“Over the last quarter at Westfield London and Westfield Stratford City we have seen major global and international brands such as Tommy Hilfiger, Apple and Hamleys increase their footprints by more than 30,000 sqft. combined. We’re also seeing ongoing interest from new concepts and digitally native brands signing up for physical space which demonstrates that retailers recognise the importance of being able to connect which customers in a physical environment, complementing an often omnichannel consumer journey.” - Kate Orwin, Leasing Director at Unibail-Rodamco-Westfield UK.
Physical retail investments are crucial for brands that want to establish a strong presence in their respective markets. Despite the growth of e-commerce sales over the last decade, physical retail remains a powerful channel for businesses to connect with customers and provide them with a tangible shopping experience that reflects the brands' values. Last year, retail real-estate vacancy rates dropped from 4.3% in Q3 to 6.3% in Q2, which was the lowest rate in 15 years. This was likely due to the high demand for retail space and very limited new development. Many new brands opened their first stores, while established brands continued to expand. However, in 2023, people are wondering how inflation and the recession may affect demand and the retail industry as a whole. Some believe that the impact will be negative, but there is strong evidence to suggest that stores and physical retail may be the key to success this year. Stores are a preferred and more affordable marketing channel that can attract loyal customers of high quality.
Digital brands are experiencing a significant increase in the cost of acquiring customers online. A recent study conducted by SimplicityDX found that online retailers are losing $29 for every customer they acquire, which is a 60% increase from five years ago.
This rise in costs is likely due to the online advertising space becoming overcrowded, with more and more brands competing for the attention of potential customers. Privacy regulations have also become more stringent, which limits the retailer's ability to target customers with precision, further increasing the cost of customer acquisition.
Both small digital retail brands & big players like Glossier recognize the importance of physical stores for business growth, especially in an uncertain economy. However, the main challenge lies in obtaining the financing necessary to open and operate a physical store. Despite this obstacle, standalone stores are not the only option available for brands looking to expand their physical retail presence.
Consider the case of Bandit, which selected Greenpoint as its location even though it's not a popular shopping district but because its main target audience, runners, are frequent visitors to the area. Bandit Running’s first store is a half-runner’s rest stop & half-fulfilment centre. Most of its other locations are collaborations & partnerships with wholesalers and pop-up shops in different cities hosted throughout the year.
Another case of strategic expansion is exemplified by Lunya, a women’s sleepwear retailer which recently launched The Rest Shop, a curated collection of third-party sleep wellness products around their customers' bedtime routine in a physical store. With seven brick-and-mortar locations across the United States, the brand intends to market the Rest Shop to its existing customer base and feature stories about the partner brands.
In an era where brick-and-mortar stores are thought to be dying, retailers are finding new strategies to reduce costs and enhance customer experience. Rather than relying solely on traditional storefronts, retailers are exploring alternative options such as sourcing cost-effective destination or second-tier real estate, setting up shop-in-shops, or exploring wholesale opportunities. By doing so, retailers can enjoy the benefits of physical retail, including creating immersive shopping experiences and increasing customer engagement, while simultaneously minimizing overhead costs. This approach is particularly effective for digitally native brands, as it offers numerous opportunities to connect with customers and foster brand loyalty. Despite potential economic fluctuations in the future, retailers can leverage these innovative strategies to adapt and thrive in an ever-changing retail landscape.