The Rebirth of Retail: Take a Peek at the Trends Sweeping the Retail World

Piles of snow in an abandoned, roofless atrium, surrounded by darkened stores. Weeds sprouting from the floor amid stalled escalators and broken glass. Forgotten mannequins and upended shopping carts. These images of abandoned shopping malls across the US make it appear as though the apocalypse has come, and in a way, it has.

It’s the retail apocalypse.

The bleak phrase “retail apocalypse” refers to the tremendous upheaval the retail sector has witnessed in recent years, with legacy chain stores like Macy’s, Brookstone, and Toys ‘R’ Us either declaring bankruptcy or closing multiple stores. According to real estate firm Cushman & Wakefield, mall visits dropped by 50 percent between 2010 and 2013.

Part of the explanation, of course, is e-commerce; consumers are shopping online instead of in stores. But that’s far from the whole story. Otherwise, why would online-only retailers like Warby Parker be opening brick-and-mortar stores? Or why do numbers show that when a retailer opens stores in a certain zip code, its online sales from that zip code climb exponentially? The truth about the seismic shifts rocking retail has to do with a complex interplay of trends—among them, evolving tastes, changing demographics, and the fact that retail is no longer simply about buying things. It’s about so much more.

Living the Experience

When Toys ‘R’ Us filed for bankruptcy in September 2017 in one of the largest bankruptcies in US history, the brand became the poster child for the retail apocalypse. Plus, with Amazon toy sales continuing to climb (they grew by 12 percent between 2016 and 2017 according to data firm One Click Retail), analysts were all but sounding the death knell for brick-and-mortar shopping—especially toy stores.

The Toys ‘R’ Us closing wasn’t entirely about e-commerce. Many factors were involved; for one thing, the company was overloaded with debt. But analysts also say a main factor in the company’s decline was its failure to make going to its stores an experience. So-called experiential retail is becoming increasingly key to retailers’ success, especially as online shopping siphons sales away from brick-and-mortar stores. Consumers these days need to feel like they are going to a store for more than a simple transaction. That might mean a retailer should add a selfie wall and food trucks, as Macy’s did in its Herald Square location, or offer a meditation room as yoga-apparel chain Lululemon does in several of its locations.

The importance of being more than just a store is something Build-A-Bear Workshop has always known, says Sharon Price John ’94, president and CEO. “The genius of Build-A-Bear when it was founded in 1997 was recognizing that brand loyalty and brand love and trust are created through these one-on-one interactions,” she says, “and that when you make your teddy bear, it’s many multiples of emotion versus just buying something off a shelf.” While stores, as we know them, may be closing, she says, “humans will still have a need to congregate toward experiences. What retail now has to do is rise to meet that new consumer demand and desire.”

John says that the next challenge will be to make online shopping experiential as well. “We’ve always had a website, but it was more commodities-based,” she says. “Now we’re building more experiential components into our online and mobile platforms.” She foresees an eventual introduction of augmented or virtual reality into the Build-A-Bear online experience. “We need to find a way to take our online experience to the next level,” she says, “to reflect the special experience in our stores.”

© Alessandro Gottardo

Brick to Click and Click to Brick

If you live in a major city, chances are you’ve passed storefronts for eyewear company Warby Parker, menswear retailer Bonobos, and even Amazon. A few years ago, as traditional retailers began closing physical locations, online-only brands like Athleta, Blue Nile, Warby Parker, and Amazon began opening brick-and-mortar stores, says Jonathan Zhang ’07, PhD ’11, a marketing professor at the University of Washington’s Foster School of Business. “When e-commerce first started in the late ’90s and early 2000s, you had ‘brick to click,’ where brands and retailers all went from brick-and-mortar to online,” explains Zhang, who studies e-commerce and omnichannel consumer behavior. “Now we’re witnessing online retailers going ‘click to brick’ and opening brick-and-mortar stores.” He calls this a crucial next step for digital-first retailers.

“Stores are important for education, engagement, and brand immersion, especially for new customers and long-term customers who need to be refamiliarized with the brand,” Zhang explains. This is especially true when it comes to what he calls fit products—complex items you want to try on or interact with before handing over your credit card—such as eyeglasses, complex electronic gadgets, or fine jewelry.

In a recent working paper he co-authored, Zhang finds that online retailers who sell fit products can more quickly turn their shoppers into high-spending customers by giving them an opportunity to engage with the brand in person. Customers now expect retailers to offer them an omnichannel experience—that is, they can shop a brand online, in a store, on social media, and on the phone; stores aren’t going away anytime soon, Zhang predicts, because they are a crucial part of this. “Product and channel choices are intertwined,” Zhang says, “and [they] feed off each other.”

The need for customers to interact with a product—to hold it or try it on—is the reason that Connor Wilson ’17 and classmate Nolan Walsh recently opened a retail space for their footwear brand Thursday Boot Company. Launched as an online-only direct-to-consumer seller of boots combining fashion and durability, the company is opening its first store in Soho this fall. “People would pop into our office asking to buy shoes when all we had were our laptops and a random sample rack,” explains Wilson. “With a dedicated retail location, we now can engage with customers and demonstrate in person what makes Thursday special.”

And when they interact they tend to spend more, says Conor Flynn (’07GSAPP), CEO of Kimco Realty Corporation, which owns outdoor shopping centers, and a member of the School’s Real Estate Forum. “Certain retailers tell us that when they open a physical store in a zip code, their e-commerce sales jump by 80 percent in that zip code,” he says. “When they close a physical store in a zip code, their e-commerce sales drop by 80 percent there.”

Reaching Customers

The omnichannel shopping experience is important for consumers who grew up with the internet and expect limitless choice, says Mark Cohen ’71 (’69SEAS), director of Retail Studies. “It’s difficult to pigeonhole who is going to do what, where, or for what reason. Consumers expect there to be a fluid marketplace.”

Luxury retailers, in particular, find that this multichannel experience is becoming increasingly crucial as millennials and even younger buyers make up a greater share of luxury consumers; according to Deloitte’s Global Powers of Luxury Goods 2018 study, millennials and Generation Z consumers are expected to make up 40 percent of the luxury goods market by 2025.

To online luxury retail powerhouse Yoox Net-a-Porter Group, providing an omnichannel shopping experience means using technology to make the interplay between all channels—in-store, online, and mobile—completely seamless. That’s why the company recently launched its Next Era project in partnership with the iconic fashion label Valentino, explains Federico Marchetti ’99, the company’s founder and CEO.

Next Era integrates the online and in-store experiences and allows customers to make purchases in the way they prefer. A customer may, for instance, buy a dress online and have it delivered at home to wear that evening or order a pair of shoes only available in another country. To enable this, Next Era gives customers access to the inventory from Valentino boutiques and logistics centers, as well as from Yoox Net-a-Porter Group’s fulfillment centers across the globe. Customers can also take advantage of in-store mobile features such as online checkout and faster delivery. For the brands, Next Era provides a single view of its customers’ interactions in-store and online, enabling them to continually optimize the experience. “It’s completely and seamlessly merging the two worlds in order to give the customers the best experience,” Marchetti says.

In breaking down the walls between the online and in-store transaction, Marchetti says, his company is also focused on personalizing the homepage experience—something he has begun rolling out for Yoox Net-a-Porter Group’s most loyal users. Using artificial intelligence based on several variables including past purchases and stylist recommendations, the group will personalize each user’s homepage. “I’m disrupting the concept of a one-size-fits-all homepage,” he explains. “Each customer will have their own homepage, crafted just for them, with their own sizes and content they love. It’s like each one will have their own private shop because we have 19 years of data.”

Wellness and Health

In making sense of a changing retail landscape, many experts are pointing to a shift in attitudes about “stuff”—namely, people want less of it. Instead, they want to spend their money on experiences, such as concerts, nice meals, and travel. This is especially true of millennials, with as many as three out of every four saying they prefer to spend money on experiences rather than on things, according to a 2017 study conducted by Ipsos and CrowdDNA for Eventbrite. With that comes spending on health and wellness, explains Lisle Davies ’93, CEO of Davies+Co., a consulting firm that supports retailers, consumer brands, and private equity investors. “People will spend more for organic, whether it’s a product that they put on their skin or in their bodies. Anything green.” Instead of going to the mall, she says, “they’re going to Juice Press and SoulCycle; they’re buying a Peloton.”

According to a recent report by market data firm Trendalytics, the global wellness market is worth almost $4 trillion. The report finds that with more people reporting depression and anxiety due to hectic lives, information overload, and the global political climate, they are willing to spend money on things that might make them feel good on the inside and look good on the outside. This is especially true in the era of social media, says Flynn of Kimco. “I call it the selfie craze that we all live in,” he says. “People are taking better care of themselves—how they look, how they feel. Fitness has become a monster category … and beauty has done exceptionally well.”

The Fall of the Mall

As retail evolves, the institution that is perhaps the most emblematic of shopping is transforming as well: the mall. Beginning in 1956, when the country’s first mall opened in Edina, Minnesota, the mall has been a place for far more than shopping—it’s been a place for hanging out with friends, eating meals, even power walking. In its heyday in the 1980s, the mall inspired songs, TV shows, and movies. Cohen explains that the rise of the shopping mall coincided with the post–World War II migration to the suburbs as service members returned home.

“Malls tracked the path of the interstate highway system and the build-out of suburban communities, and created a place for these newly emergent families to shop,” explains Cohen. Successful malls begat other malls. “Each one was bigger, better, shinier, better located,” he says. Before we knew it, we were, says John of Build-A-Bear Workshop, “over-malled.” A PwC report finds that as of 2015, there were almost 24 square feet of retail space per capita in the US, compared with just 5 square feet of retail per capita in the UK. Add online shopping to the mix, and you have oversaturation, explains Cohen. “It used to be that if you wanted to shop you had to go physically and browse, and your universe of choices was limited by geography,” he says. “With the advent of online retail, the marketplace that was the local mall is now literally the world.” On top of that, he says, malls used to be gathering places for young people, but now, “people are congregating via social media rather than hanging out at the mall.” Bleaker predictions show the number of malls in the US declining sharply; a recent Credit Suisse report predicts that by 2022, between 20 and 25 percent of malls will close their doors.

© Alessandro Gottardo

The Rebirth of the Mall

In order for malls to remain successful, mall owners will have to think outside the proverbial big box, warns David Simon ’85, CEO of Simon Property Group, which owns more than 200 properties around the world. Simon, a member of the School’s Board of Overseers, the Real Estate Forum, and the Real Estate Program Advisory Board, says that tomorrow’s malls will not look like shopping hubs as we once knew them; in fact, their main tenants may not be retail at all. They will be fitness centers, co-working spaces, hotels, apartments, and even elective-surgery centers. For example, Simon points to the Southdale Center—that Minnesota mall considered the country’s first: “They had a JCPenney in there that was not doing any business. We’re replacing it with a Life Time Athletic and a co-working space.” As certain retailers flounder—JCPenney closed almost 150 stores last year—“we’re more than happy to recapture that space and to redevelop it,” says Simon, adding that he sees the new malls as more like town squares. In recent years, the company has built 10 hotels and residential projects adjacent to malls, including in suburban Atlanta, where Simon has added a 150-room Nobu Hotel and restaurant to the upscale Phipps Plaza. “I don’t even like to call them malls or shopping centers,” he says. “The mall has been evolving for 60 years, just like the hotel business, just like the office business.”

For outdoor shopping centers like the 450-plus that Kimco owns, this diversity is becoming especially crucial, says Flynn. “What we’ve been doing recently is integrating what we call live, work, play. We have all those things to create the type of environment that you not only want to come back to, but we’re also adding apartments and hotels to further integrate ways to get people to visit, and stay, and linger, explore, and enjoy the open-air shopping center longer.” The key is also to draw customers to return multiple times a week; hence, 75 percent of the centers are anchored by grocery stores, in the hopes that customers will be enticed to visit other stores while also food shopping.

Development at Kimco centers, Flynn says, is being spurred by another relatively recent trend: the proliferation of ride sharing that is leaving parking lots under-used. “Eighty percent of the land we own is covered by parking lots,” he explains. But customers are occupying fewer parking spots. “I love to think of it as a way that 80 percent of our real estate is totally underutilized and can be something dramatically different in the future … where we can integrate apartments, hotels, restaurants, outdoor play areas—you name it.”

To Cohen, the evolution of the mall is simply another chapter in the long history of retail. In the first half of the last century, he says, “people from rural areas or suburbs would come downtown to shop. Then the shopping mall hollowed out downtown retail; in hundreds of cities like Detroit and Cincinnati, downtown retail never recovered. Now, the marketplace that was once the local mall is literally the world.”

Adds Davies of Davies+Co.: “No matter where you are in the country, you have access to quality. You know what quality is in a way that you might not have if you lived in the ’50s, ’60s, or ’70s and only had access to one local department store.” She says that the retailers who are failing are the ones who don’t innovate fast enough; those who innovate will succeed. “The way I always look at it is that the consumer is still spending,” Davies says. “She is still going to some stores and certainly shopping online. The composition of what she is buying may be changing, but the economy is good and it is our nature as Americans to consume.”

Read the original piece on Columbia Business School’s Ideas and Insights blog.