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Article published on Forbes - January 11, 2023
Last year was one of the best years for retail real estate. Vacancy rates in Q3 were 4.3%, according to JLL, down from the 6.3% in Q2 reported by The Wall Street Journal as the lowest rate in 15 years, likely driven by high demand for retail space and little new development. Endless brands opened their first stores, and many other mature brands continued to expand their footprint. But, in 2023, the big question is how inflation and the looming recession may impact demand and retail overall.
Some may believe the effect will be negative, but strong evidence indicates that stores and physical retail may be the key to success this year.
Stores are the preferred, more affordable marketing channel that acquires quality, loyal customers.
Retail Media Networks and using various customer touchpoints as advertising platforms are becoming popular discussion topics. And along the same lines is the use of stores as a marketing platform. Many digital brands are seeing the customer acquisition cost of online increasing exponentially over the past few years. According to a study by SimplicityDX, today, merchants are losing $29 for every customer acquired, an increase of about 60% from five years ago. This increase is likely due to overcrowding in the online advertising space and more privacy regulations limiting the ability to target customers precisely.
Therefore, in many cases, turning to independently profitable stores is a logical alternative for acquiring new customers. For example, Bandit Running, a luxury performance and lifestyle brand, recently opened its first store in Brooklyn's Greenpoint. Nick West, the Co-founder, and CEO, shared that "customer acquisition cost was significantly better [in-store], as compared to paid digital investment." He also cited more repeat purchases and fewer returns from customers acquired in-store.
The now vast amounts of digital brands offer endless choices to consumers. For instance, a PwC survey shows that more than a quarter of respondents stopped using or buying from a business in the past year, primarily due to bad experiences. However, a third of respondents identified human connection as essential to their loyalty – something easily provided by stores.
As West states, "Those learnings are complemented by the fact that running is a community-driven sport, especially in New York. If you want to connect deeply with the running community, you can't rely on Instagram ads to build a connection with the people driving the sport forward."
Similarly, Cult Gaia, a women's luxury fashion brand, is opening its first flagship store on Melrose in Los Angeles and will open its third store in SoHo this month. "We have seen a decade of e-commerce success, so it only felt natural to open stores and finally give our customers an immersive brand touchpoint. And most importantly, we can finally connect with them in real life. Social media interactions were a main growth driver from the jump, and now we get to develop deeper relationships face-to-face," shared the Founder and Creative Director, Jasmin Larian Hekmat.
There's a clear understanding from small digital brands, and even big ones like Glossier, that stores are essential for growth. Potentially even more so in a fragile economy. Therefore, the barrier is in the capital and financing, but the good news is that standalone stores are far from the only option.
If there isn't enough real estate or capital, brands will find a way to exist in a physical space.
Vacancy rates are lower than ever for retail real estate, which means many brands are on waiting lists and contemplating going to neighborhood centers, destination street locations, or even class-B malls. Expanding into new real estate categories is a shared prediction with Placer.ai's Retail Trends Forecast for 2023. Some less-funded digital brands may back out of deals in top centers due to low funding and capital. Still, ultimately, creativity will be critical to any retail brand that wants to build a presence in the physical world.
For example, Bandit chose Greenpoint due to its high "run traffic," meaning many runners frequent the area. So, despite it not being a famous shopping district, it made sense as a destination location. The brand plans to take learnings from this first location and apply it to future expansion, but in the meantime, it will continue to host pop-ups and partner with wholesalers in the new year.
Another example is Lunya, which launched The Rest Shop late last year – a collection of third-party sleep wellness products. "This Shop offers people tested solutions they can implement to improve their sleep and allows Lunya to broaden our offerings. It's an intentionally selected assortment. We've refined our go-to list of products to ensure our stamp of approval is meaningful," shared Ashley Merrill, Lunya's founder. In addition to helping these brands showcase their products in a physical space, Lunya is diversifying its offerings in-store, setting the brand up for success in a shifting economy.
Whether sourcing more destination or second-tier real estate, turning to wholesale, or opening shop-in-shops, there are many alternatives for brands seeking cost savings. And for all brands, but digitally native brands especially, the advantage of stores is clear, the opportunities in physical retail are endless, and a wavering economy isn't going to stop them.
