Digital-native brands test the waters of physical retail

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It’s practically become a cliché the past few years: Physical retail is dying; ecommerce can stand on its own. But if both of those are true, why are so many digital natives opening physical locations?

The answer is simple, says Nikki Baird, vice president of retail innovation at Aptos. “There is no way to grow as fast as opening physical locations.”

That has launched a boom in physical retail as formerly pure-play ecommerce brands find homes in multi-brand stores like Neighborhood Goods, Showfields and BrandBox.

“These experiments that they’ve been doing, a low-asset investment on their part, reaffirm what they would get if they opened store locations,” Baird says.

It also allows a new round of experimentation, to see how a physical location impacts online awareness and those all-important customer relationships.

Doug Stephens saw the trend coming, writing about it in his 2013 book, “The Retail Revival.” What he anticipated was a shift in the classic purchase funnel, thanks to digital media, social media and ecommerce. “It seemed that, where media had been a customer acquisition strategy and physical retail tended to be a distribution strategy, the two were inverting.”

And it isn’t just new players; some of those roots were pioneered by Story — acquired in 2018 by Macy’s — and b8ta, which now also has a Macy’s connection.

These types of multi-retail sites come at a time when a physical department store no longer has the largest selection in town — and can’t compete with the sheer number of products available at an online retailer. But that is just the beginning of the shifting dynamic, Stephens says.

“They don’t offer the most convenience, which once upon a time they did,” he says. “And they certainly don’t offer the best customer experience. What do they have? They have space and an audience. What you do with that space and audience is up to your own level of creativity.”

At the opposite end of the spectrum are digital native companies that want to make the move to a physical location, but “don’t have the manpower or infrastructure to staff them or operate them,” Stephens says. “They’re looking to businesses like these to give them what they need to become a physical store.”

Shoppers are the real winners, especially thanks to the fast-moving nature of these stores. “It’s a temporary installment, so there’s a lot of change, which incents more traffic to come back,” Baird says. “Those larger retailers are definitely moving in that kind of direction where they’re trying to provide more life and frequency of change.”

INTERSECTING BRANDS AND PEOPLE

Showfields’ co-founder and CEO Tal Nathanel has deep roots in retail. His mother was a window dresser, his father, a jeweler. When Nathanel realized he enjoyed online shopping more than he did physical retail, it was time to do something. Showfields’ New York outpost is a place where digitally native brands can meet potential customers in an environment designed to make physical retail “as easy as opening a website.”

Nathanel estimates that about 95 percent of emerging brands “can’t even contemplate the thought of a physical store because the barriers are so high. If we can make it as easy as opening a website, we can solve the problem for online brands.”

Showfields focuses on two prongs: helping new brands be found and overcoming consideration needs for better-known brands.

“We believe that the future is focusing on those stages,” Nathanel says. “If it’s an emerging brand, the challenge is discovery. As fast as it is to build an online brand, it’s not easy to break through the noise. When the brand goes a bit bigger, it’s more about consideration. Everybody has heard about your brand, but people want to touch it and feel it.”

There is a third category, which Showfields labels “collaborators” — products used in the Showfields location or by staff. “We’re trying to find creative way for these products to come to life,” Nathanel says. “It’s just another way of intersecting brands and people in the space.”

Showfields regularly changes out brands and experiences within the space. “Every time you walk into Showfields, something is going to be different,” Nathanel says. “As we grow and have more locations, they’ll move with us from one location to another. It’s more about how to constantly create something interesting for the customer.”

With a consistent experience at a place like Showfields, emerging brands can experiment in ways that pop-ups simply do not allow.

“In New York, a pop-up can vary, costing between $50,000 and $250,000 per month,” Nathanel says. “It’s like writing a question with nine variables. You never know if it was the weather, if there was another event in town, your staffing or how you designed the store. We’re trying to allow brands to isolate the variables.”

RETHINKING THE MALL STORE

At BrandBox, a concept by mall owner Macerich, opportunity met a need: The company saw digital natives like Warby Parker, Peloton, Untuckit and Chubbies experimenting with physical retail spots and jumped in to help. BrandBox offers a place where digital brands can figure out store design, staffing and technology, all with Macerich’s guidance.

As Macerich Chief Digital Officer Kevin McKenzie began studying the trend of ecommerce companies moving into physical stores, he noticed a few key things: Data was king, and most of the time, he was dealing directly with the company founders. Brands that are ready for the BrandBox level of experimentation are well-established and already have between $30 million and $50 million in annual sales.

Luxury cosmetic company Winky Lux, cashmere brand Naadam and mattress company Nectar Sleep are among brands with a spot in the first BrandBox, which opened in Tysons Corner Center in Virginia in November. It’s not just digital natives; DKNY is using BrandBox to test a new store concept.

“They were trying to figure out all the nuances of real estate, how to design a store, hire staff,” McKenzie says. “We made a decision instead of waiting for them to mature: Why don’t we formulate a solution that can help take the friction out?”

BrandBox was born as an 11,000-square-foot space with walls “like a big Tetris game” that move in 500-square-foot increments. The space was engineered upfront to remove hurdles. “We pre-embedded the real estate with technology from Wi-Fi to retail analytic sensors, and we can provision it based on how much space they’re going to use.”

The goal is to give those brands wings so they eventually turn into long-term tenants at Macerich properties. “Based on our analysis, most of them don’t have the capital to do that in a traditional way,” McKenzie says. “This allows them to test and learn so that they don’t make a costly mistake.” Macerich plans to open three other BrandBox locations in 2019.

A NEW MODEL

It seems the days of pure-play ecommerce may be waning — or at least some brands are brushing up against the limitations. “You really can’t fully actualize as a brand in consumers’ minds until they are able to have some sort of physical or emotional or cognitive connection with the brand,” Stephens says. “There’s a solidifying aspect to experiencing a brand in real life.”

The fact that some early adopters of the store-in-a-store model sell expensive items that must be touched is no mistake. Who wants to invest a couple thousand dollars in a Peloton bike without riding it, or spend a few hundred on Boll & Branch sheets without touching them? But it isn’t just those hurdles.

All brands want to “create some sort of intimacy with customers in the real world so they can get unfiltered access to a Dyson or Samsung or Sonos,” Stephens says. “Through disruption, you want to be in a position to tell your brand story in a meaningful way.”

Stephens points to Casper, which focuses on the importance of sleep rather than selling a mattress. “It has become the sleep expert in the market.”

The connection with customers could be used to change the experience for online shoppers. But it also proves that some of these digital natives are real brands — and perhaps that they’ve grown up.

“Sometimes people need a little push to get over that hurdle of trusting that this is going to be a good experience,” Baird says. “Showing up in a physical location is making a real commitment. You’re physically there in some way and that might be the little boost that consumers need to say, ‘They’re really real.’ In general, consumer level of trust is lower and having that product where I can see it, touch it, take it back if need be, builds trust.”

RETAILERS AS EXPERTS

Retail aggregators use their expertise in the physical locations to assist ecommerce brands with the nuances of physical retail.

“Retail as a service is a lot more than a physical location and some display cases where you can put your stuff,” Baird says. “It’s about how you use the physical space to tell the story. Neighborhood Goods’ whole objective is going to be more editorial and story-driven. Any brand that they engage with, they think that they have an opportunity to tell a story. Digital native brands know how to tell a story on Instagram. That’s how they got to be where they are today, but it’s two-dimensional. To bring that into real time, real-life interaction, there’s a lot more depth that you need to bring to that.”

Data is the fuel that feeds most ecommerce brands, and as they move into physical locations, they want the same insight, McKenzie says. It also has provided a bit of a shocker: “You could argue that anyone that matters in our shopping centers has Facebook on their phone. Brands have reached consumers there. You would think there is a big overlap between the consumers they touch through social media and those who walk through our malls. In one case, we found that 5 percent of people who have gone through the doors in BrandBox were touched through Facebook or Instagram,” McKenzie says.

“As these brands consider whether to open up in a mall, this proves that you’re going to touch people you would have never touched if you weren’t there.”

“You really can’t fully actualize as a brand in consumers’ minds until they are able to have some sort of physical or emotional or cognitive connection with the brand.” — Doug Stephens

McKenzie believes BrandBox is slightly different than other multi-brand retailers, largely because of the maturity of the brands and the stages they are in. “We’re really giving these brands their own independent space to test and learn. They have their own store sign, three or four walls and store frontage.”

And there are brands who just need to be in other mall situations like kiosks and popups. “BrandBox is not there to replace our common-area kiosks,” he says. “It’s to enable a brand to have an environment where they can test or learn.”

That means shorter leases of six to 12 months. “By the time you’re there for 12 months, you’re ready to do something permanent or move on,” McKenzie says.

He believes real estate is “becoming more of a service, and this is a really good opportunity to test and learn that ourselves. There are good examples of that. Look at what WeWork has done with commercial real estate. I think the new generation is expecting that sort of assistance more and more.”

LESSONS LEARNED

It seems that physical retail may have been written off too soon. “The lesson to take from what has happened is that every retailer really is in the business of selling an experience,” Stephens says. “We live in a world where access to products and information is ubiquitous. Every brand needs to recognize that the only remaining differentiator between one store and the other is the unique experience they have crafted. We have to start yielding some space away from the products and more toward the experience.”

That is something that retailers like BrandBox, Showfields and Neighborhood Goods have capitalized on. “They expose consumers to brands they’ve never heard of,” Stephens says. “They allow shoppers to take part in community and human interest events and give them a space that’s pleasant and enjoyable. There’s a food and beverage component. In a weird way, it’s going back 100 years in shopping. That’s what Selfridges did 100 years ago, create a circus environment that was fun to be in.”

If there is a lesson that must be captured by just about any bricks-and-mortar store, it is this: “There is a whole bunch of advice and product information that you can get on your phone,” Baird says. “You don’t go to your store to go on your phone. You go there to interact in a three-dimensional space and find somebody who can help you. Physical retail is coming back around to that.”

Nathanel often opens meetings by showcasing a brick from the 105-year-old building in which the first Showfields is located.

“I ask, ‘Who is going to die first, me or the brick?’ The brick is not going anywhere. Physical retail is not going anywhere. It’s just a question of what’s next.”

Sandy Smith grew up working in her family’s grocery store, where the only handheld was a pricemarker with labels.

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