By Catherine Timko, Senior Advisor
Ecommerce is not separate from retail…It’s all retail
“Shop ‘til You Drop” having heard this phrase repeatedly leading up to the holidays, I decided to do a little digging to understand where it originated. The phrase, found in print as early as the 1920s, started as an advertising slogan. The intent was that you should go to one store instead of running around to different places and becoming exhausted.
The advent of e-commerce has changed the relevance of this phrase. Our smart phones now enable us to go site to websites and graze (and ultimately spend). In fact, U.S. shoppers spent a record $222.1 billion online between November and December, up 4.9% from a year earlier, according to data from Adobe Analytics.
While e-commerce presents a new way for people to window shop and buy goods there is no replacing a physical presence where you can see and touch products. Research has demonstrated that to achieve real growth, a physical presence is a must. In fact, nearly 90% of all retail sales are attributed to physical stores.
Many retailers have determined that just having an online presence is not enough. Warby Parker is one of the first digital natives to make the shift to expanding into brick-and-mortar. Many others have followed suit (Casper, Bonobos and Allbirds). Balancing online and brick-and-mortar venues can complicate supply chain management and real estate, as many tenants learn. And the transition from digital native to brick-and-mortar is not always consistent, whether it’s showrooming or webrooming.
The reverse is also true.
A grocer involved in a deal I have been advising on has had to rethink their floor plan to accommodate e-commerce when their due diligence revealed that 20% of their customers shop online. They redesigned the center store, the main entry, and loading areas to allow for enhanced delivery and refrigerated storage. The growth of BOPIS (Buy online pickup in store) has forced retailers of all sizes to adjust their merchandising including how to use technology to enhance customer experience.
Showrooming or “Look, but Don’t Take”
A good example is showrooming, where consumers visit stores to touch and feel a product, is an emerging trend, especially for home goods and apparel retailers. Two top reasons customers are increasingly drawn to showrooming are lower prices (69%) and free shipping (47%). Ikea, whose flagship stores range between 215,000 sq ft to over 500,000 Sf, is not feasible in most urban environments. As part of their growth strategy, Ikea launched two smaller format concepts: The City Store (19,000 SF – to just under 200,000 SF) and the Plan & Order concept (1,100 to 8,600 SF). Ikea opened a 5,000 Plan & Order store in Arlington, Virginia, in August, which exemplifies a true omnichannel approach.
Retailers are also embracing smaller format stores in response to a growing distaste for massive department stores and big box spaces. We are seeing more established tenants following this path. For example, Macy’s opened a dozen small-format stores since 2020. The Gap is also shrinking its footprint, returning to a store size commonly used when they first launched (under 5,000 SF).
According to CoStar, the average size of a retail lease in the first 3 quarters of 2023, was 3,200 SF, the smallest average since 2006, when they first tracked this data. This is largely attributed to an increase in restaurants and coffee shops, which are grabbing up small storefronts in our neighborhoods, in part a response to the new hybrid work model and Americans penchant for spending more time eating out. In fact, food and beverage companies signed nearly one-fifth of all retail leases in 2023. And demand for retail space is robust. Nationwide, the rate of available retail space was only 4.8% in the third quarter, the lowest level in 18 years.
Retail’s adoption of technology has also influenced some of these shifts. By using data from online orders, social media, and foot-traffic analytics, retailers can customize, even shrink inventories, to fit the local market. As a result, they can shrink their footprints to fit that inventory. Technology is increasingly being used as a shopping research tool. Ever walk into a store and get a text about a product on sale there? Yes, your smartphone is nudging you to buy in-store. Gen Z is known for their prolific use of scrolling TikTok to learn about brands.
Changes and improvements to technology will continue to evolve and enable retailers and consumers to shop in innovative ways. While many national retailers have vamped up their use of tech and AI, many of these tools are also easy to adapt for smaller ones, even independent retailers.
What does this mean for downtowns, neighborhoods, and local markets?
If you have large vacancies, do some research to determine if any of the smaller format national stores are a good fit. If not, could one or more of your spaces be used for a showroom and not just the Ikea level. Washington, DC for example, has a cluster of furniture showrooms, (office and residential). Some have settled in former office space near architectural firms, others in former storefronts. Cutting large spaces in half is another means of reduction in the costs of storefronts and often creates more leasing options. Depending on how the space is laid out, this could provide a way to activate alleys and rear spaces.
Temporary tenants can also be a good fit for vacant spaces. National brands increasingly use temporary stores to test a market. Luxury brand Chanel uses pop-ups, including in Paris, during Fashion week. While most cities will never land a Chanel store, many other brands including local ones might be an ideal fit.
During a recent trip to Paris, I came across a few pop-ups with glee. While many of the products were unique, it was the advertising and signage by which I was most struck. Simple white paint on a window and/or sidewalk chalk was a medium repeatedly used by these boutiques to lure me in. It is also cost effective.
Pop-up strategies can be structured in a variety of ways. Seattle has a three-tier program entitled Seattle ReStored that integrates a series of options: actual temporary stores; art in vacant storefronts; and a similar option for makers and designers to place products in a window. With the second two options, through the magic of a QR code a passerby can harness the entire inventory and make a purchase. My eight-year-old nephew knows how to build a QR code so, it should be easy for local makers and tenants as a tool to market their goods. It is also a cost-effective approach that limits liability to property owners all the while activating commercial streets.
Stay tuned for more trends to watch – from wholesaling and direct to consumer and how retailers are integrating AI at the location and national levels.
 National Retail Federation, Retail Dive
Catherine Timko is the founding principal of The Riddle Company as well as a senior advisor at ESI. The Riddle Company works with communities and companies across North America and positions them to effectively compete. Projects range from strategic business and marketing planning to positioning and business development strategies.