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The Future of Physical Retail in a Digital-First World

May 13, 2022

When retail stores shut their doors in March 2020, many industry observers adopted a dismal view of the future of physical retail. By the end of the year, retailers had closed over 8,700 stores in the United States. 

At the same time, the ecommerce growth rate more than doubled, according to the U.S. Department of Commerce. As retailers faced lockdowns and layoffs, many questioned whether physical stores would survive. 

Today, midway through 2022, storefronts have proven to be an effective channel after all. "The pandemic was challenging for retailers, given their lease obligations…Those who were nimble [were] able to rapidly rebuild," says Amish Tolia, cofounder and Co-CEO of Leap, a retail platform that enables brands to deploy stores and accelerate growth.

Today, new openings are outpacing closures. As of April 1, retailers had announced plans to open 3,694 new stores. This trend will continue—UBS recently cut its five-year outlook for store closures by almost half. 

Specific categories are leading the growth in store count: this year, discount, auto, and direct-to-consumer brands will make up over 50% of new store openings.

Despite the pandemicߴs harrowing effect on traditional apparel brands, legacy retailers are optimistic. Gap recently revised its 2022 guidance upward after a productive fourth quarter. 

While physical retail has exceeded expectations, the pandemic has forever altered how we shop in person. Consumers expect stores to be digital-first, focused on speed, convenience, and community. As retailers navigate the future of physical retail, they will need to transform their store strategies to meet evolving customer needs.

New consumer habits

Consumers now expect complete control over their shopping journeys. "Today, shoppers have higher expectations than ever before," says Tolia. 

The pandemic accelerated the demand for convenience and personalization. Customers want options that allow them to design their own shopping experience. Buy-online, pick-up-in-store (BOPIS), appointment shopping, and self-checkout put shoppers in control. 

Along with convenience, consumers will maintain a proclivity for health and safety. Shoppers will expect options like curbside pickup and contactless payments to remain. 

Although consumers expect a digital-first shopping experience, they also crave connection. After two years of social distancing, shoppers want opportunities for community and engagement. 

Leap is seeing this trend in stores. "Customers still want and expect an immersive, high-touch experience," says Tolia. "If anything, they desire it more than ever… We see that shoppers are eager to engage with salespeople to learn about brands."

Navigating a new retail landscape

These shifting consumer habits have transformed how retailers grow and operate stores.

Changing retail location strategies

Before the pandemic, brands prioritized high retail streets in cities like LA and NYC. Now, retailers are expanding to smaller markets and nontraditional retail centers. 

"Stores must be convenient," says Clare Walsh, Director of Leasing Strategy at Asana Partners. "Mixed-use environments are more important than ever… Brands [want] neighborhoods that provide an environment where their customers live, work, and spend their free time." 

Leap is also seeing a shift in where brands are opening stores. "While major cities like NYC, LA, and Chicago remain in demand, brands are also following population trends and prioritizing year-round warm-weather locations [such as] Florida, Texas, and Arizona," says Tolia. 

Retailers are also using new markets to combat rising supply chain costs and delays. Brands are placing stores "in strategic new geographies to accommodate [ecommerce] demand and better meet fulfillment requirements," says Lee Jackson, Senior Vice President, Digital Solutions Advisory at JLL. By using stores as micro-fulfillment centers, he notes, brands can be faster and more efficient.     

With the shift to smaller markets, store sizes are also shrinking. According to CoStar, the average new lease in 2021 was 3,000 square feet, the lowest in a decade. Even large retailers like Macyߴs, Target, and Kohlߴs have announced smaller store formats. 

While smaller stores reduce real estate costs, they also allow brands to experiment. Lululemon uses pop-ups to test new layouts, host events, and sell excess inventory. Their pop-ups also support neighboring stores during high-traffic shopping periods. 

Nordstrom is using seasonal pop-ups to keep in touch with customers. The retailer recently announced it will open a Nordstrom Local pop-up in the Hamptons this summer. The small-format store will offer alterations, returns, and next-day pick-up to provide convenience and speed to NYC customers. 

Brands will continue experimenting with store formats that prioritize customer service as retailers navigate a new normal. 

Using stores to drive customer engagement and loyalty

Brands were already using stores as a customer acquisition tool before the pandemic. Now, stores have become even more valuable with the growth of online and social channels. 

Nate Checketts, CEO and cofounder of Rhone, sees stores as vital tools to tell the brandߴs story. Speaking on NRFߴs Retail Gets Real podcast, he said. "The why of brick-and-mortar for us is pretty simple. It works. Our in-store customers are more valuable to us."   

Walsh agrees. "Stores are critical to driving brand awareness, profitability, [and] lifetime value. Weߴre getting better data about the ߵhalo effectߴ of opening stores on overall sales… Itߴs meaningful." 

After opening a store in a new market, Madison Reed sees sales "explode" online and across its wholesale partnerships. Parachute, a DTC home brand, reports up to a 50% higher conversion rate in cities with a physical store.

Retailers are using stores to deepen the consumerߴs connection with the brand. In a crowded social and ecommerce space, stores can drive engagement and loyalty. 

Connecting online and offline 

The biggest challenge for retailers will be creating a cohesive customer journey. Shoppers want a unified experience across online and offline channels. "While it may be much more complicated from the brandߴs perspective, the customer expects it to be seamless, so seamless it must be," says Tolia. 

From BOPIS programs to virtual shopping, retailers have more options than ever to connect with consumers. Brands will need to decide what programs and digital tools work best for their business. 

According to Jackson, "A custom approach [will] determine what makes the most sense for each business type. The simplest place to start is mapping the customer journey with your brand. Where does it start?…What brought them further into the journey? What happens along the way?"

Digital-first in practice

Here are some ways retailers are using digital tools to create a seamless customer journey. 

Digital-first customer discovery

Zara employs RFID labeling to drive discovery. The Zara app offers an "in-store mode," allowing users to browse the available inventory at a particular store. Shoppers can then select the BOPIS feature and pick up within 30 minutes of ordering. The geolocation function will also guide the customer to the itemߴs location in-store. 

Champs has created a digital virtual reality experience at their new "Homefield" store. The "Champs Sports Combine" encourages customers to test new products. Shoppers can take part in virtual shuttle runs or test their high jump. 

Digital-first customer education

Brands are also using digital tools in-store to familiarize customers with their products.

Reformation uses digital screens in stores to create an "endless aisle." Stores only display a limited amount of stock on the sales floor; consumers can shop the entire inventory through a digital screen and add items to a fitting room.

Lush introduced the "Lush Lens" as part of their effort to reduce packaging waste. Shoppers can use the Lush app to scan a product with their smartphone. The app will access the productߴs description, ingredient list, and price.

Digital-first personalized customer experience 

Target offers Beauty Consultants via text. While shopping in-store, customers can text and receive real-time personalized product recommendations. 

Leap uses messaging tools to engage with shoppers after they purchase in-store. They do this via Endear, a clienteling tool available as a Shopify app. "We believe the relationship with a shopper continues well after they leave the store," says Tolia.

Digital-first community building

Cotopaxi focuses on local partnerships as part of its "Gear for Good" initiative. The brand provides incentives to encourage shoppers to get involved. Each store also has a "Community Grantee" area to showcase local nonprofits.

Roark, an adventure lifestyle brand, uses physical stores to drive storytelling. The brand releases two collections a year based on a particular travel destination. Customers can follow "the adventure" on social media and in the Roark Journal. Roark also infuses elements of the collections in its store design to keep stores fresh.

Lululemon recently announced a two-tiered subscription program, allowing consumers to choose between a free or paid membership option. For $39 a month, shoppers have access to new products, events, and a subscription to Mirror, the retailerߴs at-home fitness program. 

While the future of stores seemed questionable in March 2020, brands are now more confident than ever in physical retail. 

As consumer habits evolve, brands will need to shift how they grow and operate stores to meet those expectations. However, brick and mortar stores have been and will remain an integral part of serving customers and connecting with local communities.

Source: Shopify Retail Blog

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