Wednesday, January 18, 2017

"Do Digital Brands Need Physical Stores?"

This interesting Business of Fashion article outlines the current conundrum facing digital brands, which have traditionally relied on e-commerce as a primary channel of engaging customers and transacting business, yet now are opening brick-and-mortar stores to address evolving consumer needs. It is a particularly interesting phenomenon given that traditional physical retailers, such as Macy's, are in the midst of closing down stores and eliminating thousands of jobs. However, regardless of how innovative and effective digital brands are at creating traffic on their website and driving sales, the majority of consumers continue to gravitate toward the traditional "try before you buy" model. Indeed, 75% of consumers continue to shop and buy in physical stores, and e-commerce is projected to plateau at 20 - 25% of sales. This has incentivized digital brands, such as Bonobos, Warby Parker, and Moda Operandi, to open and expand physical stores to allow shoppers to assess fit before purchasing. What's more, the CFO of Bonobos noted that the physical stores drive higher conversion rates and increase average purchase values. 

Digital brands understand that physical stores are not only another revenue channel, but also an integral part of the media mix to market to potential customers. They serve as "permanent billboards," according to a Bonobos executive, and offer a distinguished customer experience that online can only deliver virtually. Physical stores can help differentiate digital brands from others, allowing customers to engage with brands from a "360-degree point of view."

 However, how many physical stores are enough? This a capital-intensive investment - how do digital brands know when to expand offline? Critically, digital brands are staying true to their online roots and using data about their online customers to optimize expansion into certain markets. It is also critically important that the physical stores are complementary to their online counterpart so as to not cannibalize sales. Bonobos, for example, uses their physical locations as showrooms, whereby customers can try on products, yet purchased items are sent from the same distribution warehouse as online orders. Keeping the inventory out of stores represents a cost-benefit to the brand and is synergistic with its online core identity.

In conclusion, though it may seem paradoxical, online retailers are taking a tried-and-true tactic from their traditional ancestors and using physical stores to meet customers where they are, both offline and online. 

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