Future Retail: Facts, Myths, and a Path Forward

491 800 Chute Gerdeman

Future Retail: Facts, Myths, and a Path Forward

CHUTE GERDEMAN  //  REPORT

Are you overwhelmed by the seemingly never ending reports of the upcoming retail apocalypse? Has the talk of the digital retail takeover become so commonplace and ubiquitous that you’re ready to give up?

We have the remedy to the negativity. We’ve read the reports and we’re not going to declare defeat. Our time walking the streets, observing the stores, looking at the facts, debunking the myths, and talking with consumers has created a clear and informed counterpoint to the dire predictions jamming your newsfeed.

We are the contrarians—and we’re going to change your mind.

Fact: 90 to 93 percent of retail sales still come from physical stores1,7

Fact: Over half of all e-commerce sales are being fulfilled or supported through brick and mortar retailers

93%

While online sales figures are currently capturing the headlines, physical retail is still going strong. Forward-thinking brands are leveraging the strength of multiple distribution channels to do what they do the best: getting products in the hands of customers in as many ways as possible. Brick-and-mortar’s flexibility and variety continues to be its advantage in the marketplace.

51%

We believe customers will soon experience physical and online shopping as complimentary to one another, not as competition or exclusive to each other. The numbers are saying that physical retail is still probably very important to completing the customer experience, whether that’s providing the ability to see, smell, touch, and share, or giving the consumer the opportunity to ask questions and evaluate their needs.

We think we’ll see a trend of brands breaking down operational silos internally as well, allowing omnichannel to be the backbone of the modern retail industry while holistically and organically influencing the customer’s path to purchase.

It's the retail


Fact: Development reflects demand

Since 2010, only nine new malls have been built.2 In fact, the United States now has too many malls and shopping centers, and sales there are flattening. But this doesn’t tell the whole story. As Fortune explained, “A” malls are “killing it” by renewing themselves with better restaurants, entertainment, and activities. Locations like Roosevelt Center, NY, Easton Town Center in Columbus, OH, and South Coast Plaza in CA are defying the death toll predictions. Reasons include open-air format, a mix of upscale and traditional retailers, destination restaurants, entertainment options, and the addition of traditionally non-mall retailers like Louis Vuitton and Tiffany that provide specialty sizzle while attracting high end customers with more disposable income.

Older, tired malls, mired in areas that are not thriving economically are the shopping centers that are closing. “There’s 1,200 malls in America, and Class B and C malls are about a third of the inventory,” stated Glenn Brill, managing director at FTI Consulting, a financial advisory corporation.3


Myth: It won’t be long before all the stores are gone

Stores are closing for many reasons. The decline of foot traffic to traditional malls certainly isn’t helping; department stores—the de facto mall anchors—have experienced the loss more significantly than others, closing more than 20 percent of their retail fleet.

As malls grapple to maintain their relevance, we need to question old assumptions—including the definition of “an anchor.” Tesla, for example, opening crowd-drawing showrooms in major lifestyle centers and Apple refocusing its retail as a community destination with “Today at Apple,” creates a very different picture of what future and influential mall anchor stores look like.

Scratch the surface even further and an additional reason for store closures appears: saturation. The United States has more shopping square footage-per-person than any other developed nation. We are observing the recalibration of the amount of shopping space to reflect changing demographics and consumer behavior.

Fact: Store closures fund progress

To quote Macy’s CEO Terry Lundgren, “Overall, real estate transactions in fiscal 2016 generated cash proceeds of approximately $675 million, which is helping to fund continued reinvestment in the business. We are excited by the potential of our real estate strategy, and in 2017, we will focus on advancing and continuing to monetize the locations that we have closed or plan to close. We are also developing strategies that will help create value for Herald Square while making the store an even more vibrant retail experience,” Lundgren added.9

For some retailers who do not own their property and buildings, downsizing is a reflection of the extreme commercial rental market. For Lease signs dot communities across the country, as well as the once-cherished SoHo and West Village neighborhoods in New York. Retailers there are leaving sky-high Manhattan rents in these trendy enclaves to fund quick-delivery e-commerce investments or open up stores in up-and-coming neighborhoods like Astoria, Queens and Greenpoint, Brooklyn.

Macy’s recently invested in renovations at Easton Town Center in Columbus, Ohio. Check out “Macy’s Takes on Consumer Lifestyles With a Personal Touch”.

Fact: What and where we spend has changed

With casual Friday expanding to casual everyday, as well as the increase in the work-from-home employees, the office has turned from a fashion parade to unceremonious sofa-wear slouch. But even a casual stroll down the street shows that dressing down is the new normal.

So, who is buying clothes? Looking at census figures for the last 10 years (pre-recession and post-recession) and we found surprising data. Apparel sales in clothing and accessory stores have actually increased YOY (except for a brief stall mid-recession). Starting in 2006, clothing and accessory store sales totaled $213MM. In 2016 the same category reported $258MM, a healthy uptick. The fact is that the apparel category is well and good—sales just aren’t coming from established mall department stores.

A decade of viewing luscious food-porn on television and Instagram has created foodie culture’s intrusion into your wallet. Whether you’re dining out or getting home delivery of truffle-infused delights, the upswing in interest and passion for all things edible is eating into retail figures.

A downpour of liquid libation has accompanied our foodie culture. Add a few bottles of craft beer during the week, and those couple of bottles of premium whiskey on the shelf to your tab and you’ve got a hundred more dollars a week of outflow.

And after wiping the EVOO from your chin, there’s home entertainment—a $700 phone, tablet, and e-reader. And when we fuel these items with content, (cable TV,  on-demand movies, e-books, and music) the dollars sneak out of our wallet, and they’re not being spent in stores.

According to census data, food services and drinking places outpace clothing and accessories sales 2:1. And the increase in spending is noteworthy. In 2006, we were spending $423MM at food and drinking places; by 2010 the figure was $467MM; by 2016 the figure stood at $660MM — an increase of 41% in ten years.

Spending 2006 vs. 2016 in MM

  • Apparel Spending
  • Food Services & Drinking Spending

Myth: Retailers are dinosaurs and need to speed up

The smartest physical stores are providing the antithesis to online efficiency. Rather than speeding up the experience, they are creating experiences that slow the customer journey down. For example, ever-innovative H&M has transformed their Barcelona store into a meandering journey complimented with a Flax & Kale healthy café inside — and a luxurious garden out the back. Successful stores will inspire purchases by increasing dwell time and extending the shopping journey.

Fact: Digital sees value in physical space

“You keep hearing that brick and mortar stores are in trouble, that brands are closing stores, but it’s always been our view that shopping — particularly for glasses — should be a fun, social experience,” says Dave Bilboa, Warby Parker co-founder.

There may be no better indication of the rise of brick and mortar retail than the number of once-digital-only e-commerce brands opening stores. Amazon, Google, M.Gemi, Warby Parker, Bonobos, and many others are constructing spaces and welcoming customers into physical environments.

Warby Parker, for example, has opened 50 physical stores since 2010 across the country—not one located in a traditional mall. One of their newest stores, on Melrose Avenue in Los Angeles, blends the brand’s signature library-styled design with Hollywood details, like a classic movie theater-styled marquee. The most unique element of the space is the green room, where shoppers can make a 15-second movie, choosing backdrops and stylish frames, of course. Warby Parker gives the shopper social-media friendly copy to complement the finished movie and encourage sharing.

“You keep hearing that brick and mortar stores are in trouble, that brands are closing stores, but it’s always been our view that shopping — particularly for glasses — should be a fun, social experience,” says Dave Bilboa, Warby Parker co-founder.8

So, what does the future hold?

73%

Of millennials believe physical retail will survive long term because of the need to see and try products before purchase.

58%

Of millennials visit physical retail at some point during the path-to-purchase.

29%

Of millennials prefer to ONLY shop in physical stores.

67%

Of Gen Z shop in physical stores most of the time for most of their purchases.

Digital + Physical: The Essential Synergy

It’s not a matter of either or.  Online and physical stores are demonstrating a real-world synergy. Online retailers that create physical stores see a 3.5% rise in online sales after their stores appear. Physical retailers see a 9% increase in total sales after they create an online store that complements physical retail efforts.

As “experience” becomes the new currency of retail, both online and physical stores are challenged to think more about customer experience. 

Full sensory experiences have always been exclusively the domain of physical retail. It’s where we experience a brand’s purpose and brand story; it’s where we experience products, assess quality, ask questions, and test-drive new ideas.

Physical stores allow the combining of multiple product lines to sell a lifestyle, a complete experience. “While retailers can try to replicate the lifestyle experience online, the elaborate, well-manicured showroom is the real draw, enticing shoppers to stay longer and spend more” 13

But subtly, we are learning from online technicians. A friend recently said, “Touchpoints are so last year.” Online retailers have gotten us to think about the entire customer journey (the “UX” in tech speak). “Customer-experience leaders start with a differentiating purpose and focus on improving the most important customer journey first—whether it be opening a bank account, returning a pair of shoes, installing cable television, or even updating address and account information. Then they improve the steps that make up that journey. 12

The future of retail is a blended reality:  with physical and digital retailers informing each other, borrowing best practices and capitalizing on a customer who already lives in a world of seamless commerce and endless opportunities.

Related stories—updates since publication

Images:   Abercrombie and Fitch, Polaris Fashion Place: Mary Lynn Waite;  Macy’s, Easton Town Center: Amanda Seevers;  H&M, Barcelona: 4Retail;  Victoria’s Secret, New York City: Nicole Faccinto;  Shinola, Detroit: Cara Ambrosino;  Pirch, Oakbrook: Caroline Moore;  Frye, San Francisco: Caroline Moore;  Century 21 / WithMe, Santa Monica: Adam Limbach

Sources:  1 Journal of Retail Analytics, 2017;  2 Fortune, Dec. 2, 2016;  3 Retail Dive 2016;  4 US Census Retail Reporting;  5 McKinsey 2016;  6 Shop Talk Keynote, 2017;  7 Deloitte Digital 2015;  8 Chain Store Age;  9 Macy’s Investor Press Release, FY2016;  10 Robert Reiss, contributor, published in Forbes;  11 Business of Fashion 2017;  12 McKinsey & Co., The CEO’s Guide to Customer Experience;  13 CNBC;  14 Forester, 2015;  15 Macy’s 2016 Annual Report;  16 Business Vancouver

More? You got it…

What's Your Customer's Time Worth? - CG Report
Transforming Data Into Actionable Insights - CG Reports

HOW WE THINK
SETS US APART

A collection of insights research and observations across retail, restaurant, c-store and grocery. Helping brands provide a better experience for their customers. Enjoy.

Be the first to know about the latest POV releases. Sign up for The Gist quarterly newsletter.

CHUTE GERDEMAN
455 South Ludlow Street
Columbus, OH 43215 USA
+1 614 469 1001
sign up for The Gist quarterly newsletter