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April 5, 2017

Contrary to some of the headlines that have permeated news cycles of late, over 90 percent of retail sales still take place in physical stores, a statistic that has quietly sent many e-tailers scrambling to find space in malls, shopping centers and urban locations.

While brands are easily born online, many tend to quickly reach ‘e-saturation’ and begin to stagnate. Erin Grace from JLL’s Retail team in New York explains that, by expanding into the physical world, e-tailers have the potential to expand their customer base and benefit from the higher conversion rates that stores can offer.

“The trend really began to heat up with now-household names, Warby Parker and Bonobos, but the physical landscape is quickly filling up with new entrants,” she says.

ModCloth, a women’s fashion portal that claims to be “democratizing fashion one indie, vintage and retro-inspired style at a time,” recently opened a store at General Growth Properties (Inc) Pioneer Place in Portland, Oregon. The second largest mall owner in the country has also announced that it will soon be adding other traditionally pure-play e-tailers, such as Country Club Prep, Peloton, Aesop, e.l.f. Cosmetics and Essentia, at its other properties.

This comes as its rival, Simon Property Group – the country’s largest mall owner – also recently noted a similar trend in its portfolio, with deals including the Kate Hudson-backed fitness apparel company Fabletics, subscription-based cosmetic company Birchbox, and men’s casual shirt retailer, UNTUCKit.

These retailers all have one thing in common – they hope to take advantage of the better conversion rates that physical retail offers.

As Simon’s President and COO Rick Sokolov noted on a recent earnings call, the “customer acquisition [for physical store retailers] is frankly cheaper” while, according to a ShopVisible study, physical locations also offer the ability for incremental sales. For online sales with direct delivery and only remote exchanges, retailers can expect a net sale of just 77 percent, compared to an expected 95 percent net sale for online sales with in-store return; an increase that comes from an 18 percent up-tick in additional sales. Given the cost of shipping in today’s environment, a physical location can also serve to reduce the overall return rate.

And it’s not just malls that are seeing an influx of digital- to-physical retailers. Home appliance retailer Pirch has a flagship showroom in New York City’s Soho neighborhood, offering weekly cooking classes from top chefs and allowing shoppers to test-drive appliances – even the showers.

Ms Grace believes that the barrier to entry for these retailers is only getting easier to penetrate.

“For example, WithMe stores provide fully portable, prefabricated retail environments allowing a tenant to locate anywhere—from inside a traditional department store to a convention center during a retail trade show. These modular stores blend the best of online and offline retail, with smart fitting rooms, self-checkout mobile payment options, RFID tags and even virtual reality experiences,’ she explains.

Similarly, Blinq, an online to offline ecosystem that provides exclusive offers and unique amenities for people traveling throughout the Bay Area, launched Blinq pods to the concourse level of several BART stations, as well as a companion app for iOS. Both are part of the BLINQ pilot program. The pods host a rotating selection of pop-up shops and happenings that help people take care of errands, discover new products and unearth cultural finds — all during the course of their daily commute.

So, whether you’re in the market for an engagement ring, a book, or a new pair of eyeglasses, chances are your favorite online boutique will soon have a physical store near you.

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Erin Grace

Retail, JLL Americas

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