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Smart retailers resolve to evolve

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Two ladies in shop seeing phoneWhen it comes to retail in 2020, some elements remain the same, but many are different. The brick-and-mortar store, for example, is still relevant  ̶  although perhaps more scaled down, in the “right” location and offering products at the right price point. Some stores are revamping to be more of a customer-service center or showroom. Flagship stores, once a staple, are no longer viewed as absolutely necessary. Said Kevin Kelly, national leader of Grant Thornton’s Retail Sector: “A company’s flagship today can be its presence online.”

Such thinking, said Kelly, “reflects an ability to connect with the consumer and consistently present your brand, whether it’s online, on a mobile phone or in a store.”

For the most part, the idea of building big stores isn’t resonating anymore, said Kelly. “And when leases naturally expire or there’s an opportunity to ‘kick out,’ even for flagships, retailers are taking advantage and removing themselves from that expense burden.” A case in point is the recently closed flagship Coach store that stood on Madison Avenue in New York for more than 30 years. Other luxury retailers located on that stretch of real estate have also closed. Some analysts point to a general physical downsizing of high-end stores, with many finding it’s smarter to move to smaller locations with more attractive unit economics.”

Other retailers may aggressively seek more favorable lease terms, for shorter durations, when a lease expires. This is particularly true for stores in B- and C-level malls that don’t have the cachet and traffic flow of an A-level mall. Some stores are also becoming customer-service centers or showrooms, said Kelly, which means smaller, with less inventory, but still offering an opportunity for customers to experience a product and speak to someone knowledgeable, “so that the customer has convenience no matter where the shopping or purchase takes place.”

3 takeaways for retail: • Stores are still relevant but only for the right investment and in the right size and location.
• The product  ̶  whether online, on mobile or in a store  ̶  has to resonate with the consumer.
• Customers still look for value, at any price point.
And then there is the trend of malls reinventing themselves into a mixed-use arrangement, with restaurants, apartments or maybe even a call center or office space, said Kelly. Woe to those retailers that haven’t made the right changes fast enough. “Retailers that haven’t already invested in technology and tools around customers and inventory, to present products in a meaningful way with accuracy around who buys them and how, are playing catchup,” said Kelly. “And it’s hard.”

Relationships that work both ways Giant players like Amazon have begun to open brick-and-mortar spaces for some products and for easy returns, and they have partnered with other retailers for a mutually beneficial relationship. Kohl’s, for example, now allows drop-off of Amazon returns in its stores, with the idea that those using the free service may stop and shop at Kohl’s.

There’s also a trend around buying online and picking up the merchandise in a store, which again addresses customer wants. “Some folks like the idea of going into a store,” Kelly said. “Maybe it’s more cost-effective or maybe it’s convenient to go pick it up at a store. And I think retailers really like that, because the person may come in to pick up an order but will stay to pick up a few more things.”

“Mobile is the new flagship; mobile is the new mall. There’s so much being done on a phone, where customers are connecting with their brands and their retailers in a manner that is driving traffic, but it may not be traffic into a mall.”
 ̶  Kevin Kelly, National Leader, Retail Sector, Grant Thornton
From digital to bricks and mortar “There are many digitally native brands that began online and over time developed a following,” said Kelly. “They realized there would be value in having a physical location.” Eyeglass retailer Warby Parker is an example. “But even if you go to a Warby Parker store, it’s not a huge footprint or a huge real estate cost. That’s very important — to be the right size for the market and to balance the cost.”

The rise in costs of online customers Analysts have pointed to the rising costs of acquiring online customers. These include the costs of highly targeted campaigns and tools to track consumers as they move from being leads to becoming loyal customers. They also include fees paid to varied search engine services and the costs of free shipping to a home.
“There’s long been a perception that online sales carry much less expense to a retailer than the costs of a store. Yet the difference is shrinking as the cost to attract and keep online customers goes up.”
̶  Kevin Kelly

Sustainability and social causes have a role Merchants’ sustainability efforts are an issue for a lot of shoppers. They want to know how garments are made, where and by whom, and whether companies are environmentally friendly in their procurement production and other processes.

Shoppers also want to know what a company may be giving back, such as donating a percentage of profits or products to a worthy cause. Bombas, for example, donates one pair of socks to causes that benefit the homeless for every pair purchased. Omni Bottle donates a percent of profits to animal charities.

General uncertainty amid tariffs, trade wars and the coronavirus Tariffs, trade wars and political uncertainty have also played a part in retail costs and the general retail environment. Some companies have made adjustments to their supply chain or moved production. “Even if you move elements of your supply chain, there are costs in doing that,” Kelly said. Most retailers are reluctant to pass on costs to consumers, so they’ve had to think hard about managing their supply chain in the best, most efficient and practical ways.

Adding to concerns has been the coronavirus, which has greatly affected businesses and supply chains in China. Big retailers like Apple, Nike and McDonald’s have had to delay shipments or shutter stores and office locations. The full effect of the virus is yet to be felt as most retailers had planned their inventory levels to be received before the Lunar New Year in China, which began in tandem with the coronavirus outbreak. As the industry moves into spring, summer and fall deliveries, the disruption could be significant.

The general uncertainty could be affecting how or whether retailers invest, said Kelly, and also creates volatility in the markets that could distract customers from spending. “That could be a potential headwind in 2020.” Commodity costs, too, could become an issue affecting profitability. And the tight labor market impacts how companies are able to staff their stores.

Yet overall, said Kelly, retailers that are confident they are providing products that are resonating with their customers will continue to make careful investments while maintaining a watchful eye on inventory levels to carefully manage the business.

Retail is still evolving, he added. “Yes, a retailer may close a number of store locations, yet it may open new ones that are reformatted to be smaller, more focused and in locations they know are right for them. Smart retailers will continue to thrive.”

Contact:
Kevin KellyKevin Kelly
National Leader, Retail Sector
Grant Thornton
T +1 212 624 5270