Physical Stores Change Shape, Brands Think DTC and Luxury Tests New Formats
In recent history ecommerce has been growing rapidly, but in 2019 brick and mortar sales still represented 86% of revenues for retailers globally. COVID-19 has thrown that transition into overdrive. The original target for 2020 was that 16% of retail moved online; post crisis that guess is closer to 25%. Nearly all retailers, including the largest general merchandise players, aren’t ready for this level of digital purchasing, and now have a whole lot less time to get ready. In apparel especially, the virtual experience still has a long way to go to mimic the physical one. Meanwhile, efforts at safety and cleanliness are likely to chip away at the value of the physical experience and drive online consumption further. The likely removal of dressing rooms for sanitary reasons, for example, removes the largest value of being able to shop in-store, the ability to try things on.
Blurring the Virtual and Physical
Many retailers have already learned that the path to success in an ecomm world is not to try to translate a physical retail strategy into a virtual one. Rather, the key is to leverage a true omnichannel strategy that drives revenue by offering accurate inventory, great service and rapid fulfilment to customers regardless of how they purchased. Physical space is still essential, and not just for retailers navigating a transition now. Pre-crisis many digital-first retailers, like Warby Parker and Glossier, were actively opening storefronts because the in-store experience can drive brand loyalty and purchasing across channels. And obviously, post-coronavirus, people will shop in stores again. Successful brands will drive the experiences in-store that drive loyalty online. And of course it’s not enough to just put inventory online - intelligent prioritization, personalization and selection in store vs. online will be key. We’ll need smart digital assets and renderings to replace in-person interaction with goods. And we’ll need to really beef up reverse logistics if more purchasing happens online, ensuring a return experience that makes people comfortable with purchasing from any channel.
Optimizing Physical Space
To optimize the shopping experience, all retailers will need to use analytics solutions to have the right inventory and optimize the location of that stock. They'll need to power smart decisioning on markdowns or offers based on local and digital stock. They will need to lean on inventory management systems that power their cost-effective and rapid fulfillment, and many will move to leverage their stores for decentralized fulfillment. There is an upside to more contactless and digital payment - more data will be available to drive that decision making.
Ultimately, I expect this period to further cement the idea of storefront as showroom / loyalty driver, rather than a space to optimize sales per square foot (which will be hard with social distance requirements). With reduced inventory and an altogether different purpose, retail footprints should shrink.
The physical stores that remain will be very different. Layering in a lasting desire for contactless interaction, why do we need a front checkout, or even an associate with a tablet to checkout? When will the Amazon Go experience expand to retailers broadly? Can personal shopping make sense for lower priced items and extend beyond luxury to be a commonplace behavior, so I can curbside pickup my curated order from Old Navy, too?
Major brands with existing retail relationships will likely be rethinking their approach, as Macy’s, Neiman Marcus and soon others contemplate bankruptcy. The entire mall dynamic will be shaken up, with more than half of all mall-based department stores expected to close by the end of 2021.
In theory, digitally native DTC brands should be better positioned for the post-COVID-19 environment. They know their customers and can incentivize purchases with targeted outreach. They can completely control the customer experience and have visibility into their own inventory, ensuring customers aren’t met with frustrating stockouts or are unable to reach support. These brands are not limited by their established relationships with major retailers, meaning the end customer doesn’t face the retailers’ limitations with logistics (slow returns, few shipping options). DTC brands can ensure quality of experience, and even drive revenue from returns by pushing recommended exchanges.
Right now, unemployment and stay-at-home orders have severely dampened discretionary spending across the board, and the fact that most DTC brands are losing money to scale hasn’t put them in a strong position to survive. But the strategy will likely resonate as those recessionary pressures lessen. Many brands will be newly approaching DTC efforts as their legacy retail relationships struggle, and they'll do so with no existing direct distribution. They will be looking for end to end solutions as they rethink their supply chain, distribution, marketing, pricing and promotion in that new context.
Luxury Evaluates New Formats
Luxury brands especially will have an interesting future. There will obviously be a temporary depression for luxury as the economic dip puts pressure on buyers, but the nature of this crisis might drive a number of more permanent challenges as well. China has been a major driver of global luxury revenues, responsible in 2018 for one third of the spending on personal luxury goods. Between the impact to the Chinese economy, travel restrictions blocking travel out of China and a longer-term push to onshoring manufacturing that could pull spending power from China, it is unlikely the Chinese buyer can be counted on for the few years post-COVID to prop up that market.
The recessionary pressure (and maybe a preference away from conspicuous consumption that lasts beyond it) should also drive demand for resold, rather than new goods. A likely win for sites like the RealReal and consignment, but just another downward pressure on the major luxury labels. And if they have historically sold purely through luxury retailers, the slate of recent and mid-COVID bankruptcies is hitting labels hard. Combined, these pressures should drive many labels to fold, especially those without a strong digital presence, or an existing DTC relationship with a large and loyal buyer base.
Luxury has lagged in the ecommerce category, with many refusing to offer a tiled browsing experience that contradicted their exclusive and curated in-store essence. Now is likely the time they think about new ecommerce formats – livestreaming, StockX, pop-up experiences, etc. – and digital-first styling. Given how important customer experience and image is in luxury, brands that continue to push most of their inventory through legacy or online retailers will need to work to maintain a competitive digital brand as more consumption moves online. Especially as Gucci and others turn their backs on the traditional fashion show schedule, expect digital experiences to be the blend of accessible entertainment and marketing that drives consumption in this category.
Of course, many of today’s retailers won’t survive at all. 20% to 25% of U.S. retailers will go out of business over the next two years, given the median independent retailer only sits on a cash buffer of 19 days. Perhaps it will be a whole new wave of online aggregators that determine which brands win hearts and minds in the 2020’s.
How do you expect brands and retail to adapt to an omnichannel future? Send us your thoughts, and check back next week, when we talk about how the accelerated rush to ecommerce makes the largest platforms larger and challenges CPG brands to get creative with their marketing and distribution.
To see previous posts, the intro to this series or our other research, please go to https://jumpcap.com/blog.
 Murphy, Coral. “100,000 Retail Stores Could Close by 2025, Accelerated by COVID-19.” USA Today, April 2020.
 Green Street Advisors’ estimate.
 Indvik, Lauren. “Study: Chinese Shoppers to Make Up 46% of Luxury Goods Purchases in 2025.” Vogue Business, November 2018.
 Goldberg, Jason. “The Impact of COVID-19 on U.S. Brands and Retailers.” Forbes, March 2020.
 Peterson, Hayley. “Coronavirus Could Trigger Retail Bankruptcies and Mass Store Closings.” Business Insider, April 2020.