Welcome to the latest issue of The Voice of Retail for 2024. Over the past few months, I’ve been soaking up insights at ShopTalk (the March global and June European conferences), ICSC Las Vegas and at team and client meetings in numerous cities on my nearly weekly travels.
More than in recent memory, many of the innovation topics center around retail fundamentals not always prioritized in real estate discussions:
How do retailers acquire new customers?
How do they get their products or services to the consumer?
We Must Contextualize Real Estate in the Broader Business
By now, virtually everyone agrees that physical stores are a crucial mechanism to achieving both goals. That being said, retailers are the largest occupiers of real estate in the United States; not just retail space—all real estate. They make up more than 75% of the 25 largest occupiers in the country. The pivotal question has evolved from “Do stores matter?” to “Specifically what role does a store play in a given retail business?” Unless retailers (particularly real estate teams) contextualize the role of real estate in their broader strategies—and apply the right metrics to measure the outcomes they’re seeking—they’ll never be able to accurately gauge its value, or the larger impact on profitability.
For example, what is a brand’s cost of customer acquisition via store versus traditional or digital marketing? This cost can evolve as a brand evolves; in years past, it fluctuated dramatically. In the early to mid-2010s, a massive influx of digitally native brands found an arbitrage opportunity and used highly effective, targeted social media advertising (and thus customer acquisition via digital channels), which proved much cheaper than customer acquisition via brick-and-mortar. In the following years, however, a sharp increase in ad costs and added privacy measures (e.g. Apple’s Fall 2020 launch of iOS 14) reduced the efficiency and effectiveness of targeted ads, respectively.
Customer Acquisition, Retention and Growth
I heard a number of retailers in recent months say that the store remains the best channel for customer acquisition (versus channels like traditional or digital marketing). For Victoria’s Secret, it’s specifically their mall stores, in tandem with a loyalty program launched in June 2023, that enrolled a whopping 27 million people in less than a year. This speaks not only to acquisition but also retention. “What’s really been a huge part of our success there is every person who walks in the store and makes a purchase, we ask them to sign up for the program at the register, so we’re getting a lot more capture,” said Chris Rupp, Chief Customer Officer.
In the case of luxury goods, with their aura of quality, exclusivity and status, buyers are never just purchasing a product. They’re seeking to acquire a piece of the brand culture, said Laetitia Roche-Grenet, LVMH Director of Open Innovation, at ShopTalk Europe. The 75 maisons within LVMH—from Louis Vuitton and Dior to Dom Pérignon and Tiffany—create the dream and make its execution a reality. The store is an immersive, emotional experience that allows the maisons to articulate the fullest expression of their brand stories and maximize the desire to purchase.
Stores obviously facilitate hands-on engagement, giving customers the ability to see, hear, touch, smell and try on the goods. Both American Eagle and Chicos—which have decidedly different target audiences—found that customers are more likely to buy something they see on a store associate than on a model.
A Rich Source of Customer Intel
Meanwhile, brands capture a critical mass of valuable feedback at the store level to shape, improve and personalize a product or service. That data is the life blood for companies seeking to be “customer-obsessed.” Lauren Morr, A&F’s Senior Vice President of Global Digital Engineering & Architecture, spoke at ShopTalk Las Vegas about how a combination of data, insights and really listening to customers helped drive A&F to a record $1 billion in sales in its most recent quarter.
Stores also provide an important channel to gather direct intel on the customer experience in real-time. Retailers such as Tapestry, Inc., which owns Coach, Kate Spade and Stuart Weitzman, give associates in-store apps to collect and immediately transmit feedback, which the brand has used to improve everything from the music in a store (short feedback loop) to hardware on a handbag (longer feedback loop). This feedback is even more powerful when synthesized with customer data from e-commerce, phone and social interactions.
Building Connection, Trust and Loyalty and Differentiation
More fundamentally, we trust what we can see, touch and feel. As AI makes digital environments easier to manipulate—from deep fakes to bogus reviews to bots—customers will gravitate toward experiences they can trust. In a store, they can believe what they see.
Physical spaces can also build connection, trust and loyalty. In an age of social isolation, when the U.S. Surgeon General is warning about the health implications of loneliness, a store or great project can become a center of social interaction and a place to build community. It's the stage for customer events, from launch parties to meet-up groups, classes to workshops: 87% of consumers say they will buy products from a brand after attending one of their in-store events, according to the Event Marketing Institute. And on a purely tactical level, a store is a last-mile distribution center and a return hub that helps to curb expensive shipping costs and creates another opportunity for repeat visits.
The store has the potential to add enormous value in a rainbow of these different contexts. And yet the industry continues to measure value with the narrowest of yard sticks: gross sales of the location divided by the rent, a.k.a., occupancy cost ratio.
When it comes to ensuring store decisions are most productive for brand goals, I would argue for a wider lens.
Aperture and Measurement Matters
Retailers speak passionately about their focus on "unified retail" and being "omnipresent" for the consumer. Delivering a truly seamless, frictionless and continuous experience, whether in store or online, is now table stakes. In this scenario, the role of stores and the way we account for their value must shift. The most successful brands want to consistently surprise, delight and serve the customer wherever they are, to offer an experience so incredible that they want to share it. In that context, what is a store for? What needs to be considered in the measures of its success? How do we calculate—or recalculate—the formula for its contribution to the bottom line?
I am also intrigued by advances in closed loop marketing, which aggregates data gathered on a consumer's search history, social media activity, retailer website visits and physical store visits, and then uses that information to precisely tailor a marketing strategy for that customer. Most importantly, effectiveness is measured to continuously refine an approach.
I know that signing into public Wi-Fi means my phone is tracked, but I don't fully appreciate the degree to which that data is being distributed and used. For example, there are brands that can quantify the impact of their digital marketing based on whether or not someone steps foot in or near their stores (without completing a purchase) based on a Wi-Fi sign-in from months before at another unrelated location. These brands can essentially A/B test the impact of their digital marketing on the physical world. This is huge.
The measurement is becoming more precise. This data is the fuel that helps a brand be "customer obsessed"—along with traditional surveys, focus groups, customer journey mapping—ultimately leading to obsessive brand loyalty. We are seeing analytics for physical space continue to pick up speed (think AI-backed cameras and sensors). How are brands and property investors building measurement tools and analysis into their budgets for customer?
A Chief Development Officer or SVP must be fluent in the role real estate plays in their brand's marketing, customer acquisition and delivery strategies, while also navigating conversations on capital allocation across the C-suite and up to the board level. Whether it’s sales, impressions, eyeballs or another metric, there won't be a single best practice to measure outcomes, because retailers value stores for so many different reasons. But their vital role in the evolution of unified retail experience demands leaders and their teams to think holistically.
A few additional measurement themes to consider:
Customer acquisition cost across channels (e.g. digital vs. store).
Overall sales for a region and share of those sales from store(s) vs. other channels.
Impressions (i.e. how many sets of eyeballs will a given location offer a brand).
Conversion: What does a brand do with those sets of eyeballs? How many people are walking by (important that these are de-duplicated counts) and then walk into a given store? And at the retailer level, how much of the traffic coming in converts to sales? These are relatively basic but no less important questions.
Incremental sales from including a wider assortment in store (i.e. Is that additional 50% of store GLA worth it to house closer to 100% of the assortment?). Often, we see merchandising drive this, and sometimes real estate teams are deeply involved. More fluid collaboration between those teams seems to generate the most efficient results.
Quality of information from customers via store associates.
New loyalty sign-ups by channel and location.
While the bulk of this piece has focused on the retailer view, the property investor view is no less important. This thinking, and in some cases the inverse of this thinking, will grow in importance for property investors engaging with their existing and prospective tenants. What matters to the retailer is fundamental to the retail property investor.
Beyond Real Estate
In this section, I share recent readings that have piqued my interest and delve into insights sometimes beyond, but always relating to, commercial real estate.
The Rise of Loneliness and Retail as a Refuge for Connection
In the years following the pandemic, habits formed around the reduction of in-person gathering have led many people to self-isolation. According to the Wall Street Journal, more than 40% of fully remote workers still go days without leaving the house, which is unhealthy on a variety of levels. I venture to say that the real estate industry is even more “in-person” and social than most, so this may be harder to relate to. Retail can be a critical gathering point for this rise in demand. When done properly at the property level (think strong consumer marketing, activation and event efforts) or store-level, retail can create wonderfully organic ways to connect with others over common interests.
While Gen Z is a digitally savvy generation, they still prefer to be in-person; for certain social activities, events and—perhaps despite portions of popular opinion—professional settings. Taymoor Atighetchi, CEO of Papier, summarized at ShopTalk Europe that Gen Z, the fastest growing portion of their customer base, is five times more likely to digitally detox than any other generation. Atighetchi likens this to the often-noted rise of vinyl sales, craft coffee and other avenues of "return to analog" like physical journaling.
Demand Shortfalls and Floor Plate Mismatch: What's Happening with Downtown Retail
I enjoyed this piece from Urban Land Institute by Michael J. Berne which argues that the impact of office workers on downtown fashion-oriented retail is overstated. The reduction in demand was driven, at least initially, by a reduction in free-spending foreign tourists and affluent urban dwellers, including empty nesters and life-stage transitioning millennials. While many of the nation's 26 largest downtowns lost population in 2020, all but two had exceeded pre-pandemic levels by the end of 2022. Berne argues that major impact came from pre-pandemic shifts in the types of retailers that are popular and the kinds of floor plates they prefer (spoiler: they prefer smaller floor plates than the previous flagships).
