At the top of the year, many digitally native brands were in expansion mode.
Rent the Runway launched a new tier to its subscription services, online plant brand Bloomscape forged a deal with West Elm, and Casper, a so-called darling in the direct-to-consumer space, made its public debut in February. In its IPO plans, the company reiterated its intent to open some 200 stores in North America.
While Casper’s expansion seems lofty, it follows a trend in the sector. What started with bigger players in the space like Warby Parker and Bonobos opening up shop, has now stretched across the sector. Online lingerie brand Adore Me announced in 2018 plans to open up some 300 stores over the next five years and hair color brand Madison Reed said last September it aims to open 600 stores by 2024. A late 2018 report from commercial real estate firm JLL said e-commerce retailers were set to open 850 stores over the next few years.
Fast forward to March of this year and suddenly stores were forced to temporarily shutter their doors, putting any immediate plans on ice.
As a result, brands are having to reevaluate not only what their relationship with brick and mortar looks like now, but in the months and years to come.
What’s the point of a store for DTC anyway?
While DTC brands planted their roots online — and in some cases swore they would never diverge from the channel — many are increasingly seeing the value in a physical presence.
Storefronts grant consumers those touch-and-feel experiences, like trying on apparel, but they also give brands the opportunity to form relationships with their customer base.
Direct-to-consumer brands recognized that opening stores “provided additional connectivity with a customer so that it wasn’t simply transactional,” Matthew Katz, a managing partner and Retail & Consumer practice lead at SSA & Company, said. “It was more of a relationship development opportunity.”
But more than that, for many of these brands that operate mainly — or exclusively — online, the cost to acquire and retain customers can become prohibitively high. Online in recent years has become so saturated with competition that it has become increasingly difficult for brands to stand out from the rest. Storefronts can help provide an extra marketing channel.
Chewy spent $106 million on advertising in the first quarter, or 7% of total revenue, from $102 million in the year-ago period; Casper spent $38 million, or 33% of total revenue, from $30 million a year ago; and Wayfair spent $276 million, or 12% of direct retail net revenue, from $244 million a year prior.
“The main risk is that without physical stores it will be more difficult for some to build presence and win over new consumers. Online is a very crowded space and a physical presence can help cut through the noise and give a DTC brand more significance,” GlobalData Retail Managing Director Neil Saunders said in an email, noting, though, that they won’t necessarily provide immediate relief to brands that have struggled to turn a profit for years.
“While stores are often more profitable than online, it would be very difficult for a DTC brand like Wayfair to push themselves into the black simply by opening new shops — mainly because they would have to open so many to offset the losses online and they’d also have to completely change their business model to [fulfill] more orders from stores,” he added. “In the short term such a move would likely erode profitability further because of all the capital and set-up costs.”
Pulling back on existing plans
Casper in May this year announced that it is “reducing the number of planned new retail store openings in 2020,” though the company did not provide specifics on how this affects its plans to open 200 stores across North America.
“There was always a degree of bravado in Casper’s plans. They had to sell a bold story in order to get investors on board. While 200 stores is not an unrealistic target, the mattress and bedding space is already very saturated with both traditional and emerging players and I think it would be hard for Casper to make a financial success of all 200 shops,” Saunders said, noting that the risk is heightened as a mattress is generally an infrequent purchase.
Reigning in plans is something much of the industry has been forced to do. Online furniture brand Burrow told Retail Dive earlier this year the pandemic has forced it to put its plans on hold, but not even larger, traditional retailers are immune. Macy’s has had to significantly pull back on its Polaris turnaround effort as the coronavirus continued its spread and disrupted business.
“At present we are in a period of massive disruption and it is not clear how shopping patterns will evolve or what malls will be successful as we come out of the pandemic,” Saunders said. “A ‘wait and see approach’ is the most sensible option, but I expect once the future is clearer, many brands will get back to opening physical shops.”
“The direct-to-consumer brands are picking pop-ups or small locations or key High Street locations for their brands so that they don’t have a portfolio of unprofitable locations.”
Managing Partner and Retail & Consumer Practice Lead at SSA & Company
Nonessential retailers, though, shuttered their stores back in March, either by choice or by government mandate. With cases on the rise in many parts of the country, and with the threat of another lockdown looming, direct-to-consumer brands may actually be at an advantage by not leaning so heavily on stores for sales and having a strong e-commerce presence. That also gives those brands more flexibility in choosing exactly where and when to open stores, and how many to open.
Traditional players have much larger fleets, and within those fleets, there’s a wide range, Katz said: at one end of the spectrum there are profitable stores, at the other end unprofitable ones, and then in between there are several locations that just break even. For DTC brands that formed their roots online, they’re able to enter select markets more cautiously and with relatively lower risk financially because of the size of the locations. “The direct-to-consumer brands are picking pop-ups or small locations or key High Street locations for their brands so that they don’t have a portfolio of unprofitable locations,” he added.
And while brands may be hesitant to open stores in the middle of a pandemic, Katz said they should still try to ink those deals now and negotiate rent terms to coincide with when locations are actually able to safely open.
What can brands do now?
While opening a permanent shop may not be a priority for online brands given the uncertainty the pandemic has provided, there may be alternative ways to enter into brick and mortar in the meantime. Companies can look to temporary pop-up models or to partnerships with retailers like Showfields or Neighborhood Goods, which aim to bridge the gap between online and offline retail and what the latter describes as a “modern alternative to — and evolution of — the department store.”
“In the short term we will likely see less risky options being used, including temporary pop-ups — these could be particularly popular as we come into the holiday period,” Saunders said. “With a lot more retail vacancies, retail landlords will be keen to make deals with DTC brands so there will be some good opportunities to get temporary retail space at a great price.”
It’s what Andrew Csicsila, managing director with AlixPartners, called “a balancing act.”
Additionally, mass merchants, Katz said, may be looking to form partnerships with digitally native brands in order to gain the digital prowess they possess, an element that has become increasingly crucial over the last several months as some nonessential stores were temporarily shuttered and consumers’ willingness to shop in physical stores dramatically decreased.
“They want to leverage their partnerships and give up a little bit of short-term profits for a little bit long-term protection.”
Managing Director at AlixPartners
According to a Coresight Research consumer survey taken July 22, which was emailed to Retail Dive, 86.6% of consumers said they’d avoid any kind of public place, up from 84.8% the week prior, which the firm attributes to consumers’ increased wariness as well as reclosings in areas where there are case spikes. Two-thirds of consumers said they’d avoid shopping in malls, while half said they would avoid shopping altogether, the report found. Additionally, 20.1% expected to buy apparel online in the next two weeks compared to 12.6% who planned to do so in a store.
All this said, the report found that 54.7% of consumers said they expect to retain their changed behaviors, down from 57.5% the week prior, indicating consumers still see value in physical retail.
And even more than gaining digital knowledge, forming relationships with younger brands can help drive new customers into the doors of traditional retailers — particularly department stores, according to Marie Driscoll, managing director of Luxury and Fashion with Coresight Research. “Once you’ve gotten them there, you have the opportunity to surprise and delight them, [but] if you don’t get them there, you don’t have the opportunity.”
Flexibility — whether through leases or retail partnerships — will be key as the industry continues to grapple with the unpredictable selling environment right now.
“I don’t see a lot of companies making major long plays in retail investments,” Csicsila said. “I would imagine that they want to be as flexible as possible. They want to leverage their partnerships and give up a little bit of short-term profits for a little bit long-term protection.”