TLQ 1.3 | Will Digital Still Go Physical?

Will Digital Still Go Physical?

D2C retail in a post-COVID world.

KEY POINTS

  • Mall operators are paying close attention to customer preferences and retailers’ new criteria and are prioritizing discovery, interest, and experience in their shopping centers.
  • At one point, the majority of discovery happened in the department store. That sense of discovery still exists, but it has evolved outside of the department stores’ walls. 
  • Today, technology at every level of retail is ‘table stakes’ for doing business — and this is quickly becoming true of mall operators as well. For shopping centers, these tech capabilities fall into three categories — fulfillment, store roll-out, and store connectivity.
The Digital District in Westfield Valley Fair, San Jose, CA

Ten months ago, all the talk was about direct to consumer brands going physical. They had exhausted E-commerce consumers, customer acquisition cost had become too high, and the brand experience was underdeveloped online. Meanwhile, malls (and shopping districts to some extent) had already begun to face macro-economic realities that many communities were over retailed, increasing digital commerce had altered shopping habits, and changing social/economic/population dynamics meant shopping centers were catering to a new and different shopper. That was February 2020. With the promise that 2021 looks to be the beginning of the return to a normal, we look at where those shopping centers, brands and retailers were and where we believe they will go.

At this time last year, high growth brands were gearing up for significant store expansion. Brooklinen, for example, had just closed on a $50 million investment round to open a fleet of stores to engage a wider audience with the community-building elements that a physical store allows for. They were pushing on stores for customer acquisition, brand activation, and revenue channels. 

Meanwhile, established retailers and shopping centers were adjusting to the new realities of a shrinking American middle class and shift to e-commerce. Their answer to this challenge has been  experience —  by offering service, amenities, convenience, social activities, and culture, they could stem the decline in physical shopping

Of course, 2020 has been a much different year than we anticipated. With a retail landscape now permanently altered by the pandemic, and pundits proclaiming that ‘malls are dead’ and ‘stores are dead’ – we thought we’d check in with two high-growth brands, Brooklinen and Faherty, and a major mall operator, URW (Unibail-Rodamco-Westfield, formerly Westfield), on how they are recalibrating to shifting social and economic dynamics. 

Brooklinen's flagship in the Williamsburg neighborhood of Brooklyn, NY

REEVALUATING THE RETAIL STRATEGY

Both Faherty and Brooklinen have taken measured approaches to store openings. And while they are at different stages in their retail journeys, their motivations are similar —  customer acquisition, brand activation, experience, and new revenue channels. 

Brooklinen first tested their retail rollout with a pop-up in NYC’s Soho neighborhood. The test ultimately steered Brooklinen away from Soho (which was tourist-heavy) and instead toward a  retail strategy built around “bedroom communities”, with Williamsburg, Brooklyn becoming home to their first store. The decision paid off. Rich Fulop, Co-Founder & CEO says this is just the start. “Despite the challenges of 2020, our first permanent store in Williamsburg is thriving and we’re looking forward to opening more locations in 2021 and beyond.” 

Faherty has 14 locations — 2 of which are in malls— and 12 in high-traffic shopping corridors. Their locations really fall into three buckets: resort locales (for maximizing buy-now-wear-now sales and for on-brand beach vibes), major cities (for brand awareness and customer acquisition), and new markets (activating in locations with strong online sales). 

In much the same way that Brooklinen used existing data to determine new store locations, Faherty has done the same. They’ve recently opened in New Jersey’s Short Hills Mall — a luxury shopping center, much like LA’s Century City or Santa Clara’s Valley Fair. The decision was based on observed success. “(We) had a great Nordstrom business at Short Hills. The mall is a go-to shopping destination for that part of North Jersey, which is a great demographic for us. Plus, we’re originally from New Jersey, so we know the important role that mall plays in the community,” said Alex Faherty, CEO & Co-Founder of Faherty. 

Meanwhile, mall operators are paying close attention to customer preferences and retailers’ new criteria and are prioritizing discovery, interest, and experience in their shopping centers. To promote discovery — shopping centers are activating brands in common areas. To drive interest, savvy operators like URW place high-interest brands near entrances. And to build on experience, they are creating ‘street like’ experiences. Colin Shaughnessy, Executive Vice President of Leasing at URW explains, “It has to feel different than what people have been used to because, ultimately, that feeling of difference, that relevance that you can kind of create, is what people want to go spend their time doing.” 

At one point, the majority of discovery happened in the department store. That sense of discovery still exists, but it has evolved outside of the department stores’ walls. “People are going shopping to find new stores, new brands, and new concepts, and they’re open to trying new products outside of a department store landscape now more than ever before,” said Faherty. 

Faherty's One Paseo location in San Diego, CA

VALIDATING RETAIL AS A CHANNEL

We continue to explore the idea of physical retail based on the premise that store success is largely based on customer acquisition, brand activation, experience, and revenue channels. One of the gating factors to opening a store is the start-up cost and associated risk. So how do we measure the success and how does a brand move into a retail space with ‘no money down’?

Shaughnessy helped summarize this risk and how it can be offset. “The difficult part for a direct-to-consumer brand is how do they go from being on an online platform, a digital platform, to creating a personal touchpoint with their consumer? They’re also constrained by the cost to build a store within a shopping center. So if we can find a second-generation space or space that had been previously built out that they can modify for half the price of a normal build-out… that is key.”

Once creating the space is financially viable, the next question is measurement. In our conversations with both Brooklinen and Faherty, we found that measuring success is much more art than science. Customer awareness, customer acquisition, store (4 wall) EBITDA margin, sales per square foot, community engagement, year-over-year growth, and more make up that formula.

As for the science, Alexei Agratchev, Co-Founder and CEO of in-store analytics pioneer, RetailNext, explains there are any number of ways to measure success. “This past year has reinforced the need to understand the real-time condition of stores across operations, labor planning, marketing, and even supply chain, particularly as the role of stores has evolved. Understanding metrics such as traffic, occupancy, and shopper yield is critical to optimizing customer acquisition strategies, driving customer experience through virtual queues and appointment shopping, optimizing labor allocation and task management, and ensuring top-notch service delivery through programs like BOPIS and Curbside Pickup.”

THE OPPORTUNITY FOR D2C BRANDS IN MALLS

Many D2C brands in The Lead community are born out of a ‘tech product innovation mindset’. In other words, they are accustomed to testing, learning, failing, modifying, and starting again. The more they test, the better they get. 

Shopping centers have caught on to the ‘Lean Start-Up’ approach to testing, which also minimizes cost and risk for the retailers. URW, for example, has pop-up spaces that are super well positioned and very visible. Over five or six weeks they will bring a brand into the space and they can then test the market, test the concept, test the merchandise, and see whether it’s worth staying longer or moving to a permanent location. Meanwhile, these spaces are modular (think movable walls, making them easily transformable) and tech-enabled (e.g. Retail Next technology) so feedback loops are fast and pivots are nimble. 

That said, there is a benefit here for the operator as well. As Shaughnessy put it, “If you’re bringing in something that doesn’t exist anywhere else, or nobody’s been able to see, or the launch of a product with a brand that doesn’t typically build stores, it allows you to create something that people want to be a part of.” Sounds like a win-win.

The value a digital brand can bring to a shopping center is not lost on the team at Brooklinen. “We do have an incredibly loyal and dedicated customer base that can be found around the country. The opportunity for customers to be able to come into a physical store and have the ability to touch, try on, and compare products would be a traffic driver,” said Fulop.

The Holiday Market, Century City, Los Angeles, CA

THE MALL AS A TECHNOLOGY-DRIVEN EXPERIENCE — TODAY

Today, technology at every level of retail is ‘table stakes’ for doing business — and this is quickly becoming true of mall operators as well. For shopping centers, these tech capabilities fall into three categories — fulfillment, store roll-out, and store connectivity. 

BOPIS was a trend gaining steam in 2019 and has come into full effect in 2020. Even with a sole retail location, Brooklinen finds it valuable. “We’ve found the model to be compelling for our customers. We’ll continue to build upon and evolve this offer – especially as our physical footprint expands across the country,” said Fulop. 

Seeing the overwhelming need for BOPIS at their centers in 2020 — for customers and for tenants without their own solution — URW enlisted their concierge teams to run curbside pickup operations, bringing purchases from the stores directly to the customers. This operational support expands the channel, strengthens the offering, and brings a sense of quality and consistency to the shopper. 

Beyond BOPIS fulfillment, wifi, store analytics, visual displays, screens, till systems, and e-commerce/multichannel fulfillment systems are no longer a want, but an expectation. As Stephan Schambach, Founder of NewStore puts it, “To survive in 2021 and beyond brands need to operate stores as a unified extension of their website. For this to work, online and offline systems need to be tightly integrated with serialized inventory at the core. From payments to endless aisle, physical retail will be a place where ecommerce-like experiences are standard.” 

THE MALL AS A TECHNOLOGY-DRIVEN EXPERIENCE — TOMORROW

There is much more technology and innovation on the horizon. China and Asia more broadly are building and outfitting many of their malls with cutting edge technology. We spoke with URW executives about this next wave of innovation overseas. These next-generation centers have an integrated inventory management system, an integrated e-tail system, and all the information into product, customer, sales, and traffic which is being centralized at the mall level and then utilized and shared with all the tenants. It could be one checkout system, one payment system, or one loyalty system. And they have visibility on inventory and products. All of this working together opens up a lot of capabilities. These systems are still several years out in the US, but not too distant in the future.

At home, the digital team at URW is thinking hard about customer identification, building pattern recognition and truly understanding the shopper from when they enter the mall, to when they make a purchase, and so on. This data is being collected and fed back to improve the shopping center, and to help deliver on stronger customer acquisition and loyalty (more on that below). 

While Brooklinen has not yet opened a mall location, they too have invested significantly in data and analytics with, as Rich shared, a fairly simple goal, “to provide the most seamless and impactful omnichannel experience by using online purchasing trends to guide our in-store merchandising, geo-targeting to guide retail expansion and tracking, and aggregating customer feedback to offer more flexible bundle options in-store.”

THE MALL AS A CUSTOMER ACQUISITION & RETENTION CHANNEL

It is clear that digital retailers aim to acquire new customers with physical stores — but leaving to chance is not much of a strategy. Mall operators recognize this and URW has made significant investments in CRM and Loyalty to drive the strategy home. For instance, they’ve built a robust global database of 15 million+ contacts that they can map and engage. And on the back of this effort, URW has developed loyalty programs that provide the ability to engage, to measure, and to understand how strategies have succeeded or failed.

We want to thank the leadership teams at Brooklinen, Faherty, and Westfield (URW) for their perspective and contribution. Launched in 2014 by Rich and Viki Fulop, Brooklinen offers global customers a curated collection of stylish, luxury-grade linens and beautiful home essentials at an accessible price-point. Faherty, founded in 2013 by Mike and Alex Faherty and Kerry Docherty, is a lifestyle and apparel brand fueled by purpose and optimism that creates high-quality, sustainably-minded clothes. Unibail-Rodamco-Westfield is the premier global developer and operator of Flagship destinations. The group owns and operates 89 shopping centers, including 55 Flagships in the most dynamic cities in Europe and the United States.