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Do Digital Brands Need Physical Stores?

While mall staples are shuttering stores, a slew of digital brands are rushing the other way, seeing new value in physical retail.
A Rent The Runway showroom | Source: Courtesy
By
  • Chantal Fernandez

NEW YORK, United States — As many of America's traditional retailers struggle to attract customers and shrink their store networks, a new generation of more nimble digital players is seeing increased opportunity in physical retail. Indeed, the final months of 2016 saw a flurry of offline activity from retailers that were born digital.

In September, Moda Operandi opened its second appointment-only showroom in New York. Two months later, Rent the Runway, a Netflix-like rental service for fashion, announced a major partnership with Neiman Marcus and opened its sixth permanent location in the department store’s San Francisco location. That same month, Modcloth opened its first permanent shop in Austin and Everlane launched a six-week pop-up store in New York. In December, Warby Parker opened its 46th location in Palo Alto, California. Next month, Bonobos plans to open its 31st “Guideshop" in Detroit.

Of course, when it comes to fashion and accessories, consumers have long preferred to "try before you buy," making a physical store presence advantageous. "If you're in the business of e-commerce, whether you are renting clothes or you're selling clothes, clothes don't always fit," notes Jennifer Hyman, chief executive of Rent The Runway. "And there are still customers who are less tech adopters than others."

What’s more, while e-commerce continues to grow rapidly, the channel still only represents a fraction of total fashion and apparel sales and is expected to plateau at about 20 to 25 percent of the market, meaning that, for the forseeable future, the vast majority of sales will still happen in physical stores.

Bonobos chief financial officer Antonio Nieves says the company’s physical “Guideshops” also drive higher conversion rates and increase average purchase values, compared to online. The men’s apparel label, one of the first digital brands to experiment with physical stores, plans to reach 100 store locations by 2020.

But critically, the company’s physical stores are tied to online inventory, whereby shoppers try on samples and purchases are dispatched from offsite warehouses, just like with e-commerce orders. “Our model, where we have all the inventory sitting in one location, allows us to actually save and eliminate one of the most difficult parts of inventory management for retailers,” says Nieves. “It’s a huge cost benefit for us.” Indeed, by eliminating the need to house inventory on-site, Bonobos’s store model offers significantly higher productivity per square foot than traditional retail.

Modcloth, a womenswear brand known for its vintage aesthetic and inclusive range of sizes, operates a similar model, though some pieces are stocked in store. “The customer had already gotten used to ‘click and ship’ as far as having to buy something sight unseen from us,” says Modcloth’s chief executive Matt Kaness.

Physical stores add something unique and different to our growth that's beneficial to our business.

For digital brands, physical stores can also be powerful marketing and customer service channels. Nieves calls Bonobos shops “permanent billboards” that drive brand awareness more effectively than online channels. Modcloth, too, thinks of its stores as part of its media mix. “It’s much more competitive online with respect to customer acquisition,” says Kaness. “A store is a great first impression for new customers versus putting another dollar into banner ads or some other top of the funnel digital advertising.”

“Retail stores can potentially be viewed as a piece of our customers experience and marketing budget, as opposed to looking at it just in terms of what our sales are per square foot,” adds Rent the Runway’s Hyman.

To determine where to open their physical stores, these companies can readily tap e-commerce data. “We leverage our existing web sales to triangulate best opportunities to open stores,” says Nieves, adding that Bonobos is opening next in Detroit, Pittsburgh and Lexington, Kentucky. “We know exactly where our customers are.”

Some are even turning to online data to curate the contents of their stores for individual shoppers. Luxury e-tailer Moda Operandi has launched highly choreographed, appointment-only showrooms where everything on display is based on personal data, from online browsing behavior to upcoming travel plans. "We have reams of information on these women because of the online experience and can deliver surprise and delight that feels so organic, but it's actually powered by data," says Lauren Santo Domingo, co-founder of Moda Operandi. The retailer's first showrooms opened in London in 2014 and the company plans to add 12 more locations in the US, Middle East and Asia.

But are physical stores essential to scaling digital brands? And how many stores is enough?

“The reality is that Rent the Runway would have incredibly high growth whether or not we had physical stores. It’s just physical stores add something unique and different to our growth that’s beneficial to our business,” says Hyman. She adds that Rent the Runway only needs one store in every major metropolitan area in the US, a total of about 15. “There is no way that the sheer quantity of physical stores that exist today — multi-branded retail and single brand retail — is going to exist five years from now, let alone 15 years from now. It’s not needed.”

“You have to have a vision about where the ceiling is before you get started because it might change where you put stores within certain markets,” says Kaness, adding that a smaller store footprint allows retailers to think more flexibly about how many locations they can support. “I truly believe that Modcloth could have at least 100 locations across the country that are not only additive to our local communities’ lifestyles, but also additive to our online business.”

Meanwhile both Nieves and Kaness agree that while physical stores can be an important growth driver, even more important is proprietary product. “It’s the number one growth strategy for Modcloth since I joined,” says Kaness. “Scaling that, regardless of the channel of distribution, is foundational to everything that we do going forward.” He says that more than half of the company’s spring sales will come from exclusive or in-house lines. “To be a strong digital brand, you have to have your own branded products,” adds Nieves. “Amazon has won the third-party branded war.”

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