving with some caution, and largely because the platform is dominated by minors and children," Niedermeier said. But, he says, those brands that are "at the cutting edge and want to stay at the cutting edge are not coincidentally the first ones getting into this space." 

Roblox addressed some of those concerns in a letter to shareholders in February 2022. "[W]e must maintain the community's trust. And to do that, our platform must be safe and civil. Since our founding, safety and civility have been at the foundation of everything we do and we will continue to invest substantial resources to improve on this key priority." 

The company is also making moves to expand its engagement with older users. It named attracting users in older age demographics as one of its "key objectives." CEO Baszucki in the company's recent earnings call noted that in January 2022 its 17- through 24-year-old segment grew 51% year over year, stating that it was "a wonderful validation of our vision to bring people of all ages together on our platform."

While co-creation is fundamental to the platform, it does mean that retailers have to give up some brand control as users expect for interactions to be collaborative. 

But, that may be part of the larger future of how brands decide to market to their future customers anyway. Especially with a generation that holds community, creation and competition in high regard, according to Ben-Shabat. 

Roblox "shows a very strong understanding of who this generation is, because it plays on all these elements," she said. "This is going to the heart of the psychology of this generation." 

Finally, there is always the risk that users simply decide to abandon the platform because one that is more compelling arrives on the scene. Roblox understands that risk, stating that because a majority of users are under the age of 13, the demographic "may be less brand loyal and more likely to follow trends, including viral trends, than other demographics." Young people are ripe to change means of entertainment rapidly. 

Yet, tens of millions of active, daily users on the platform means Roblox currently has a significant place in many users' lives. 

"It's the Wild West," Niedermeier said. "And these things are going to continue to be moving targets. This is for the edgy marketers who have the stomach to roll with these changes." 

In the mid-20th century, when malls were retail's fresh new idea, department stores moved into the suburbs with confidence. That has been shaken, and many malls are now looking for their replacements.

Back then, department stores had valuable amenities: big spaces with varied assortments, savvy merchandisers, attentive store associates and the fierce loyalty of their customers. Shoppers came in droves, spilling into the smaller specialty stores, who happily received the busy crowds. Not everyone who came in bought from them, but the traffic was so plentiful that they rang up more than enough sales.

These retailers still have big spaces, but, increasingly, they're empty. Consumers have steadily lost their attachment to department stores, so traffic has dwindled. In 2020, Green Street analysts warned the pandemic was speeding up the disappearance of these anchors from malls, estimating that more than half of mall-based department stores would close by the end of 2021. That's on top of the hundreds and hundreds of Sears stores alone that shuttered in recent years.

It's become a no-win situation that has, inevitably, chased specialty stores away from malls as well. In 2019, Gap's CEO said the traffic declines had rendered malls the "wrong locations" for stores. In 2020, a new CEO said the company would close 350 Gap and Banana Republic stores and switch to a plan where 80% of the fleet would be found at strip centers, city centers and outlets by 2023.

While the pandemic isn't yet over, a decent immunization rate has eased it in the U.S., and retail sales, even at department stores, are recovering. (So far in 2021, however, the department store segment continues to record declines compared to 2019, according to the Commerce Department.) Economic recovery may slow the closure acceleration predicted by Green Street, but it's unlikely to stem the tide long term, according to Nick Egelanian, president of retail development firm SiteWorks​.

"Nothing significant has happened to change the trajectory of department stores in the long run, or the fact that they have no real purpose going forward," Egelanian said by phone. "All that's changed is we got vaccinated, came out of our cocoons, and everybody's acting euphoric right now. We might get a snap-back, but what has happened to change the overall picture, that malls and department stores are irrelevant going forward? Nothing."

The replacements

There was a time when a department store seemed irreplaceable. That time is over.

In a recent phone interview, CBL Properties CEO Stephen Lebovitz said that anchors closing is nothing new, and that department stores have trimmed their expenses and are bouncing back. But he also said the mall company retooled its anchor strategy during the long, steady decline at Sears.

"The process of replacing former department stores has been a key part of our strategy for a while and we've been very successful in replacing the traffic that those former department stores were generating by adding a mix of uses," he said by phone, noting that CBL, which went bankrupt in 2020, has enlisted a hotel, arcades, eateries and casinos to drive footfall. "We are being proactive in looking to replace department stores where we see the opportunity."

The problem with such replacements is that there's little evidence to suggest that they stimulate sales the way department stores once did, Egelanian said. "What data is there that says that [such a business] feeds the retail and the center? It doesn't exist," he said.

The most effective replacement may be no replacement at all, according to Greg John, chief marketing officer at Waterstone Properties, a privately held commercial real estate developer. At the company's emerging Rock Row mixed-used development in Westbrook, Maine, a department store will be nowhere to be seen. More importantly, the center won't depend upon one tenant or type of tenant to drive traffic.

Rather, at Rock Row, which is being built next to an old gravel quarry that will eventually be used for rock climbing and water activities, retail will be just one attraction in a community-oriented locale where people will be living, working and playing. If that sounds familiar, it is. It mirrors the downtown experience that malls undermined decades ago.

"It's not about an anchor anymore," John said, speaking on site. "It's creating an experience with different elements — residential, events, retail. It's not about going to one store, it's about going to a place."

After unveiling multiple stores last year, Savage X Fenty is hosting a three-day pop-up shop in the Los Angeles’ Fairfax shopping district, according to an announcement emailed to Retail Dive.

As part of the pop-up, the brand is showcasing its limited edition Game Day collection, which includes hoodies, sweatpants, varsity jerseys, boxers, beanies, hats, a top and bandana. Customers can also receive special gifts with their purchases, per the announcement.

The brand said it is releasing this collection of football-themed apparel and accessories ahead of CEO and singer Rihanna’s super bowl performance.

Rihanna’s Savage X Fenty brand seems to be continuing its momentum from last year. About a year ago, it launched its first physical store in Las Vegas and had plans to open more stores in Houston, Philadelphia, Los Angeles and Washington D.C. Its Las Vegas location featured Fit:Match technology, which enables users to get a customized body scan that creates a 3D avatar of their bodies and gives personalized product recommendations. Last spring, the brand said it planned to open six more locations in Detroit; Chicago; Atlanta; Long Island, New York; St. Louis; and Newark, Delaware. 

But before it announced plans for more locations in May, the company reached an important milestone in March. Rihanna’s Savage X Fenty brand was reportedly considering an initial public offering, valuing it at $3 billion, Bloomberg reported. 

Alongside Savage X Fenty, other brands have been introducing pop-up shops in Los Angeles and elsewhere. Last May, Social Tourist, a teen-focused sub-brand of Hollister, opened a pop-up in Los Angeles on Melrose Avenue. In December, Aviator Nation also opened a pop-up shop but chose New York instead to showcase its T-shirts, sweats, outerwear and other new collections.

Leap, the company that helps DTC brands open and operate brick-and-mortar stores, assisted Social Tourist in debuting its pop-up shop. Last year, Leap co-CEO and co-founder, Jared Golden told Retail Dive that DTC brands have frequently chosen Los Angeles for their second or third physical storefronts, but other locations like San Francisco have also attracted digitally native brands.

 

Adding products to its lineup, Showfields on March 1 launched a new assortment of direct-to-consumer brands across beauty, beachwear, wedding and other categories at its Miami Beach location, the brand announced on Wednesday.

The retailer features beachwear fashion in its Cabana Curation from Chubbies, Watskin, Agua Bendita, Bombchel Factory, Ansea and Mamie Ruth. The Showfields Wedding Suite showcases shoes and accessories from Badgley Mishka and jewelry from Nadri and LUV AJ.

The retailer is also introducing its Mushroom Market, where customers can find fungi-based products from brands like Fungies, B.T.R. NATION, POW Matcha, Popadelics and One Up.

With its Miami Beach store, the retailer is adding products from other DTC brands, such as footwear from Katy Perry Collections and Hims & Hers.

Showfields joins other retailers, including Walgreens, Walmart, The Vitamin Shoppe and Urban Outfitters, in distributing Hims & Hers products in a brick-and-mortar location. At Showfields, Hims & Hers will offer its over-the-counter personal care products and let shoppers sign up to start receiving personalized treatments. 

Showfields has been working to showcase DTC brands in its brick-and-mortar stores. In 2019, the retailer opened its 14,707-square-foot location in New York City, featuring a rotating mix of digital brands with the goal of bridging the gap between online and offline retail. 

Its second location was Miami in 2020 — 14,300 square foot space that, along with DTC products, incorporated experiential elements like a theater for live performances, art installations and indoor and outdoor food concepts. 

"We believe that Miami sits on the intersection of art and retail,” Amir Zwickel, chief real estate officer and co-founder, said at the time of the opening. “We are excited by the crossover of both our existing NYC customers and an international audience that may not have the exposure to the brands that we currently showcase.” 

The retailer opened a location in Washington, D.C. last year. The three-floor store is divided into departments designed to resemble a typical home and draws inspiration from the Brooks Brothers store once located there. 

For many DTC brands, avoiding physical stores was supposed to be the pathway toward profitability and superior customer experience. However, some brands, including Glossier, Casper and Adore Me opened their own stores or shop-in-shops within other retailers to reach more customers.

How Macy’s set out to conquer the department store business — and lost

At the dawn of the 21st century, the 160-year-old retailer expanded amid the sector’s steep decline. What now?

January 10, 2022 • By Daphne Howland
Visualizations by Julia Himmel

In 1990, Macy's was hardly the chain it is today. That year, four of the top 10 U.S. retailers on McKinsey & Company's list were department store companies, but Macy’s wasn’t one of them.

It’s true that R.H. Macy and Co. was described by the New York Times as “New York's biggest retailer and the operator of about 100 department stores in the East, South and West.” But to much of America, for much of the 20th century, the name “Macy’s” evoked the classic holiday movie “Miracle on 34th Street” and the nationally broadcast Thanksgiving Day parade — a famous department store in a famous city far from home.

Early in the 21st century, that changed. Through a series of fateful decisions, Macy’s transformed itself into a national retailer and the largest department store in the country, if not the world. Now, it has a murky future, muddied further in recent months by rhetoric from activist investors who would have it cleave its operations in two — one Macy’s existing only on the internet, the other only on the ground.

The magic of Macy’s, everywhere

Around its 135th birthday, Macy’s set out to conquer areas of the U.S. where other department stores had long staked their claim. In 1994, thanks to a merger with department store conglomerate Federated, Macy’s nearly quadrupled its store count; a decade later, thanks to a merger with department store conglomerate The May Department Stores Co., it more than doubled that.

By 2007, when corporate parent Federated itself changed its name to “Macy’s,” the company had already replaced scores of local department store names, affixed the red Macy’s star to those buildings and ripped away their private labels. The brand, to the chagrin of many of those retailers’ customers, was no longer far from home.

Macy's becomes a national retailer

To see how the Macy's chain took over local department stores over the years, click on the blue dots on the timeline. Click on the map's squares to see when a store became "Macy's." Some had previously switched to other names (in parantheses.)

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Name of store

2006

Macy’s had taken its place as the country’s dominant full-line department store chain, with 853 stores in 45 states, the District of Columbia, Guam and Puerto Rico, under the names “Macy’s” and (far fewer) “Bloomingdale’s.” That amounted to an aggressive expansion of Macy’s footprint and brand, so what came next was a surprise to many.

Macy’s backpedaled.

First, in 2008, after dedicating resources to revamp dozens of hometown department stores in its own image and centralize their operations, Macy’s declared localization “a key component” of its growth strategy and launched “My Macy’s,” an investment in “resources in talent, technology and marketing that will allow us to ensure that each and every Macy’s store is ‘just right’ for the customer who shops in that location.” Then, starting around 2015, the company embarked on another great project: massively shrinking that store fleet.

Not long after its massive expansion, Macy's announces significant closures

Macy's square footage at peak vs today

“[Then-Macy’s CEO] Terry Lundgren was supposed to be some kind of retail hero, but it was his strategy to purchase all these brands, change the name from Federated to Macy's, put different signs up on all these local department stores including one that we had here in Columbus — and then quickly close them all,” Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, said by phone. “A ‘champion of retail?’ I don't think so.”

As Amazon rises, so falls Macy’s

Amazon wasn’t a major retailer in 1990, either, of course, because it wasn’t established until 1994; the e-retailer first appeared in the top 10 in 2012, according to McKinsey’s report.

It’s tempting to correlate Macy’s downsizing with Amazon’s appearance as a top-10 retailer and the rise of e-commerce in general. After all, in 2016, weeks after Cowen & Co. analysts said they were “more confident” that Amazon would soon overtake Macy’s in apparel sales, the department store announced it would close 100 stores within a year.

In 2018, as analysts from Coresight Research and elsewhere were documenting evidence of share loss to Amazon, Macy’s added to its closure count. Then, in 2020, as Amazon moved deeper into fashion and Coresight found it was gaining yet more in apparel, Macy’s said it would permanently close another 125 stores. That was part of a transformation strategy announced pre-pandemic and recently resumed, possibly with fewer closures.

“

Everybody knows that Amazon was growing, so everybody thinks Amazon killed retail. There are 10 things going on, but nobody pays attention to the other nine.

Nick Egelanian, president of retail development firm SiteWorks

”

Amazon’s rise has certainly forced retailers including Macy’s to dedicate resources to selling online, leaving less need for quite so many stores. But it’s not solely responsible for Macy’s increasingly challenged sales. Nick Egelanian, president of retail development firm SiteWorks, calls that misperception “the real Amazon effect.”

“Everybody knows that Amazon was growing, so everybody thinks Amazon killed retail,” he said by phone. “There are 10 things going on, but nobody pays attention to the other nine.”

To find the real culprits, it helps to know what was happening when Macy’s decided to expand.

What Macy’s bought into

Most department stores — an American retail phenomenon soon found elsewhere in the world — were established in the 19th and early 20th centuries. Many share similar origin stories and evolutions, beginning as dry goods stores, dress shops or haberdasheries, and, as the cities around them prospered, growing into marvelous emporiums housed in grand structures.

Department stores traditionally sold all kinds of things (apparel, housewares, wine, books, leather goods and more), prided themselves on customer service (offering amenities like delivery, in-store pickup and styling guidance, which retailers are clambering to provide today) and flourished through much of the 20th century. They enjoyed a heyday during the post-war boom and another as consumers moved to the suburbs, where department stores anchored gleaming new malls, according to Bruce Kopytek, who writes about the history of department stores.

The early years of this century, however, did not mark a department store high point. Rather, the model was arguably on the skids, just as Macy’s was adding hundreds of stores to its portfolio. To witness the trajectory, it’s useful to travel to Minneapolis, where George Draper Dayton founded his dry goods company in 1902, a business that matured into a department store within a decade.

Like other department stores, Dayton’s (later Dayton-Hudson) opened its first suburban branches in the 1950’s. In the 1960s it expanded via a merger with Detroit-based department store company J.L. Hudson and in 1990 they acquired another top department store name, Marshall Field’s.

The department store business was thriving. Yet in 1962, in a move at first seen as folly, Dayton diversified with the establishment of “Target,” a low-price, mass market store that promised to “combine the best of the fashion world with the best of the discount world.” Target wasn’t an immediate success, but the Daytons stuck with it, according to Mark Cohen, director of retail studies at Columbia University's Graduate School of Business and a veteran of the sector.

“Dayton-Hudson created Target in the face of an emerging Walmart, and they nurtured it,” he said by phone. “And the Dayton-Hudson leadership back in the day recognized that their department store channel, which was their signature business, was going to be under fire, and that they ought to have a multichannel approach.”

Macy's appetite for growth builds despite the sector's steep decline

Department store sales as a percent of total retail sales

By 1975, Target was Dayton-Hudson’s biggest revenue producer, expanding nationally through the 1980s and 1990s. The department store business increasingly operated in Target’s shadow — and then it disappeared. In 2000, Dayton-Hudson changed its name to “Target.” Four years later the company sold off its department stores to the May Department Stores Co. And the year after that — the same year Target topped $50 billion in sales for the first time — Federated (soon to be “Macy's'') bought May.

“

The Dayton-Hudson leadership back in the day recognized that their department store channel, which was their signature business, was going to be under fire.

Mark Cohen, director of retail studies at Columbia University's Graduate School of Business

”

It’s almost as though the Daytons (the family remained in leadership for generations) could see into the future what the historical numbers tell us now. From 1992 to 2017, retail sales grew from $1.8 trillion to $5 trillion, with general merchandise sales growing in that period from $247.9 billion to $691.9 billion, according to numbers from the Gerney Research Group, using U.S. Census Bureau data. But full-line department store sales fell 43.2% in that time, as discounters, particularly Walmart Supercenters and warehouse clubs like Costco, gained market share, with annual average sales increases of 17.2%, those researchers found.

In 2006, Macy’s ran more than 850 department stores and a website and notched $27 billion in sales; in its comparable fiscal year, Target ran nearly 1,500 stores and a website and notched $59.5 billion. In other words, Macy’s had a prodigious appetite for expanding a retail model that one of its leading exemplars had ditched in favor of running a discount chain.

What happened

While Macy’s grew through mergers and acquisitions, that couldn’t stave off the decline in department store sales, and Macy’s revenue was sloping downward well before the COVID-19 pandemic.

In fact, just before their merger, Macy’s and Federated each took a spin through bankruptcy court — Macy’s after burdening itself with debt by plunking down more than $1 billion to acquire West Coast department stores I. Magnin and Bullock’s, and Federated after vacuuming up department stores including Rich’s in Atlanta, Bloomingdale’s in New York and Burdine’s in Miami.

Several forces, interconnected, continued to work against the sector — before, during and after Macy’s and Federated tied their fates together.

Two major mergers can't prevent Macy's sales struggles

Macy's net sales in billions

One was the rise of off-price stores, which for decades now have helped themselves to generous portions of department stores’ market share. A flip in fair-trade pricing policy in 1975 would pave their way. Until then, Depression-era fair trade regulations in 45 states required retailers to charge manufacturers’ minimum suggested prices. Before Congress repealed the antitrust exception allowing those state laws, most department stores rang up sales at full price knowing their competition was doing the same.

“

It isn’t just ‘boring retail.’ Retail isn’t failing, retail is distributing, and mid-tier retail is shrinking in accordance with the redistribution of wealth.

Brian Kelly, retail consultant

”

Off-price retailers would prove to be particularly fierce competitors because unlike discounters, they sold many items found at department stores. In 1985, Southern Illinois University marketing professor Jack Kaikati warned in the Harvard Business Review that off-pricers selling name-brand goods would increasingly challenge department stores unless their weaknesses, including “weak service and noncontinuity of assortment,” could be exploited. Instead, “noncontinuity of assortment” proved to be an off-price strong suit — better known as a treasure hunt — while poor customer experience became associated with none other than Macy’s.

When the fair trade laws that enabled full-price department stores were enacted in the 1930s, the goal was to save local shops vulnerable to large chains with pricing power. But by the 1970s it was the consumer who was under pressure. As the Dayton family had already noticed, discount stores like Walmart and warehouse clubs like Costco were advancing. Households were gravitating toward lower prices in part because middle incomes were shrinking and becoming harder to achieve, even with two earners. In 1971, 61% of Americans were middle-class; in 2019 that was down to 51%, according to the Pew Research Center. The problem is ongoing, according to retail consultant Brian Kelly, also a veteran of the department store sector.

In 1970, middle-class families, department stores' customer base, held a dominant share of household income. The U.S. middle class has been shrinking ever since.

Share of US aggregate household income, by income tier

“It isn’t just ‘boring retail.’ Retail isn’t failing, retail is distributing, and mid-tier retail is shrinking in accordance with the redistribution of wealth,” Kelly said by email. “To me, it’s the reason why Macy’s is failing or why Kohl’s or Dillard’s or Belk are also struggling. Department stores are done and dusted.”

Where it happened

Department stores adapted well when they moved to the suburbs from downtown. But as suburbanites grew less optimistic, cities regained some of their appeal and Gen X found something to do, malls began to lose their luster.

“It was sometime around 1950 that the first true suburban enclosed mall was built, and then the department stores reinvented themselves,” retail consultant Jan Rogers Kniffen, (who worked on the Federated-May merger, after decades at Federated), said by phone. “We figured out we could do a 240,000-square-foot store, which would be almost a third of the size of our big 600,000-square-foot downtown stores. So we can build 240s, and we can build them in every damn one of the 1,200 malls that would finally get built between 1948 and 1992. The department stores were still very healthy up until about ‘92. And that’s when the giant consolidation started.”

Mall traffic was ebbing as early as the 1990s, but disaster struck around the time of the Great Recession, when some 400 malls disappeared. Off-price stores and discounters had avoided that problem by opting for the cheaper rents and more convenient shopping found at strip centers, but malls and their department store anchors were stuck with each other. Their once mutually beneficial relationship began to deteriorate, until it went into a death spiral, a years-long trend recently hastened by the pandemic.

“

The department stores were still very healthy up until about ‘92. And that's when the giant consolidation started.

Jan Rogers Kniffen, retail consultant

”

“The mall is not like it was in the ‘80s, a hangout for kids,” Peterson said. “It’s all specialty apparel retail, predominantly, so the tenant mix in 80% of malls is wrong to begin with because it’s based on the premise, developed in the late ‘80s and early ‘90s, that we’re going to drive traffic by young people coming in to buy clothes. And I think the nail in the coffin for malls right now is work from home.”

The goods

Accessories, apparel, auto parts and services, beauty items, books, electronics, eyewear, hobby supplies, housewares, imports, jewelry, music, musical instruments, pet supplies, photography studio services, rugs, toys, and wine and spirits. These were among the many departments that gave “department stores” their name.

Unfortunately for department stores and their assortments, these are also the specialty stores that fill the malls they anchor, and the big-box stores that occupy the landscape between malls. Over the years, each Best Buy, Williams Sonoma, Kay Jewelers, Sephora or other chain store has steadily taken market share in those categories from department stores, according to SiteWorks research.

In response, department stores including Macy’s shut down department after department, and filled the empty spaces with more apparel, SiteWorks’ Egelanian said. Many of the grand “full-line department stores” were gutted, becoming “fashion department stores” more akin to Nordstrom or Lord & Taylor. Since then, as apparel sales growth has tanked, Macy’s, which does sell furniture, mattresses, luggage and more, has scrambled to diversify further. Recent efforts include an investment in tech-focused retail concept B8ta and adding back toys.

“Fashion was the savior, but then it was also the noose around their neck,” Egelanian said.

Unlike now, apparel sales were healthy in the 1980s. But Macy’s failed to account for the vagaries of retail, according to Columbia’s Cohen.

“They were getting rid of businesses like electronics and elements of home, whose gross margins or whose gross margin return-on-investment didn't look great,” Cohen said. “They were feasting on the boom in apparel and accessories that was going on, without regard to the fact that, like anything else, those things cycle up and down. But at that moment, it looked like a really great way to prop themselves up, without regard to what it would mean for the future.”

“

The mall is not like it was in the ‘80s, a hangout for kids.

Lee Peterson, executive vice president of thought leadership and marketing at WD Partners

”

In the name of efficiency, Macy’s also squandered the localized knowledge and customer relationships at each store in its fleet, as it centralized buying, merchandising and marketing. In peeling off all the local department store names and discontinuing their private labels — something previous corporate parents had avoided — Macy’s aimed to take advantage of what it saw as its powerful national brand. But the strategy engendered resentment among locals that the “My Macy’s” effort couldn’t appease, and in some places the ill will lingers to this day.

The mall location and the sameness of the merchandise turned out to be exactly wrong for the 21st century. Young consumers have embraced idiosyncrasy, seeking items via resale sites or limited drops, and no longer flock to the suburban shopping center, according to WD’s Peterson.

The question for Macy’s is: What next?

The future

It’s been more than a quarter century since Macy’s embarked on its grand national buildout, and it has succeeded in rendering itself a national retailer, if somewhat more subdued than it perhaps foresaw. The company now runs 512 stores under the Macy’s banner, plus 54 Bloomingdale’s stores and 160 Bluemercury spas; in its most recent quarter, 32% of its sales were online.

Judging from in-store shopping trend data crunched by analytics company App Science, Macy’s retains a strong following around the country, ranking fifth in the West, eighth in the Northeast and South, and tenth in the Midwest. Besting the department store, however, are its old discount foes Walmart and Target, which ranked above Macy’s in all regions.

The retailer has taken the note. In 2015, Macy’s opened its own off-price banner, Backstage, with plans to bring it to 270 of its stores and open some stand-alone locations away from the mall. Macy’s also realized the power of tech early on and was one of the first retailers to invest in e-commerce. In recent years it has employed and even acquired innovative retail concepts.

“

Macy’s needs to figure out how to operate profitably on the coasts, where they can really have a future.

Nick Egelanian, president of retail development firm SiteWorks

”

Macy’s didn’t comment for this story. But the company itself, after setting out to conquer the department store business, may now be losing faith in it. Its experiment with small-format stores in strip centers takes it full circle, to its roots as a “small dry goods shop.” Its full-line fleet is smaller than ever, after already completing more than half the 125 closures it announced in 2020 as a three-year goal, in favor of a digital-first strategy. If it goes through with the e-commerce spinoff being pushed by activist investors, which many observers warn could hamper the overall operation, Macy’s could disappear even faster from the American landscape.

But Macy’s is unlikely to change the dynamic that in the past decade led to the loss of a quarter of its market share, mostly to off-price retailers, brands and Amazon, which consistently beat it on price, product or service, UBS analysts said in November. Indeed, it’s difficult to find an observer who believes that Macy’s has a game plan for a reality where the department store is an anachronism. Macy’s may need to retrench — return to running “100 department stores in the East, South and West” — in order to reinvent itself, according to SiteWorks’ Egelanian.

“They think their big enemy is the internet, and it’s not,” he said. “Their stores are old and tired, the malls they’re in are dying, and the merchandise they sell is ordinary and overpriced. Macy’s needs to figure out how to operate profitably on the coasts, where they can really have a future. The off-price and the secondary store locations that make up the majority of the company’s stores and square footage are nothing but a distraction, making it harder and harder for them to focus on the parts of the business that can survive.”

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After putting brick-and-mortar plans on ice at the onset of the pandemic, DTC brands are back in expansion mode.

Companies like Brooklinen, Savage X Fenty, Burrow and ThirdLove have announced plans to open more stores as the limitations of selling almost entirely online become increasingly apparent. As many DTC brands grapple with the high cost of customer acquisition — which sometimes can come at the expense of profitability — stores have become an additional marketing vehicle.

DTC brands are strategically mapping out physical locations of their stores, and are starting to look beyond New York City for viable options.

“If you look at the old retail playbook, it was kind of: Put down stores until the profit per square foot doesn't make so much sense,” Katherine Black, a partner in the consumer practice of Kearney, said. “What we see really with DTC brands is their stores, their location strategy is really used to lower their cost of customer acquisition to their online store. So they're really looking for locations that have very high traffic.”

Among the regions gaining popularity with DTC brands is Washington, D.C.’s Georgetown neighborhood.

Warby Parker, Everlane, Faherty, Allbirds, Brilliant Earth, Bonobos and Outdoor Voices are just a handful of brands that have opened in the area in recent years.

But the neighborhood hasn’t always been a hotbed for online brands.

The last decade of retail in Georgetown

When a shopper walked down Georgetown’s popular M Street 10 years ago, the retail scene looked different.

“The most noticeable, notable change — retail space wise — over the last 10 years has been the fact that restaurants have basically abandoned M Street. Not entirely, but almost entirely. And what seems to replace them almost every time is some sort of, generally women's clothing store,” said Topher Matthews, writer of the Georgetown Metropolitan blog and resident of the neighborhood since 2003. “Out of every five new stores, four of them are some sort of clothing store.”

In addition to restaurants exiting M Street, Matthews said a lot of college bars that had once been mainstays in the neighborhood, like Rhino Bar, have since disappeared as well, replaced by national apparel retailers.

“It probably was about 10 years ago, I had some tourists walk up to me on M Street, and they basically were like, ‘So where are the shops?’ And I was like, ‘Well, you're here,’” Matthews said. “They were like ‘These are just what you'd see in a mall.’ I sort of shrugged my shoulders. Like yeah, that's what we got. Ten years ago, it was probably even more of a mall than it is now.”

But some of those traditional retailers, like Brooks Brothers and Loft, that operated stores on popular streets in the neighborhood have filed for bankruptcy and closed many stores as a result, including their Georgetown locations. This, Matthews said, has added to the number of vacancies or perceived vacancies in the area.

“Generally, vacancies are always, always a story with Georgetown where it seems to be high,” he said, adding “that's one thing that locals complain about all the time. It doesn't matter how far back they've been complaining about vacancies, particularly on Wisconsin Avenue. … There's just increasing numbers of vacant spaces down there, which in the past, it had these very stable national brands.”

More recently, the vacancy rates in the neighborhood spiked in 2020 following the murder of George Floyd and subsequent protests, according to Joe Sternlieb, CEO of Georgetown’s Business Improvement District. “I think we had vandalism in 57 businesses when they came through, and a bunch of places didn't reopen, and some places reopened and closed,” Sternlieb said. “We had a net loss over the pandemic of about 60 brick-and-mortar retail and restaurant businesses. Last year, we had a net increase of 27 between openings and closings, and I think we'll do something similar this year.”

The increased vacancies coupled with the fact that rents became more negotiable opened up an opportunity for DTC brands to move in, Kearney’s Black said.

“A lot of brands who were in high growth mode really took advantage of that trend as much as possible during the pandemic because I think most folks saw that as a real opportunity to continue their expansion strategy,” Black said. “Those with capital who had a strong business model, who were in growth mode, I think absolutely took advantage of some of the other stores going out of business or closing.”

What makes Georgetown so attractive for DTC brands?

Several brands that launched online realize the importance of having a physical presence to help acquire customers and scale their businesses.

“Direct-to-consumer brands that do not have a brick-and-mortar strategy, need to have one,” said Philippe Lanier, a principal at EastBanc, the landlord who owns the Georgetown stores of Outdoor Voices, The Reformation, Gorjana, Everlane, Faherty and Glossier. “A comprehensive retail brand needs to have both and needs to be able to string a story between how they sell online … versus the experience that [consumers] have in the store.”

While New York City, Los Angeles and San Francisco were among the top cities where DTCs opened their first few stores, Georgetown is quickly becoming a destination for digitally native brands.

Over 15 direct-to-consumer companies have opened up stores in the neighborhood with more on the way, including Glossier, which plans to open a store this summer.

So what makes this quaint D.C. neighborhood attractive to DTC companies?

For one, it’s situated near a university, which generates significant traffic to businesses. But the neighborhood has also become a destination for residents from the surrounding suburbs, which Black attributes to how easily accessible it is for those residents compared to other neighborhoods, like SoHo, which is more isolated.

“We have 2.8 million square feet of retail and 4,000 housing units, maybe 1,000 residents at best,” Sternlieb said. “Ten percent of our retail sales are to residents … 90% of the customers were imported from probably a two- or three-mile radius of Georgetown.”

It’s also become a stop on the map for out-of-town tourists visiting Washington, D.C., who “want to check out Georgetown. They've heard of it before, get a cupcake, whatever,” Matthews said.

And unlike some other areas, like downtown where many of the businesses close after workers leave the offices, Georgetown continues to draw traffic well after those stores close for the night.

“The interesting thing about Georgetown is, it has a long day to it. It's not just a shopping center that closes at 6 p.m. or 8 p.m. There are a number of bars and restaurants — it's known to have a very vibrant nightlife scene,” Black said. “If part of your strategy is almost to use the store as a billboard, that counts. So that store, that billboard is getting really active traffic long after the store is closed at night with a key target demographic. Because you’re getting people cycling through as tourists or for business purposes or as part of the university, you're getting a wide range of eyeballs on that store, which is exactly the strategy to make the brand known to then acquire those customers to the website.”

Downtown areas, which were heavily saturated with offices and commuters, suffered particularly hard when businesses shifted to remote working. Georgetown, being somewhat more residential, was better able to weather the challenges.

“The residents never left. I say we lost 60 businesses but we didn't lose 390,” Sternlieb said. “It's just a beautiful environment that people want to be in. So on a nice day — even at the height of the pandemic — there were still people sort of walking around. In downtown it was sort of an office park and when the office workers stopped coming, everything imploded. Whereas in Georgetown, when the office workers stopped coming, the residents were still here, the visitors were still here, the tourists — to the extent that there were tourists — were still here.”

To help cater to the conditions brought on by the pandemic, the neighborhood introduced 35 outdoor areas for restaurants to expand to during the pandemic, Sternlieb said, adding that it has “created a sense of life” on the streets further enticing other businesses to open up.

The ability to work from home and have more flexibility has also helped weekday traffic in the neighborhood to increase because consumers have more time to shop and dine during the week as opposed to saving it for the weekend, according to Lanier.

The area, being a true neighborhood, fits into the authenticity these brands try to possess and feels a bit more "genuine," Black said. And the fact that many of the buildings are older with smaller square footage appeals to the needs DTC brands have when it comes to opening stores.

“Everybody's figured out that Georgetown is the amenity rich neighborhood, that it’s well maintained,” Sternlieb said. “The people are back and so if they're going to move back into the market, this is the place they want to come first.”

A pandemic helped retailers realize something vital to the industry: All stores, in one way or another, are convenience stores.

That is, the demand for consumers to obtain products in a fast, streamlined way via their preferred channel went from being a retailer differentiator to an absolute necessity. Companies that hunkered down to improve operations were rewarded with increased sales. Those that didn't are getting left behind.

Traditional c-stores have been going through their own accelerated transformation because the needs of their customer base changed. No longer were they simply a place to get coffee before going to work — because a chunk of the population was suddenly making their own coffee from their at-home offices. Shoppers also didn't need to get gas on a regular basis because their commute disappeared and travel slowed.

Instead, shoppers needed basics. They were looking for paper products, cleaning supplies and grocery items, according to a report by the National Association of Convenience Stores. Total inside sales for c-stores increased 1.5% in 2020 to a record $255.6 billion, and average basket size increased more than 18% year over year as the segment helped fill basic product needs during a time of unsteady supply chain and panic buying.

With over 150,000 c-stores in the United States and over half of U.S. consumers saying they frequent convenience stores once a month or more, the retail segment is showing signs of advancing in a myriad of ways to continue to meet consumer needs.

"Convenience stores have become the cool kids," said Jeff Lenard, vice president of strategic industry initiatives for the NACS. "C-store doesn't necessarily stand for cool store, it still stands for convenience, because you have to sell speed of service. And speed of service is however the customer defines it." 

Go back to (delivery) basics

The origin story of many convenience stores is based on one product: dairy. Milk delivery was introduced in 1785 in Vermont via milkmen who traveled through neighborhoods to sell their product, according to NACS's magazine. By 1964, Wood Brothers dairy company needed a distribution point for its milk and introduced its first convenience store — now known as Wawa.

So, while the pandemic may have changed consumer shopping habits, in many ways, the c-store industry leaned heavily on systems that defined what set it apart from the beginning. Meaning, the ability to reach their customer where they were, either through home delivery or by easy to reach brick-and-mortar locations. 

The pandemic sped up those revived options, with retailers like 7-Eleven partnering with Instacart by offering delivery of milk, bread, eggs, alcohol and other staples in about 30 minutes. Foxtrot Market was founded in Chicago as a delivery-only convenience store, then moved to open a number of neighborhood-focused brick-and-mortar locations while still offering about 1,000 SKUs for delivery within an hour. And Gopuff, which launched retail sites in New York City in the fall of 2021, delivered products "in just minutes ... for immediate everyday needs" through micro-fulfillment centers.

"This next generation — Gen Z and Gen Alpha and Gen Beta — they didn't ever have to wait for the tape to rewind," Anne Mezzenga, co-founder of Omni Talk, said in an interview. "They are so used to streaming their music, their TV, getting delivery in 15 minutes. And that's not going to change. And so, as a retailer, whether you're a grocery retailer or a convenience store retailer, you have to be putting some level of testing dollars or R&D efforts toward figuring out how instant delivery can be done in your business."

Focus on localization

As malls continue to find a new way forward, especially as anchors falter, many retailers are attempting an off-mall approach to real estate. That means moving into strip centers and neighborhoods and testing small-format locations.

Bloomingdale's, for example, is testing its Bloomie's concept in Fairfax, Virginia, where merchandise is highly curated and frequently changes. Nordstrom has its merchandise-free Local store concept, and even Foot Locker and Nike have opened up neighborhood-based stores.

C-stores, though, have a history of providing local products to the communities they serve. These retailers typically have stores that are smaller in footprint and fit into areas that large grocers cannot, thereby providing grab-and-go solutions to their customer base.

That concept is only going to grow as c-stores evolve, according to Eric Dzwonczyk, global co-leader of the restaurants, hospitality and leisure practice at AlixPartners. "I think that localization is probably the thing that trumps everything. The pandemic has sort of reinvigorated that in American urban consumers," he said.

That means c-stores can act as a central point where people in a community can gather and hang out, as well as make quick trips to pick up a couple of items, according to experts.

An optimized assortment of products on a local level is what convenience stores have always offered, simply because many times there were so many c-stores in the same area. "For years, retail had a one-size-fits-all, or a two-size-fits-all" solution, Dzwonczyk said. But, c-stores had to adapt because there are so many of them, with some less than a mile from each other. "Really being able to quickly localize and tailor the assortment to the area where they're operating, I think is an awesome advantage. And being able to do it quickly," he said.

That's especially true if c-stores move to become more hybrid in nature — meaning a combination of the traditional convenience store, with an added mix of grocery item availability and great food, according to Dzwonczyk. High-end c-stores seem to be following this trajectory: "They're part convenience store, part restaurant, part grocery, part corner market, part cafe. There's a little bit of everything all in one place. And I think that's the thing that's really generated the most consumer appeal," he added.

Embrace private labels

Although the concept is not new, private labels have increasingly become a part of a product strategy in retail. Target specifically has led the way — it now has 48 private brands, 10 of which are worth a billion dollars. Bed Bath & Beyond in 2021 launched eight of its own and Foot Locker introduced its products via the Lckr brand, the Don C lifestyle brand and a performance line through Eastbay.

Grocery is also increasing its private label efforts. A report from the Food Industry Association found that 91% of food retailers and manufacturers are planning to significantly or moderately ramp up their private labels in the next two years. Within grocery, private brand sales reached over $64 billion in 2020, up nearly 15% from the year prior. The motivation behind the change, at least in part, has to do with the pandemic. Seventy-seven percent of survey respondents said they are changing or rethinking assortments and supplier strategies due to COVID-19 pushing changes in consumer behavior and supply chain operations.

Private labels are a way for retailers to give consumers quality at a reasonable price point, can be a competitive product offering and give shoppers an alternative to large brands, according to WholeFoods magazine. 

That may be some of the reasoning behind why c-stores are pushing further into the category, as they leverage their owned brands. In 2021, Foxtrot Market announced two senior-level hires to help expand the company's private label meals and grocery products to help support its "fastest-scaling category." In December 2020, 7-Eleven reached $1 billion in private brand annual sales.

Private label sales are expected to continue to climb. An NACS article that cites research from mobile platform and analytics company InMarket said that private label sales increased 12% in 2020 from the previous year. Additionally, private label offerings may help determine where people decide to shop, and higher earners with incomes of over $100,000 are increasingly purchasing private label products at c-stores.

Surprise and delight

A treasure hunt shopping experience has always been the domain, and strength, of off-price retailers like T.J. Maxx and Marshalls. Yet, the same may be said of convenience stores.

While customers always expect to find products like snacks, coffee and household cleaners at gas stations, there is a certain level of discovery that occurs with these stores, especially when it comes to food.

It may be because around 60% of convenience stores are one-store operators. That means individual owners are bringing their particular concept of what will drive traffic to their brick-and-mortar locations. "With almost 100,000 different owners, there's so many ideas," Lenard said.

Whether it is brisket in California, Nepali dumplings in Virginia or fried chicken in Michigan, offering great food at a value price point is a way to build excitement and consumer loyalty.

Convenience stores have improved their food offerings so much that some experts think that their competitors aren't other retailers but rather other restaurants. And research backs up that notion: AlixPartners reports that high-frequency customers are more likely to purchase meals from c-stores, with 84% of those shoppers interested in doing so.

"Today, when you look at convenience stores, people shop them differently. They're more likely to go to the store because of what they have to eat and drink. And oh, by the way, get gas," Lenard said. "And as convenience stores evolve from acting like gas stations to acting like restaurants — when you take the gas station component away, you have a restaurant."

That is all part of the c-store evolution, according to AlixPartners' Dzwonczyk. "More and more they've moved into the foodservice business, and now really compete with restaurants," he said. "And they've really amped up their game in terms of being able to hit a wide range of consumers, families and kids at different times of day with good quality and reasonable price points."

But, it's not just about the food. As with localization, the notion is to give shoppers something unanticipated in addition to those items they expect.

"People love being surprised, right?" Lenard said. "They love when they find something unique." 

Continue to experiment with tech

By their nature, convenience stores have always been at the forefront of making a shopping experience quick and easy, but even these retailers had to expedite changes in order to meet the needs of shoppers during a pandemic. 

"The pandemic forced probably five years of innovation in eight months for convenience stores," Dzwonczyk said. "They got so much better at foodservice and delivery and technology because they had to." 

Even as c-stores had to recently adopt new practices, they've also been steadily experimenting with technology even prior to the pandemic. One place where that is most evident is with grab-and-go tech.

"The biggest change that is hitting the c-store right now is this idea of cashierless checkout," said Omni Talk's Mezzenga. 

Amazon has been one of the leaders in the space with its Go concept stores that debuted in 2018. Since its launch, Amazon has moved to sell its Just Walk Out cashierless tech to other retailers, and in late 2021 partnered with Starbucks to debut a grab-and-go store in New York City.

Amazon isn't the only company that is building out that type of technology, though. Startups like Standard Cognition and Zippin have raised millions of dollars to further develop, scale and implement cashierless tech. Even 7-Eleven opened its own cashierless store at its corporate headquarters in 2020.

And the reason why c-stores are willing to experiment with this and other technology? It all comes back to a foundation of serving customers better, and faster.

"People will never ask for less convenience," Lenard said.