Executive Summary

What does physical retail look like in a world where tens of millions of products are readily available on the Internet? It no longer needs to be the only place where shoppers find, buy and receive products. This should free up companies to experiment and push the boundaries of what their existing and new real estate can do.

While a small crop of modern brands and legacy players are taking these changes in stride and creating truly next-generation offline concepts, most companies have not meaningfully evolved their retail strategy in decades. Physical retail’s evolution affects everything from the number of stores brands need to the size and permanence of these stores to the way they measure their performance.  

This report looks at:

  • How have retail’s transactional beginnings led to the current revolution and why is this happening?
  • How are companies using physical retail to create enthralling experiences and how do they differ from traditional in-store events?
  • How are stores reinventing themselves around personalized customer service and community building and what are the results of these advances?

Takeaways

  • Physical stores traditionally measure success using metrics like sales per square foot and average order value, which are limiting their adaptability and relevance in the new consumer economy.
  • Although hosting in-store events and providing services is not a new idea, the approach has significantly changed as expectations have, creating an era of experience-driven retail that hopes to drive more customers to stores.
  • Retail spaces that use events, community building, and exceptional customer service to create spaces that delight consumers will do well in the future, as the purchase decision no longer occurs in the aisle. More and more, the decision takes place in the days, months, and even years before a sale.

Case Studies

American Eagle, Apple, Bed Bath and Beyond, Best Buy, Glossier, JCPenney, Target 

The Market: What’s happening and why does it matter?

For hundreds of years, retail primarily existed as a sales tool. Brands occasionally used it a marketing tool, but this was a secondary goal. Selling products always came first. However, 21st-century retail, which is very much a response to the shortcomings of its previous generations, has three main goals:

  1. Increasing transactions
  2. Creating enthralling experiences
  3. Providing personalized customer service and building community

But first, it’s important to understand how retail got to this inflection point.

From the origins of transactions

20th-century retail was initially created to move as much product as possible. Before the Internet, stores gave people access to a variety of consumer goods products that weren’t easy to come by. But there wasn’t much shoppers could do there beyond shopping. Some installed couches for husbands or kids to sit while they waited for their wives, but this was rare. Customers would simply shop and then leave.

Online shopping sales have increased 352% in the last 12 years, netting around $294 billion a year. This is diminishing the role of purely transactional retail, which is seeing falling foot traffic. The oversaturation of retail—especially in the U.S.—is only compounding the problem.

In the pre-internet era, many stores measured their success with metrics like sales per square foot  or sales per day. Even today, sales per square foot is the most popular metric when it comes to measuring the efficiency of a store. Stores also use metrics like sales per hour and average order value to measure the sales associates’ productivity. They are often compensated and promoted accordingly. The result is an environment where sales associates spend much of their time in the stockroom, fetching products in order to drive their sales.

As a result, most stores suggest implicitly that if a customer walks into a store, she needs to buy something. This approach, however, only embraces shoppers who know exactly what they want. In a world where Amazon is a massive search engine—built around exactly the same goal of matching demand with supply—many stores are finding themselves vastly less essential than they used to be. This is happening to all types of retailers: Urban Outfitters, JCPenney, Bed Bath and Beyond, Target, Best Buy, and more. Many of these larger companies are trying to make strategic changes to compete and some are doing better than others. Conversely, digitally-native brands are starting without any legacy retail infrastructure, which allows them to reimagine the purpose of a store.

JCPenney

JCPenney has been around since 1902. It hit its stride during the 20th century by offering low, competitive prices on quality goods. Today, it’s still optimizing its stores for sales, even as its revenue has decreased 2.8% from 2013 to 2016 and the world has changed. This has led to an uninspiring shopping environment and continued corporate frustration. As of 2017, the best-performing part of its stores are the Sephora store-within-a-store formats, which feature the highest sales per square foot and employ Sephora’s experiential retail style. However, only 25% of Sephora shoppers purchase in the rest of the store. JCPenney is missing the bigger picture of why Sephora is so popular and has failed to reimagine its stores’ goals in a similar fashion. (Ron Johnson, the previous CEO, was both too aggressive and not given enough time to transform the retailer.)

In its Q2 2017 conference call, JCPenney’s current CEO Marvin Ellison confirmed that the company is still focusing on sales per square foot and gross profit dollars per square foot to determine the company’s health. While these metrics aim to increase conversion rates, they miss the bigger picture. In order for JCPenney to thrive, it needs to take a new approach and evolve away from a transactional store. Its latest experiment strategy is a partnership called the Salon by InStyle, which it hopes will ultimately bring in more traffic to its Sephora sections. This is one of many experiments, both big and small, that the company should be running.

Bed Bath and Beyond

Bed Bath & Beyond is another retail giant going through similar problems. It announced a quarter-over-quarter 1.7% sales decrease in Q2 2017, falling way below Wall Street’s expectations. Soon after, the company stated it was “undertaking a number of transformational initiatives” to calm investors. However, later that day in its Q2 2017 earnings call, the company revealed that it’s initiatives merely included adding in-store pickup, giving people the ability to schedule appointments online for registries and fixing the back end of its website.

Focusing on these incremental changes is a trap that many larger retailers are falling into. The problems they face are not small, which means the solutions will not be small either. They are taking baby steps when everyone else is taking leaps.

Experiential

Although hosting events and providing in-store services are not new ideas, the mentality and expectations for these experiences have significantly changed. A new era of experience-driven retail is dawning, an approach that originated with the popularity of pop-up shops. New companies use them as branded extensions and places where shoppers can touch and feel products that they have only previously seen online.

Experiential Retail Phase 1

Phase 1 experiences were mostly sideshows and companies measured their worth in short-term sales gains. For example, some stores would offer a makeover if a customer purchased a minimum amount of makeup, or a shopper would get invited to a free samples event with the expectation that she would buy a full-sized (and full-priced) item at the end. Icing, a company owned by Claire’s, would give customers “free” ear piercings with a required purchase of a $20 to $60 “starter-kit” that included earrings and cleaning solution.

The other, more visible trend, was the installation of coffee shops in the fronts and back of stores. The goal was to create a new space where customers could sit, work and experience the store’s vibes, but it’s unclear whether this was worth the space and investment it took to operate. Many were often filled with customers who had little interest shopping.

Experiential Retail Phase 2

Phase 2 experiential retail is a ground-up operation that places customer experience at the center. Phase 2 stores are places to spend time discovering products and interacting with the brand. This removes the overt expectation on shoppers to purchase products. Phase 2 stores optimize for Net Promoter Score, number of event RSVPs, customer engagement, and media impressions. This approach relies on selling to the shopper covertly by encouraging her to feel good walking into a store and then share her experiences with friends, either face to face or online. Direct-to-consumer companies have taken the lead with these types of experiences, but legacy brands are also adopting the approach to combat their own problems.

Glossier

Every time Glossier releases a new “phase” for its brand—what it calls a set of makeup and skincare products—the company launches an offline pop-up experience. These activations—and the events organized around them—are key to Glossier’s strategy. They give people the ability to experience the brand in-person and test out its products, which is crucial for digitally-native companies. Glossier’s pop-ups, designed as “clubhouse meccas” where women can experience the brand, draw massive crowds. In late 2017, the brand created its largest series of pop-ups ever. They took place around the world to market its new perfume, Glossier You, whose  smell adapts to the wearer’s body.

Even though these experiences are not overtly transactional, Emily Weiss, Glossier’s CEO, says “sales are through the roof and defying all odds.” Pop-ups also spread the word about the brand by creating a fruitful canvas for user-generated content, Weiss explains that some women go into the store just to feel the “energy in the room.” She says few other beauty retailers can claim this, which she thinks is vital to relevance and growth in the current retail landscape.

The company also uploads a new phone wallpaper to its site every Friday, often featuring Glossier’s logo or products. The brand  gets around 50,000 downloads every week and act as billboards that further integrate the brand into customers’ lives. All of these initiatives help to drive the correlation between experiences and sales. The whole brand experience goes from online to offline. According to the company, the goal is to make Glossier a part of a woman’s life, from when she puts on its products in the morning to when she takes them off at night.

American Eagle

American Eagle, which opened its doors in 1977, is trying to improve performance by adding an experiential element to its stores. This comes after the success of its lingerie brand Aerie and the real bodies campaign it recently ran, which featured ads that were not airbrushed and challenged the supermodel standards placed on young women. Now, American Eagle is creating a store in Union Square with complimentary laundry services for students who can hang out and study nearby while they wait.

The company’s latest goal is to become synonymous with jeans in the minds of shoppers, according to its Q2 2017 earnings call. The store will also feature a collaboration with Atelier & Repairs, who recycles old clothing and turns it into new styles. The store will showcase repurposed denim from American Eagle’s previous collections and will also offer denim customization stations and repairs. For now, this concept is only debuting in one location in Union Square, New York City, which is close to its headquarters. This allows American Eagle to test, learn, and quickly roll the concept out to more stores if it’s successful.  

Although it’s difficult for an older brand to entirely refresh its stores, not to mention the massive sunk costs in existing retail footprints, American Eagle is proving that committing to modern trends and pursuing innovations is the only option. It’s less about the success of any individual experiment, but rather the appetite, culture and freedom to continuously experiment that leaders need to instill from the C-Suite to the sales floor. As an initial good sign of the company’s trajectory, American Eagle had a two percent increase in sales in Q2 2017, higher than analyst estimates, in addition to a three percent revenue increase, beating sales forecasts.

Communal & Customer Service

The new retail mentality creates a place for shoppers to experience a brand and its products before buying. This means creating retail for the consideration phase of the shopping journey, optimizing for the right type of customers, and then—and only then—closing sales. These new approaches understand that consideration does not happen in an aisle, seconds before purchasing, but rather in the hours, days and months before the purchase. Focusing on customer service and community building is a crucial part of this endeavor. This includes ensuring that customer service representatives are only around when it’s ideal for the customer.

Reinventing community & customer service

Since the moment Apple Stores opened, they focused on building community and delivering the best customer service. Apple has seemingly optimized its stores for engagement rather than sales. This allowed the company to generate exceptional foot traffic, with over 500 million people visiting an Apple Store in 2017. In 2016, even though only 1 out of 100 people who visited the store actually purchased something, Apple booked over $48 billion in sales between its 500 retail stores, with an average of over $97 million per store. Various reports say it’s the world’s most profitable retailer by square foot as well, generating $5,546 per square foot, compared to an average of $325.  

While Apple’s retail productivity is nearly unrivaled, the company is rolling out a major refresh built around the idea of a “Town Square.” The goal is to feature more events, educational programming and attractions to get people into its stores. Apple’s first Town Square opened in Chicago on October 20, 2017. This new approach will allow Apple to build relationships with current and potential customers, while hopefully increasing its sales along the way. Apple is proof that the experiential model works at scale. But success is culture-driven as much as it is operationally-driven.   

Target

Target is trying to compete with retailers like Apple and the explosion of online sales by focusing on community and customer service, rather than just transactions. The company has struggled to perform in recent years, which has led to a $7 billion initiative to match changing shopper preferences. Like many other retailers, the company experienced decreasing in-store traffic and lower average order values.

Target has started building smaller stores and is trying to engage its audience. It’s taking advantage of its history of high-fashion partnerships and exclusive products. The company is also focusing on creating private-label products that appeal to urban shoppers and replenishing products more often to give the customer something fresh every time she walks in. Target plans to have 1,000 stores remodeled by the end of 2020 and is already seeing success with a 2% to 4% increase in sales in the updated stores, according to its Q2 2017 earnings calls. Additionally, the company is retraining its staff to focus more on customer service on the sales floor compared to back-of-house activities such as stock picking.

Best Buy

Best Buy has followed a similar path. After losing market share to companies like Amazon and Apple, the company has started its “New Blue” campaign, which entails taking its sales associates—called Blue Shirts—and retraining them to be home consultants and specialized service providers. In-store, it’s creating more partnerships with companies known for high-touch experiences, including one with Apple. Best Buy is also adding smart home sections in all of its stores and adding 1,500 dedicated staff members who are knowledgeable about this quickly growing category of electronics. Early signs of these efforts point to higher quarter-over-quarter, same-store sales gains than expected. Best Buy grew 5.2% in Q2 2017, much higher than analyst estimates of 2.1%.

 

What does this mean for you and what should you do about it?

Brands

Driving change—quickly

Brands need to completely rethink how they are using stores, how many of them need to exist, and how permanent they need to be.

  • How can brands imminently prioritize research and development to figure out exactly what they need to change about their existing retail footprint?
    • Which stakeholders should you involve?
    • How quickly can you move?
    • How will you measure success to show that progress is happening even though complete transformations will take time?
    • What existing best practices can you leverage? Are there clienteling behaviors that still remain relevant or should you reimagine them?
  • How can new brands and product lines experiment with modern retail to test concepts efficiently and quickly? What aspects of modern retail (experiential environments, virtual reality, etc.) resonate with the brand’s identity?
  • Could it be advantageous to cross-pollinate online and offline retail customer experiences and how does one support the other in tandem?
  • When you survey all of your sales associates, who might succeed in the new world and who might not? What can you learn from them and how you can embed this mentality into training for the entire sales force?  
  • What are the profitability implications for physical retail? Does it make sense to consider a pop-up strategy or would permanent stores be a stronger long-term investment?

Changing the metrics

Metrics like sales per square foot have been the norm for a long time, but in a world where retail is not only about sales, the measurement toolkit is evolving.

  • Look at the metrics you are using to measure the success of your stores. How are these metrics affecting how the store looks, how your employees perform and how you create products? What would change if you used different metrics?
  • How can you experiment with non-traditional metrics in order to change their significance and engrain it in your company’s ethos? What happens if you rebalance the importance of sales per square foot?

In-store employees

Training and hiring in-store employees is crucial to your business’s future. They are on the front lines and can no longer be an afterthought. The in-store experience these team members provide is making and breaking retailers today.

  • If your target customer profile is evolving, how do you evolve sales staff accordingly?
    • How can you evolve your recruiting methods to find new employees with different backgrounds who are eager to help shape your brand’s experience?
    • How will you train them differently than you did the in past?
    • How do you retain your original customer base and avoid alienating your core?
  • How will you compensate and schedule your in-store employees? Will you pay them competitive salaries and give them full benefits or will they be part-time, on-call or seasonal workers? What incentives are you creating and do they align with the company’s overall goals?
  • How can you keep sales associates’ morale high in the new landscape where sales are not as linear as they used to be, given the multitude of places to purchase products today? How can you justify more investment in these teams?
  • How are your employees compensated? Are they forced to think about sales per hour or sales per transaction? How is this limiting how they spend their time? How else can you measure their effectiveness on a daily basis in order to get better results?
  • What is the sales hierarchy in terms of roles and responsibilities? Does it drive employees to exceed their sales goals and climb higher in the company?
  • Which is a higher priority goal: new customer acquisition or existing customer retention? Could a “personal shopper” role be relevant to the sales experience and necessary to increase customer retention?

Investors

Gauging the company’s retail awareness

Most digitally-native brands are taking advantage of the shifting retail landscape, especially since this is where the vast majority of sales still take place. Almost every digitally-native brand needs to think about a retail strategy, which affects many aspects of your investment and scaling criteria.

  • When looking at companies in which to invest, are they aware of both online and offline as a virtuous ecosystem, or are they adamant that they will be online only?
    • How do their projections account for this?
    • How is the brand specifically thinking about its in-store experience?
    • Are they planning to make the store a place shoppers want to spend time or is the store meant to be a purely transactional venue?
    • Will the store stand out in an environment filled with endless places to complete a transaction?
  • How does the company plan to acquire customers?
    • Is its customer acquisition plan reasonable given how different sales channels are serving different purposes or will the costs rise as it scales?  
    • How are they planning to keep this number sustainable with a mix of offline and online initiatives?

Creating attractive stores

The most successful stores today are magnets—shoppers want to spend time in them even if they don’t need anything. When creating physical experiences, it is crucial that stores measure their success with this in mind.

  • How will the company’s stores become “shareable” and viral experiences that people will want to talk to their friends about or share on social media? How does offline sharing translate online and vice versa?
  • How can the brand use offline retail to drive Net Promoter Score? How can online efforts support this?
  • How can the company create a store that people go to and hang out in during their consideration stage before they are ready to purchase? Is the company looking at in-store customers as a nuisance or are they embracing them and using them as opportunities to engage them positively?
  • How does the in-store customer experience expectation change internationally? How is luxury represented differently? What are key experience drivers that could be relevant to different markets?

Smart retail experiments

As retail’s role continues to shift companies are testing new retail formats and in-store experiments to help them determine what their retail strategy should be for the future. These take the form of pop-up stores, in-store events, partnerships, and more.

  • How is the company planning on executing its stores in the beginning stages of the company? Is this plan flexible? How are the executives going to change course if their plans aren’t working?
  • Is the company going after permanent leases or will it start off with pop-up store experiments first? What are companies planning on learning from these pop-ups and how will they use them to fuel their permanent retail locations?
  • When creating partnerships with other companies, how will companies measure their success, what tests will they run on them, and how will they use these learnings for future in-store executions?

Real Estate Developers

Short-circuited leases

An increasing number of companies are closing stores and declining to renew their leases. Some cite the inflexibility of their landlords as one of the main reasons they’re leaving while others are rightfully cutting their losses and exiting their leases before they hit maturity.

  • How can you determine which of these non-renewing leases are worth renegotiating and which you should walk away from? How can you use publicly available information and your own internal metrics to make this decision?
  • Even though younger brands might seem riskier or less permanent, how can you sniff out the ones that have staying power? How can this new crop of brands help reinvigorate your property?
  • How can you adjust your leasing structure to both attract new brands and mitigate the risks of older brands? How can you create an environment that celebrates experimentation?  
  • What infrastructure do new companies need to make these tests successful and how can you provide it to set everyone up for success?
  • If your lease structure requires minimum sales expectations, how do you nurture growing brands who bring in new customers but might need more flexibility with sales minimums?

Finding a replacement for anchor tenants

Anchor tenants are crucial, yet the companies that held down the fort in the past are disappearing. This is leading to falling foot traffic, which affects all tenants.  

  • Can partnering with coveted digitally-native companies give your mall an edge and increase its foot traffic? Which direct-to-consumer companies should you target and how can you find ones that are driving foot traffic?
  • How could you aggregate smaller but desired brands together to fill the gaps created by failing anchor tenants? How are you seeking out and measuring these new companies?
  • How can you create experiences—gyms, food halls, restaurants, non-apparel stores—to both fill vacant spaces and increase foot traffic? What would new, quality tenants look like? How can you widen your lens when it comes to determining tenant quality?

Going Forward

Online sales make up only 9% of retail sales, but this number will rapidly increase in the next few years. The importance of retail isn’t waning, however. Amazon, the country’s largest e-commerce retailer, which accounted for 44% of all online sales in 2017, is making retail a large part of its focus. With its $14 billion dollar purchase of Whole Foods in the summer of 2017, the company has made it clear that physical retail will be vital to its future. It has already started using its new real estate to test out Amazon products and learn more about physical retail.

Walmart is the largest retailer in the world, bringing the majority of its $485 billion in sales from physical retail. As Amazon looks to compete, it knows that offline retail is an integral part of its future as it builds upon its $136 billion in sales. While Walmart’s stores get 10.4 billion visitors a year, higher than the world’s population, Amazon hopes its physical presence and online prowess will help it continue to conquer retail. For other retailers, there will be an immense amount to pay attention to as this space continues to evolve as big and small companies alike drive this rapid change.