Mall brand, small brand!

When the likes of Casper and Warby Parker first strutted into the retail industry, it seems like they had their lives so well sorted nothing to shake them.

Being direct-to-consumer (D2C) brands, and digital-first, they didn’t have to deal with the sunk costs that came with running physical retail stores. Take that money out and put it on Facebook and Instagram. Start the flywheel of sales. Trial rooms gave way to evocative typography. Aisles gave way to attractive look books on Instagram.

Customers came flooding in, demand shot up, millions of dollars in revenue flowed in. All was good.

But what’s a story without a bad guy or an unforeseen turn of events or a foolish mistake by the protagonist or a hitch of some other kind?

The Party-pooper

In this story, the first hitch was the fact that being online-only will take you up to a certain point, albeit super fast, but there’s bound to be stagnation soon after. Once D2C brands hit the $3-$5 million mark with revenues, things started tottering. The D2C playbook was out, and every brand was doing the same things - online ads, billboards, impressive subway ads with liberal white spaces, and so on. And all of this started becoming more expensive by the day.

Then, there was the issue of platforms like Facebook that started tightening its boundaries and made it tough for D2C brands to track users or interact with them on such online platforms.

The other was, of course, Covid-19.

While it was initially a bounty, with everyone shopping only online and also willing to experiment with new brands, with shelter-in-place restrictions being lifted, people are back to physical stores. In high density regions like New York, you cannot afford to not have some physical presence. Call it brand-building or smart arbitrage decision, brands are going back to physical stores.

Who is going physical?

As per the numbers my research team at PipeCandy found, 44% of the 20,000 D2C brands they looked at had at least one physical store up and running. A majority of this (31%) is in the fashion and apparel space, followed by food and beverages (3%), and art & entertainment(2%).

Note: Numbers may not add to 100% because of rounding.

The longer bar in the $1M-$5M web sales range is an outlier. It’s not the DTC brands in this revenue category that drive store adoption in droves, but it’s the bigger labels who are predominately retail-first have started having DTC presence. You’d see this bar sprint down the chart as years go by. Nonetheless DTC brands and beleaguered retail-first labels are going back to retail stores.

Rationalizing Retail Expansion

What happened to the capital-intensiveness of this path? Well, a few things are happening and the current economic conditions are in the favor for retail:

1. Digital attribution is a war of attrition that brands will lose.

2. Landlords are turning investors because there is no other way to stay in the game. Consequently, small foot-print retail is within the reach of brands.

3. Phygital (a word that sends creepy crawlies into my skin) is seamless. Showrooms as a ‘point of exposure, experience, conversion, and return’ works well due to tech.

4. Appointment setting as a behavior is mainstream now and so are QR codes.

Companies such as Leap, that run ghost stores are now partnering with DTC brands to manage physical outlets. They take on the responsibility of managing the design, construction and day-to-day activities for these ecommerce brands. These stores could be full-fledged stores where customers can shop, or be ‘experience stores’ where customers can see the products on offer, talk to the retail store experts and get questions answered, or try products on before buying them.

Leap has helped companies such as NAADAM, Something Navy, Ashley Stewart, Birdies, Frank and Oak to set up physical stores. Uppercase is another full service real estate, retail development and operations company that has worked with companies like Kotn, Mejuri, Brooklinen, and Gymshark.

The pilots have been quite successful, going by the fact that several brands are now courting these ghost retailers. Leap, for instance, plans to increase its store counts by 300% in 250 locations by 2022.

I still have questions though

1. Small footprint stores aren’t exactly good news for landlords. Becoming an investor into brands only adds to their mess. Instead of worrying about utilization and rental yield, they now have to worry about free cash flows of investee brands.

2. While on paper it makes sense to acquire/roll-up DTC brands with some anchor retailer and it might even work for Simon and Brookfield, I wonder if  the ‘small footprint’ opportunity will extend to a lot of DTC brands.

3. Models like Leap kinda ‘democratize’ this access. But Retail isn’t just about the storefront. For models like Leap, a revolving door with brands going in and out isn’t going to be good.

In retail, every new innovation with physical presence works exactly for a year. So, let’s revisit in 12 months. There was COVID. There is inflation. Right?

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