Physical Stores Change Shape, Brands Think DTC and Luxury Tests New Formats
To start, I want to clarify that my focus in this article is on the kind of shopping that you do when wandering through the mall with the vague intention of purchasing pants. That is, discovery. I am also focused on non-essential goods. There are fascinating things happening with the purchasing of staples that ensures a customer never runs out of toilet paper, but that is out of scope here.
Discovery is the core of a good consumer shopping experience, regardless of the product. It is fun to look in a jewelry display case, to peruse store windows, to sample new foods. And it is also critical for the brand behind the product. Great shopping experiences drive up order value; they introduce customers to new collections, collaborations or products that can drive customer loyalty and repeat engagement. Events, curated collections, effective visual merchandising all drive impulse purchases and material revenue.
The nuance between shopping and buying is especially important in digital. In the US, ecommerce has always attempted to be an efficient buying format rather than a shopping destination. Amazon isn’t the dominant platform because I can’t wait to log into it every night. Bezos won by consistently having the lowest prices and the best selection. Even Gen Z has surprised us all by overwhelmingly reporting brick and mortar is still their preferred shopping experience. But of course they feel that way – in the US ecommerce is always playing catch up and mimicking what works in physical stores.
Something much better is coming. Consider that our email icon is a letter, our save icon is a floppy disk, and it’s become a common joke that if you’d asked, people would have voted for a faster horse rather than a car. It’s hard to appreciate the opportunity a new modality affords us, but the truth is digital shopping should actually be significantly better than browsing in-store. Consider that in digital, you can see all the available inventory anywhere, you can have AI-generated style suggestions, you can interact live with a store owner.
COVID temporarily closing physical stores obviously catalyzed ecommerce growth (see our previous post), but the second order effects have permanent negative impact on physical discovery. More than half of all mall-based department stores are expected to close by the end of 2021, and nearly 25% of America’s malls will close in the next 3-5 years. This creates an appetite for ecommerce to replace the casual browsing and social shopping that malls enabled. And perhaps by limiting the ability to sample and try-on things in stores for the near-term, COVID might have done something even more transformative. It has removed the biggest advantage physical stores had over digital and given ecommerce free reign to reinvent itself.
I’m hardly the first to point to China, but look at how different the path to purchase is there:
Notice that the path above is buying, but below is shopping.
While it is tempting to say that China is a model of what may happen in the West, there are many nuances to the infrastructure, technology and evolution of ecommerce there vs. here that challenges that thesis. So let’s instead ask, what are customers here clamoring for? And heads up, I’m going to focus a lot on the next generation, as millennials are now old hat.
I’d say they want: engagement, interaction, personalized treatment, seamless buying cross-channel, story-telling, socially-driven experiences and validation. Let’s dissect:
Gen Z is a generation born with social media, and they leverage multiple platforms regularly. 90% of them are on Instagram, 80% Snap, 50% on TikTok. This infuses their shopping behavior. This generation uniquely experiences brands across many formats, and expects that omnichannel accessibility:
“they want to shop across both types of channels all the time … that shopping journey touched on brick and mortar, it touched on e-commerce online on their laptop, and it touched on mobile. It’s a holistic experience.”
Social is a huge driver of shopping activity. 75% of this demographic engages with brands on Instagram. The fact that Gen Z’ers interact with brands across formats means more comfort with brand presence and engaging with brands across social and entertainment experiences. 51% of 16-24 year olds do research on social networks, and nearly a third discover brands through social ads and recommendations. 50% have made a purchase through Instagram.
Influencer marketing is material in the US, but it is still often seen as an innovative marketing channel rather than what it can be – a consistent path to create trust in the brand and validate purchases. Influencers are fundamentally relatable personalities a viewer trusts, that have the advantage over the typical celebrity of actually being accessible to interact with. And in Asia, influencers have really evolved their role as product validators. There, Key Opinon Leaders like Viya reportedly have a 200 person team to try products. Effectively engaging an influencer like that can bypass much of the review-reading and product comparison that delays or derails purchases.
Gen Z’s specifically are “always-on purchasers.” Another excerpt from McKinsey describes it well: “when they get triggered—whether it’s through social media or something else—they’ve also been primed to know that they can go make very small-ticket purchases at any point in time, and that’s become OK.”
One of the most obvious opportunities is the frictionless checkout that transforms social media marketing into social commerce. And indeed, this is a huge priority for Facebook/Instagram, Pinterest, Google, Amazon and Snap. Facebook estimates that friction in online checkout processes cost U.S. businesses alone more than $213 billion in sales in 2019. Today browsing and purchasing is disconnected, but shopping the post that inspired your new living room décor is key to creating the seamless (and impulse-driven) shopping experience of the future. Many interesting companies are surfacing to make content, social posts, and experiences everywhere shoppable.
This – effortless shopping across formats, both physical and digital – is the omnichannel dream.
Much of what is magical about the in-store experience is the personal attention and relevant support. In digital this can actually be done better, though to date I haven’t seen a brand really meet the challenge. Personalization tech today optimizes landing pages, can drive recommendations based on past purchases, suggest fit, etc. but really hasn’t scratched the surface of knowing the customer across channels to deliver both products and experiences that make sense. Part of the challenge is data, which is what makes a post-COVID world exciting - more ecommerce and cashless transactions create more rich data.
The other tools are AI-driven support, 1:1 portals to live human help and personalized styling. Together, they represent an opportunity to create a “white glove” experience in digital. Also, not leveraged often stateside but huge in China: on-site community forums to have questions rapidly addressed. In reality, the combination of all of these things should be much better than the guidance of an associate who may or may not actually have access to a record of your purchases, measurements and preferences, and certainly can’t share the wisdom of a crowd.
Gen Z’s care a lot about brand story: “The value cost matrix is for them disrupted by considerations of societal values and standing. 69% of the group are more likely to buy from a company that supports social causes.” That has certainly contributed to more story-led advertising, but has also supported the effort to make the in-store experience an interesting one, with zero inventory and concept stores reimagining physical footprint as a portal to brand loyalty rather than square footage to be optimized for sales.
This appetite for experience carries into the digital realm. None of this is captured in the filtered search results that represent the typical ecommerce experience today.
Creative digital retailers are winning by developing that unique, personalized, engaging and interactive experience online. Digital product drops, selective access events, influencers / celebrity hosts and live shows all try to recreate the fun of shopping and in-person engagement. Some take engaging experiences to a whole other level.
And the product images themselves are most commonly a few static shots of the good, or for apparel a mannequin or model sporting it. The latter is critical, and 82% say they trust a company more if it uses images of real customers in its advertising, which should explain why social posts can be so effective. A nice photoshoot is helpful but still falls short of the authenticity the shopper is looking for, and fails to leverage all that digital can offer to breathe life into the item. Not doing this well means brands are giving up the opportunity to own this narrative and leaving the customer to seek an interaction and review of the product elsewhere.
And that customer is likely to go to YouTube, as digital video specifically is a powerful story-telling player. The incredible success of unboxing videos, tutorials, and recommendation videos reflect that audiences are very comfortable infusing shopping into their entertainment and seek that out. One Google survey claims that over 90% of people say they discovered new brands or products on YouTube, and half say online video dictate what they buy. Especially coupled with trusted personalities, video creates authenticity, and it allows customers to see more of a brand’s identity. When Rebecca Minkoff states that content featuring herself “drives the revenue and the clicks and the sales,” I think it is because of the authenticity that content creates for the brand.
I’m going to say a crazy thing now. There will be a platform in the next few years that reimagines commerce and is a real challenger to Amazon.
Really think about Amazon’s category penetration today and you’ll see the same opportunity. Penetration is poor; Amazon is concentrated in electronics, apparel, home, beauty, auto parts… and I’d caveat that even in apparel Amazon has struggled to break into fashion or luxury. You don’t order takeout there, order a car on the platform, book beauty services or events; you don’t buy financial products, automobiles or real estate. But all of that is possible on Taobao.
Today, Amazon isn’t catering to the desires we highlighted above – it’s not entertainment, it’s not interactive, and it’s not social. On it you purchase things, you don’t get a chance to join a brand’s story or buy into a mission you believe in. Digitally native vertical brands especially are proving customers will go off-Amazon for something more unique.
Sure, it’s going to be hard to beat that fulfillment, but logistics is evolving rapidly and there are solutions that enable even small brands to cost-effectively deliver in two days and offer exceptional returns and service. Eventually all marketplace sellers and DTC brands will offer that experience. And of course buying (vs. shopping) will still be a big business.
And perhaps the winning platform doesn’t have to compete on fulfillment strategy at all. After all, Taobao doesn’t; it’s purely a marketplace. And in that respect Amazon will be especially weak; brands appreciate the bind they put themselves into by being a seller on that platform, giving up their customers and data to a behemoth who will turn that into a successful private label competitor.
So if a better marketplace came along, one that leverages social, interactive experience and generally engenders trust of brands and customers while serving up an experience you actually want to show up to – how can that not win? As we watch a 5G rollout and envision an increasingly mobile future, a purchase path that involves research on content sites, inspiration on social sites, validation through video, etc. becomes a whole let less compelling. An entertainment/commerce blend will be best positioned. (Though to be clear I do believe Amazon should only become stronger at high purchase intent traffic: capturing more purchases with voice, smarter recommendations and increasing use of subscribe and save models.)
And why do I believe that the online shopping winner won’t be a FANG or existing player? Already, Facebook is building shoppable experiences, Amazon has launched Amazon Live and Google is experimenting with Shoploops.
The social platforms are all missing the biggest piece of the puzzle – payment integration. Taobao was a commerce platform from day one, and payment was embedded. Facebook definitely made a run at this, but adoption has been light and it scrapped some of the P2P payments it was pushing in Messenger given poor adoption. It isn’t as easy as building the right product, either. The best positioned platforms to build a media/commerce hybrid skew too young, meaning there isn’t a base with meaningful disposable income. In Taobao’s Tmall, though 80% of its users are aged 35 or younger, the user base's highest concentration is among users between 26 and 30 years old. Meanwhile 90% of Snapchat users are 13-24 years old and that demographic makes up 69% of TikTok’s base.
Google and Amazon, on the other hand, aren’t social, and I’ll point to Google Plus if you tell me it will be easy for them to build that aspect. Amazon’s Twitch has a shot, but broad appeal and commerce enablement are far away for both Twitch and YouTube.
As the missing link between media and shopping, I believe livestreams are the perfect blend of both. It is fundamentally additive to the purchasing decision in a way that suits the demands of shoppers we described here:
Is livestreaming the future of commerce? No. As they do today, people will buy across many formats, both virtual and physical. But livestream commerce does represent 9% of ecommerce in China. Assuming a similar 9% here we’re still talking about a $70bn industry in the US. Already today, QVC brings in ~$10bn a year across its live events on linear TV, its app and social streams.
Brands are obviously under pressure. Pre-COVID, there was already a tremendous proliferation of new labels, leveraging the fact that a digitally native brand is much faster and cheaper to set up given the infrastructure available from Shopify and fulfilment players. Add to that the ease of starting as a marketplace seller and the massive growth of those players, and of course the rise of fast fashion and rapid production that has enabled most influencers to have their own brand to promote. The landscape was already incredibly competitive and noisy.
In our COVID series we highlighted that retailers feeling the pressure have pushed back on orders effectively closing off the wholesale channel. Leaning on distribution partners will be challenged for sometime, as evidenced by the bankruptcies of many retailers (JC Penney, Aldo, Pier 1, Sur La Table, Tailored Brands, Lord & Taylor, Neiman Marcus at last count). As a result brands are already warehousing excess inventory, and COVID has generally driven many brands to emulate their digitally native competition and become DTC players. Generally speaking, being a brand is a tough gig now, and they’re getting creative.
But selling tech solutions into this vertical has always been hard. Steve Dennis describes well why:
“Innovation isn’t seen as a serious discipline in the way other aspects of the retail business are. So you know they’ll put a lot of effort against supply chain, loss prevention, digital merchandising, etc… and generally speaking there really isn’t an innovation process. … when you look at companies that are more historically innovative, they have just more money and effort against creating the next big thing.”
But the pandemic and the brutal forces of competition may be just the push required to motivate those resources and focus. From Rebecca Minkoff:
“We’re trying to find other avenues where we can move the product that we had made…just be open to new things. It’s a whole new world and so there’s no shame in trying out different platforms, trying out other ways of selling… I’m probably gonna go on IG Live and start trying to figure out how I can… in a jerry-rigged way sell from you on Instagram Live. We’re just trying to be creative and trying to move product that belonged to other people and to other channels… If these other opportunities that we’re exploring right now turn into big businesses then it’ll be again another silver lining of something we might not have explored before, but we’re taking risks now… Every day would frankly prioritize the needs of the bigger piece of the pie [wholesale], and we have an amazing ecomm businesses, but no one was worrying about it… the ecomm team was worrying about it. And the organization wasn’t structured around ensuring that every and all vectors aligned towards that. So now that is the case… so I think for us, rallying around, this is RebeccaMinkoff.com, this is what we live and breathe each day, and let’s make it as strong as possible so that god forbid if something like this ever happens again we know exactly what to do, we know best practices… we know how to hit the battleground.”
In other words, not only do the forces at work here suggest it makes sense for brands to prioritize ecommerce experiences, the brands are actually doing just that.
I see the opportunities in both B2B tools to drive discovery off-site (i.e. in social) and on brand’s owned properties. In China, actually fairly little traffic goes directly to sites, and if we expect a similar aggregation of engagement brand platforms would be an odd place to invest. But as we highlighted, I don’t see a path for any existing player to really dominate and I think we’re years away from that killer app, so there is actually substantial opportunity for brands to step in and lure buyers to their own virtual experiences.
A note that some of the tech I highlight may feel niche or gimmicky. But many things that in the US feel experimental, in China have become commonplace. And as Rebecca notes, you’re going to see a lot of brands try more “experimental” things and keep coming back to what works.
As Connie Chan highlighted, shopping in real life is fun, and virtual shopping should be, too.
Soon, ecommerce will be a form of entertainment you’ll be eager to hop into for hours daily. Who will build that future? You tell us.
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 Green Street Advisors’ estimate.
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 Dennis, Steve. Where We Buy Podcast, Episode 145
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