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.
The concept store may prove the company's agility and ability to bring in new audiences.
By: Kaarin Vembar• Published Sept. 20, 2021
The next generation of department store concepts may be located in Fairfax, Virginia.
Armed with a smaller footprint (22,000 square feet), a stylish selection of products and a tech-savvy space, Bloomingdale's new Northern Virginia location, Bloomie's, could point to a new direction for the sector. Or, at the very least, an alternative path.
"Our new Bloomie's store will deliver everything they love about Bloomingdale's in a highly edited, convenient, and unexpected way," Bloomingdale's CEO Tony Spring said of the concept.
The store features a "tech-enabled stylist service model," and offers men's and women's apparel, shoes, accessories, activewear and beauty. It also has a returns dropbox, in-store and curbside pickup, alteration services and a front desk that answers customers' style needs. The store frequently rotates trends, hosts activations and features merchandise carts, which prompt product discovery. It also offers drinks and Cuban food via a local cafe, Colada Shop.
But will a smaller space, cocktails and coffee, and the ability to drop off online returns be enough to re-engage customers and get them excited about department store shopping?
Looking like a whole snack
The past few years have been especially unkind to department stores. It would be easy to point a finger to the pandemic and place full blame on a health crisis that changed daily life as the reason for their downfall. But, the reality is that COVID-19 only sped up decades of decline in the sector. Rapid expansion, company consolidation and a rise in e-commerce played a part in changing where and how people shop.
Then there is the decline of the mall. While in the past, malls served as an alternative to a city's main street, the appeal of going to one has been waning. In 2020, Green Street analysts forecast that more than half of mall-based department stores could close by the end of 2021. And in the first part of 2021, vacancy rates at "regional" and "super regional" malls reached a record 11.4%, according to Moody's Analytics REIS.
But, an interesting thing started happening. Retailers decided to take their stores outside of the mall structure. Both department and specialty stores — including Nordstrom, Victoria's Secret, Macy's and Express — have opened locations that are not mall dependent. Bloomie's is in that group, with its concept store in the middle of an outdoor shopping district.
"For most people the days of just browsing and wandering through the store and making shopping a day with lunch in the middle — that concept may be beyond repair," said Allen Adamson, co-founder of Metaforce. "So, the notion of trying different things is smart," he said of the Bloomie's concept, stating that it can be a way of getting "the best of Bloomingdale's" while allowing customers to get quickly in and out of a store.
And a quick pop in to the store is part of its appeal. Instead of wading through racks of merchandise, the Bloomie's product selection is curated and meant to frequently change so customers will "find something new to obsess over each and every visit" according to the company website. That means new deliveries are coming into the store multiple times per week.
"It's a showcase for you. I just want to see something interesting," Adamson said, referring to the benefits of being able to swiftly take in what is new at a store. "In today's time-pressed world, people just want a snack, they don't want a five-course meal."
Besides traditional merchandising, customers can readily discover products on carts located throughout the store, which are designed with flexibility and trends in mind.
That steady influx of products appeals to a younger demographic, according to Shelley E. Kohan, an adjunct professor at Syracuse University's Whitman School of Management and former employee of Macy's and Bloomingdale's for 17 years. "That translates into fresh goods, more frequency, more visits. And because they're creating a smaller environment, popping in and out of the Bloomie's store is quite easy and fun."
The right technology in the right places
Another potential draw for shoppers are various services that can be accessed at different points in the store.
Instead of a traditional cash wrap area, a front desk answers shoppers' questions and is set up to perform a variety of tasks like online pickups, returns, gift wrapping, alterations and styling. In that area, shoppers can also access a dropbox for online returns.
A QR code on a sign makes it easy for shoppers in the Bloomie's store to connect with an associate at Bloomingdale's New York flagship to discuss luxury handbag offerings. And fitting rooms have buttons that shoppers can push for assistance.
Stylists are also able to use tech to aid customers. That means they can access products not only from the Bloomie's store, but other Bloomingdale's locations and on the retailer's website as well.
It's not that all of this technology is cutting edge. (QR codes, for example, were invented in 1994 and have been used by retailers in the decades since, but gained widespread popularity during the pandemic.) Rather, it is the right mix of technology being employed in the right situations, according to Kohan.
"Certainly the pandemic accelerated, pushed retailers to have to figure out how to converge all these different enabling technologies to make the shopping journey and experience more convenient," she said. "So while a lot of the technologies have been around for many years, I think we're coming to a point that we're actually utilizing the right technologies in the right spaces that are relevant for the consumer."
Making it personal
While tech and convenience play an important role in the store, services that make a shopping experience feel personal are also emphasized. One service that lends itself to personalization is the location's monogramming station. Customers are invited to stylize their apparel through monogramming, embroidery, alterations or patches. This is similar to the Levi's Tailor Shop, which customizes productswith sewing, pins and patches. The in-store service allows a shopper to easily add their own touch to apparel.
But, the biggest nod to a more personalized shopping experience is that every associate at the Bloomie's concept is a stylist and an expert in all categories of the store. That takes something from merely being transactional to relationship-building, according to Kohan.
"Unlike a lot of other companies that are really making customer service very self service — they are pulling back on a lot of personal connection and personal touch — Bloomingdale's is doing the exact opposite," she said. "They're trying to create a closer connection with the customer, a deeper loyalty, and their whole strategy is around personal connections."
In a study from 2020 about personalization, McKinsey & Company brought home the importance of developing those bonds with customers. "[R]etailers must respond to the demand for personalized experiences not only to differentiate themselves but just to survive," the authors wrote. "When done right, though, personalization allows retailers to do more than merely survive: it enables them to thrive."
Many legacy retailers are getting that message. Macy's in 2020 introduced both virtual and in-person stylist appointments. Nordstrom, which has long been known for its customer service, offers a variety of styling services so shoppers can get outfit recommendations or receive a complete wardrobe overhaul. And Neiman Marcus launched "Your Neiman's," a hub that offers personalized luxury services including the ability to collaborate with a store stylist.
And that thinking may move department stores from a mindset of just surviving to gaining cultural relevance once more.
The future of department stores?
Is Bloomie's the future of Bloomingdale's? Is it representative of the direction that most department stores should head?
Experts said that the most important thing the legacy retailer is doing with the new concept store is staying agile. That means it has the ability to repeatedly test things and make swift decisions.
Some retailers are already doing this by experimenting with neighborhood stores. Nordstrom Local, which touts itself as being a "Nordstrom experience a little closer to home" has multiple locations in New York and Los Angeles. Market by Macy's is a smaller brick-and-mortar concept with "neighborhood flair," according to the company. And even Nike has been playing with hyperlocalization as part of its larger fleet offering.
"Revitalizing the traditional department store has been tried for many years," Adamson said. "If you can grab something and see what's new and hot and zip in and out, that has a higher likelihood of being more relevant for today's consumers. And it's a lot easier to pivot and say, 'Oh that didn't work, let's try a different curation.'"
Article top image credit: Kaarin Vembar/Retail Dive
7 experiential store concepts that opened in 2021
From Dick's Public Lands outdoors banner to Bloomie's to Ulta's Target shop-in-shops, here are some of the most notable concept launches.
By: Cara Salpini• Published Oct. 11, 2021
As in past years, testing store concepts has been top of mind for retailers in 2021, as the industrymoved past the mass closures and severely dampened traffic of 2020.
For some DTC brands, that means returning to physical retail after abandoning it in 2020 or testing their first brick-and-mortar presence now that the environment is more favorable. For more established players, it means expanding recent store concept initiatives, introducing new formats and solidifying partnerships for shop-in-shops to make the in-store experience more compelling.
For many, but not all, the piloting of new formats has been done in pursuit of experiential retail, the lofty concept that stores can do more than just sell products. That they can offer shoppers community and entertainment through the likes of services, classes and local events. For others, new formats are just a way of reaching a different market.
Regardless of the reason, here are some of the most interesting store concepts and shop-in-shop partnerships that launched in 2021.
But the big news from Dick's are its House of Sport concept and its new Public Lands banner (the latter of which is branded as Public Lands, not Dick's). In April 2021, the retailer's experience-driven House of Sport format debuted, featuring everything from a rock climbing wall and a turf field to a putting green and racket stringing. Analysts expect the retailer is using the concept to test every experience it could potentially offer and eventually roll out the winning ones, so to speak, to the rest of its fleet. Already, some of the golf services offered at House of Sport are beingintroducedto its golf stores.
Public Lands is a completely different venture. Announced in November and launched in September 2021, the banner is an outdoors-focused business that competes more directly with the likes of REI. It's got an environmental mission and, to some extent, serves as a replacement for the Field & Stream stores Dick's is exiting, though without the emphasis on hunting. Analysts think it could be a powerful growth vehicle for the company as outdoors has gotten a boost over the past year or so.
The 1,000-square-foot concepts are designed to feel like an "extension"of Ulta's own physical stores, including with special training for the associates that man them; the idea is that current Ulta shoppers get what they're looking for and new ones are also drawn in. While the initial rollout includes just 100 locations, Ulta and Target are planning for 800 over time, and Ulta executives have already said they're "thrilled" with how the shop-in-shops are going.
"Each aspect of the shop was thoughtfully designed to make the space feel authentic to Ulta Beauty, Target and the featured brands within the assortment," Ulta CEO Dave Kimbell said on the retailer's Q2 earnings call. "From the unmistakable Ulta Beauty orange pop canopies and vivid graphics that weave into the existing Target store, everything was designed to create an inspiring and unique beauty experience for guests."
With department stores still under pressure, Bloomingdale's is hoping to reinvent itself with a 22,000-square-foot format dubbed "Bloomie's." The smaller format is located in Fairfax, Virginia's Mosaic District, notably outside of the mall, and builds off of a similar strategy pursued by parent company Macy's.
Not only has Macy's announced its own plans to move outside of the confines of the mall, but the legacy department store has also tested its own small format concept, Market by Macy's. Bloomie's, which opened in August 2021, features men's and women's apparel, accessories, shoes and beauty, as well as centralized services like a returns dropbox and curbside pickup. The concept is meant to offer "everything [customers] love about Bloomingdale's in a highly edited, convenient, and unexpected way," Bloomingdale's CEO Tony Spring said in a statement.
The storefrequently rotates trends, hosts activations and features carts throughout the store that prompt product discovery.
Ulta and Target stole some of the thunder out of Sephora's deal with Kohl's, as their announcement came just a month earlier. However, the two partnerships vary in some key ways. For one thing, Sephora teaming up with the department store comes at the expense of J.C. Penney, who it currently has a deal with. Those Sephora shop-in-shops will wind down by early 2023, the beauty retailer said.
Sephora's deal with Kohl's also has a far bigger footprint than Ulta's Target shop-in-shops, at 2,500 square feet. The experience features Sephora-trained beauty advisors, testing and discovery zones, a rotating assortment, and in-store returns and pickup.
However, Casper also launched something new for the company in 2021. On July 22, the DTC brand opened its first branded shop-in-shop at Bed Bath & Beyond's flagship in New York City. Bed Bath & Beyond will offer the DTC brand's products at other locations as well, but the New York City store is unique in offering a Casper shop-in-shop.
"Casper will create one-of-a-kind, immersive in-store shopping experiences of its award-winning suite of sleep offerings to Bed Bath & Beyond customers," Casper said in a release about the shop-in-shop.
Wilson's first store, at 2,247 square feet, opened in Chicago in July 2021 and sells both the company's new apparel line and an assortment of sports equipment. Like many in the athletics space, the well-known brand is aiming to bring uniqueness andexperiences to its customers through exclusive seasonal drops, limited edition products and special events. Wilson described the Chicago store as a "test lab" for gathering feedback — and in May outlined plans for stores in New York, Shanghai and Beijing as well. The company later added plans for a store in Los Angeles.
"Following the launch of our Wilson Sportswear line earlier this summer, it was important that we introduce physical retail locations so that our athletes can experience and interact with our sports equipment and apparel in person," Gordon Devin, president of Wilson Sportswear, said in a statement about the brand's Chicago store opening. "Our first-ever retail location centers around Wilson's heritage, serving as a physical 'love letter' to our city."
Prior to the launch of its permanent Chicagolocation, Wilson in August 2021 debuted a tennis-focused pop-up in SoHo ahead of the U.S. Open featuring racketcustomization, and an entire floor dedicated to tournament viewing and events.
7. Nordstrom's Indochino shop-in-shops
Workwear has had a tough time since the start of the pandemic, to say the least. Broadly, consumers just haven't had the same need for it as in prior years when commuting into the office was a daily task for much of the working population. That's meant that retailers selling formal wear and workwear have needed to pivot or grow their offerings to stay afloat.
Some of the dark clouds around the category have receded, though, as more events open up again. In that landscape, Nordstrom and Indochino announced a deal for the DTC custom apparel brand to open 21 shop-in-shops at the upscale department store. As a retailer that prides itself on service, the Indochino partnership makes sense for Nordstrom, as it is a highly service-oriented model.
Nordstrom shoppers interested in the brand'sapparel work with Indochino salespeople to choose fabrics and customization options for their clothing, including lapels, buttons, pockets, lining and monogramming. Apparel is then made to measure and sent directly to customers within two to three weeks. Nordstrom also offers complimentary alterations for all Indochino customers.
"We have long admired Indochino as a leader in made to measure suiting and apparel and we are excited to bring the Nordstrom customer a new bespoke experience in our stores," Shea Jensen, executive vice president and general merchandise manager of women's and men's ready to wear at Nordstrom, said in a statement on the launch.
Article top image credit: Courtesy of Dick's Sporting Goods
The evolution of stores, and what it means for you
Data now affects every single aspect of the purchase funnel, except in-store signage. Unfortunately, this element is often not given the full data treatment that its peers receive, likely because of attribution difficulties. It can be much harder to assign actual numerical results to signage when you have little information about shoppers' exposure to — and purchase intent driven by — physical signage. But with consumer recall of in-store advertising outperforming expectations, modernization is a necessity.
Consumers have demanded in-store change
Modern consumer expectations are expansive. Advancements in technology, and an overabundance of instant gratification, mean that shoppers have more choices to get what they want when they want it. It's no longer about just fulfilling needs — it's about fulfilling them in a meaningful, personalized way that makes the shopper feel special.
When they're there, they're engaged. According to Inmar shopper survey data, nearly 70% of shoppers recall seeing in-store product advertisements.Those impressions yield results — 69% of consumers who saw an in-store ad browsed the featured product, and 61% ended up purchasing the product.
Inmar data indicates that 85% of consumers make a shopping list prior to going to the store. However, only 11% of shoppers build their lists with brand names, while 42% do a mix of products they need and brand names.
For shoppers not loyal to a specific brand:
80% decide which brand to buy based on the price at shelf
44% will purchase if they have a coupon
27% are persuaded to purchase after seeing a sign that tells you more about the brand
15% if the product was recommended by an associate
What should you be getting from an advanced, Intelligent In-Store program?
A strategic partnership to help establish your in-store media value
Customer-centric programs that monetize your unique audience
Digital media and promotions blended with signage for a cohesive customer engagement strategy
Reasonable at-shelf placements, relevant signage, and reference to local flavors with national dollars
1st and 3rd party data that prescribes when, how, and where for optimal engagement
Measurement and attribution for suppliers, which brings you more dollars
Shoppers are now looking to stores for guidance, engaging with in-store media, and remembering the ads they’re exposed to. It’s time to solve the in-store problem — and data will be your best tool.
Article top image credit: Rodnae Productions / Pexels
'There's nothing like it out there': Dollar General's Popshelf aims to create and conquer a new market
Seeking a treasure hunt vibe, the new format is expanding rapidly as it courts middle-income suburban shoppers. With success and scale come some big decisions for the company.
By: Ben Unglesbee• Published July 19, 2021
2020 was not a banner year for launching new retail concepts. Many in the industry put their efforts into building out their e-commerce and omnichannel capabilities as the pandemic raged across the country.
Dollar General was among the small, hardy group that launched new store concepts in 2020. Its first store under the Popshelf banner opened in Tennessee that October, and didn't get many visits from media or financial analysts. The first analyst who did take a look at the store in person called it the best new concept he has seen in nearly two decades.
"I walked in there and went, 'Wow, like, this is something special,'" Scott Mushkin, CEO of R5 Capital, said in an interview. "The only other one that made such a significant impression on me was Five Below back in 2005."
Dollar General has long been courting customers in higher income ranges than its traditional base. Popshelf is an entire concept devoted to a market outside of Dollar General's core. As such, it is a first not just for Dollar General, which opened its first store in 1955, but in many ways a first for the entire sector.
"From Dollar General's perspective, they saw an opportunity in the market that's being underserved," said Joseph Feldman, retail analyst and assistant director of research with Telsey Advisory Group. "I hear this a lot from the dollar stores or value-oriented retailers, that there's a number of great products out there if you could go upscale a little bit, higher than what you normally do in your core store."
Between October and May, Dollar General opened its first eight Popshelf stores, which are around 9,000-square-feet each. The performance of those stores "far exceeded our expectations," Chief Operating Officer Jeff Owen said in Dollar General's most recent earnings call.
Annualized sales as of May 2021 stood at $1.7 million to $2 million per store, compared to $1.4 million in first-year sales for a traditional Dollar General. Gross margin rate at Popshelf stores is roughly 40%, eight percentage points higher than at Dollar General stores, according to Owen.
With the banner performing well, the company has accelerated its build-out of the concept as it eyes thousands of locations across the U.S. While successful already, the concept is in its infancy. Dollar General will have to make calculated decisions about the brand along the way, and the retailer will have to scale a concept not quite like anything either it or its dollar store peers have ventured into before.
Five Below for the over-20 set
In announcing the new format, Dollar General said that it targeted suburban female customers with household annual income ranging from $50,000 to $125,000. Popshelf is really the first dollar store to devote itself entirely to that demographic.
Comparisons with Five Below are perhaps inevitable — especially as Popshelf's target price is $5 or less for most items — but those comparisons are also not very accurate based on each format's target customer.
"There's nothing like it out there," Mushkin said. "It's very much on trend. The merchandise is insane. It's just a really fun format. In some ways, it's like Five Below all grown up. But that probably doesn't do it enough justice."
To be sure, there are many discounters and value-based retailers vying for the dollars of the middle-class suburban shopper. Feldman named Big Lots, Ollie's, HomeGoods, even Bed Bath & Beyond, as well as other dollar stores. But none quite align with Popshelf's specific offer and merchandising.
"It's too simplistic to call a Popshelf just similar to Five Below. It's more like an adult version of Five Below."
Retail Analyst & Assistant Director of Research, Telsey Advisory Group
Feldman also noted the inevitable but imperfect comparison to Five Below. "It wouldn't surprise me if Dollar General saw the success of Five Below, and sees the success of HomeGoods and others, and thought, 'Hey, you know, there's a niche for us in there too,' to cater to the adult community," Feldman said. "It's too simplistic to call a Popshelf just similar to Five Below. It's more like an adult version of Five Below."
For its part, the company told Retail Dive that Popshelf "is not an attempt to replicate or refine an existing retail format. It's a new and, we believe, unique store concept and new brand."
Key to the banner's proposition to its target customers is Popshelf's merchandising, which focuses on seasonal and home decor, health and beauty, cleaning supplies, party goods and other categories.
With Popshelf led by Dollar General Chief Merchandising Officer Emily Taylor, the retailer is looking well beyond the household essentials and general fare at its traditional stores. Its goal is to trade in trendy brands and products and create a treasure hunt experience at the Popshelf stores. That effort includes combining continually refreshed merchandise with seasonal specials and limited-time offers.
The company already thinks the banner is having resonance with customers. CEO Todd Vasos in May cited promoterscores in the upper 80% and 90% range, which he described as "unheard of." Owen, on the same conference call, said customer satisfaction scores at Popshelf were "very high."
When Mushkin visited the store, the analyst thought, "Who the hell is merchandising this thing?" He saw party crafts, face mask bars, black cutlery, colored pens, pet treats, shampoo, and stations to build your own mops and design T-shirts, as well as healthy and organic snacks and other consumables. His firm estimates that at least 50% of a Popshelf's store sales are likely to come from higher margin categories.
"You just really couldn't merchandise anything any better than they're doing," Mushkin said.
Popshelf opens doors for Dollar General to products and price points largely left out of its traditional stores. The banner allows the retailer to "leverage their strengths, which are clearly buying and sourcing," Feldman said. "It opens up this whole world in goods and items."
But it also means buying for a unit within the larger organization that has very different needs and makeup than the rest of Dollar General, which is much more focused on consumables and household essentials. However, the retailer has been working to grow sales of non-consumable products — an initiative that helped spawn Popshelf. In Feldman's view, while different in needs, Dollar General's existing sourcing infrastructure can help it stock Popshelf.
"They already have the scale of Dollar General behind them," Feldman said. "To go in the market and then to be able to bring that heavy pencil to write those orders — you can get great pricing."
Behind that "heavy pencil" is the financial firepower of a company that made $33.7 billion in annual revenue and $2.7 billion in net profit during a crisis year for the country. There is also a massive, mature buying organization that stocks Dollar General's more than 17,000 stores.
Within the organization, Popshelf has its own dedicated procurement team, which also tries "to leverage core competencies from DG to support pOpshelf, including collective buying power with vendors for the benefit of the customer," the company told Retail Dive in written comments. The company also sees opportunities for cross-learning in the respective merchandising of its core and Popshelf banners. "As much as DG can influence pOpshelf, we may see learnings from pOpshelf to integrate into DG stores," Dollar General said.
Filling a niche
Opening during the pandemic does have its advantages.
Asked about it in December 2020 by an analyst — who was "curious in terms of decision to launch the new concept right now during the pandemic" — Vasos said that the concept had been in the works for 18 months and was always slated to open when it did. "So we were very much right on track to our initial launch times," Vasos said, according to a Seeking Alpha transcript.
The executive went on to note that "we didn't anticipate ... the abundance of available real estate that would be out there, and that's been a real positive for us." That abundance came from the store closures in 2020, which hit nearly 9,000, and which created opportunities for a retailer that already accounts for nearly a fourth of all new store openings in 2021.
Real estate vacated by retailers closing shop may have helped fuel Popshelf's expansion, along with its stellar sales performance.
In March 2021, Owen said the company was accelerating its plans for Popshelf this year. It now expects to open 50 stores under the banner, up from 30, and to additionally add the concept to 25 Dollar General stores during the year. Long-term, executives see room for 3,000 possible Popshelf stores in the U.S.
Using Five Below as a proxy, Mushkin came to a similar estimate for possible Popshelf stores. As to where all those stores will go, and what fellow retailers they'll share strips with, that is not yet clear.
"I think they just like being in high traffic areas," Feldman said of the Dollar General organization.
The concept's target demographic is large enough and its offer broad enough that it could go in a diverse set of shopping centers. "It's right down the middle," said Mushkin. "Bed Bath & Beyond, Kohl's — any of those ubiquitous strip centers across the United States that have middle-income retailers in it."
He added that Popshelf may be competing with Five Below for real estate, but in terms of consumer wallets, the two retailers aren't necessarily going head-to-head given the age difference in their target customers.
"You could almost say they could co-locate," Mushkin said of Popshelf and Five Below. That could allow for family shopping at the same strip, with parents going into Popshelf to shop while their teen and tween children shop at Five Below.
Two stores or one?
Along with the opportunities of scaling Popshelf come big decisions, and some risks, for Dollar General.
The signal from executives that they plan on adding the banner as a shop-in-shop inside its namesake formats raises some obvious questions. Are the two brands compatible, complementary? If so, to what extent and in which markets? If not, what's the downside of intermingling the two brands?
The company has not said how many shop-in-shops it will open or to what extent they may comprise Dollar General's target of 3,000 stores.
In a March 2021 call, a Goldman Sachs analyst asked executives, "As you think about your core customer, what gives you confidence that the customers will not feel an alienation to the core banner with this double signage outside in a store-within-a-store concept?"
Vasos replied that those areas where it might put a Popshelf inside a Dollar General are those where incomes are higher than the retailer's traditional core customer. Vasos also noted strong sales when there has been "cross-pollination of items" — that is, products sold in Popshelf also sold within a Dollar General, sans any Popshelf signage.
Mushkin is skeptical of the shop-in-shop plans, and said he has even flatly told company executives he doesn't think the strategy is a good idea.
"The upside of co-mingling is maybe in some of your DGSs you can put a Popshelf and you can enhance returns a certain amount, and that's good," Mushkin said. "What's the downside? The downside is you freaking tarnish the Popshelf brand and you never get the results. The downside is significant because you can screw up something that's just amazing."
He added: "It's not like you can't do it ever, but you protect the brand and grow it independently. To me, that's more important."
Along with the differences in assortment, the higher price points — with 95% of products $5 or under — are one reason to demarcate Popshelf as its own banner. "I don't know that you could simply drop in some of this stuff" into Dollar General stores, Feldman said. That could send the wrong message to customers about the Dollar General banner.
Mushkin thinks the banner could eventually be spun off or sold. "Dollar General is something that is a completely different animal in my mind," he said. For one is the value potential in Popshelf, which he thinks could add more than $50 to the retailer's stock price.
There are also operating differences between the two models. Popshelf's constant merchandise refreshment requires different training and labor structure than Dollar General stores. As for labor, Popshelf stores are being launched with spots for 15 workers, compared to 6 to 10 new jobs slotted for traditional Dollar General stores, according to the company.
"I think they can scale it, but it's different running 15 to 20 stores than it is 3,000," Mushkin said.
With Popshelf still in its early stages, there is no hint from the company as to whether it might one day spin off the banner. For now, it is rapidly moving from experiment to an actual store chain. One way or another, Dollar General is betting that Popshelf's higher prices and higher margins will be a money-maker for the company.
Article top image credit: Courtesy of Dollar General newsroom Popshelf
Malls may not even need anchors. Here's why.
Department stores used to drive traffic, but now they're just a drag.
By: Daphne Howland• Published July 12, 2021
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."
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.
"We are being proactive in looking to replace department stores where we see the opportunity."
CEO, CBL Properties
"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."
Big boxes, specialty stores and discounters have stolen share from department stores for years. Now some, most notably Target, are stealing their merchandising playbook too.
By: Daphne Howland• Published March 15, 2021
There was a rumor in Chicago that Target was thinking of taking over space being vacated by Macy's on the Magnificent Mile shopping district, at the Water Tower Place shopping center, according to a March 2021 report in the Chicago Tribune.
This location has been the scene of controversy in the past. Before it was a Macy's, that store was a Marshall Field's, one of the mall's first anchors when it opened in the 1970s. Some Chicagoans have never forgiven Macy's for its takeover of perhaps their most beloved retailer early this century.
Now, the notion of replacing Macy's with a Target is creating a buzz. In an interview with WGN radio, Cook County Treasurer Maria Pappas called the prospect "embarrassing," "disgusting," and "desperate" on the part of mall owner Brookfield.
"I'm trying to figure out what is magnificent on the Magnificent Mile about Target," Pappas said.
Others defended the idea, including author Micheline Maynard, who said in an email that she once lived three blocks from Water Tower Place. "Urban Targets meet the needs of today's city dwellers, the way the original wave of Chicago department stores, like Marshall Field, Carson Pirie Scott and Goldbatt's did in the 20th century," she wrote in Crain's Chicago Business.
She may be on to something.
Target declined to comment on whether it's signing a Water Tower lease, and Brookfield didn't immediately return a request for more information. But if it is, it would be a neat illustration of how, as Maynard points out, Target has usurped the traditional department store, as some retail analysts see it.
"Target has become a place where consumers go to discover new things," GlobalData Managing Director Neil Saunders said by email. "This used to be at the heart of what department stores were – going right back to the very early days of the concept. They were merchants which brought a world of interesting products within easy reach of consumers. Most traditional department stores – with some exceptions such as Harrods and Selfridges – do this no longer. Indeed, they are more like museums where boring products go to gather dust!"
What department stores gave up
In their heyday, department stores were true emporiums, with merchandise as varied as sewing notions, housewares, tools, art, wine, candy, toys, electronics, jewelry, beauty, pet supplies and even more, plus, of course, apparel and footwear.
Their lovely buildings, high-touch services and helpful store employees, along with amenities like tea rooms and child care in many cases, made a trip to a department store an enjoyable day of discovery. These various departments gave them their name, which has steadily eroded as big-box stores and specialty retailers, and later e-commerce players, enticed their customers with lower prices and in-and-out convenience.
As department stores gave up sales in many categories, those departments shrank or emptied and usually filled up with more apparel (a once highly lucrative market that now has its own problems). At many stores, (several of them, like Marshall Field's, eventually taken over by Macy's), there are now fewer services and fewer helpful store employees.
Sounds like local officials are out of touch with retail realities. I'd take a Target over a Macy's any day of the week! And I don't think I'm alone! https://t.co/RIutUdfhci
As department store consolidation continued through the late 20th century and into the 21st, many local and regional department stores' private labels also disappeared, replaced with those of their owners (again, often Macy's) and more third-party brands.
"They nuked the private label that did well in each one of the markets, which was one of the first really stupid things that they did," Sanford Stein, founder of Retail Speak, said of Macy's predecessor Federated when it bought up and centralized a slew of local and regional department stores. "These home brands really met the taste of the marketplace. They did it for the sake of numbers, and efficiency."
How Target (and others) stepped in
As more shoppers buy online, stores need a reason to exist beyond presenting goods warehouse-style. Now many of the players that have taken share from department stores are adopting tactics perfected by those old retailers.
While big-box and discount retailers have traditionally had vast interiors with utilitarian displays, for example, some have begun to carve up their brick-and-mortar spaces to facilitate browsing. As part of a $7 billion overhaul of its stores and private labels launched in 2017, Target has noticeably disrupted its aisles to exhibit home goods and apparel so that shopping is easy and pleasant.
The retailer in March of 2021 said it's dedicating $4 billion more in capital expenditures, part of which will go toward remodeling more stores.
"Those Target stores very much recognize the value of those visual cues, where they took down partitions and they made the visual cues much more engaging, and the subconscious messaging that the store was making, their strike points, their introduction of the vignettes, the well-placed little breaks, the intersections between one walkway," Stein said. "This is all adding in the vocabulary of the department store. This is all part and parcel of what was basically the rulebook for good merchandising design in most department stores."
Shop-in-shops and pop-ups from third-party brands have also appeared not just back into department stores like Macy's, Nordstrom, Kohl's and J.C. Penney, but also at specialty big-boxes like Best Buy and mass merchants like Target.
"Those Target stores very much recognize the value of those visual cues... This is all adding in the vocabulary of the department store."
Founder, Retail Speak
Target, in particular, has announced dedicated spaces for Apple, Ulta, and an exclusive collection of apparel, home goods and pet supplies from Levi's. Disney has announced the closure of 60 stores in North America but has ramped up its shop-in-shop locations, including at Target. The discount retailer has partnered with direct-to-consumer brands like Casper and Harry's. And for decades now, it has fostered a "cheap chic" image through limited partnerships with high-end designers. Saunders expects yet more brands to seek out Target.
"Target has become a department store in the traditional sense of the term," said Saunders. "It already has very clearly delineated sections for different categories, with each having a distinct merchandising style and feel. This is very different from a traditional variety retailer or discount general merchandiser, like say Walmart, where most departments do not feel particularly different but tend to have a warehouse type feel. This really allows Target to add value in categories like home as it can display products more effectively and entice consumers into buying."
Finally, mass merchants have also discovered the power of private brands, which differentiate their merchandise from names that might be found anywhere and provide fatter margins. The king of private labels is probably Costco's Kirkland, whose sales outpace Macy's entire enterprise, but various introductions and revamps in a range of categories have come from Amazon, Walmart, Kohl's and Macy's, among others.
But once again, Target has excelled at this, after its concerted effort to sweep away many old store brands and design new ones. Steady introductions since 2016 have appeared throughout its assortment, from commodities like food and consumer products to more discretionary items like home goods, luggage and apparel. They've been lucrative: The company's new activewear line notched $1 billion in sales in its first year and is the 10th billion-dollar private brand in its portfolio.
When Macy's announced its Polaris turnaround in early 2020, an effort that was interrupted by the pandemic, executives said its own private labels were similarly due for an overhaul. But analysts at the time warned that the department store's focus on cutting costs could interfere with that. That shows that, whether at a department store or elsewhere, employing specific merchandising methods can only go so far.
"We saw this with J.C. Penney which, despite having the phenomenally successful Sephora shop-in-shop concept, failed to reignite its core business," Saunders said. "Sephora certainly drove traffic to JCP stores, but very few of those consumers were big spenders at J.C. Penney itself. In contrast, Target has a very strong underlying business so its partnerships are really icing on the cake. It is all very well having other brands and concepts come in, but retailers should also be innovating themselves. Target does, but many others do not."
Article top image credit: Daphne Howland/Retail Dive
A closer look at RH's Aspen 'ecosystem'
The brand in 2021 made an investment into a major Colorado real estate development, which includes stores, restaurants, residences and a spa.
By: Caroline Jansen• Published Jan. 14, 2021
RH is heading for the mountains to offer consumers a new way to experience its brand.
The home goods retailer in early 2021 announced it made a $105 million equity investment into Aspen, Colorado, real estate to build out a first-of-its-kind ecosystem of properties. The project will feature retail locations, hospitality concepts, restaurants, residential developments and workforce housing projects, according to the company.
It will open its Guesthouse concept in Aspen's Crystal Palace, which will also host the company's first bath house and spa. RH is also building out its Residences, which will include up to five four-bedroom homes at the Boomerang Lodge in addition to a six-bedroom home on Red Mountain. And Aspen, according to Telsey Advisory Group Senior Managing Director Joseph Feldman, serves as "an ideal location" to showcase the brand's products and services to its "affluent" customer base.
"We believe Aspen represents a singular opportunity to elevate the RH brand by exposing the world of RH to the world's most affluent and discerning customers in a single, walkable market," CEO Gary Friedman said in a statement. "Additionally, we believe the education RH will gain from a real estate development and ownership perspective will be immeasurable as the brand builds its global ecosystem of products, places, services, and spaces."
The Aspen announcement, which Wedbush analyst Seth Basham said serves as a "good first test," is part of RH's long-term vision of expanding beyond its Galleries and developing an "ecosystem" out of its brand. "If it's successful, it will give RH confidence to invest in these areas in other geographies — guest houses, turnkey residences, etc.," Basham said in an email.
The brand previously announced plans to open its first Guesthouse in New York City's Meatpacking District. The 14-room, 25,000-square-foot space was originally supposed to open in the fall of 2019, but was delayed to sometime in 2021.
But RH has made a play in the hospitality space before. The brand has restaurants, wine bars and cafes in cities across the country, like New York; Yountville, California; West Palm Beach, Florida; Columbus, Ohio; and Minneapolis.
The trend of retailers expanding beyond commerce and into other categories, like by opening branded restaurants, is nothing new. Department stores have long housed restaurants and tea rooms. ABC Carpet & Home in 2010 launched ABC Kitchen through a tie up between chef Jean-Georges Vongerichten and the retailer's creative director Paulette Cole. Crate and Barrel in 2019 launched The Table at Crate, a full-service restaurant within its stores. And Pirch, which specializes in kitchen, bath and outdoor products, allows customers to take a shower or cook a meal right in its stores to fully test out the products.
"Experiential retail is critical to success in a world where consumers can easily shop and make purchases online when the goal is simply convenient purchasing," Basham said, adding that RH's restaurant has proven successful to the retailer by helping to draw traffic and further elevate its brand.
Other brands like West Elm, Shinola and Muji have also put their names on hotels in recent years, but RH is approaching this venture differently, according to Friedman.
"Our guesthouse model is going to be unlike some of the other people that are doing branded hotels," Friedman said on a call with analysts discussing first quarter 2020 results, pointing to how several brands have previously partnered with hotel companies. "We're going to control the whole thing."
"You don't have a lot of risk, but you don't have a lot of upside either. You don't really control the experience," he added of others' efforts.
While an investment of this nature and scale may seem unusual, it's not entirely unheard of. Walmart in 2018 announced plans to lease underutilized land and parking space to restaurants, gyms and other businesses to create community spaces dubbed "Town Centers." The concepts — initially rolled out in Washington, Missouri, California, Texas and Arkansas stores — also featured green spaces and skateparks, among other things. However, similar to the deals Shinola and West Elm inked for their hotels, Walmart turned to partners to help build out its centers.
"It doesn't matter if it's a Guesthouse. It doesn't matter if it's a restaurant. It doesn't matter if it's a residence deal. We might have a partner from a development point of view, but we will control it. We want to own it. We want it to be ours. We want to be great at it. And it's hard to be great when you're kind of licensing out parts of your business. No one's going to care as much as you. No one's going to love it as much as you," Friedman said.
The significant financial investment also came amid the coronavirus pandemic, which has created problems for some retailers so dire they've been pushed into distressed territory. RH, however, has benefited from the pandemic-induced trend of consumers investing more heavily in their homes. The retailer in its second quarter of 2020 reported a 24.6% increase in net revenue to $844 million, while itsoperating profit grew to $111.2 million.
An experience-driven development like this may play in RH's favor as consumers hold onto pent-up demand for experiences as a result of being forced to spend much of the past year in their homes.
"This is a sizable, ambitious investment," Basham said. "Whether it is successful will be very important to evaluating the value of the company."
How Nike is using DTC and data to expand its empire
Since 2011, the sportswear giant has grown direct-to-consumer sales from 16% of its namesake brand revenues to 35%, all while continuing to take share.
By: Cara Salpini• Published March 23, 2021
In 2011, nearly ten years before Nike would announce its Consumer Direct Acceleration strategy to speed up the prioritization of DTC, the company was already focused on growth in that channel. In its annual report that year, Nike wrote that while wholesale made up the largest share of Nike brand revenues, "we continue to see growth in revenue through our Direct to Consumer channels."
At the time, DTC sales made up 16% of Nike brand revenues, or $2.9 billion of the total $18.1 billion the sportswear giant's namesake brand brought in that year (total company revenues, including Converse and other businesses, hit $20.1 billion). By the end of Nike's fiscal 2020, which came May 31, that number had grown to 35%, or $12.4 billion. Of course, Nike's revenues have also grown over that 10-year period, to $35.6 billion (or $37.4 billion company-wide).
The dominance of Nike was not always a sure thing. The numbers used to look closer than they do now (and they still are in countries outside of the U.S.), but the brand's journey to $35.6 billion, and generating more in DTC sales alone than some of its competitors make annually, has been through a path of persistent growth.
"Back in the mid-'80s, Reebok actually took No. 1 market share in the U.S. for about 18 months," Matt Powell, senior industry adviser for sports with the NPD Group, said. He noted that Nike had neglected the women's business, allowing Reebok to break in. "And then this guy named Jordan came along and Nike took No. 1 position back again. It's really been a multi-year strategy of them continuing to take share: Most years in the United States, Nike has taken share."
It's been about having the right product, definitely. But it's also been about knowing how to make tough decisions. In the '90s, that meant opening outlet stores when trends shifted to khakis and away from sneakers, according to Powell, and in the past few years, it's meant doubling and tripling down on shifting spend to its DTC channels.
"There's few brands that I can think of that should be pursuing the amount of economic upside from this kind of transformation more than Nike should," Michael Binetti, managing director at CreditSuisse, said. "It's such a big brand, with so many advantages to doing this."
Chief among those is that DTC sales are more profitable. Hence, the number of startups that have cropped up as DTCs. Nike has a strong brand, so it's able to command a sizable business through its own channels, but the more sales Nike can get that way, the better. Another advantage to the method is that Nike has more control over how its brand is presented through DTC channels, something which analysts speculated was the reason it stepped away from Amazon.
A report from McKinsey and the World Federation Sporting Goods Industry estimated that the shift to DTC has been accelerated by two years because of the pandemic, and researchers recommend that in the medium- to long-term, brands that want to thrive will need to aim for a 20% DTC business, or higher. It's at that point that brands begin to see a virtuous cycle from DTC sales and higher margins, rather than the "vicious cycle" that comes with less scale of the channel.
"They're all doing what Nike's doing," Joe Feldman, senior managing director and assistant director of research at Telsey Advisory Group, said. "They're all trying to segment more. They're all trying to clean up their vendor partners."
Of course, retailers' partners are the other half of this equation. Even though the Nike brand still does 65% of its business through wholesale, Nike's DTC rise has consequences for the wholesale opportunities it's leaving behind.
"I think, frankly, any retailer who loses Nike is going to be affected in a major way," Powell said. "Some of the mall-based retailers do as much as 70% to 75% of their business with Nike. And even the ones who don't have that kind of dominant space, it's in the 30s. So it would be a significant loss to any retailer, to lose that brand."
Nike's acceleration of selling directly to consumers doesn't mean overnight changes, necessarily. The retailer has been steadily shifting to more DTC sales over the past several years. But with the pandemic accelerating e-commerce growth by years, the next phase in Nike's strategy might turn out to be incredibly well-timed.
"I've covered these guys for 13 years and I've never seen them really embracing change and moving as fast as they are today," Binetti said. "And if you'd have asked me if I would have seen the biggest company in my coverage moving at this kind of pace… it's quite an impressive thing."
The Nike ecosystem
As Nike's been pushing toward a greater percentage of DTC sales, the retailer has also been carefully constructing an ecosystem to support that shift. In reality, it's just Nike delivering on what every retailer aims for when they talk about omnichannel, but where others have struggled, Nike seems to be succeeding.
As explained by CEO John Donahoe in June 2020, the company's DTC strategy starts with digital and Nike's owned stores. Most retailers have an e-commerce presence in addition to a fleet of stores — that's not unique, per se. But how Nike is using its stores is. After years of experimenting with digitally connected store concepts like Nike Live and House of Innovation, Nike is planning 200 small-format stores in the same model as Nike Live.
While most retailers understand the benefit of having physical stores, and how it increases online purchases in a given area as well, few retailers operate stores that are as digitally enabled as some of Nike's recent concepts. The retailer has managed to make its app so useful to the in-store experience that consumers without it are at a disadvantage. Customers can scan QR codes to pull up products on their phone, they can start dressing rooms through the app, and signs throughout the stores show customers what else they can do with their phones.
"It's this really smart acknowledgement that a purchase journey is sort of fragmented, and there are multiple touch points that go into a customer's consideration process," Sarah Marzano, a retail analyst at Gartner, said of the stores. "You might visit the Nike website while you're considering a shoe. You might then want to pop into your local Nike store to evaluate that product in person. They keep being really thoughtful about, 'How do we collect the first-party data that's necessary to knit that journey together and drive conversion?'"
In addition to creating an interconnected experience, Nike also has a strong sense of the purpose that each of its channels serve, Marzano said. For its stores, there are multiple objectives. Nike's new locations, notably off the mall and in more local communities, will not only help compensate for the closing of wholesale doors by providing a place for shoppers to see products, but they will also help build community with loyal customers, in the same way many DTC brands view their stores as marketing channels more than just revenue opportunities.
"They're in front of the curve, where they're saying, 'Look, we're making a bet that the consumer is going to either shop digitally or closer to home and the way that a lot of retail is built on high streets and in malls across the country, those are going to continue to diminish,'" Binetti said. "They're making the right bets. And we hear similar overtones of the neighborhood store strategy or the smaller store strategy all over the place."
Of course, e-commerce as a channel in and of itself has also accelerated over the years, and even more dramatically during the past few months. Nike has said before that it plans to become a 50% digital business (that includes both its own digital channels and those of retail partners like Foot Locker) and analysts believe that is a medium-term milestone rather than an end-goal.
NPD's Powell noted that the "targets are moving" on e-commerce as a whole thanks to the pandemic, with the firm originally projecting athletic footwear would be 50% e-commerce in five to 10 years, and instead it grew from 29% to 40% in 2020 alone. What that means for the future share e-commerce could make up is less certain.
"Is 50 a ceiling or does this go beyond that?" Powell said. "My gut tells me it goes beyond that."
Erinn Murphy, senior research analyst at Piper Sandler, said Nike's direct digital channels are on track to make up 21.5% of the total business by the end of fiscal 2021, up from 15.5% in the last fiscal year. That would amount to $9 billion. Reaching 50% with its retail partners, then, seems "very achievable," Murphy said. In fact, in an August 2019 report on Nike, Piper Sandler noted that over time it expected digital DTC "to become [Nike's] largest selling channel."
Nike execs added on a conference call in March 2021 that its digital business had grown over 70% year to date, and total digital (both owned and partnered) had grown to 35% of the company's business.
Fueling that digital growth are Nike's apps. The SNKRS app alone is now a $1 billion business, according to Murphy, and made up 18% of Nike's total online sales in fiscal year 2020, Piper Sandler wrote in an October 2020 report. The percentage of both male and female sneakerheads that use the SNKRS app has increased year over year, according to Piper Sandler, while the Nike app saw almost 200% growth in Q1 last year.
"It becomes a sticky ecosystem because, say that you've downloaded the Nike app on your phone, and you have the Nike running app or the fitness app that they have or even just their shopping app — you'll get targeted emails and they start to know what you do athletically. Or they might know your style," Telsey's Feldman said. "They'll start to send you direct emails when there's either a new product that might be of interest to you or they'll give you a first crack sometimes at a new product that just came out."
The importance of digital to Nike — and all of retail, really — has also led to shifts in how companies think about manufacturing and shipping, something Nike will have to think through as well. According to a joint report between McKinsey and the World Federation Sporting Goods Industry, digital trends have forced athletics retailers to "become nimbler, and produce smaller, more frequent product runs. Perhaps because of this shift, lead times have shortened, with Asian suppliers of large sporting goods companies moving initially from 120 days to 90, then 60, and often eventually down to 30 days."
Nearshoring, the process of moving operations closer to where the products are sold, has also been explored by some, according to the report. With Nike, Binetti doesn't believe the majority of the retailer's manufacturing volume will move to North America, but the new small-format fleet will likely be built to hold a certain amount of high-conversion inventory, and could be used to ship local orders when it's more cost-effective to do so.
"In very simple terms, there's a boat ride across the ocean that can't be changed," Binetti said. "It's just far away. But this, however, has caused them to look at all the other parts of the business and say, 'Look, we need to get a lot better at the digital side of it.'"
And in 2020, they brought in a digital CEO to do just that. Donahoe came in as the former CEO of eBay and Nike praised him for his "expertise in digital commerce, technology, global strategy and leadership" when his appointment was announced.
"He's the right man for the job," Binetti said. "And you see him doing it very, very quickly."
Nike, but make it personalized
At its heart, Nike's strategy for its various channels emphasizes uniqueness. Its Nike Live stores are focused on housing a localized assortment to best suit those geographies, and its wholesale partners receive different product depending on what type of consumer they serve. Nordstrom, for example, is a different consumer than Dick's Sporting Goods or Foot Locker.
"Nike probably does the best job of any of the sporting goods manufacturers in terms of segmenting the market," Feldman said, explaining how the retailer is careful to avoid too much overlap at its wholesale partners, even with flagship products like its Nike Pegasus running shoe. "There might be different colorways, there may be slight differences within them, so that will help segment the market. And then they may even offer some that you can only get that certain color on their own website. So for direct to consumer, it helps to drive business that way."
With the Nike Live stores, the retailer personalizes in a different way, changing its assortment to reflect consumer trends in the region, as well as local teams and cultural touchpoints in that area. Matching assortment to what's popular in a given geography also means the retailer can benefit from using those stores as potential shipping or pickup points for online orders by customers that live nearby.
Being able to personalize effectively, of course, comes back to data. Nike's "robust data ecosystem," as Marzano refers to it, is what's behind the retailer's efforts to create a completely seamless online and offline experience. It informs the retailer's merchandising strategy, and also how the retailer markets to specific consumers. The company's made acquisitions along the way (four in the data and analytics space over the past few years, Donahoe said in a recent earnings call) to help it achieve those goals, including Celect, a predictive analytics and demand sensing firm Nike acquired in August 2019, and Datalogue, which Nike acquired in February.
In Nike's third quarter earnings report, which came out in March 2021, Donahoe hit on both acquisitions, saying Celect has helped with "getting the right product in the right place at the right time" and Datalogue will help improve personalization on both search and product recommendations, including anticipating when customers might be due for new product. In terms of a personalized experience for consumers, Nike is "just scratching the surface," Donahoe said.
"If you're really trying to control how your brand is presented at retail, how it's priced, how it's merchandised and so forth, having thousands of wholesale partners is really antithetical to getting that done."
Senior Industry Adviser for Sports with the NPD Group
But the retailer doesn't want to lose sight of product in all that data.
"The science of what we're doing: It's been done, it's doable," Donahoe said, according to a Motley Fool transcript. "But the thing that makes this company remarkable is the art. It's the creativity of our apparel designers, of our footwear designers, it's the creativity of our brand teams and the storytelling they do. And so, data doesn't displace art, it's both."
The result of Nike's data-heavy focus is that not only is merchandise personalized to certain stores, but the online experience of individual consumers is unique as well.
"When you open up the Nike app on your phone, it's not just, 'Here's a bunch of Nike stuff that we're excited to sell today.' It's literally a vending machine of the product that is most likely to sell to you," Binetti said.
With such an emphasis on differentiation, Nike's DTC strategy is understandably focused on pulling out of partnerships that aren't as unique or useful to the Nike brand. When it comes to wholesale, retail partners have to add something to Nike: a different customer base, a geography Nike isn't as saturated in, or representation that is advantageous from a branding perspective. Wholesale partners that just want "the hot Air Force One of the day" won't be attractive to the brand, according to Binetti.
Execs reaffirmed that strategy on Nike's recent earnings call, saying consolidation would continue, and that the retailer has been prioritizing inventory for its "strategic partners" and its direct channel over undifferentiated retail.
Analysts pointed to strong partnerships the brand has with certain wholesale partners like Dick's and Foot Locker as examples of areas where Nike is getting it right.
"Wholesale gets painted as kind of a bad thing these days ... but Nike's really, really good at it. They're really good at it," Binetti said. "There are still some places where they really should be doing it and can make a really good amount of money, leveraging other people's real estate, other people's customer bases, things like that. But there's always going to be that temptation to try to encourage those sales to happen in your own channels, in your own distribution, either your own stores or digital."
Off-price, on the other hand, is one of the channels that could suffer as Nike, and its peers, move away from certain wholesale partners. Multiple analysts referred to the channel as an area athletics retailers are trying to step back from as they look to avoid cheapening their brand. Rather than using discounting to drive incremental sales, Nike has relied on newness and exclusive product drops, according to Marzano, which keeps the focus on full-price products.
Analysts also highlighted that the U.S. is an incredibly retailer-diverse country, which means brands are selling through a large variety of different players. That complicates how companies can control their brand messaging, which is a key tenet of the DTC playbook.
"If you're really trying to control how your brand is presented at retail, how it's priced, how it's merchandised and so forth, having thousands of wholesale partners is really antithetical to getting that done," Powell said.
Innovating when you make $40B in revenue
As with any ambitious strategy, investments must be made, risks must be taken and occasionally, unpopular decisions must be made. Nike's particularly good at that last one, which has helped it weather crises in the past, according to analysts.
This time, it's Nike's undifferentiated wholesale partners that will pay the price.
"It's much more aggressive than, you know, 'I know some of my retail partners are going to go away, so I'm going to ramp up my DTC to offset it,'" Powell said. "This is actually forcing some of your retail partners to close in order to ramp up your DTC."
There have been other casualties as well. After the retailer announced the acceleration of its DTC strategy in June 2020, layoffs were close behind, with execs noting that the new strategy would allow it to "significantly simplify" its organization. Layoff costs were estimated at between $200 million and $250 million, as the retailer shuffled its management to better align with the new plan. The company has made additional cuts since then.
"The leadership changes, combined with a strategic alignment of NIKE's operating model against the CDA, will create even greater focus and agility that will be enabled by a nimbler, flatter organization in service of consumers," a press release at the time read. "To drive this focus, NIKE will streamline its organization, including its Corporate Leadership Team (CLT)."
Nike's undaunted attitude is also matched by a willingness to make heavy investments, and a large amount of revenue to take the sting out of those investments. Since 2015, Nike has made upwards of $30 billion a year, peaking at $39.1 billion in fiscal 2019. Even during a pandemic, Nike made it out with $37.4 billion. That's $13.6 billion more than Adidas made last year.
Being a bigger company comes with both pros and cons, though.
"Nike has to transform $40 billion worth of revenues every year, so for them, they just have to invest bigger dollar amounts because they have a bigger business to transform," Binetti said, noting that during the pandemic they had problems just like everyone else, but with "10 times" the complexity because of their scale.
"Middle-sized companies, they're always having to make a decision between, 'OK, are we a big enough business to make an investment in this technology and have it really generate a return for us?'"
Managing Director at CreditSuisse
Researchers from McKinsey and the World Federation Sporting Goods Industry also highlighted that a shift to DTC could pose problems for larger companies because it may be difficult to move as quickly as a smaller company, but that mostly applies to brands that aren't pursuing change the way Nike is.
"We think there are two types of brands who are particularly at risk," Alexander Thiel, partner and leader of the Sporting Goods Practice EMEA for McKinsey, said in a briefing on the report at the beginning of the year. "They are smaller brands lacking the capital and liquidity to make the investments that are required to succeed in these plans. But the second group we think [that] will also have issues are bigger, lagging brands who lack a culture of agility and change, and who will therefore be slow to adapt."
For brands that are already aware of what shifts need to be made, scale is a benefit over smaller competitors.
"Middle-sized companies, they're always having to make a decision between, 'OK, are we a big enough business to make an investment in this technology and have it really generate a return for us?' And in a lot of those things, Nike's size — just being four or five, six times bigger than anybody — they don't have to think about that," Binetti said. "They know that if they make a bet, then it costs a couple dollars. Even if it's a little bit of an expensive acquisition, if they can use that across their $40 billion of revenues around the world, it's going to pay for itself."
Looking at Nike's small-format stores is a good example. The stores are practically built on effective uses of data, which has come through acquisitions. While the majority of retailers have known data is important for years, Nike is one of the few who's made big strides in using it well, according to Binetti, and part of that is that the company has the "biggest budget of anyone" to pursue it. The basis of the retailer's Nike Live stores, which rely on changing assortment frequently and using data to understand local preferences, wasn't possible a few years ago, Binetti said.
The retailer started small with the concept, testing Nike Live locations in a handful of places, but it rapidly accelerated to a fairly large-scale expansion of similar stores — around 150 to 200. Not only do analysts see no problem with Nike opening that number of stores, some think the rollout is actually conservative, and that even if they don't work, it won't be a real problem for Nike.
Nike's competitors aren't sitting still. Adidas is also investing boldly. The retailer rolled out a four-year strategy in March 2020 that emphasizes the same things that Nike is focused on: having a DTC-led business model, sticking with only strategic wholesale partners and investing heavily in digital. It includes funneling 1 billion euros ($1.2 billion) into a digital transformation between now and 2025.
Executives also said during an investor presentation on the strategy that Adidas had a plan for the basketball segment, an area where Nike is the "dominant brand" in the U.S., according to Feldman. The difference between Nike and its competitors, at least for the moment, might just be that it's moving faster.
"It is interesting to see that most of these guys have realized that data was the future and they knew they had to talk about their data initiatives, but they're still on the cusp of really getting smart," Binetti said of other players in the space. "I think it's interesting to see the biggest one of them, Nike — with the biggest mountain of a business to move — really moving, in my opinion, fastest on a lot of these things."
Article top image credit: Permission granted by Nike
Dick's is testing 5 store concepts. Here's why.
Store revamps are also in progress, and the sporting goods specialist is expanding its private label reach as it looks to maintain a winning position.
By: Cara Salpini• Published July 19, 2021
Since June of 2020, Dick's has debuted five new store concepts, set up a new men's private label, signed brand ambassadors for two owned brands, all while in the midst of store revamps.
It's a lot for any retailer, especially when two of the concepts are quite involved. Dick's first House of Sport location opened in April 2021, with experiential features like a turf field, a rock climbing wall and a batting cage. The company's planned Public Lands concept, which debuted in September, is an entirely new banner focused on the outdoors space.
While the announcements seem from the outside to be coming in rapid succession, some have been planned for years behind the scenes. According to Warren Cheng, a consumer softlines analyst with Evercore ISI, House of Sport and Public Lands have been in the works long before the pandemic. The multiple off-price concepts Dick's has launched in recent months — two, Overtime by Dick's Sporting Goods and Dick's Sporting Goods Warehouse, debuted in June 2020 and one, Going, Going, Gone, debuted in May 2021 — are likely products of the pandemic.
"All three of those I think were ways for them to deal with the pandemic and the extra clearance that they were going to have," Cheng said. "And they've done remarkably well, so I would expect at least one of those to stay as a clearance vehicle."
Opening experiential flagship stores like House of Sport, revamping current locations to include upgraded soccer shops and adding more experiential features at Golf Galaxy stores are bigger investments, but they might be necessary ones. Adrienne Yih, senior analyst of U.S. retail and e-commerce at Barclays, pointed to the need for retailers to create emotional connections with consumers in their physical stores and provide them with a reason to come in rather than buying online.
"The proven concept of the business has never been stronger, and has never had a stronger tie to Nike."
Senior Analyst of U.S. Retail and E-commerce at Barclays
The amount of money these investments will take is not a concern at the moment, according to Yih. That's thanks to Dick's strong performance of late, and its deep relationship with some of the top national brands, including Nike, which during its most recent earnings callnamed Dick's among three "large strategic partners" that it works closely with in wholesale.
"Dick's has such an incredibly strong balance sheet that you can take some of these cash risks, and at the end of the day, the percentage of sales and EBIT that's going to be coming from these tests is insignificant to the strength of what we're currently seeing at 99% of the core business," Yih said. "The proven concept of the business has never been stronger, and has never had a stronger tie to Nike."
That's not to say that there are no risks involved. Only that Dick's is capable of withstanding the blow from any of these investments that don't pan out.
"A lot of the things we talked about today, I think will fail. It's not a 100% hit rate," Cheng said. "But if you want to be innovative, if you want to be forward-thinking and you want to meet the customers needs in the future, even though you don't quite know what they look like yet, then you kind of have to have that mentality."
Breaking down the store concepts
While Dick's is testing five different store concepts at the moment, they don't all serve the same purpose. The retailer is experimenting with off-price, dabbling in high-touch customer experiences and entering new segments in especially high demand.
The off-price opportunity
Overtime, Warehouse and Going, Going, Gone are all off-price related and, according to CEO Lauren Hobart, are "truly just a test."
Overtime offers up to 75% off apparel, footwear and equipment from Nike, Adidas, Under Armour and other brands. Warehouse locations feature up to 90% off of "customer-favorite footwear and apparel brands." And Going, Going, Gone offers "surprising deals on unique finds in footwear and apparel from the brands customers have enjoyed shopping" at Dick's over the years, according to press releases at the time of their debuts.
Inspired by the pandemic-induced need to keep inventory moving, off-price could end up being a lucrative long-term business, no matter how many of the concepts stick around.
"The sports industry does not have a robust off-price business," Matt Powell, senior industry adviser for sports with the NPD Group, said via email. "The new off-price concepts can keep inventory clean in the full-price stores and exploit an opportunity to buy and sell off price as well."
According to Yih, it also allows Dick's to reach a value-based customer, but that means making sure the value quotient is right.
"TJX, Burlington and Ross have really excelled because they're giving you value. You're not getting a cheap thing, you're paying for things that you think are worth more and therefore it's valuable to you," Yih said. "If I pay $10 for a T-shirt that I think is worth $10, that's very different than if I pay $10 for a T-shirt that I think is worth $20."
House of Sport and experiential retailing
While off-price could be a profitable venture, making money may not be the only focus for its House of Sport concept. The plethora of experiences offered — a putting green, personal appointments with wellness experts, yoga classes, rock climbing, batting cages, and equipment fixes like racquet restringing and baseball glove steaming — means that much of the gigantic store footprint doesn't generate revenue, according to Cheng.
"I think their purpose is to say, 'We're going to put every kind of experience into this store. It's going to help us figure out which ones of these are the biggest traffic drivers, are the ones that people care about. And then we're going to use them more as like a testing and learning center to figure out which of these experiential elements to scale out across the chain,'" Cheng said. "So I think that's much more the motivation than having these be stand-alone commercially viable."
For that reason, House of Sport is unlikely to make up a significant portion of Dick's store fleet, according to analysts. Especially considering the square footage required for one of these locations. GlobalData Managing Director Neil Saunders praised Dick's innovation and investment strategy in emailed comments on the retailer's most recent earnings report, citing House of Sport and the off-price concepts.
"While we do not believe these segments will ever be as large as the core business, they do provide some new avenues for growth and will help the company in the year ahead," Saunders wrote at the time.
Although House of Sport is clearly a different model with a different purpose — more akin to Lululemon's experiential megastores — there is still a need for the concept to prove itself. Especially before Dick's pursues a large-scale rollout of it.
"The days of creating flagships and these sort of brand identity stores that don't necessarily make a whole lot of profit: Those days are over," Yih said. "If I am going to invest capital, I want to see a profit return on that, that is equal in size or could potentially be profitable over the long haul."
Public Lands and the outdoors opportunity
According to Cheng, Dick's is particularly good at finding gaps in the market and filling them. Public Lands is a potential example of that. The first stores in the concept replace Field & Stream locations, a business the retailer is exiting as it moves away from hunting more broadly.
Already, Public Lands is "hitting all the right notes for a consumer who is not into hunting but wants to be outdoors," Powell said.
And it's an example of Dick's moving in the direction of its values. The same way the company took a stance on guns in the wake of the Parkland shooting in Florida, its new outdoors concept will champion environmental efforts. It also allows Dick's to move beyond team sports and athletics and into a new recreational activity area, according to Yih. Notably, the outdoors space has only been bolstered by the pandemic.
The move puts Dick's up against the likes of REI and Patagonia, which are well-established as outdoors retailers with environmental causes. But that doesn't mean there isn't room for Dick's in the space.
"What's fueling their decision to do this is they think that category is going to expand," Cheng said. "They're sort of betting on the increasing size of the pie outweighing the fact that it's going to take them a really long time to chip away from REI."
The store won't have the Dick's name behind it — it will launch as Public Lands — so the banner will have to tackle being a new name in the space and building up brand awareness and loyalty. However, that may not be that big of an obstacle if the concept shows initial success.
"I wouldn't underestimate the access to capital and the ability to put marketing dollars behind a new initiative to grab eyeballs and market share," Yih said.
The rest of the game plan
Fresh store concepts are not the only way Dick's is investing in its business. Revamps at current locations and an increased focus on private label offerings are also contributing to the retailer's dominance.
Dick's is arguably the last of its kind in the sporting goods space, as fellow national big-box stores like Sports Authority and others died out in recent years. There are some regional players, but Dick's has largely outlasted its principal competition, and its recent efforts are part of a bid to stay in that top spot.
Dick's, too, is finding ways to glean higher margins by developing its own private labels, including Calia, DSG and VRST. The first is a women's-focused athletic lifestyle brand, the second is a family-oriented value-priced athletics brand and the last is a men's athletic lifestyle brand. The private label business is "a point of differentiation and a margin builder," Powell said, while Yih noted Dick's has one of the fastest growing private labels Barclays tracks.
Saunders wrote in May 2021 that Dick's apparel offering is "looking stronger than ever" with its combination of private labels and national brands. Dick's VRST private label just launched in March, and it mirrors the way a DTC brand sells, with its own dedicated e-commerce site in addition selling through Dick's website and stores.
"The introduction of new own-brands such as VRST has helped to elevate the proposition and has allowed Dick's to differentiate from rivals," Saunders wrote. "This effort has been important in a market that has steadily become more crowded as other retailers have entered the athleisure and sporting apparel arena."
Dick's is also putting more marketing power behind those private labels, naming brand ambassadors for DSG and VRST. That included signing DeVonta Smith, the 10th pick in the 2021 NFL Draft, to rep its new VRST line. While that might hint at stronger competition between Dick's and the likes of Nike and Adidas, the private labels are not meant to be direct competitors to the national brands Dick's sells, according to Cheng. Rather, DSG fills part of the hole left by department stores, and VRST is a more direct competitor to a company like Lululemon than Nike.
"If you're outfitting your child for the baseball season, you can't just do it at a Nike store."
Consumer Softlines Analyst at Evercore ISI
Dick's wants to keep the top brands it sells happy, Cheng said, but if there are gaps in its merchandise offering where Dick's "can do it better with private label," the company will pursue that. Currently, Dick's private label offering is about 15% of its total, with a goal of reaching between 20% or 25% — a point Cheng doesn't think the retailer will go beyond.
"I think they're going after a different target market that's going to broaden out their total accessible market," Yih said of Dick's private label strategy. "And it'd be very hard to say that their private label brands will rise to compete to the level of the traffic drivers. The branded product are the traffic drivers to the stores and then you hope that they pick up some private label while they're there."
Dick's also holds a slightly different place in the market, which keeps it from becoming directly competitive with Nike. The question of whether Nike's DTC ambitions could hurt Dick's is "a really controversial topic" among analysts, according to Cheng. He believes that Dick's will "be around forever," along with a few others like Foot Locker (which also has a strong relationship with Nike) that offer premium multi-brand retail experiences.
"If you're outfitting your child for the baseball season, you can't just do it at a Nike store, because maybe they like the Adidas gloves, the Easton bat and the Nike cleats, right?" Cheng said. "There are some things in athletic retail that I think have to be multi-brand forever — and I think that's one of them."
Susquehanna Financial Group in June 2021 likewise espoused confidence in Dick's market position, saying in emailed comments that the company "will be the sole surviving national sporting goods retailer post crisis" and will "continue to gain significant market share from smaller, under-capitalized players, many of whom have struggled during the pandemic."
In fact, one of the things that is keeping Dick's at the top of the wholesale partner list for national brands is the company's in-store experience. That will likely only improve as Dick's looks to revamp its current locations with more premium services. The retailer is rolling out more higher-end soccer shops inside some of its Dick's stores, which feature a larger cleat shop, specially trained soccer associates and, in some places, soccer trial cages.
Its Golf Galaxy stores are likewise getting more upgraded services, including hitting bays, golf lessons, and TrackMan and BioMech technologies.
"If you can offer those experiential elements, even if they're not revenue generating, that's where you're going to win versus your competition," Cheng said. "It's almost like you trade off the square footage in the store that you could be making money on for having a more relevant store and taking away your competition's market share."
Article top image credit: Permission granted by Dick's Sporting Goods
How outdoor furniture brand Outer grew its unique showroom model
The DTC company last month opened its 1,000th Neighborhood Showroom, a concept that helps connect potential customers with existing ones.
By: Caroline Jansen• Published Aug. 3, 2021
Despite experiencing the same challenges brought on by the pandemic as most of the industry, DTC furniture brand Outer hasn't slowed down on its path to growth.
At the start of 2021, the company announced it raised $10.5 million in a funding round led by Sequoia Capital China. The brand at the time said it aimed to use the funds to become an "outdoor lifestyle brand" by expanding beyond furniture and rugs, building on its sustainability commitments and adding to its unique showroom model.
To the latter point, Outer announced it opened its 1,000th Neighborhood Showroom, which connects existing customers to potential ones.
"We saw an opportunity to change the way that outdoor furniture was designed, but also how people shop for it," Jiake Liu, Outer co-founder and CEO, told Retail Dive. "We thought that the experience of shopping for furniture was not great. When shopping for outdoor furniture in an indoor showroom that's protected from all the elements, [that] didn't make any sense to us — it's not authentic or real."
The company invites existing customers to apply to be "hosts" and show the Outer products they bought to potential customers. Liu said that given the rise of other crowdsourcing businesses, like Lyft and Airbnb, having hosts invite interested customers to their backyard was a natural step, and even less invasive because it's a backyard and consumers can use a separate entrance or gate.
While hosts are compensated and given discounts to use on Outer products, they don't receive a sales script from the brand or receive commission on any sales as a result of the visit.
"Put yourself in the shoes of that potential buyer. You're really just wanting to check out Outer in someone's backyard. You show up one day — you really don't want a high-pressure sales environment. You really just want to experience a product for yourself, maybe talk to a customer, ask them how they feel about it," Liu said. "It would feel really awkward if your neighbor is trying to hard sell you on the piece of furniture. That's not the experience that we try to create. It's all about making a space and the time for a customer to experience in real life without additional pressure."
In fact, following a survey Outer conducted, the brand found that the top three reasons for wanting to become a host were receiving discounts, supporting a brand they believe in and being able to offer their backyard as a source of inspiration to potential consumers. The brand also found that hosts use the Neighborhood Showroom experience as a way to feel more connected with their community, with 89% reporting they felt more connected to their neighbors after hosting.
The Neighborhood Showrooms, which Outer now operates in 49 states, are an example of a growing trend of brands looking to alternative models for consumers to experience their products. While many DTCs have entered physical retail in more traditional ways — like through retail partnerships, pop-ups or owned stores — others have explored less conventional methods. DTC furniture brand Burrow previously formed partnerships with coffee shops to allow consumers to experience its products in a relaxed setting, though it has since ended those after discovering muffin crumbs in between its couch cushions didn't make for the best first impression for a potential customer.
Like nearly every aspect of the retail industry, the pandemic disrupted Outer's business, including its Neighborhood Showrooms. With safety in mind, the brand pivoted to virtual showrooms, offering hosts and potential customers the option to connect via phone call, email, text or video call, Liu said. And despite consumers' wariness of leaving their houses during the past year, the flexible options led to an influx in applications for becoming a host, Liu added.
Hitting the 1,000th Neighborhood Showroom mark "shows that people are willing to do this. During the pandemic, people are outfitting their backyards, and they were looking for ways to connect with their neighbors, even if it's virtually," he said. "I think consumers are starved for connection with their communities, especially after a long year of isolation during the pandemic, so really this announcement that we're making is also a celebration of reopening the country and for people to safely gather again in the comfort of their backyard."
Article top image credit: Courtesy of Outer
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• Published Feb. 10, 2021
Cigarettes, tobacco alternatives, salty snacks, candy, packaged beverages and beer.
These are familiar items found at convenience stores, and among the top drivers of sales for those retailers, according to Nielsen. They are easy to grab during quick stops, after filling the gas tank.
They must be good for drugstore sales, too, because these are also the products that crowd the front of the stores run by the top drugstore retailers in the U.S. (CVS stopped selling tobacco products in 2014 in order to square its merchandising with its healthcare ambitions; rivals Walgreens and Rite Aid so far have resisted taking that step despite their own moves to offer more clinical services.)
"A lot of words are being spoken about drugstores becoming wellness destinations," GlobalData Managing Director Neil Saunders said by email. "However, there isn't much action on the ground. Most drugstores are still badly lit boxes with grey carpet tiles that lock away razor blades and feel completely dispiriting. They are places to go and feel depressed, not to go and feel well. There is much work to do."
Health and beauty, and snacks and toys
The convenience store-like atmosphere of most U.S. drugstores has little in common with what is found in Europe and elsewhere overseas at analogous retailers.
Most such shops abroad tend to have an organized, sometimes clinical feel, with beauty products positioned as wellness items. L'Oréal France took that up a notch a couple of years ago with a co-branded urban store concept that added services like light therapy, along with a convenience play that featured dry cleaning, parcel pickup points and one-hour delivery for certain items.
"I have seen firsthand the stark contrast between European drugstores and U.S. pharmacies," Marcel Hollerbach, chief marketing officer at Productsup, an e-commerce data integration company based in Berlin, said. "While U.S. pharmacies such as Walgreens and CVS can take the shape of toy stores, the snack aisle and a place for prescription medicine all at once, European drugstores tend to emphasize beauty and wellness, sans the impressive variety of chocolate bars and candy at checkout."
The U.S. retailers are probably giving junk food and other sundries pride of place because they ring up higher margins than the consumer products found in the health and beauty aisles, according to Sanford Stein, founder of Retail Speak. Decades ago, Stein's father and uncle ran a small local Milwaukee chain of discount health and beauty stores dubbed "Pill & Puff." The stores were clean and well-lit, with depth and breadth of assortment, but only within those categories, like a wide variety of sizes and SKUs of hair spray, Stein said.
After an investment firm bought the business with plans to expand it, that focus was lost.
"The very first thing they did was bring in the candy and all of the other crap," he said. "And within five years the whole thing was down the toilet. My father used to say, 'If a retailer thinks they're one thing on Tuesday, and something else on Friday, how is their customer going to know what they are?' Drugstores do have an identity crisis because if you're going to be taken seriously as a partner in 'well-being,' you don't want to be selling Doritos, or you don't want to be also having aisles of half-broken toys and leftover Halloween candy. All of that stuff that makes a lot of money for them, it's just a contradiction."
What it costs
Drugstores' merchandising approach — party in the front, medicine in the back — comes at a price.
As already discussed, it muddies the healthcare message that all the major players emphasize these days, including operating as major distributors of COVID-19 vaccines. CVS a few years ago rebranded to "CVS Health," acquired a health insurance company and is running healthcare clinics across the country; Walgreens also plans to run more clinics and Rite Aid is testing a store concept that moves the pharmacy to the front.
"Not only has this approach meant that drugstores have missed out on lucrative opportunities, such as the growth in premium beauty, it also means that they are ill-equipped to deal with present-day realities," Saunders said, noting that Amazon has entered the pharmacy business, while competitors like dollar stores and Target's small-format stores are challenging them in other categories. "It has also, to some extent, tarnished their brands."
Another challenge comes from retailers like Bed Bath & Beyond's Harmon Health and Beauty stores, with 55 locations mostly in the New York tri-state area, one of the holdings that retailer hasn't sold off. The value-focused operation, which resembles the Steins' Pill & Puff discount and merchandising approach, in January 2021 hired a Macy's veteran to help drive growth.
Moreover, convenience may boost traffic and margins, but it fails to drive loyalty because it doesn't foster an emotional attachment to the brand, according to Saunders.
"This is exactly what happened with the drugstores," Saunders said. "The problem is that they now desperately need to reinvent themselves. But after years of underinvestment this is difficult. It is hard to create a new brand image and it is hard to make consumers think about them differently. Given that most drugstore chains have thousands of shops, doing things like format refreshes is also difficult."
Still, it's imperative that they pick a lane for the long run, probably the more meaningful health and wellness path in which they've invested so much, with online and offline touchpoints that work together, according to Hollerbach. The soda fountain of old, which Stein notes was once a fixture of local drugstores that provided a gathering place and fostered loyalty, could morph into the kind of healthy smoothie bar touted at wellness centers.
"As health and wellness become increasingly associated with these brands, it's imperative this is reflected both online and offline, especially as consumers start to view a trip to the local CVS as out-of-home entertainment," Hollerbach said. "Walgreens, CVS and Rite Aid may want to have it all by promoting health and hosting aisles of junk food, but it's more likely consumers will resonate with consistent communications that fit with beauty, wellness and health."
It's not clear how many people are leaving cities due to the pandemic. Or how much it helps the once-popular shopping destination if they do.
By: Daphne Howland• Published April 9, 2021
The COVID-19 pandemic has been an extreme event. The disease outbreak devastated human health and upended the global economy, and remained a threat even after a year despite the rapid development of vaccines. When it comes to business in general and retail in particular, it altered or sped up several trends, including the decline of malls, once the favorite shopping destination of much of America.
That slide was already underway before 2020. But several analysts, including Green Street, have noted that the closures that might have taken place in the next five years to a decade are now more likely to happen in two, with the countdown already ticking.
With foot traffic to malls disappearing even before the pandemic, several retailers, including all-important department store anchors, have fled, either by shrinking their footprints or shifting to other locations. In the first quarter of 2021, the vacancy rate at enclosed malls reached an all-time high of 11.4%, a 90-basis-point jump from the previous quarter, according to Moody's Analytics REIS. Given the structural decline, that's not likely the bottom, according to Moody's Analytics Senior Economist Thomas LaSalvia.
But the pandemic could be providing a softer landing for these shopping centers, in the form of a flight to suburbia from cities. At least, mall executives hope so. Earlier this year, Simon Property Group CEO David Simon predicted that "the suburbs are going to be hot" and "where the action is in the future" and told analysts that will "spell a good opportunity for us."
Living for the suburbs?
The trouble with this theory is that it's a little shaky.
It does appear that in 2020, with the usual urban amenities like theater, dining and shopping reined in by the pandemic's restrictions, some people, especially those in wealthier households, headed to second homes or their parents' houses in the suburbs, according to a report from PwC and the Urban Land Institute. Many of them will or already have returned to their city apartments. But some of this swing toward suburbia could last three to five years, according to that report.
"But, like many of the changes that have occurred due to the pandemic, the ultimate impact on the desirability of large cities will be on the margin," according to the report. "Some companies and residents will choose smaller cities or the suburbs, but, in response, cities will likely creatively adapt, perhaps adding more green space and outdoor activities, and continue to improve livability to retaining and attracting residents who continue to value an urban lifestyle."
Any suburban boom will be partly fueled by people who continue working from home even after the pandemic, some experts say. Green Street analysts, for example, earlier this year said they expect higher income consumers to move to "the suburbs and low-cost markets, potentially upending the long-running megatrend toward urbanization," though they also noted that some of their analysis involves "guesswork." Like Simon Property Group's Simon, researchers at footfall analytics firm Placer.ai see these trends as "a powerful opportunity for suburban retail and malls as they look to address the needs of this new population – one which likely has more spending capacity than they did before."
"Millennials hate the mall more than anybody."
Many demographics researchers see the move toward suburbia as mostly unrelated to the pandemic, if perhaps sped up by it, with an increasing number of millennials starting families and taking a predictable step away from urban life in favor of backyards and good schools.
That's not emptying cities utterly. It looks like older members of Generation Z are stepping up to take their city apartments thanks to falling rents, according to research cited by Placer.ai, which called the movement away from cities "less about an exodus than a revival."
There's also evidence that to some extent millennials are importing the vibe of urban life to the suburbs. Malls aren't necessarily a big part of that.
"Millennials hate the mall more than anybody," Nick Egelanian, president of retail real estate firm SiteWorks, said by phone. "They're going to shop at Costco, they're going to shop at Trader Joe's, they're going to shop at Whole Foods, they're going to shop at all the TJX concepts. And if they have a professional job, they'll go to Nordstrom to get nicer clothes and maybe some will go to Saks once in a while."
Most of those retailers, including the big-box stores that have been siphoning market share from department stores for decades, are also found in the suburbs. They present formidable competition that was growing fiercer well before the pandemic, Egelanian also said.
"Almost all of the malls that are left are in the suburbs. They were in the suburbs before the pandemic, they're in the suburbs now," he said. "So, if we think some moment in time, shifting where people are staying, is going to change 40 years of secular trends change, think again. A momentary change in human behavior does not change a 40-year trend in how retail works, and what people's preferences are. And to the extent that any other retailer, like the T.J. Maxxes of the world, think that there's going to be a population boom in the suburbs, they're going to build all the more."
As Moody's economist LaSalvia also said in his report, that doesn't mean that every enclosed mall is doomed. Unlike Egelanian and others, Jan Rogers Kniffen, CEO of J.Rogers Kniffen WorldWide, does see a dramatic, possibly decades-long shift away from cities.
But fewer than 300 malls may benefit by what he calls "the great de-densification that actually began before the pandemic and was dramatically accelerated by COVID."
"There are 278 great malls in America. They are virtually all suburban. They did not and do not need saving," he said by email. "They were always going to be fine. They will have high occupancy, rising rents, and increasing foot traffic as soon as the pandemic fades. They will also get the best stores from the best retailers. Will the great de-densification of America save the remaining 650, or so, enclosed malls? No, it will not."
Regardless of how many U.S. consumers change their address or stay put, or for how long, most malls need to get moving, experts including Egelanian, Kniffen and others say. Some need a complete transformation, from retail-heavy behemoths flanked by department store anchors into mixed use campuses, residential developments or distribution centers. Others have to shrink dramatically, and sell much less apparel and footwear, according to Kniffen.
"Some, unfortunately, will get bulldozed,"he also said. "Some will become hydroponic farms. Some will be supported by economic redevelopment by the nearby community that does not want to see the mall go away. What will really benefit from the great de-densification? Casey's General Store and Tractor Supply and Boot Barn and convenience strip centers."
As the limitations of selling exclusively online become apparent, the company's mission is to not only give emerging brands a physical presence but an opportunity to grow.
By: Caroline Jansen• Published April 27, 2021
The following article is part of the "30 minutes" series, where Retail Dive talks to top executives about some of retail's hottest topics. For more, check out our landing page.
Co-founder of For Now
Cimo co-founded For Now in 2017. Prior to this, she was the director of marketing at activewear startup Crane & Lion from 2013 to 2017.
Co-founder of For Now
ReQua co-founded For Now in 2017 and serves as the company's director of operations. She's held a number of operations-related roles, including the director of operations at Crane & Lion.
Kaity Cimo and Katharine ReQua started For Now, a regional brand incubator, with one goal in mind: to help brands grow.
The company, which has two retail storefronts in Boston's Seaport district and Nantucket, will typically work with around 20 emerging brands for three to four months at a time. Brands are given access to physical retail through For Now's stores, receive product feedback from customers and exposure to a new set of customers.
Cimo and ReQua believe that in order for brands to be successful, they need to have strong operational and marketing foundations. That's where their prior experience comes into play.
Before launching For Now, the founders were working together at a women's activewear company where Cimo was the director of marketing and ReQua was the director of operations.
"We found that ops and marketing just sit at the same table, not only literally but figuratively," ReQua said. "So many of the decisions that we were making really drove the success of that business, and we wanted to take our skill set and our expertise and help other brands grow."
From a brand's standpoint, particularly a digitally native one, partnering with For Now allows customers to touch and feel a product before making a purchase while at the same time creating greater potential to acquire customers in different markets. Over the years, as the limitations of exclusively selling goods online have become ever more apparent, direct-to-consumer brands have entered brick and mortar through a variety of ways, whether through stand-alone stores, temporary pop-up shops or partnerships with traditional retailers, like Target and Walmart.
And while opening a storefront wasn't part of For Now's initial strategy, it's really become a part of its overall mission.
"We really believe in the physical storefront, and not all brands can do it on their own. It's extremely capitally and human-capitally intensive," ReQua said. "So, if you can find a partner who can tell your story on your behalf, generate sales on your behalf and collect feedback on your behalf, it's a win-win."
The small-shop atmosphere may play to brands' advantage as well. Brands not only reach a new audience but through For Now, they also gain direct feedback and customer insights from shoppers, so they're able to take those learnings and make necessary adjustments as they grow.
"Exposure is really, really important," ReQua said. "We're telling that story in a way that sometimes the founder can't always articulate, and I think some brands struggle with their true value prop. By seeing that product with customers, and often hearing the same thing over and over again, we're able to take that back to the brands and be like, 'Have you ever thought about positioning it this way? Or packaging it that way? Because that's how customers are seeing it.' So it really is a holistic view."
Building these relationships and gaining insights by communicating directly with customers in stores not only benefits brands by helping them better align product launches but also allows For Now — as curators — to know what brands and products to seek out in the future.
From a brand's perspective, something that may be particularly appealing is the fact that the concept not only provides exposure to their brands and products but actually creates loyal customers, who will eventually shop directly from the brand's website in the future.
"What's interesting and amazing to me is that we have been able to convert customers for brands, not only within our store but on their own website, which is really valuable to them obviously because then they acquire the customer information themselves," Cimo said.
Something a few brands that have worked with For Now have expressed is that when they've partnered with similar concepts, they've gotten sales, but haven't necessarily acquired customers in the long run, Cimo said. "The difference in working with us is that on social and on email, we really do make an effort to tell the brand's story." For Now will not only share product information from a brand with its followers but also go into who the founder is and tag those individuals so that customers can learn more about them, she added. "People are like, 'OK, I'll check that at For Now.' But then after [the brands] rotate out, they'll actually follow the brand and perhaps purchase in the future."
The For Now experience
But what does it take for a brand to be housed in For Now's concept?
"Kaity and I are big gut people," ReQua said. "We're also the type of people who don't mind walking down the street, whether it's our hometown or we're traveling, and we see someone wearing a pair of shoes or a bag we like. We're the people who are like, 'Oh my god, I love her bag, where did you get it?' And if it's a small company or a brand from another country, we'll reach out to them and inquire about working together."
For Now also receives a lot of brand referrals from other companies it has previously worked with, but ReQua said regardless of how a brand connects with For Now, "for us what's really important is understanding the brand and the brand story. So, is there an interesting story for us to tell? And will it resonate with our customers?"
When For Now was first getting started, the strategy was to have "high churn," constantly rotating out brands and presenting customers with ever-changing products. However, as customers came to expect certain brands to be available, the company adjusted its model. Now, about 20% to 30% of brands offered are part of what ReQua calls its "core collection." ChappyWrap, for example, has been working with For Now for about two years.
"We have kept them and a few other brands that just sell well, and our customer would be really disappointed if we didn't carry them," Cimo said. For Now has "this balance of making sure that there's still a great discovery aspect in our store to our shoppers, but also having some reliability."
Handing control over to another company to make sure your brand is accurately portrayed can be concerning for some founders. But For Now aims to address that through extensive staff training and allowing the founders to be involved throughout the process.
"Really, what it comes down to is our ability to story tell," ReQua said. "We put a huge emphasis on our training process when we onboard a brand. Our entire team has a call with the founder or the representative of the brand to hear the brand story really fluently. So anyone who comes in, we can speak really authentically not only about the product features but the founders."
While founders may initially be drawn to For Now for the exposure and growth opportunities for their brand, they're also welcomed into a community of other founders and business owners who may have faced similar challenges.
"We found ourselves naturally connecting founders to one another," Cimo said. "If someone would say, 'I've had an issue with my factory for XYZ. I'm looking for a solution,' responses would be like 'Oh, we know someone that we can connect you with.'"
Building on this sense of community, For Now would host events in-store before the pandemic. The company would bring in five or six founders or experts to participate in panels or discussions on a variety of topics, ranging from female entrepreneurship and sustainability to influencer marketing strategies.
The success of the events is what drove Cimo and ReQua to broaden this concept into something larger: the Female Founders Summit. The event initially was going to be in person and include about 90 people, including speakers and participants.
But like most other events across industries, the summit, which was supposed to be held in March 2020, was upended by the pandemic. For Now pivoted to a virtual event that was held last February and featured speakers like Faherty co-founder Kerry Docherty, designer Mara Hoffman and M.Gemi president Cheryl Kaplan.
"I think something really important about being a small self-funded concept is that we were actually able to pivot in a way that a lot of larger companies weren't able to at that time, and we were able to move really quickly."
Co-founder of For Now
But the event wasn't the only thing For Now had to shift online. Before the pandemic, the company didn't have much of an e-commerce presence at all.
"We actually didn't have a website before the pandemic. Our focus and our expertise was in the storefront and really telling the story there and being physical space for online brands," Cimo said. "All of a sudden, we didn't have a choice."
For Now attributes advantages like being able to get an e-commerce website up and running in a matter of days to the fact that its team is small.
The website has "taken on a life of its own in a really, really exciting way for us," ReQua said. "We're so fortunate to have been able to be a super small team, who didn't have to answer to investors, who could make a really quick decision without any red tape. I think something really important about being a small self-funded concept is that we were actually able to pivot in a way that a lot of larger companies weren't able to at that time, and we were able to move really quickly."
Having an online presence is something, in hindsight, For Now wishes it would have done sooner and sees a lot of potential in going forward, according to Cimo and ReQua. The company is now able to reach customers all over the U.S., rather than just in areas where its physical stores are located. For instance, one of its biggest customers is someone in Washington, D.C., who the founders have never met in person.
"We see online now as a big part of our growth," Cimo said.
Something 'For Later'
The founders have expanded their sights beyond just their storefront and e-commerce business and are looking at other ways to support growth among the brands they work with.
"We obviously opened a storefront as a vehicle to help brands accelerate their growth," ReQua said. "It was through that, that we realized the next step for their growth is often related to financing and funding."
And thus, the idea of "For Later" was born. The concept consists of four partners who offer financial analytics, operations, marketing and commercial real estate expertise to the brands they invest in. So far, For Later has invested in three companies: Sh*t That I Knit, Jibs and Qatch.
The goal is to make three to five investments every year "assuming we're finding high potential brands that we think are really going to accelerate in the marketplace," ReQua said, adding that the company isn't "going to invest in every brand. And we'll probably turn down some great brands at some point," she added.
And even as the company continues to evolve its business and expand into new territories, For Now's mission of helping brands grow remains true.
"For Now started as a customer discovery lab, and now it's a customer discovery lab that informs our ability to make strategic investments," ReQua said. "Our sole focus is to help emerging brands accelerate their growth. Whether that's through the storefront, through our e-commerce channel, through a Female Founder Summit, or through For Later. It's sort of a multi-prong approach of helping this acceleration."
Article top image credit: Adeline Kon/Retail Dive
The evolution of stores in 2021
As physical stores re-open nationwide, what was old in retail is new again. With convenience conquered by e-retailers, stores are redesigning locations to be enticing and experiential, experimenting with brick-and-mortar to attract shoppers who have been dormant too long.
included in this trendline
Dick's debuts experiential House of Sport store concept
Dollar General ramps up expansion of Popshelf concept
How Nike is using DTC and data to expand its empire
Our Trendlines go deep on the biggest trends. These special reports, produced by our team of award-winning journalists, help business leaders understand how their industries are changing.
Davide SavenijeEditor-in-Chief at Industry Dive.