Direct-to-consumer brands seek brick-and-mortar opportunities

Friday, Dec 18, 2020

Direct-to-consumer brands are changing their retail strategies to seek opportunities in the brick-and-mortar landscape. E-commerce-native brands, such as Bonobos, Harry’s, Casper, Bark Box, Quip, Bonobos and Native are reversing their original philosophies to start partnerships with major retailers like Target, Walmart, and CVS.

These partnerships will allow pure-play online-only brands to expand their customer base and physical footprint. The rise of direct-to-consumer brands in big box stores brings an added element of discovery to shopping in brick-and-mortar. These brands can now sit on a shelf next to major players in the industry – allowing for added exposure beyond just an Instagram feed.

Consumers want the option to shop online or in-store, and by only offering e-commerce options, this causes a variety of limitations. An omnichannel approach is the most efficient and allows for consumers to shop however they prefer.

“Having multiple touchpoints for consumers, so they can shop and learn and consume our product however they would like — offline, online, or a combination of both — is important,” Phillip Krim, Chief Executive Officer at Casper, told Business Insider.

The e-tailer transition to brick-and-mortar is a common theme we’ve seen in the industry for well over a year.

Shopify, which serves as the leading cloud-based, multi-channel e-commerce platform, is now dabbling in physical spaces. Their LA location serves as the in-person embodiment of the company’s network of gurus who help merchants online.

The leading online home furnishings retailer, Wayfair, opened its first location in 2019 in a mall. Since then, they have opened an outlet center and several other pop-up locations.

Andy Dunn, co-founder of Bonobos, believes that the transformation of their business came when they moved from single channel to multi-channel. Although the landscape was betting on e-commerce, Bonobos decided to venture towards a relationship with Nordstrom to integrate their product into their stores.

“And the iron of our business was, after years of being told that wholesale was going away, and that department stores were dying, our most profitable business became Nordstrom. And our second most profitable were our retail stores. And those two businesses profits were funding losses from the e-commerce business,” Dunn said in an interview with NPR.

Based on our findings, retailers in the industry are transitioning from a native e-commerce brand to a cross-functional omnichannel company for several reasons. Here’s why they’re making the move to brick and mortar:

Today’s Brick-and-Mortar Landscape

Retailers in the industry are reinventing the current brick-and-mortar landscape to adapt experiential retail concepts. This includes creating smaller-format setups and integrating technology into store models.

VF Corporation has started an initiative to introduce a new store with multiple brands and a “phygital” environment where physical and digital interact to create a hyper-digital retail space. The immersive experience uses live streaming and POS technology to provide a unique in-store approach, and potentially create a new department store model right in front of our eyes.

Kohl’s and Sephora recently formed a strategic partnership to integrate Sephora into Kohl’s stores across the US. The launch will feature a premium Sephora destination at the front of Kohl’s stores to create an immersive experience that successfully highlights each brand’s best offerings.

Levis Strauss & Co. has emphasized the importance of experiential retail throughout their stores and provided a blend of physical and digital to form strong customer connections. Their “NextGen” prototype is a new concept that features Tailor Shops at the heart of stores to allows customers to craft their own custom creations.

New retail concepts and partnerships brought a season of growth in 2020. Retailers have been expanding their brick-and-mortar footprints across the US.

ROSS Stores has added over 100 new stores in 2020 and successful completed their plan to expand to over 1,600 Ross Dress for Less stores and 275 dd’s DISCOUNTS.

Piercing Pagoda recently announced their plans to open 15 new kiosks by the end of this year. The brand’s kiosk model has been successful throughout the year and is found very approachable by consumers.

Burlington remains focused on growth as well. In March the company shut down their e-commerce site after finding that it was nearly impossible to be successfully online as an off-price retailer. In their third quarter, Burlington open 30 new stores with expectations to open 62 new stores in fiscal 2020.

Numbers Don’t Lie

Brick-and-mortar operators continue to prove the resilience of retail. Considering the current restrictions in place, shoppers are still coming out to shop. At first this was due to pent-up demand and now, it’s likely the holiday season. The main reason, however, is due to the human interaction individuals crave. To touch, feel and see a product in person is entirely different than through a computer screen.

The numbers from the past quarter back up this reasoning, and they don’t lie. Retailers are seeing record-beating results that show improvement over last year. Although there’s been parameters put in place to limit interaction, consumers are making their way out and spending more. Physical retailers are benefitting from this, which has allowed them to beat expectations and continue with growth initiatives.

Shoe Carnival delivered its most profitable quarter in company history. Same-store sales growth and the strength of their business model helped them to achieve net sales of $274.6 million.

L Brands showed significant strength in their financial results due to exceptional sales numbers from Bath & Body Works stores.

DICK’s Sporting Goods reported a record-setting increase in same-store sales for their third quarter. The retailer’s brick-and-mortar sales numbers reflected an all-time best performance since opening nearly two decades ago.

October retail sales in the US showed an increase for the sixth straight month in a row. This was driven by the early start to the holiday shopping season and Black Friday. This year’s playbook for the typical “Black Friday” playbook was a little different – instead of it being one single day, it became an entire month. November was filled with promotions that typically reflected the one-day holiday, in hopes to spread out shopping over time and not have crowds of people on one single day. The month-long sales event showed positive results for numerous retailers and reflected the typical Black Friday performance.

Face the Reality – We Need & Want Stores

Business Insider noted that one of the main reasons that direct-to-consumer brands are making the pivot from e-commerce to brick-and-mortar is the fact that consumers still shop at big box stores. Even though a lot of these pure-play e-tailers are meant to be discovered on an Instagram feed, the reach of major retailers such as Walmart or Target go way beyond what they will reach online. These stores can help direct-to-consumer brands reach beyond just urban millennials that are on social media.

The reality is that consumers still want, crave and need physical stores. The role of retail today would be nothing without brick and mortar. It has served as the foundation for other platforms such as e-commerce and it will continue to remain there for the foreseeable future.

Now that the role of retail has shifted slightly due to the current pandemic, retailers are changing their landscape, to adapt omnichannel methods and a “phygital” model in stores.

Saks Fifth Avenue is a prime example of this. The high-end department store knows their customers – from where they vacation to what they’re passionate about, and more. They’ve crafted meaningful relationships with their consumers and in-store experiences. Without this face-to-face human interaction, Saks would not be able to form relationships with their clients and know exactly what they want. They’ve shifted their in-store services to meet the needs of the current pandemic, but they’ve made it a priority to still provide their services whether its digitally or in-store.

Restoration Hardware, a high-end furnishing retailer, released their Q3 sales report, noting that physical retail is a huge sales driver for the company. The retailer has faith in the fact that this will only strengthen as the pandemic passes.

“We are physical and social creatures. It’s why we still go to theaters to watch movies, concerts to listen to music, ballparks to see a game, casinos to place a bet, and restaurants to grab a bite. We don’t believe “bucket lists” of the future will be filled with lonely online activities, with or without AI, AR or VR. And although the virus has limited our abilities to interact, we believe that post pandemic the need for physical and social interaction will be greater than ever. We look forward to experiencing new restaurants and resorts, plazas and parks, markets and malls, stadiums and yes, stores,” said Gary Friedman, RH’s Chief Executive Officer.

Gen Z is a generation that prefers experiences and shopping in physical stores. They are predicted to become the largest generation of consumers and they represent up to $143 billion in buying power, according to a case study SREG released on Gen Z’s shopping preferences. A study by NRF and IBM also found that 67% of Gen Z shop in brick-and-mortar stores most of the time.

“Shopping in a brick-and-mortar store offers a completely different experience than shopping online: there’s a person happy to answer questions, a chance for personalized recommendations, and the opportunity to disconnect from the online world,” mentioned by Wizards Play Network.

Cost of Acquistion

Retail partnerships with Target and Walmart offer a way for direct-to-consumer brands to expand their reach without the expensive costs of acquiring them through digital ad spend. This is often a crowded market that can be difficult to engage with new consumers.

According to a study by SEMrush, the cost of online visitor acquisition decreases when digitally-native brands open brick-and-mortar stores. This data also showed a favorable correlation between the opening of a brick-and-mortar store and increase of online traffic to the brand’s website. Because of this, it’s more cost effective to operate a retail brand with an omnichannel model and have a brick-and-mortar store as the driving anchor.

Operating physical stores also lowers a brand’s expense of paid online (PPC) traffic. Not only are PPC costs lower, but the distribution of carrying per physical store were significantly reduced.

Hidden Costs & Frictions of E-Commerce

It’s no surprise that there are a variety of hidden costs in e-commerce, such as returns, inventory, and acquisition to name a few.

The cost of returns, for instance, are constantly rising each year, and are predicted to cost companies $5 billion this year alone. This is 75% more than four years prior. And as we approach the holidays, returns become even more prevalent for online purchases – as high as 50% for more expensive items. There is predicted to be as much as $71 billion worth of holiday purchases this year are expected to be returned, according to CNBC. Consumers typically only make returns in brick-and-mortar stores 8-10% of the time, but for e-commerce that number is nearly doubled.

Projected E-Commerce Sales

Projected E-Commerce Returns

Increasing returns brings a higher probability for net loss. To make up the loss in margins, e-tailers feel the pressure and see the need to sell more product. Because returns happen so often, e-tailers are constantly looking to make up the loss in sales. This is likely why they may have to keep costs down in other sectors, such as inventory and product offerings.

“Reverse logistics has been challenged to keep the same pace with return orders in recent years, and they will really be put to the test this year. The hope is that companies that are in demand, or continue to be in demand, have already underwritten these costs and capacity needs into their holiday fulfillment strategies,” said Travis Sapaugh, CBRE Dallas Senior Vice President, in a statement.

Delivery serves as a contributing factor to these costs as well. Increasing online orders has brought a new height to delivery costs. These are the one of the most notable challenges in e-commerce logistics, featured in an article by Bloomberg. In a survey, Bloomberg found that 54% are facing difficulties with increasing delivery costs as the last mile of the supply chain.

Shipping companies are currently working to deal with this surge in online orders. On Cyber Monday UPS had reportedly told its drivers to stop picking up packages from some of the largest retailers in the country after the delivery company had hit its capacity. During this time of year, delivery drivers are often overworked with the influx of packages being shipped daily.

These restrictions with costs and delivery have even made it difficult for companies to survive during these times. Some retailers were not given any warning of this year’s holiday shipping delays. FedEx and UPS can only pick up a certain number of packages per day, which leaves restrictions for retailers looking to get out thousands of deliveries before the holidays. It also makes it difficult for them to create sales and other promotions for Black Friday knowing there may be an increase in orders that they just can’t get out in time. 

“It was like, ‘this is going to ruin us as a business,‘” said Johnny Galbraith in an article with Modern Retail, whose company sells letterboards and other home decor. “We are being told that just to ship out our existing queue — without any other orders coming it — it would take us up until the holidays to get them out to customers.”

Increased E-Commerce Worries

Increased costs of e-commerce have also brought heightened worries among consumers and retailers. These online frictions are coming to the surface now more than ever before as the holidays approach.

The holiday season as we know it has transformed, and this has brought a different dynamic with increased anxieties. In a survey by Loqate, consumers expressed concerns about shipping and that their packages may be stolen. This is also a peak time for cyberspace hackers – who are looking to steal money and personal information.

Consumers noted worries about delivery times as well. Package arrival delays have been prevalent, and this has also caused increased shipping rates across the board.

Research released from Wharton School’s Baker Retailing Center and Wiseplum provided insights that further prove some customers are noticing frictions that arise with e-commerce. These shortcomings include long wait times and queues, inventory and overall customer service offerings.

This has brought a rude awakening for shoppers, which has heightened their worries as these constraints don’t seem to be going away anytime soon.

“We are seeing brands looking for ways to improve customer experience; however, our research shows there is still a lot of friction in the experience and the pandemic has made this worse. Customers are experiencing more issues with their online shopping experience, proving that not all retailers are suitably prepared for this digital shift,” said Thomas S. Robertson, Professor of Marketing at the University of Pennsylvania’s Wharton School.

Let’s face itthe convenience and reliability of brick-and-mortar is unmatched. E-tailers are turning to this channel because of its monumental role in retail. Brick-and-mortar served as the foundation for this industry and now it has molded it to become what it is today. Direct-to-consumer brands will have more opportunities and less frictions if they face the facts and use brick-and-mortar retail to their advantage.

Source: Direct-to-Consumer Brands – Business Insider, Bonobos – NPR, Wizards Play Network, UPS CNBC, Modern Retail, Returns CNBC, Bloomberg Delivery Logistics Graph
Photo Credit: Pexels

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