Online brands try a traditional marketing strategy: Physical stores
By Ellen Rosen
When Vanessa Barboni Hallik began working on a new line of sustainably sourced women’s apparel, she envisioned a direct-to-consumer model that would bypass traditional retailers and the complicated, often revenue-draining world of wholesale.
She started her company, Another Tomorrow, as a digital business six weeks before the onset of the pandemic, relying on social media and search engine advertising to reach potential customers. But opening a physical store was always part of her plan.
Barboni Hallik, a former Morgan Stanley managing director, focused on Greenwich Village, a robust residential Manhattan neighborhood that had a surfeit of storefront vacancies even before the pandemic.
“I felt a gravitational pull toward a more residential space,” she said. “And it felt meaningful to make an investment in an area that needed a shot in the arm.”
Barboni Hallik is not alone among e-commerce entrepreneurs who are turning to physical stores. Many retailers ramped up their e-commerce efforts while Americans were stuck at home during lockdowns, but for others, the pandemic presented new real estate opportunities.
Some larger online brands — like Warby Parker and AllBirds — have expanded with physical locations for several years, and smaller companies are now experimenting as well, opening free-standing shops, leasing from a retail service or securing short-term spaces in other stores.
Business owners are motivated by multiple factors. Some have always included brick-and-mortar outposts as part of their strategy, adopting what’s known as an omnichannel approach, which provides a seamless shopping experience across desktop, mobile and physical platforms.
For others, renting a store has become more attractive because the cost of acquiring customers through social media advertising “has become prohibitive,” said Michael Brown, a partner in the consumer products and retail practice at Kearney, a consulting firm. The tipping point varies, he added, but it “typically occurs where growth has slowed and the cost of acquiring new customers has increased.”
Estimates of an often-cited retail metric known as customer acquisition costs range from $100 to more than $800 per customer, said Daniel McCarthy, a professor at Emory University’s Goizueta School of Business, who has done extensive research in the field. In addition, changes to Apple’s operating system for its mobile devices make it harder to send targeted ads to potential customers; Google recently announced work on privacy settings for its Android operating system.
Barboni Hallik thought that her store in Greenwich Village would attract potential customers who might overlook online advertising. The location was available for roughly 18 months, and she is negotiating a new lease.
Newer retailers, however, often “don’t come from a bricks-and-mortar background and don’t want to commit to a long-term lease,” said Naveen Jaggi, president of retail advisory services at JLL, the commercial real estate company. As a result, he said, property owners have become more flexible.
“The big trend line we have seen during the pandemic is that many landlords are starting to recognize that in order to attract different brands that can make their property stand out, they will have to go to shorter lease terms,” he said.
Rents in some high-traffic areas, whether in malls or premium urban neighborhoods, have held to pre-pandemic levels, he added.
In addition to shorter leases, some landlords are offering more generous tenant improvement allowances. And taking a percentage of store revenue in lieu of a fixed rent, while not a new strategy, has become more common.
Ben Soleimani, a seller of high-end rugs and home furnishings, started his business digitally in early 2019 and, later that year, opened a store in Los Angeles, where he is based. Last year, he leased a nearly 9,000-square-foot store that luxury watchmaker Tourneau vacated on Madison Avenue in Manhattan.
“When you open stores, your business gets much stronger in that region because people are passing by and can just walk in,” he said, adding that his clientele likes to “feel and touch our offerings and get that experience.”
Soleimani declined to disclose his rent, but said he had a two-year lease with an option to stay for five years. He added that he had planned to open stores this year in Chicago, Houston and Miami. He found that some rents had declined during the pandemic, but that those discounts were unavailable in the locations he sought.
The same held true for Todd Snyder, a menswear designer who started his namesake line in 2012. He opened his first store near Madison Square Park in Manhattan in 2016. Rather than a quick rollout of subsequent stores, however, Snyder took a deliberate approach, choosing locations with special appeal. These included a former liquor store in Tribeca, a century-old building in which he has retained the original fixtures.
He has also opened stores in Rockefeller Center; East Hampton, New York; and Greenwich, Connecticut. The rents vary, but there are no bargains. Rather, he said, the square-foot price is generally “more expensive than it was two years ago.”
Snyder, whose company is now owned by American Eagle Outfitters, envisions running 20 stores nationwide, but he does not anticipate that in-store purchases will exceed more than 20% of his revenue.
Some retailers lease their spaces directly, but others have chosen a different approach. On Bleecker Street in Greenwich Village, where Another Tomorrow has its store, several other digitally native brands line the streets, including Mack Weldon, Goodlife Clothing and Brooklinen. These companies relied on Leap, one of several startups that operate a “retail as a service” model, offering help in leasing and expanding stores and gathering data on shoppers.
Leap leases locations in clusters and then subleases them to retailers, said Jared Golden, a co-founder and co-chief executive of Leap. In turn, the brands pay a fee that covers rent, labor and insurance, as well as a percentage fee based on the store’s sales, he said. At the end of 2021, the company had about 50 stores in Arizona, California, Florida, Illinois, New York and Texas.