The Real Reason E-Commerce Merchants are Opening Stores
When asked why he robs banks, the notorious Willy Sutton answered: “Because that’s where the money is.”
Several high-profile e-commerce merchants are venturing into the world of brick-and- mortar for the same reason. Bonobos, Trunk Club, Nasty Gal, Warby Parker, Rent the Runway and Birchbox are just a few of the big e-names opening stores. Though they tout them as an invaluable way to showcase their brands and engage with consumers, it turns out these shops might also be an unavoidable route to reaching their financial potential.
Late in the Aughts, when most of these companies came into being, venture capital was plentiful for tech businesses, which is how they were positioned. But today, pure-play e-commerce is so last decade.
E-commerce merchants realize that without that high-touch interaction with the consumer allowing a full experience of the brand proposition, online shopping sites remain unsatisfyingly two-dimensional, and face serious limits to upside growth. Though it’s been increasing at twice the clip of its brick-and-mortar counterpart, the e-commerce channel still only commands a 7 percent share of total retail sales. Omnichannel is the future of retail, driven by a consumer who wants to dictate when, where and how he or she will buy, and will only do so when the experience is compelling and irresistible.
“The consumer likes physical and online stores,” says Michael Dart, a partner at consulting firm A.T. Kearney and co-author, with Robin Lewis, of the recently revised ‘”The New Rules of Retail.“ “If you can make the bricks and mortar work economically because of what you have built online, the growth opportunity is enormous.”
And with seemingly thousands of websites launching every year, selling everything from paper clips to diamond rings, the only way to rise above the clamor is to open a fabulous store and have everyone and her brother Tweet, Instagram and Pin about it.
Bonobos, the online menswear seller known for its colorful pants for hard-to-fit athletic guys, was founded in 2007 by Stanford Business School students Andy Dunn and Brian Spaly. Its first foray into bricks and mortar was in 2012, when Nordstrom, after leading a $16 million investment round in the brand, began to carry its pants in the stores. Later that year, after the company introduced a line of suits and ties, customers began asking for a way to try on the products before ordering, so Bonobos opened the first of several Guideshops in the lobby of its NYC headquarters. According to Dunn, the move into physical stores has helped its shirt and suit business grow bigger than the pants business. Bonobos just opened its fifteenth retail store, in Newport Beach, California, and has inked a deal to open a 4,000-square-foot New York flagship in the Flatiron district in June.
Trunk Club is headed by Bonobos co-founder Brian Spaly, who left the business he co-founded with Dunn to become CEO of the Chicago-based online wardrobing service through which members sign up for periodic hand-selected shipments of six to 10 items from high-end brands based on taste, lifestyle, and needs — shipped to them in a cardboard box, or “trunk.” Men can try on the items, which average $150 each, and send back what they don’t want. The retailer opened its first “clubhouse” in Chicago, followed quickly by locations in Dallas, Washington, DC, and LA. Trunk Club revenue reportedly grew from $20 million in 2012 to over $100 million last year. The business was acquired by Nordstrom last summer for $350 million. To expand awareness among consumers in New York, its top market, it just opened a Manhattan flagship at Madison and 50th Street not far from such venerable menswear emporia as Burberry, Thomas Pink and Paul Stuart.
Nasty Gal is the e-commerce retailer of edgy vintage-inspired fashion founded by fashion visionary (and best-selling author of #GIRLBOSS) Sophia Amoruso in 2006 as a side project on eBay. Amoruso reportedly began toying with the idea of opening stores when sales growth, which was on rocket fuel for about seven years, began to slow in early 2014. With a new round of financing secured by Ron Johnson, formerly of Apple and JCPenney, the brand opened its first store on Melrose Avenue in Los Angeles late last year, followed by a second store in Santa Monica last month that, at 6,500 square feet, is three times bigger than the first. The centerpiece of each store is a set of empowering one-way mirrored fitting rooms from which customers trying on clothes can see out into the store but remain unseen themselves. The “being a cool girl is democratic” vibe is reinforced by a vast product assortment ranging from accessible to aspirational to designer, with Chanel and Moschino alongside local and affordable brands. To complete the high-touch, high-tech ambience, iPad-toting sales associates called “Nasty Gal muses” roam the stores to help customers in need of help finding and selecting product and then checking out.
Birchbox, the five-year-old beauty e-commerce brand, refers to its business model as “discovery retail.” The wildly successful club sends its members a monthly customized box of five carefully selected deluxe beauty product samples to try in the comfort of their home and then purchase in full-size versions on the Birchbox site. To enhance the discovery experience of its customers, the company opened its first brick-and-mortar store in NYC’s Soho neighborhood last July. In it, the company brings the whole Birchbox experience to life, allowing shoppers to look for beauty products and even build their own custom Birchbox in-store. The offerings change frequently, giving customers incentive to come back often. The store is full of video screens with tutorials, and inspiring photos from Instagram that were sent in by customers. Many beauty-industry watchers expect the company to open more stores in the future.
Dressy clothing rental site Rent the Runway, founded by Harvard Business School classmates Jennifer Hyman and Jenny Fleiss, decided that it could expand its reach by opening outposts in major cities like New York, Washington DC and Las Vegas where there were lots of Millennials who want to look like a million bucks when they go out despite being on shoestring budgets. RTR’s free-standing store in the Flatiron district of New York City has garments arranged by color, length and theme. Its associates, called “stylists,” help customers find the look that best suits them and their upcoming occasion. For women who need to see, try on and feel a dress before committing, the store provides that extra layer of confidence. The retailer, whose backers also financed Netflix and Spotify, reportedly doubled its customer base last year, and keeps one of the largest dry cleaners in the country humming 24/7. RTR’s newest store opened in Chicago last week.
Despite the fact that they’ve already received more ink than a Bic factory, we would be remiss to not mention digital eyewear disruptor extraordinaire Warby Parker in this group of e-commerce-turned-omnichannel-retailers. The brand, which made a name for itself selling affordable, hipster-chic vintage-inspired eyeglasses online, first experimented with a shop-in-shop showroom near its headquarters in Soho in early 2013. The concept was such a success in bringing in new customers that they added more outposts, including kiosks in the hip Standard hotels in Miami and LA, and in stand-alone pop-ups on Boston’s Newbury Street and on Abbot Kinney Boulevard in Los Angeles. When the company opened its New York flagship across from an Apple Store last year, founders David Gilboa and Neil Blumenthal pointed out, in response to all the buzz about the store, that they’d actually been in the physical retail business since the very beginning, allowing customers to come into Blumenthal’s apartment back in the early days to try on glasses before buying.
And you don’t need glasses to see that this strategy’s working: Analysts estimate that the eight Warby-Parker retail stores now open sell an estimated $3000 per square foot, the highest in non-Apple retail.
E-retailers are finding that a bricks and mortar presence gives an almost immediate boost to the bottom line. Consumers who shop in both online and in-store tend to spend much more than those who shop in just one channel, and as any marketer knows, it’s a lot more profitable to get more business from existing customers than to try to find new ones.
And get new business they must. Investors have put hundreds of millions into the retailers discussed above, and want a return on that investment. According to venture capital tracker CrunchBase, Bonobos has raised around $98 million from firms that include Nordstrom, Lightspeed and Accel Partners. Nasty Gal raised $65 million in capital from backers Ron Johnson and Index Ventures. Birchbox has raised $76 million from Accel Partners and Red Swan (one of whose owners is Bonobos founder Andy Dunn). Rent The Runway raised $114 million from investors including Bain Capital, Kleiner Perkins, and Netflix backer, Technology Crossover Ventures. Warby-Parker raised $74 million from investors including J. Crew CEO Mickey Drexler, who is on the company’s board, Amex, Menlo Ventures, and Red Swan.
We will almost certainly see more pure-plays venture into physical retailing. Though fan faves ASOS and Net-A-Porter seem to have no plans beyond some pop-ups, flash sale giant Gilt Groupe recently conducted some test “stores” set up in a conference room in the company’s New York City offices with reportedly off-the-charts results.
But what about the biggest pure-play retailer of all? Rumors have been flying that Amazon is planning to open stores where customers can experience the company’s growing collection of Fire and other electronics products. So far, there’s no word from Seattle on when or if that will happen. Last year’s reports that the Seattle-based e-behemoth was opening a retail store on West 34th Street near Macy’s turned out to be just a rumor.
However, if you see a drone flying around an abandoned Radio Shack location on what appears to be a reconnaissance mission, it might mean the rumors are true.