Clicks to Bricks: Why Digitally Native Retailers Are Getting Physical

October 22, 2018

 

The retail landscape continues to evolve, sometimes in surprising ways. For example, not too long ago, many predicted the demise of the physical store—but stores are still standing, and they still account for the vast majority of retail sales. To be fair, a number of retailers that failed to adapt to consumers’ changing needs and shopping habits have fallen by the wayside as they’ve lost relevancy, but for those that have adapted, a physical presence is critical to future growth.

 

In recent years, the trickle of digitally native retailers exploring opening physical stores has turned into a wave. Today, a significant number of digital retailers have either already opened stores or plan to. Casper, Fabletics, Frank And Oak, Indochino, UNTUCKit and Warby Parker are just some of the digital natives on this list, which is growing rapidly. Amazon, of course, is operating through several physical concepts, including Whole Foods stores, stand-alone bookstores, a Brooklyn store offering Amazon’s Best Sellers from multiple product categories and a pop-up concept store with Good Housekeeping at the Mall of America. The company also recently announced plans to open 3,000 Amazon Go cashierless stores over the next few years.

 

What’s driving this trend?

 

We think that there are six key reasons everyone is looking at stores as a necessity in the new retail age:

 

  1. Stores Are Where the Customers (and the Dollars) Are

 

Despite the rapid growth in online sales, sales made in physical stores dwarf those made online. In 2017, e-commerce sales accounted for 9% of total US retail sales. Although this figure is expected to reach 12.4% in 2020, that still means 87 cents out of every dollar will be spent in physical stores.

 

  1. They Provide Unique Business Intelligence

 

Digitally native retailers are using their physical stores to gather detailed information on their customers, and then putting that data to excellent use. Fabletics, which operates 25 stores and recently announced plans to open another 75, calls this process “brick mining.” President and General Manager Gregg Throgmartin attributes much of the brand’s online growth to its brick-and-mortar stores and the valuable data they produce. “More data does not equate to more insights,” he said. “We needed better, more contextual data—this is the reason we decided to open stores.” Retailers are using information generated by brick-and-mortar shoppers to monitor their satisfaction with products and tweak assortments.

 

  1. They Help Retailers Acquire New Customers Cost-Effectively

 

While the barriers to entry in e-commerce are low (anyone can publish a website), cutting through the online clutter to acquire customers is increasingly expensive. As online-only retailers seek to grow and attract new customers, they often need to provide shoppers with incentives that end up squeezing gross margins. For these retailers, physical stores not only serve as brand ambassadors and generate incremental revenue, but also increase online sales, as research shows that when a new store opens in given area, it can increase local web traffic by as much as 84%. Research also shows that a high percentage of shoppers who make purchases online have also “touched a store” at some point along the shopping journey.

 

  1. They Offer Convenience and Speed

 

Shoppers sometimes need a product immediately—not in an hour, not tomorrow, and not two days or a week later. The option to physically shop for a product or to order it online and then pick it up from a store right away is not something every pure online retailer offers. Even when timing isn’t crucial, many consumers prefer to stop by a store to pick up their purchase or “try before they buy” rather than having their packages left on their doorstep. Leading retailers are even leveraging cross-channel inventory by offering shoppers the option to reserve items in-store for pickup, with some orders ready in as little as an hour. As retailers get better at using data on cross-channel demand, their ability to offer customers exactly what they are looking for in local markets should improve.

 

  1. They Elevate Service and the Shopping Experience

 

Best Buy is not a digital native, but it has been able to thrive despite offering products and prices that are similar to Amazon’s. One key to Best Buy’s competitiveness is the level of customer service it provides in stores, including its Geek Squad technical support team.

 

Many online retailers making the move to physical stores also recognize the importance of service in increasing customer satisfaction. For example, Indochino, a digitally native retailer of made-to-measure men’s clothing, uses its physical locations to gather customer measurements that are more precise than those submitted online by customers. The more accurate measurements result in better-fitting garments, which lead to increased customer satisfaction and fewer returns.

 

There’s also no denying that some customers enjoy the shopping experience and interacting with products prior to purchase. As much research suggests, stores play an important part in the customer purchase journey, whether as a place to see and test products and get expert advice before buying or at the point of purchase.

 

  1. They Improve Inventory Efficiency

 

One of the not-so-secret secrets of online retailing is its high return rate. Opening physical outlets provides brands with an opportunity to sell not only new products, but also returned inventory. Retailers can also use data to ensure returned products are sent to the locations that have the best chance of selling them, lessening the need for markdowns. Wayfair is opening its first outlet store near its Kentucky distribution center, and the company intends to primarily use the location to liquidate returns. Some customers prefer returning online purchases to stores, which provides yet another opportunity to convert returns into sales.

 

What pure-play e-commerce retailers have realized is that physical stores serve an important role in the customer purchase equation by providing elements that the online experience cannot replicate. These retailers are proving to be quick learners in understanding how physical locations can enhance their brands and help them grow their businesses. Traditional retailers stand to learn quite a bit from their efforts as well. The truth is that the retail winners in the near future will be the ones that best combine online and brick-and-mortar capabilities to win over customers and deliver sustainable profitability.

 

Email Antony Karabus or Farla Efros for more information on our Retail Consulting Services